March 12 (Bloomberg) -- Reykjavik Geothermal, the Icelandic power-plant builder, plans to begin drilling in Ethiopia by July as part of a $2 billion project to develop the renewable energy source, Chief Operating Officer Gunnar Orn Gunnarsson said.
Ethiopia’s government signed a deal with the Reykjavik-based company in October to build a power plant on an imploded volcano in the Rift Valley that will generate 500 megawatts of electricity by 2020. The licensing of a large-scale private power-generation project marks a shift from the country’s previous reliance on domestic investment and Chinese loans to finance infrastructure development.
“We think we have a project that can have a return on equity that is acceptable by the investors,” Gunnarsson said in an interview on March 7 from Iceland. The company plans to begin closing financing deals this month worth as much as $80 million and expects to eventually raise $500 million from equity partners, he said.
Ethiopia’s government has operated a state-dominated market economy since rebels overthrew a socialist military regime in 1991. While private investment has been encouraged in areas including agriculture and manufacturing, government enterprises control or monopolize financial services, transportation, energy and telecommunications.
The deal between the government and Reykjavik Geothermal “signals a more open policy toward foreign direct investment in key economic sectors currently dominated by public enterprises,” International Monetary Fund country representative Jan Mikkelsen. It should be replicated in other state-controlled industries to alleviate “infrastructure bottlenecks,” he said.
Ethiopia’s economy is projected to expand 8 percent in the fiscal year to July 7, the end of the year in the Ethiopian calendar, after increasing at an annual average rate of 9.3 percent for the past four years, according to the IMF. That growth rate is convincing companies to invest in producing electricity from ample resources of wind, geothermal, water and sun, Prime Minister Hailemariam Desalegn said Feb. 10. General Electric Co. is considering investing in the power industry in the country, the government said in January.
Ethiopia is expanding infrastructure as it seeks to become a regional electricity exporter and manufacturing center, and is using its low-cost labor and cheap power from Africa’s second-largest hydropower resources to attract investment. Reykjavik Geothermal will sell power to the national grid, once it begins producing, Gunnarsson said.
“All the industries here are screaming for power,” he said. “It’s dragging their development of everything to have no power.”
The Ethiopian Electric Power Corp., a government utility, is building the 6,000-megawatt Grand Ethiopian Renaissance Dam on the Blue Nile River. The 80-billion birr ($4.1 billion) hydropower project will be paid for by domestic bond sales and government funds and is scheduled for completion in 2018.
The Export-Import Bank of China is primarily funding a $1-billion transmission line from what will be Africa’s largest power plant. Chinese banks are also financing new railways and roads on Ethiopia’s main trade route to the Port of Djibouti.
Reykjavik Geothermal expects to conclude deals with three or four investors this month worth $40 million to $80 million, which will help cover the cost of drilling as many as five wells to produce an initial 20 megawatts of power, Gunnarsson said. While other partners may also buy into the project, “all these equity providers aim to continue and follow through to the whole 500 megawatts,” he said.
On top of the collapsed volcano, or caldera, steam seeps from cracks between rocks in an undulating, dusty patch of Ethiopia’s Rift Valley about 20 kilometers (12 miles) west of the town of Shashemene. Residents have propped up meshes of branches to trap the condensing steam. A few kilometers away, hundreds of head-scarfed women, children and donkeys gather with yellow jerry cans to collect water from a rare well.
The caldera, which formed tens of thousands of years ago, is suitable for using steam to turn electricity turbines as tests shows that a “huge resource” of water vapor at temperatures of well over 250 degrees Celsius (482 Fahrenheit) lies near the earth’s surface, Gunnarsson said.
Similar sites in Iceland produced significant amounts of energy, “so we are very, very confident that we will be successful,” he said. The addition of 500 megawatts of power would increase current generating capacity by 25 percent. The company is also working on projects in Mexico and the Caribbean and considering Kenya and Tanzania, Gunnarsson said.
The U.S. government is supporting the project, which is known as Corbetti, as part of the six-nation Power Africa initiative, a $7 billion commitment by U.S. President Barack Obama to increase access to electricity on the continent.
The Corbetti site may generate as much as 1,000 megawatts, Gunnarsson said, and there are other potential geothermal locations in the Rift Valley.
Experts from the U.S. Agency for International Development have held workshops for Ethiopian officials on Power Purchase Agreements and the agency is paying for a “transactions adviser” to help the government negotiate with Reykjavik, Earl Gast, USAID’s assistant administrator for Africa, said in a Feb. 2 interview.
“The government sees this as a critical project because they want to demonstrate that Ethiopia is open for business,” he said in Awassa.
To contact the reporter on this story: William Davison in Addis Ababa at firstname.lastname@example.org