Ethiopia, Reykjavik Geothermal (RG) Resolve Differences over Largest Geothermal Project in Africa
August 13, 2017 - The much delayed two billion dollars Ethiopian geothermal development project, Corbetti Geothermal, near Shashemene town is finally to take off the ground. Corbetti Geothermal, a multi-national energy company that has been working to develop 500 MW of electric power from geothermal sources in the Corbetti Caldera in East Arsi Zone, and the Ethiopian government have resolved their differences on the implementation of the project through negotiations to resurrect the pending project. Corbetti Geothermal, the Ethiopian Ministry of Water, Irrigation (MoWIE) and Electricity and the Ethiopian Ministry of Finance and Economic Cooperation are finalizing negotiations to sign the final agreement that will enable the company to embark on Africa’s largest geothermal project.
Reykjavik Geothermal (RG), an Icelandic company specialized in geothermal energy development projects, signed a framework agreement called “Heads of Terms” with the then Ethiopian Electric Power Corporation in October 2013 enabling it to develop 1000 MW of electricity from geothermal energy sources in Corbetti, Tulu Moye and Abaya localities in the South Eastern part of Ethiopia. Reykjavik Geothermal with its local partner Rift Valley Geothermal established Corbetti Geothermal Plc. and brought along two major investors–Berkley Energy and Iceland Drilling–who have shown a keen interest to invest on the geothermal development project.
Mekuria Lemma, Strategy and Investment Director with the Ethiopian Electric Power, told The Reporter that Corbetti Geothermal and the Ethiopian Electric Power (EEP) have agreed on all the pending issues on the power purchasing agreement. Though the implementation agreement was supposed to be signed in August 2016 it was delayed because of some differences that arose between the company and the Ethiopian government. Mekuria told The Reporter that the two parties have resolved their differences and hope to finalise the negotiation in September and sign the project implementation agreement by end of 2017. “We will have final round of meeting in September and sign the implementation agreement in October or November this year,” Mekuria said.
RG split the 1000 MW geothermal development project into two phases–the 500MW Corbetti project and the 500MW Tulu Moye and Abaya project–each costing two billion dollars. Corbetti Geothermal Plc., a special purpose vehicle company established by RG in Ethiopia, has been working on the Corbetti geothermal development project located 270 km south-east of Addis Ababa in East Arsi Zone, Shalla Woreda, Corbetti Kebele. RG owns a 28.5 percent stake on Corbetti Geothermal Plc, Berkley Energy 53.5 percent and Iceland Drilling 18 percent. Corbetti Geothermal secured funding from major international financiers, including African Development Bank and European Investment Bank. Other many public and private investors from the US, the UK and other European countries are behind the Corbetti geothermal project. The project is also backed by the US Power Africa Initiative.
After a long negotiation, Corbetti Geothermal and the Ethiopian Electric Power signed a conditional power purchasing agreement in July 2015 during former US president Barack Obama visit to Ethiopia. The company agreed to build the geothermal power plant and sell electric power for 7.53 US cents per KWh for the Ethiopian national grid.
Mekurai said since it was the first Power Purchasing Agreement (PPA) the Ethiopian Electric Power did not have the technical capability to negotiate with the international energy firm that came up with legal experts who have wealth of experience in similar power deals. Thus, EEP hired international legal consulting firm with a grant secured from the African Development Bank.
Corbetti Geothermal was waiting to sign the implementation agreement and proceed with the investment project. But the negotiation got into a stalemate when the Ethiopian Parliament enacted a new geothermal development law.
“We started the negotiation three years ago and signed the “Heads of Terms” when the country did not have a geothermal development law,” said Mekuria. After looking at the geothermal proclamation, the Ethiopian Council of Ministers instructed MoWIE to reconcile the agreement with the new geothermal law. That was when the problem occurred.
Mekuria said they identified eight points that contradicts with the new geothermal law. The new geothermal law limits the concession area for geothermal development to 200 hectares of land while Corbetti Geothermal’s license area covers 700 hectares of land. “With 200 hectares of land they can generate only 100 MW. But Corbetti targets to generate 500 MW.”
Tax issue was another bone of contention. Initially RG secured the exploration license from the then Ministry of Mines which used to administer the geothermal sector. Back then the mining law levied 25 percent profit tax on geothermal energy generation. But later on, the geothermal sector was transferred to MoWIE that levies 30 percent tax on geothermal development.
The “Heads of Terms” was signed on build own and operate basis while the new geothermal law stipulates that the developer will operate the power plant for 25 years and will transfer the plant to the Ethiopian government. “We had to change that to build, operate and transfer basis. We really pushed the company hard to accept these points,” Mekuria told The Reporter.
Mekuria said Corbetti Geothermal demanded the government to consider two percent cost escalation on the investment project since 2014. “The Ethiopian government refused that and agreed to consider the cost escalation beginning 2016. All these points had to be dealt with. It was a tough negotiation and it took a long time. They accepted most of our proposals and we conceded to some of their demands.”
State minister of the MoWIE, Wondimu Tekle, told stated that one of the disagreements was on the ownership of the natural resources that may be discovered during drilling the geothermal wells. Wondimu said Corbetti Geothermal claims that it is entitled to make use of any mineral resource that could be discovered during drilling the geothermal wells while the government has a firm stance that any associated mineral belongs to the state. “Gold or petroleum could be discovered and that should be owned by the government. That was one of our differences. But finally the company accepted our position.”
The Corbetti Geothermal Project, pronounced as the biggest geothermal development project in Africa was announced during the UN General Assembly in New York in 2013 with a splash international media coverage.
Mekuria said that Corbetti geothermal has gone a long way and invested a huge sum of money on the pre-development work. “They have spent more than 30 million dollars on the exploration project. They started negotiations with us three years ago but they have been working on the project for the past seven years,” said Mekuria.
“Before we sign the final agreement, we have spent on the project in good faith because we trust the Ethiopian government,” said senior executive of the Corbetti Geothermal. “We have built access road to the drilling site. We have also been engaged in community development projects,” the executive said. “Today we are happy that after marathon negotiations we are about to sign the implementation agreement. This clean energy development project has multi-faceted benefits to Ethiopia. The global energy industry is closely watching it to happen. If it succeeds other geothermal developers will follow suit,” he added.
Mekuria said that the implementation agreement will be ratified by the Parliament and the agreement would be signed with Corbetti Geothermal end of this year. “The company is already in the process of procuring drilling service.”
According to Mekuria, once the implementation agreement for the Corbetti geothermal project is signed negotiation for Tulu Moye and Abaya geothermal development project would commence. Mekuria said RG is also committed to start work on Tulu Moye and Abaya project-which will have an installed generation capacity of another 500MW. RG considers Tulu Moye and Abaya as second phase project that will kick off once PPA and IA are signed.
Mekuria said RG has notified EEP and its partner, an American company called Meridian, which will finance the Tulu Moye and Abaya geothermal project.
According to Mekuria, as Ethiopia transitions to industrialization it requires more reliable energy sources. “As we are developing the manufacturing sector and building industrial parks our demand for electric power increases. Accordingly, we have to develop reliable and sustainable energy sources. Geothermal should be our base plant. A geothermal power plant generates constantly for more than 20 hours while hydro power plant generation depends on the amount of water stored in the dam. A 100 MW geothermal power plant is equivalent to 200 MW hydro power plant. Some countries which do not have geothermal resources use nuclear, coal or gas power plants as base plants. But we have the geothermal resource-a clean energy source. So we should focus on that.”
The country’s total generation capacity has reached 4,280 MW of which the lion share 92 percent is hydro, six percent is wind and other two percent thermal. Ethiopia’s geothermal potential is estimated at its maximum to be 10,000MW while the hydro power potential generation capacity is as high as 45,000 MW.