The Prospect of Ethiopian Energy Sector for Regional Growth

Ethiopia is the second-largest country in Africa in terms of population and is one of the leading players in the geopolitics of the horn of Africa. It is the seat of the African Union (AU) Head Quarter and the United Nations for Economic Commission of Africa (UNECA). In economic terms, massive investment in infrastructure facilities like roads and industrial parks has transformed the country into one of the fastest-growing economies in the world, with continuous double-digit growth in the last decade. Here, Pragma has tried to put the present situation and future prediction of the country’s energy consumption, production, and potential.

Present

The country’s rapid economic and population growth has led to an increase in demand for energy. As we all know, Ethiopia is one of the countries trying to reach lower-middle-income status in the next few years. We can see examples that are changed from one of the world’s poorest nations to a middle-income economy in one generation. The best example of this is Vietnam. According to International Energy Agency (IEA), Vietnam’s installed power generation capacity is approximately 80,000 MW (80 GW). However, the current electricity production in Ethiopia is only 4840 MW (4.8 GW). Hydro mega projects like the Grand Ethiopian Renaissance Dam (GERD) are expected to play a significant role when completed. GERD will generate 5,150 MW (5.15 GW) of electricity when it reaches total power-generating capacity by 2023. These numbers show that Ethiopia needs at least 70,000 MW (70 GW) to be like Vietnam. In another aspect, European countries provide 1000-2000 MW (1-2 GW) electricity per 1 million people to their citizens. When we compare this to our country using the European standards, we only provide 42 MW (0.042 GW) of electricity to our citizens per 1 million people. This number shows that Ethiopia is experiencing energy shortages and load shedding as it struggles to serve a population of over 115 million people and meet the growing electricity demand forecasted to grow by 30% per year.

Ethiopia’s energy consumption predominantly depends on biomass energy sources, which account for an overwhelming 90%. Traditional energy sources such as fuel wood, charcoal, branches, and dung cakes meet the country’s energy demands. Hydropower, wind, and solar power cover only 4% of the country’s energy consumption, whereas the rest, 6%, of energy sources are imported oils and coal. The demand for oil in the international market is increasing, and its price has hiked up recently. COVID and the war in Ukraine have made importing oil difficult for Ethiopia and African countries. Ethiopia’s oil import cost reached 3 billion USD in 2021 despite a slight drop in 2020 due to the pandemic. Out of these imported oils, Ethiopia uses 35% of them to generate energy.

Ethiopia generates 94% of its electricity from hydropower, while wind and solar energy contribute a small amount of the power. There are currently 14 hydropower stations producing 3,822 MW (3.82 GW). If we see residential energy use, 98.5% of almost every residential person uses wood & dung, and only 1% of the energy used by residents is electricity.

Ethiopian Electric Power (EEP) revenue is increasing by exporting electricity to neighboring countries. In the current fiscal year (2021/22), EEP earned $95 million from electricity export, the highest ever. Djibouti and Sudan, in total, received 460 MW (1,704 GWh) of electricity. There was also a 200 MW (0.2 GW) power purchase deal between Ethiopia and Kenya last week. There is a huge demand in the area for electricity which can be seen as a positive sign for Ethiopia to strengthen its capacity and export.

Future

The government is implementing the ten-year economic plan that replaced the GTPII implemented by the past regime. The duration of the project is from 2021-2030 for ten years. The main target is to double the population’s per capita income and reduce absolute poverty to below 7 percent by 2030. The plan prioritizes five sectors as the economy’s main drivers: the Agriculture, Manufacturing, Tourism, Mining, and Information Technology sectors. Energy isn’t one of the prioritized sectors in the plan. However, a section in the plan discusses energy development for the next ten years. The goal is to raise the country’s power generation capacity from 4,478 MW (4.478 GW) to 19,900 MW (19.9 GW) and power transmission lines from 18,400 to 29,900 km by 2030.

Of all the energy sources the country has, hydro has the highest potential to fulfill the energy demand, and the government plans to reach universal access to electricity by 2030. Ethiopia has the potential to generate 48,035 MW using hydropower only as the country has 12 lakes and nine major rivers with an annual runoff volume of 122 billion cubic meters. It shows the country has enough natural resources to raise its power generation capacity and develop power transmission lines. This resource will allow the government to increase the forex gained by exporting electricity. The government plans to increase the country’s export revenue from electric power to 400 million USD within the coming ten years.

There have also been made a lot of economic reforms under PM Abiy’s administration to move the country forward and open the economy to foreign investors. To reach middle-income status, Ethiopia needs to increase its GDP. According to Trading Economics, Vietnam’s GDP reached 362.64 billion USD in 2021. Ethiopia’s GDP in 2020/21, according to the National Bank of Ethiopia (NBE) annual report, was 111,271 billion USD. Looking at these numbers, Ethiopia roughly needs around 250 billion $ to be like Vietnam. Ethiopia needs to provide the right platform for investors to create businesses, companies, and industries to increase productivity. One way to increase the country’s GDP is by increasing investment in the energy sector, as there’s a lot of potentials. As we have seen, Ethiopia has untapped potential to produce electricity from hydropower, wind, solar, and geothermal sources.

Source: EEP

One potential challenge for attaining production ambitions is getting too committed to solar and wind, as they might not always work. There is no consistency and reliability between these two energy sources. The solution is to balance it as much as possible and store energy from the wind and solar. It can be stored using batteries and no batteries and will benefit society in keeping energy for the long term.

Overall, the energy development systems in Ethiopia can go in two directions: one is on the grid when the country builds large power stations, have a grid, and transform energy for society. The second is off-grid when the consumer directly connects to the generator. Several government economic reforms passed in the past four years allow private investors to engage in various sectors. The power sector is one of them. The current climate enables private investors to engage in energy production through public-private partnerships (PPP) and independent power purchase (IPP) agreements.