Ethiopia moves to de-risk private power investments

From the newsletter

The African Trade Insurance Agency (ATIDI), a pan-African trade and investment insurer, has signed an MoU with the Ethiopian government. The agreement sets a framework that offers financial protection to IPPs by guaranteeing payments owed by state utilities. This comes as Ethiopia plans to double its energy capacity by 2030.

• Last week, Ethiopia issued an advertisement inviting bids for the construction of two utility-scale solar PV projects, totalling 225 MW, under a Public-Private Partnership (PPP) framework.

• Investing in Africa is often perceived by investors as risky, primarily due to political risks. This perception has scared many potential investors. However, Africa offers numerous opportunities. ATIDI was established as an insurance vehicle to mitigate these risks.

More details

• Under the agreement, ATIDI will provide support through its Regional Liquidity Support Facility (RLSF). The goal is to address key challenges in the energy sector by enhancing payment security, thereby accelerating Ethiopia’s transition to clean energy by attracting foreign investment in renewable energy projects.

• This is timely considering the government has previously relied on domestic resources, which are limited, for its energy infrastructure projects. With its ambition of reaching about 13,000 MW by 2030, it needs private sector money. This signed deal will facilitate that.

• Speaking at the signing ceremony, Finance Minister Ahmed Shide said, “Through this partnership, Ethiopia aims to facilitate timely payments to developers, mitigate financial risks, strengthen the bankability of power purchase agreements (PPAs), and enhance the creditworthiness of EEP.”

• Ethiopia becomes the 11th ATIDI member state to sign the RLSF MoU, joining Benin, Burundi, Côte d’Ivoire, Ghana, Kenya, Madagascar, Malawi, Togo, Uganda, and Zambia.

• Since its inception, the RLSF has guaranteed $24.7 million in approved projects. This, in turn, has facilitated investments totalling $373 million and the development of 182 MW of installed renewable energy capacity across Africa. It recently partnered with Anzana Electric, a renewable energy company, to provide insurance for its 10.7 MW hydropower project in Burundi.

• Ethiopia is endowed with abundant renewable energy resources, including hydropower, wind, solar, and geothermal. With the exception of hydropower, these resources remain largely untapped. Hydropower currently accounts for over 90% of installed capacity. However, the government aims to diversify its energy mix by exploiting its vast renewable resources, with a current focus on solar and wind.

• Solar investments in Africa have attracted significantly more investment than other renewable energy technologies. This is because solar energy, unlike wind or hydropower which are dependent on specific geographical conditions, can be harnessed virtually anywhere with sufficient sunlight. Ethiopia enjoys an average of nine hours of sunlight per day.

• Ethiopia's National Electrification Plan (NEP) aims to achieve universal electricity access by 2025. However, this target needs revision considering that the country has currently achieved only 56% electrification. Connecting millions of people within a one-year timeframe is unlikely to be feasible.

• Solar energy plays a crucial role in this plan, particularly for off-grid communities and rural areas where grid extension is challenging. The NEP intends to provide 65% of electricity access through the grid and 35% through off-grid solutions like solar mini-grids, solar home systems, and large-scale solar farms.

Our take

• Ethiopia could accelerate its renewable energy growth by adopting key policies from China's successful approach, particularly those focused on driving private sector investment. It could implement Renewable Portfolio Standards (RPS), similar to China, which would mandate a certain percentage of electricity generation from renewable sources. This would create a guaranteed market for renewable energy and stimulate private-sector investment. 

• But there is also a need for clear and consistent policies, streamlined licensing procedures, and attractive incentives such as tax breaks or feed-in tariffs. This could significantly de-risk renewable energy projects and attract both domestic and foreign capital. 

• On the question of demand, Ethiopia has plenty, both from the unconnected population, cryptocurrency mining, and electricity export markets. With ATIDI coming in to insure IPPs, the investment market looks set to attract more players to generate electricity.