Ethiopia – Kenya Energy Deal

Ethiopia’s mega dam promises to be a big boost for energy deficient Horn of Africa

Following tests on a new power transmission line, Ethiopian Electric Power Corporation starts exporting energy to Kenya

According to Ethiopian Electric Power Corporation, the state-owned power company has started exporting electricity to neighboring Kenya following weeks of testing and readying a new transmission line.

The line, which took years to complete at a cost of $500 million, has the capacity to transmit 2,000 megawatts of electricity, potentially earning Ethiopia as much as $100 million annually when fully operational.

According to a report published on Bloomberg, citing Ethiopian Electric Power Corp, “The country has completed activities to ensure uninterrupted and reliable transmission of power and it is expected that similar activities will be implemented by the Kenyan side to provide dependable energy integration to a fast-growing East Africa.”

Given the possibilities, economic and infrastructure integration between the two countries is still in its infancy. More can be done to link power, roads, and ports in the Horn of Africa * and recent signs are promising. Kenya’s Safaricom, one of Africa’s biggest telecom and fin-tech companies, was recently given the greenlight to operate in Ethiopia, for a license fee of $850 million, making it the single largest foreign direct investment into Ethiopia. In years to come Safaricom will continue to invest in Ethiopia’s telecom infrastructure.

Recently, a boost has been added to Ethiopia’s power grid, thanks in large part of the Grand Ethiopian Renaissance Dam, a giant hydro-power dam on a Nile River tributary, which began generating electricity in early 2021, and with plans to increase power generation turbines in the coming years. This has been a cornerstone project for economic development but it has stirred tensions with downstream neighbors Egypt and Sudan, more so Egypt than Sudan.

The $5 billion dam, which is wholly financed domestically, is a national priority. It is expected to generate 5200 megawatts of electricity once completed in 2024. In the meantime, Ethiopia has signed power supply agreements with Kenya, Sudan, Djibouti, Somaliland, Tanzania, and South Sudan. According to Bloomberg’s report, The Horn of Africa nation earned $95.4 million from electricity exports last year with room to grow. Demand for electricity has grown massively, but now there is tangible reason to believe supply is coming.

Given the nation’s capacity for hydro power, this current level of power generation only scratches the surface. The electric grid also needs modernization and further expansion. Investment for such projects will be a key priority for a government with ambitious development plans.

Ethiopia’s economy has demonstrated resilience despite several shocks, including covid-19, global supply chain disruptions, inflation, and the conflict in the northern Tigray region of the country. According to the World Bank, the nation’s GDP grew by 5.6% in 2021. In the current year, the growth rate subsided to 4.8%. Still, forecasts for 2023 estimate growth rates of 6.5%.

Indeed, given past economic growth rates, this nation of 120 million people, with a median age of 19 years will have an insatiable appetite for energy. This will have implications for the environment. The current government has emphasized green development in electric generation, hydro and solar being the two main areas.

At the recent COP27 climate summit, Prime Minister Abiy Ahmed highlighted Ethiopia’s “ten-year development plan, anchored on building a climate resilient green economy as one of its key pillars”. Part of this is the Green Legacy, a campaign of nationwide afforestation, planting billions of trees every year since 2020. According to the Prime Minister, this will help to remove hundreds of millions of tons of Carbon dioxide equivalent from the atmosphere and reduce deforestation Combining this with green energy and technology is a key and striving goal.

As always, financing will be a challenge, particularly considering recent delays in IMF funding caused by U.S insistence that the government end its offensive against the Tigray People’s Liberation Front, a Marxist-Leninist party which ruled the country from 1991 to 2018, but now turned rebel group, after a falling out with the new government. The recently agreed peace deal signed, however fragile, gives hope to millions of people affected by the fighting.

To fully unlock Ethiopia’s clean energy potential, peace and stability must be maintained. U.S based energy companies can play a critical role, but they will face competition from Europe as well as China. For the first time, outside powers are seeing Africa’s potential for growth beyond the extractive industries. In East Africa, there are a handful countries which have shown significant GDP growth despite shortfalls in foreign direct investment. The region’s integration drive promises to be a boon for frontier market investors.