Mikael Alemu is co-founder of “10 Green Gigawatt for Ethiopia”, an Ethiopian solar energy developer co-founded by Ethiopian, Israeli and German professionals in solar energy, economic development and international finance. Having a background in engineering and strategic management, Mikael is confident that off-grid solutions are essential for economic development of Ethiopia. The Reporter’s Samson Berhane sat down with him to learn more about the energy industry and the initiatives that must be taken to meet the electricity demand:
The Reporter: Let’s start with the introduction. What do you do? In which area do you have expertise?
Mikael Alemu: When I see what is going on in Ethiopia, I believe that a lot of things are similar to how the economy was developing in Eastern Europe in the 1990s. That gives some insight into what’s going on. For the last several years, my focus has been on Ethiopia, specifically energy. I believe that the energy situation in the country is one that requires immediate attention.
Ethiopia has installed capacity for electricity generation at just 5 gigawatts, which for a country of 120 million people is unbelievably little. Russia generates 245 gigawatts and has 140 million people, while Vietnam, with 97 million people, generates 70 gigawatts. A city conglomerate of Tokyo has 38 gigawatts. It goes without saying that in the modern world you can’t do anything without electricity. It’s impossible to find any area that doesn’t require electricity, with very minor exceptions where it is still by far more economical to use coal: steel and cement production.
Like I said, 5 gigawatts installed electricity generation capacity is far too little for modern economy, and it’s impossible to imagine how the country can develop without substantial increase in generation capacity. We have the Grand Ethiopian Renaissance Dam or GERD, which is a huge nationwide project that is only producing 670 MW out of it’s 5.25 GW potential. Everything needs electricity in this day and age, and that’s why we think it’s most important for the development of the country. That’s why my partners and myself see our mission to develop energy sector and created “Ten Green Gigawatt for Ethiopia” company that is focused on solar energy.
Let’s talk about your company. What do you do? When was it founded? What’s your target?
The idea of building an Ethiopian solar energy developer supported by strong international engineering expertise and foreign financing made me lose my sleep two years ago. Since that moment my partners and myself have been studying Ethiopian energy market, solar industry business cases in other African countries, value chains for our future customers and many related issues.. And last June we have registered a holding company for our project, and I have moved to Addis, laying the foundation for our business activities. I believe that before the rainy season we will open an office,relocate several key people here, and start executing projects.
“10 Green Gigawatt for Ethiopia” will establish a first sizeable warehouse with solar installation components in Ethiopia. We will have PV panels, industrial three-phase inverters, and batteries in stock. The world’s solar equipment market is chronically deficient. We always have issues with panels, inverter controllers, and other such things. So, I would be happy to bring components to Ethiopia. That’s my goal.
So, you’re planning to set up an assembly firm?
We will have our own stock of components, as well as our own engineering team and installation crews. In several years, we’ll start manufacturing in Ethiopia. We will produce mounting structures for solar panels. As for assembly of solar panels – I don’t see why somebody has to go into the assembly of the panels. This process in costly while bringing extremely little profit margins of 4-5%.
Over the last three decades, the government has tried to expand energy infrastructure across the country. Even from the statistics we see, Ethiopia is the largest and is even called the “energy powerhouse of Africa” because of the high amount of electricity it generates. But still, if you see the electricity coverage, it’s very low. The government says that the overall electricity coverage is now over 60 percent. But what is the government missing? We have several electricity infrastructures that have been expanded, but much of the population still does not have electricity in Ethiopia.
First of all, Ethiopia is not yet the energy powerhouse of Africa. Several African countries have more electricity generation per capita. Without a question, Ethiopia has a lot of potential as we have 13 months of sunshine and a lot of territory for solar panels as well as strong rivers with big energy generation potential
Second, there is an issue of centralized electric grid. Ethiopia is one of the largest countries in Africa, more that one million km2. Our energy grid is huge, very expensive to operate and maintain. Every time when power lines or transformer substations are damaged, technical crews have to come and repair them, and with the world’s lowest electricity tariff (Ethiopian population pays about 3 cents per kilowatt-hour), the Ethiopian Electric Utility (EEU) does not have enough money to maintain and repair infrastructure. In a recent interview, the CEO of EEU stated that it needs at least twice the budget to maintain the existing grid.
Ethiopian energy grid serves about 38 percent of the population, and 11 percent are served with off-grid solutions. Do we even have money to make the grid available to the whole country? It would be prohibitively expensive because of the complicated landscapes. To add to that, the population is also scattered and lives far from each other, especially in the south, where we have pastoralists and people that tend cattle. I think that extending grid to most of population is impossible and not necessary.
According to what you’re saying, the path we’ve been on for the past two decades of building several structures with billions of birr in investment is one of the areas that has left the development sector heavily indebted. For example, the Ethiopian Electric Power Company owes the Commercial Bank of Ethiopia billions of Birr. Given that most of the taxpayers’ money went to this sector, are you saying that the investments were in an area where they weren’t supposed to be?
Well, it’s progress. We may estimate that United Kingdom has invested hundreds of billions of pounds sterling into in coal mining and iron ore extraction, but where is steel&coal industry of the UK today? It does not exist, completely destroyed by China. Hundreds of billions of invested pounds have gone, as well as the lives of tens of thousands of people who died building British industries.
Economic development is rather simple thing. Britain it in 1740s, France in 1780s, then Germany, and then other countries, following the same pattern of evolution. UK now makes money from financial services and IT start-ups.
When you are a student, you have to go to the first grade before you go to the fifth grade, so in this sense, the development of centralized electric grid was the first grade of economic development. It made Ethiopia modern, but the future shouldn’t be “coal mining”. Off-grid solutions are least-cost approach to rural electrification, making centralized grids obsolete.
So, you are saying that investing in non-grid solutions is profitable and less costly than investing in the grid sector. Taking that into account, what is your recommendation to the government?
It would be no surprise to me to see the government go down the road of grids and large-scale generation; that is what governments do around the world, but the good news is that a government cannot simply turn up and construct five more dams tomorrow. Even though you build infrastructure to generate electricity, let’s say by building a nuclear power plant that generates 25 gigawatts, you still have to think about distributing these 25 gigawatts to villages, which brings back the idea of grids. It also costs about USD 10 billion to build a nuclear power plant, and half that amount to build another GERD.
So, we are not talking about the alternative approaches; the government is focused, and it is within its interests to upgrade the price to 10 cents per kilowatt hour. This is a good move because they will then have money to maintain the grid. In Ethiopia, many of the developed places have grids; there is a new substation in Bishoftu, and everyone is happy.
I think that even if all the substations in Ethiopia were operational, the generation would still not be enough. Right now, there is about 20 percent of unused electricity generated, and 25 percent is lost due to old equipment.
Regarding the tariff, the fact that the Ethiopian government charges a low tariff is said to be one of the reasons that discourages investors from engaging in its energy sector. What is your take on that?
Low electricity tariff is just one of the five factors discouraging investors.
Let us look at the nature of power purchase agreements (PPAs) – ones that government signs with investors. PPA is an obligation from the government to purchase electricity for 20-25-30 years at the pre-defined tariff.
To sign PPA, investor have to believe the government, will be able to honor it’s obligations, i.e. be able to pay for the duration of contract. So, the government should have a good credit rating and investors have to feel that the political situation is stable.
Do you think the tariff should be deregulated and maybe governed by the demand and supply so that many investors would be attracted to Ethiopia’s market and also avert the electric power shortage that citizens are facing right now?
Two things: tariffs are for the grid. Tariffs for the grid are important, I feel, for EEU, which maintains the grid. Investors should also be coming to do upgrades for particular businesses.
Is that what the government is doing right now?
The government can do more; they can make easier upgrades, like for one customer. The government has little involvement in off-grid systems. But the government can make the investment climate better.
If it’s off-grid, does the investor set the price?
Absolutely, by the investor and the customer, of course.
However, the investor’s goal remains to provide electricity to investors or businesses because the general public cannot afford to buy electricity at a higher tariff from private developers. So, taking that into account, what is the best solution, especially an off grid solution for citizens?
I believe it’s something that we will be able to see over time whether it’s working or not. But my belief is that large power generation can provide electricity to commercial users, and some amount of electricity can be provided to the local population. My calculations show that there is a reasonable price that I can charge commercial users, so I can give it to the population for free. This is one of business models.
There are other models, of course, but I believe that a low tariff for the population can be maintained. Also, the population in Ethiopia consumes little electricity, and this will not change overnight. People would not install air conditioning units while living in their huts. It will grow slowly, and by the time they live in nice villas, they will most likely have enough money to pay 10-15 cents per kilowatt hour.
The tariff is only, as you said, for the grid. But with regards to solutions, how can the government provide solar lanterns or panels, especially taking into account the geography of Ethiopia and its population and demography? What kind of grid solutions do you recommend for Ethiopia? Plus, do you think Ethiopia might encourage the production of solar lanterns locally?
Those are questions about the solution for the population. As previously stated, I come from a background in strategy analysis, and I also see things from a different perspective. Ethiopia is not the first country that is going through economic development; it’s following the path that was started in 1740 by England, which was the first country to start going this way. We all know how it works. For example, pastoralists are wonderful, but there will be no pastoralists in 50 years. It’s just impossible. People require adequate medical care and must live in a clean environment. So, it will change; urbanization will come; and society will change a lot, and people will be moving to the areas where the industries also exist.
Energy supply for irrigation/agro-processing/industries/mining can be energy supply for people; you will not be solving the problem when you have to supply energy to people but there are no irrigation/agro-processing/industries/mining. Even today, the most problematic area is the south, with its huge sugar factories and storage facilities. You can supply energy to the sugar factory and to the citizens, but later it will be more urbanized, more concentrated, and more focused. I envision the future of energy, as well as the future of society, as more modernized and concentrated, with more people working in factories. Then I see an energy solution with off-grid generation.
But for a country with a critical shortage of foreign currency, do you think that five percent even matters?
Local assembly at 5% margin does not make economical sense. When you run assembly, you effectively become the supplier of an assembled product. Then you are responsible for product warranty, product repair, customer support, management of distribution channel, marketing and sales support. 5% margin will never be enough to cover related costs.
On the overall energy sector, the government is encouraging many foreign investors, especially as a public-private partnership, to invest in geothermal, solar, and other areas. So, what advice do you have for investors and the government in terms of creating a conscious investment climate?
First, investors should be aware of huge deficit of electricity in Ethiopia. Our country needs at least 50 gigawatts to support economic development. Second, investors should be aware of the most important number in Ethiopia. It is 2.5% of population, which is how many more Ethiopians are born every year. In five years, there will be 10 million more Ethiopians. These people have to get work because if they do not get work, it will not be good for anyone. So we need to create 10 million new jobs every five years. For this, we need industrial development. For industrial development, we need energy.