Benefitting from an array of renewable resources, Djibouti is currently a net energy importer as of early 2016, but has set itself some ambitious goals to improve domestic supplies. The energy sector is a key piece of the country’s long-term development plan, known as Vision 2035, which identifies energy access and energy security for its 850,000 strong population as strategic goals and central to expanding manufacturing and industrial activities. The plan sets forth the ambitious goal of meeting 100% of Djibouti’s energy demand through renewable energy by 2020. This will require significant capital investment and support from private sector partners, but in light of the increase in renewable energy generation throughout the East African region, Djibouti is well positioned to tap into global capital flows.
Although it sits next to some of the world’s largest energy producers, with no proven oil reserves and no refining capacity as of early 2016, Djibouti relies entirely on imported fossil fuels and electricity to meet its energy needs and, therefore, remains exposed to fluctuating oil prices. Given the country’s primarily urban profile – in 2014, 77.3% of Djibouti’s population lived in urban settings, according to the UN statistics division, with the majority in the capital, Djibouti City – energy consumption favours modern fuels, in particular electricity, kerosene and liquid petroleum gas.
According to a “Renewables Readiness Assessment” conducted by the International Renewable Energy Agency (IRENA) and published in 2015, Djibouti’s per capita energy consumption was about 440 kg of oil equivalent in 2012. The country has since embarked on several mega-infrastructure projects in various sectors, driving local demand for energy to increase. This has been reflected in rising imports of hydrocarbons and derivatives in recent years, which increased more than two-fold in four years from 187,709 tonnes of oil equivalent in 2010 to 474,487 tonnes by 2014, according to Djibouti’s Statistics and Demographic Studies Directorate.
Prior to 2011, 100% of Djibouti’s energy was generated from heavy fuel oil and diesel thermal power plants. From then onwards,however, some 65% of Djibouti’s electricity has been supplied through a 150-MW interconnection line from its hydroelectric resource rich neighbour, Ethiopia. Local power production, which now accounts for around 35% of the energy supply, continues to be generated though local heavy fuel oil or diesel thermal power plants, with a total power generation capacity of 126 MW, distributed between four generation plants: Boulaos (108.2 MW), Marabout (14.4 MW), Tadjoura (2.2 MW) and Obock (1.2 MW), according to a Djibouti market brief by the Africa-EU Energy Partnership in 2013. The two generation plants in Djibouti City, Boulaos and Marabout, feed the main 5-km, 63-KV backbone, while the isolated systems of Tadjoura and Obock are based on lower voltage distribution networks.
The existing generation plants are powered by fuel oil and diesel to produce baseload electricity. However, due to a legacy of under maintenance, effective generating capacity is limited to 57 MW out of the total 126 MW that is installed, according to IRENA.
The state-owned electricity company Electricité de Djibouti (EDD) previously operated as a monopoly in the generation, transport and distribution of electricity, until mid-2015, when authorities liberalised the generation of electricity from renewable energy sources in a bid to incentivise the exploration of the country’s significant renewable energy potential. According to the Central Bank of Djibouti, EDD’s electricity production reached 446,171 MWh by end-2014, an increase from 372,658 MWh in 2010.
The deployment in 2011 of the interconnection with Ethiopia has had a significant impact on the energy sector. Between 2010 and 2011, domestic energy production declined by more than 37% , enabling Djibouti to reduce its dependence on fossil fuels and, by extension, its oil import bill, as less oil was needed to power the thermal plants. “We currently rely on Ethiopia for around 65-70% of our electricity sources with the rest supplied by fuel,” Ali Yacoub Mahamoud, the minister of energy, told OBG. “But we are looking to diversify, both to help local development and reduce pressure on Ethiopia’s grid.”
The majority of the supply coming from Ethiopia is hydroelectric power, according to IRENA, which has also resulted in welcome reductions in prices for electricity. The power supply through the interconnection is regulated by a bilateral contract, which established a maximum energy trading of 243 GWh per year over the period 2012-15, and up to 70% of Djibouti’s load up to 2019. Under the agreement, tariffs were set at competitive prices ranging from $0.06 to $0.07 per KWh, depending on the hours of the day or seasons, significantly below the cost of fossil-based electricity, at DJF52 ($0.29) per KWh in 2014. The connection has nonetheless left Djibouti exposed to the irregularity of Ethiopia’s hydraulic resources, particularly during the country’s dry season – a significant challenge in light of the ongoing drought.
The electrification rate for the population of Djibouti is around 55%, which means that access to energy remains a significant challenge for the country and, with demand on an upward trajectory, it now faces a considerable task in terms of meeting its energy demands. At 330 KWh, Djibouti’s per capita annual electricity consumption is among the lowest in the world – below the African average of about 575 and the global average of over 2770 KWh, according to IRENA. Though the main grid primarily serves the capital and adjacent urban areas, access remains limited due to insufficient networks.
Meanwhile, with no generation available locally and no connection to the main grid, access to electricity in rural areas is around 1%. “Currently, consumption stands at 12m litres per year but with increasing purchasing parity and the arrival of more corporate clients this amount will increase swiftly,” Fahmi Abdo Hachem, former CEO and current director of operations of Societe De Distribution Et De Vente De Kerosene, a petroleum company, told OBG.
However, in spite of the low levels of usage in absolute terms, electricity consumption has increased by an estimated 75% in the past 10 years, according to IRENA. Annual production, by contrast, is estimated to have grown at a much slower rate of 5.7% in the past 40 years. Meanwhile, in 2013, the Africa-EU Energy Partnership forecast demand for the main grid to increase by 70-75% in the period up to 2035 and demand for the isolated networks of Tadjoura and Obock to increase at only slightly lower rates of 62.5% and 49.5%, respectively. According to EDD, total demand stood at an estimated 121 MW in 2015 and is set to nearly triple by 2032 to 355 MW.
Obstacle To Growth
Conducted in 2013, the World Bank’s Djibouti Enterprise Survey revealed that some 49% of firms in Djibouti rated access to electricity as the biggest obstacle to daily operations. Despite tariff reductions following the implementation of the interconnection with Ethiopia, at DJF52 ($0.29) per KWh in 2014, Djibouti’s electricity rates remain among the highest in the world, well above the African average of $0.14, East Asia’s $0.07 and South Asia’s $0.04, according to data from the African Development Bank. Nearly seven out of 10 firms rely on private generator power as a backup and power bills account for around 25% of average business expenses, according to the World Bank. Local press reports cite power outages as becoming increasingly frequent, with the longest, in May 2009, blacking out Djibouti City for up to nine hours per day.
The irregular and costly supply of energy has had a particularly negative impact on local businesses, and the country’s economic development more generally, by preventing what might otherwise be a faster development of the industry and manufacturing sectors.
In recognition of the strategic importance of a stable energy supply, the Djibouti government is taking steps to increase energy security. Launched in 2014, the country’s ambitious long-term development plan, known as Vision 2035, makes improving access to energy and energy security a primary strategic focus and envisages a power sector transition from 100% fossil thermal in 2010 to 100% renewable energy by the year 2020.
While a number of emerging and frontier markets in Africa, such as Morocco, Kenya and South Africa, are also targeting increases in renewable generation, if Djibouti is able to reach its target, it would become the first African country to achieve that status. While the environmental sustainability aspects of domestic renewable production are central to Djibouti’s attractiveness, if properly exploited, they could lower local energy production costs significantly, aiding an increase in electrification rates and, ultimately, enhancing energy security for the nation.
The sector’s strategic vision is also informed by the first National Strategy for the Efficient Use of Energy, put into action in June 2015. A joint effort by the Djibouti Agency for Energy Management, the UN Development Programme and the Regional Centre for Renewable Energy and Energy Efficiency, an independent, non-profit organisation, the strategy seeks to increase energy efficiency and demand management, while increasing the role of renewables in Djibouti’s energy mix. The strategy prioritises the implementation of energy efficiency schemes in several sectors to help reduce pressure on the local grid, a move which, in the short term, could not only provide big savings for the country’s foreign exchange reserves through a lower import bill but also supports efforts by Djibouti to meet its target of decreasing carbon emissions by 40% by 2030.
A Focus on Renewables
The country’s ambitious goals for the energy sector are reliant on its substantial and relatively untapped renewable energy potential, particularly in geothermal, wind and solar resources. In its 2015 report, IRENA confirmed the transition to green energy as a possibility, attainable by 2020, through the development of the country’s renewable resources, both for on-grid and off-grid applications, in tandem with the strengthening of the interconnection with Ethiopia.
With an estimated potential of 1000 MW, according to the Ministry of Energy, the country’s geothermal potential is particularly promising. Geothermal production is a priority focus for other East African states, including Kenya, and for good reason. Given its flexibility, this type of energy has the potential to replace the existing heavy fuel oil and diesel base-load, enabling production of energy at stable and affordable prices, and stabilising the electrical system to support the integration of more intermittent energy sources, like solar and wind. According to IRENA, the construction of geothermal power plants could reduce the cost of power generation by a margin of nearly $0.20 per KWh, relative to the heavy fuel and diesel currently in use (see analysis).
Djibouti’s renewable energy potential has not gone unnoticed by international investors and donors alike. A series of geothermal, solar and wind energy projects are under way, with the potential to increase electricity rates in urban and rural areas and boost energy security in the medium term (see analysis).
To this end, Djibouti authorities are taking important steps to strengthen the sector’s legal framework in a bid to increase efficiency and provide incentives for greater private sector participation. One important step in this direction was the liberalisation of the electricity market for the generation of renewable energy in the first half of 2015. While the EDD will continue to enjoy a monopoly in terms of transport and distribution of electricity, the new law nonetheless allows private operators to generate electricity through renewable sources and to supply the national grid. Moreover, in May 2015 a law was passed which provides a tax exemption on all renewable energy equipment. Further incentives should be expected in the near term as efforts to attract further private investment continue.
The design of a coherent framework for public-private partnerships could also be a possibility in the near term. Djibouti launched the High National Council of Public-Private Dialogue in March 2014 to improve the country’s business environment, and authorities in Djibouti are working with a number of agencies, including the World Bank’s Public Private Infrastructure Advisory Facility and the African Legal Support Facility, to make the current legal and regulatory framework more attractive for private investors.
Given the benefits of the country’s current level of interconnection with Ethiopia, improving cross-border grid integration is also a priority for the country, with work already under way to boost the energy supply from Ethiopia via a second interconnection, which is in the beginning stages.
In November 2015 Ethiopian Electric Power and EDD signed a contract for the feasibility studies for the second electrical interconnection. Financed in the form of a grant from the Kuwait Development Fund, the feasibility study will cost $2.4m. According to local media, the second interconnection will extend from Samara in Ethiopia’s Afar region, to Jaban, in Djibouti City, spanning 280 km, 100 km of which is in Ethiopian territory. The new 230-KV transmission line will enable imports of between 35 MW and 70 MW. The existing 230-KV line supplies around 35 MW.
The interconnection initiatives between the two countries are part of broader efforts to develop energy linkages between Djibouti and Ethiopia. Djibouti’s ports already process an estimated 90% of landlocked Ethiopia’s inbound and outbound trade. Ethiopia’s GDP expanded by 10.3% in 2014, according to the IMF, outpacing its peers, and is expected to grow by an annual average rate of 8% through to 2020. The growth trajectory of the country, which has a population of 95m, has seen demand for fuel increase at a double-digit rate in recent years.
Throughput for refined products going from Djibouti to Ethiopia registered an increase of 16% in 2015, rising from about 3m cu metres in 2014 to 3.5m cu metres. At under $40 per barrel in early 2016, the current low oil prices are likely to see demand continue to expand in the coming years, and Djibouti is well positioned to benefit from it.
In The Pipeline
One project in particular is set to have a significant impact on refined product throughput. In late September 2015, the two countries signed an agreement for the construction of a refined petroleum pipeline. The Horn of Africa Pipeline Project (HOAPP), as it is known, will provide a link between Djibouti’s Damerjog port with a storage terminal in Awash, to the east of Addis Ababa, in central Ethiopia, through a 20-inch diameter, 550-km-long pipeline, for the transport of diesel, petrol and jet fuel.
The project is being financed by US-based private equity firm Blackstone Group and will be carried out by a 50:50 joint venture between Blackstone’s Black Rhino Group and South African service provider Mining Oil and Gas Services, a unit of Royal Bafokeng Holdings. At an estimated cost of roughly $1.55bn, the new pipeline is expected to reach completion in 2018 and will operate as a 30-year concession, once commercial operations begin.
Phase two of the project will consist of the construction of an import facility with a storage capacity of 950,000 barrels in Damerjog which, together with new offloading facilities, is set to increase efficiency and capacity at the port significantly. With current storage capacity of 371,000 cu metres, the new storage facility has become a necessity for Djibouti, which already operates at maximum capacity, with vessel offloading times on the rise recently. The new facilities will raise total capacity to 500,000 cu metres, ensuring sufficient capacity in the coming years.
The project is also set to significantly improve efficiency and security in the fuel supply chain, reducing transport costs and cutting journey times. At present, the transport of fuel to Ethiopia is done via an 800-km two-lane route across mountainous terrain, with some 500 tankers making the journey each day (see Transport chapter). Once operational, the pipeline will enable the movement of some 240,000 barrels of fuel per day and is also expected to reduce waste from fuel leaks that occur en route.
Work on another mega project, a gas pipeline connecting Djibouti to Ethiopia, is also expected to start shortly. The project is being executed and funded by Chinese group Poly-GCL Petroleum Investments. According to local media, the project will represent an investment of some $4bn, with the largest share – $3bn – to be spent on Djibouti territory. Since late 2013 Poly-GCL Petroleum Investments has had a production-sharing deal in place with Ethiopia’s Ministry of Mines to develop the Calub and Hilala gas reserves in the south-east of Ethiopia.
Gate To East Africa
Both projects come on the back of broader bilateral efforts to accelerate economic integration with landlocked Ethiopia and will reinforce the country’s strategic position as the gate to East Africa, a role Djibouti authorities are keen to advance. “Djibouti has a lot of potential to become a regional centre for the distribution of hydrocarbons,” Omar Assoweh, director-general of International Hydrocarbons Company of Djibouti (Société Internationale des Hydrocarbures de Djibouti, SIHD), told OBG. “Due to its geographical position and advanced infrastructure that adheres to all modern quality standards, the country should focus itself on supplying the mostly land-locked region, composed of countries with high economic growth and energy needs, such as Ethiopia and South Sudan.”
Djibouti is investing heavily in seaports and other infrastructure projects, which poses an important opportunity for the small country. “Today Djibouti is the gate to a market of some 450m people with significant energy needs. The potential to export to a number of countries, in particular within COMESA, is enormous,” Mourad El Mouetamid, general manager of Djibouti Petroleum, told OBG. The new petroleum pipeline, coupled with an already completed 750-km rail link connecting the capital cities of Addis Ababa and Djibouti City in less than 10 hours, are initial steps in what could be the beginning of a much larger regional distribution network. According to Greg Meneses, managing director of Black Rhino Group, a multi-modal transport system incorporating the new pipeline, rail link and truck delivery, could pave the way for wider distribution beyond Ethiopia, to South Sudan, Uganda and northern Kenya. “Although the investment into Djibouti is less than half of the HOAPP investment,” Meneses told OBG, “the infrastructure included in HOAPP Djibouti significantly bolsters the strong existing regional growth trajectory.”
With East Africa’s aggregate electricity demand set to reach 50 TWh in 2018 and 120 TWh by 2030, and the COMESA region already facing an electricity deficit estimated at 20%, the regional electricity market offers further opportunities for Djibouti. Given its strategic position, Djibouti is well placed to become a transcontinental hub between the energy pools in Africa and the Arabian Peninsula linking, as IRENA noted, two key power interconnections: the East African Power Pool and the GCC interconnection. In the short term, integration with Yemen on the Arabian Peninsula is looking likely, as Ethiopia prepares to supply it with energy through a submarine-transmission line through Djibouti. An Ethiopia-Kenya transmission line is also under way, pointing to continued regional integration.
Longer term, the development of its significant renewable energy resources could eventually enable Djibouti to enter the regional power market as a power seller, supplying baseload power to Ethiopia during the country’s dry season, when hydropower generation is limited, and to other countries connected to the Ethiopian power grid.
At home, one sector already benefitting from Djibouti’s strategic position is bunkering and re-fuelling services. “Due to a substantial demand for fuel from an increasing number of cargo ships docking or circulating across the Red Sea to different destinations, the trend has been for those to be refueled at inner anchorage,” Farhan Omar, sales and marketing manager at Emiroil, a primary supplier of fuel products to Djibouti, told OBG.
Currently, Red Sea Bunkering, based in Djibuti, enjoys a monopoly in bunkering services and fuel supply. The company is undergoing expansion and announced in late 2015 that it would be offering offshore bunkering via a double hull 9300-deadweight tonnage vessel. Since July 2015, it has also offered an onshore road tank wagon service to all Djibouti ports and an ex-pipeline service at the Horizon Terminal Jetty. According to Abdi Ismail Kahin, general manager of Emiroil, based on its geographic position and stable environment, Djibouti has the opportunity to become a hub for bunkering across the region. “Although,” he told OBG, “to do this, facilities must be well maintained and technologically up-to-date.”
Meanwhile, the downstream marketing and distribution market is seeing significant changes. Despite rising local demand, Total and Shell both left the Djiboutian retail sector in 2015. Shell sold its operations to Oil Libya, while Total sold to Rubis Energie, which now controls the largest distribution operations in the country, with an annual sales volume of over 100,000 cu metres. Subsequently, National Oil Ethiopia, with its 40% share of the Ethiopian petroleum retail market, entered the Djibouti market for distribution of fuel, oil and petroleum products by purchasing of Oil Libya Djibouti for $22m. Oil Libya’s assets included six retail outlets, oil tankers and an oil depot at Djibouti-Ambouli International Airport. Oil imports are regulated by SIHD, a state-owned firm. In late 2013 SIHD entered into a joint venture with Kuwait’s Independent Petroleum Group, founding the Djibouti Oil Supply Company to import refined petroleum products to Djibouti.
The expansion of local generation from renewable power will have positive knock-on effects on the provision of other basic utilities in Djibouti. This is most visible in the large capital investment plans for the water industry, a priority sector that the authorities are seeking to improve. With low reserves, access to water remains a challenge in Djibouti. Water production reached 18.3m cu metres in 2015, around 40% below the current level of demand, according to the National Office for Water and Sanitation of Djibouti. “Access to water has been increased, but at the same time the demand for water has also increased by almost two-fold, and the pressure on the water system has grown significantly,” Mohamed Fouad Abdo, general manager of the National Office of Water and Sanitation of Djibouti, told OBG. “The water connection with Ethiopia and the desalination projects will allow for sufficient supply in the coming years and will further expand affordable water access for people of low revenue.”
Among the most important initiatives currently under way is the Project for Producing Safe Drinking Water with Renewable Energy ( Production d’Eau Potable par Dessalement et Energie Renouvelable, PEPER). A €46m investment, of which €40.5m will be supplied by the EU Development Fund, will see the construction of a new desalination plant in Djibouti City. With initial capacity of 22,500 cu metres per day, scalable up to 45,000 cu metres per day, the new facility is expected to more than double water supply in the capital, once it is fully operational.
In light of the high demands the plant will exert on the electrical grid – desalination plants are voracious energy consumers – the second phase of the PEPER project will see the construction of a 20-MW wind farm to help power the plant. A number of water treatment projects were also under way in early 2016, including a new water treatment plant in Balbala, which is a suburb of Djibouti City, and the expansion of the existing water treatment plant in Douda.
As with the rest of the sector, integration with Ethiopia in the area of water provision services is also set to increase. A cross-border water project, which will see Ethiopia supply Djibouti with 100,000 cu metres of water per day, at affordable prices, was agreed in 2014, and will be funded through a $332m-loan from China Exim Bank. The project is being implemented over a period of 24 months.
While meeting increasing energy needs will remain a key challenge, several factors are likely to prompt a significant redefining of Djibouti’s energy sector in the long term. With considerable renewable energy resources for the size of its economy, there is real potential for Djibouti to reach its goal of self-sufficiency, reducing energy costs for businesses and benefitting the economy as a whole.
Furthermore, backed by a strong political will which has produced an all-encompassing energy strategy, and with a strengthened legal framework under development, the resulting increased transparency could attract more private investment, not only in the energy industry, but also in other sectors, where energy costs are a deterrent to investment.