Frontier markets represent underdeveloped regions exhibiting market conditions conducive to investment. Looking around the world, low interest rates and saturated markets force investors to seek locations for significant returns on investment. However, Frontier markets offer this with some risk. Significantly, emerging frontier markets offer opportunities for smaller independent power developers, as larger corporate entities are more risk averse but tend to dominate these regions once they reach maturity.
Djibouti is a small country within the North Eastern African region known as the ‘Horn of Africa’. Djibouti’s geographical location plays a key role in both its economical and strategic importance to other nations. Djibouti’s location at the mouth of the Red Sea, combined with its comparatively minimal natural resources, has resulted in an economy being dominated by the services sector which is fairly unusual in the African context. With the only deep-water port facility in the region and free trade policies, Djibouti has both a strong income from the shipping sector, and massive potential for expansion of this capacity
The current power situation in Djibouti is that there is around 120mw of generation capacity comprised of several diesel generation units. With a peak demand of approximately 90mw, according to sources, only around 40mw of the 120mw is considered reliable base load capacity, with the remainder being imported from Ethiopia. According to sources, this peak demand is projected to grow to 300mw within the next few years due to a variety of driving forces.
Expansion: as aforementioned, Djibouti’s positioning is key to its economy. Driven by international trade and notable support from China, there are large scale expansions to Djibouti’s shipping infrastructure presently underway.
Diversification: Less than 20% of revenue in Djibouti is from industry, with the bulk of revenue stemming from its shipping sector. This lack of diversification stems from a lack of natural resources, hostile environment and key positioning. On the advice of a number of financial institutions, there is a drive toward diversification of the economy. Efforts to formalise the salt mining industry, potential mining endeavours, development of a desalination facility and the development of complementary industry to support shipping are being investigated and supported.
Policy: Djibouti has a free trade policy and is working towards the creation of business-friendly policies. Djibouti aims to become the ‘Dubai’ of Africa. This, paired with the ambition to be 100% powered by green energy, and reform within the IPP policies, will ensure increasing economic expansion.
Hydro: Djibouti has no internal hydro capacity but imports around 40mw of hydroelectricity from Ethiopia under a contract that allows Ethiopia to supply power to Djibouti “when available”. There is some concern that this may not be guaranteed due to dissatisfaction within Ethiopia. Ethiopia has a lower electrification rate than Djibouti, and political pressure exists that contests the export of power when such a large percentage of the Ethiopian population lacks access. However, this is counterbalanced by the fact that Ethiopia is land-locked and, with instability in Eritrea, is reliant on Djibouti for both exports and imports.
Solar and Wind: Djibouti has a hot sunny climate with extremely low rainfall. Currently, there is a significant solar farm under development. Areas of Djibouti additionally feature consistent windy conditions.
Geothermal: There have been significant exploration efforts that have identified viable geothermal capacity due to Djibouti’s positioning at the juncture of three geological rifting systems. In the past, many of these resources were found to be unsuitable due to high levels of mineralisation and the presence of salt water intrusion. However, technological advances, including the use of titanium well bore tubing and chemical dosing, have ensured the viability of Geothermal units in similar mineralised conditions. In addition, the use of Organic Rankine Cycle (ORC) technology now allows the use of mineralized / low temperature heat resources to produce power.
Using the above advances, a 15mw geothermal unit is currently underway with plans for construction scalable to 50mw.
With the current renewable projects under development, there may be concern with rapid saturation of the market. You need to in turn examine the proposed power mix. With ambitions of 100% renewable power, large wind and solar seem to suit the mix well. However, both of these are intermittent power producers, failing to produce power consistently. Base load stability becomes a major concern, variable power sources cannot account for all of base load power requirements with between 60 and 70% of base load needing to be constant generation. Djibouti’s only current source of green power is the 40mw from Ethiopia’s hydro resources and, considering the fact that it is imported, poses grid security concerns. Internally, if one discounts fossil fuelled generation, only geothermal can supply Djibouti with power on such a large scale.
On a smaller scale, wind/solar installations featuring battery storage can service new industrial applications. However, these remain fairly expensive for rural community-based projects, as much of the meaningful economic activity occurs in the capital which excludes the participation of rural populations.
Window of opportunity
With extremely high electricity prices (over 30c/kWh) there are attractive opportunities for developers. The window of opportunity, especially for small to mid-sized developers targeting utility- scale projects, will likely be the next 4-5 years. As Djibouti’s policies mature, larger developers may be able to price many competitors out of the market. Opportunities for smaller off-grid solutions, aimed at both public and private off-takers, presently exist as new industry seeds itself, especially any developments located a distance from Djibouti Ville.
I welcome anyone’s thoughts on this, I’m neither an engineer nor a finance expert, hence open to correction or elaboration. My personal interest in this market is the geothermal sector (longer term) and heat recovery using both small and large-scale ORC technology in the shorter term. I am involved in other potential smaller scale renewable developments supporting business and look forward to visiting Djibouti in the near future.
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