Introduction
A new Geothermal Regulation No. 453/2019 (“Regulation”) was recently enacted by the Council of Ministers to supplement the Geothermal Resource Development Proclamation No. 981/2016 (“Geothermal Proclamation”). In 2016, the adoption of the Geothermal Proclamation introduced a separate legislative framework to govern geothermal energy resources which was previously treated as part of the mining sector. (For more on the Geothermal Proclamation, please click here). While the geothermal legislations regulate the exploration and development of geothermal resources, for the purposes of power and energy generation, the Energy Proclamation No. 810/2013(as amended) (“Energy Proclamation) and the Energy Regulation No.447/2019 (“Energy Regulation”) will be applicable. In this issue of our legal update, we present the key features of the geothermal Regulation with special emphasis on Grade 1 geothermal resources capable of generating electric power.
Details on application requirements for licenses: the Geothermal Proclamation provides that any person that is interested in investing in Grade 1 geothermal resources must obtain the following licensees from the Ethiopian Energy Authority (“EEA”) - a reconnaissance license, an exploration license and geothermal well-field development and use license. The Regulation provides details on process and procedures that must be followed to obtain these licenses.
Disclosing Beneficial Owners: the Regulation introduced a requirement for corporate entities, at the time of applying for an exploration and well-field development license, to disclose the name, nationality and experience of key personnel, including every director or equivalent officer. For juridical person holding capital shares, the Regulation further requires disclosure of the name of any person who is the beneficial owner of more than five per cent (5%) of the issued capital shares. (Article 4 (b)(5)). In addition, the Regulation requires a full list of the names of the board of directors, showing the address and nationality of each. This is a departure from existing investment laws which do not require companies to declare their shareholders or ultimate beneficiaries as a pre-requirement for approval of any investment or license. Such a condition is typically required at a later stage of investment when requests for repatriation of dividends are made, in which case the National Bank of Ethiopia requires identities of ultimate beneficiary of a dividend to ensure that forex is not ultimately and indirectly disbursed for persons who are not entitled to receive it. The intended objective for this requirement under the geothermal Regulation is likely to trace indirect transfer of ownership or shares abroad and also controlling money laundering and financing of terrorism.
Obtaining License through Bidding: the Proclamation provides that an exploration or well-field development and use license can be issued through competitive bid or direct application. In relation to competitive bid, the EEA will prepare the bid package which among other things will include a model power generation license containing the proposed terms and conditions of the license and preliminary terms of the power purchase agreement.
Work-Program: Under the Proclamation, it is provided that any geothermal licensee must provide a program of work showing details of the work and expenditure to the EEA. The Work Program is a precondition for granting a reconnaissance, exploration or well-field development and use licenses. The Regulation provides further details on what the work-program should constitute, including the following:
- activities to be carried out in the first year of exploration,
- long-range plan for exploration activities, including a plan for completion of a drilling plan by the end of the third year the latest, with drilling to start by the fourth year the latest;
- location of existing access roads, and plans for construction of any roads that may be needed;
- budget for the license term showing expenditures on key items; and
- a health and safety plan.
Certification and Drilling Permit: all tool pushers and drilling superintendents are required to have completed an internationally recognized well control certification program and furnish the certification to EEA before commencing any drilling operation. The certification is required to be renewed every two years. Further, the welding of wellhead connections is required to be performed by a certified welder who holds a certificate of competence for this purpose.
License Transfer: The Proclamation provides that a license may be transferred with the prior consent of the EEA. Transfer includes sale, encumbrance, inheritance, assignment or any other change in ownership of a geothermal license. The Regulation provides details on the manner of transferring Grade I exploration and well-field development license. In particular, it stipulates the requirements for creating security interest over the license.
Relationship between Licenses: once an investor completes exploration and development of a geothermal project and commences electricity generation, the investor will be subject to the rules of the Energy Proclamation and Energy Regulation. Accordingly, the Energy Proclamation provides that a geothermal energy must commence operation within 5 years of obtaining a generation license. The Regulation clarifies the potential overlap between a generation license under the Energy Proclamation and a well-development and use license under the Geothermal Proclamation by stating that a power generation license will be issued during the term of the geothermal development and use license. However, the generation license will be incorporated into the Grade I well-field development and Use License by reference. Further, when the holder of A Grade I Well-Field Development and Use License obtains a power generation license, the duration of the power generation license will be identical to the duration of the a Grade I Well-Field Development and Use License.
Boundaries of a License Area: the Geothermal Proclamation limits the size of a Geothermal Well Field Development and Use License to fifty square kilometres (50 km2). However, the Regulation allows a Grade I Well-Field Development and Use License holder to obtain as many licenses as it can without limitation. This means that although the Regulation provides maximum size to 50km2, the ability for licensees to hold more than one licenses expands the area restriction.
Local Content Requirements: both the geothermal Proclamation and Regulation do not provide for mandatory rules or thresholds that should be met in terms of local employment and local sourcing of materials. However, the Regulation provides that an application for licenses (exploration and well-field development license) should include a program of employment and training including proposals with respect to the employment and training of citizens of Ethiopia; and goods and services required for geothermal operations which can be obtained within Ethiopia. In addition, the Regulation provides that any licensee may employ a qualified foreign national, if it provides evidence that shows a qualified Ethiopian national cannot be found to fill a position and obtains approval and permission thereof from the EEA.
Community Outreach: investors that have completed their exploration stage and applying for a well-field development license must provide community outreach and coordination already undertaken by them and a plan for coordinating with local communities to determine and address impacts. In addition, plans for community action approved by the appropriate regional state authorities must be provided.
Environmental Fund: an exploration or well-field development license holder is required to deposit to an environmental fund to restore the license area. The amount of the fund will be determined by the approved environmental and social impact assessment study. However, it shall not be less than 0.1% of the overall costs of the project activity.
Observations
Grey Area – as noted earlier, the geothermal sector used to belong to the mining regulatory framework. With the introduction of the geothermal Proclamation and the Regulation, applicable rules under the mining laws are no longer applicable to the geothermal sector. However, the divorce has created some ambiguity in terms of rules related to tax. Existing Income Tax laws contains a separate section that deals with mining and petroleum companies. This section among other things provides mechanism on how to deal with exploration, development and rehabilitation expenditures for mining activities. Notably, the corporate income tax rate for mining and petroleum companies is 25% when it is 30% for other sectors. Both the Proclamation and Regulation are silent on the tax aspect of geothermal operation particularly on whether the same approach adopted to mining sector will also be applicable to geothermal resources in terms of exploration, development and rehabilitation. The geothermal laws are also not clear on whether the income tax rate applicable to mining also extends to the sector.
On the Pipeline
The EEA has prepared draft directives that is expected to further regulate the following issues:
- Duty Free Rights: this directive will regulate the type and quantity of consumable goods, equipment, machineries and vehicles to be imported free from custom duty and tax for geothermal operations.
- Application and Pre-requisite for Licensing Procedure: this directive will regulate details regarding work program and feasibility study. Further, the directive will address how an application for license or bid document will be processed and the approval requirement.
- Export of Geothermal Related Samples for Laboratory Test: this directive will deal with the requirements that have to be fulfilled by a license holder while requesting a permit to export geothermal related samples for laboratory test.