The Horn-of-Africa nation, which is the second most populous on the continent, has the second biggest electricity deficit in Africa according to the World Bank, with about two thirds of the population lacking a connection to the grid.
"Geothermal enhances our energy security by providing constant output power to support industrialisation," Prime Minister Abiy Ahmed said on Twitter, adding that it was the first such power purchase agreement to reach such an advanced stage in the country.
Geothermal power refers to the use of underground hot steam to drive turbines which in turn generate electricity.
It makes up a huge portion of the sources of electricity in neighbouring Kenya, which has abundant geothermal resources on the floor of the Rift Valley.
Ethiopia's Tulu Moye Geothermal plant, which signed the deal with the government, expects to start generating 50 MW of power when the first phase is completed in February 2023, rising to 150 MW at full completion in 2025, it said.
Drilling of steam wells started last month, the company said.
Located in the Arsi Zone to the southeast of the capital, the plant is being developed by the Tulu Moye Geothermal Operations (TMGO), a holding company for Paris based investment firm Meridiam SAS and Icelandic firm Reykjavik Geothermal.
