Background The global decline of malaria burden and goals for elimination has led to an increased interest in the fine-scale epidemiology of malaria. Micro-geographic heterogeneity of malaria infection could have implications for designing targeted small-area interventions. Methods Two-year longitudinal cohort study data were used to explore the spatial and spatio-temporal distribution of malaria episodes in 2040 children aged < 10 years in 16 villages near the Gilgel-Gibe hydropower dam in Southwest Ethiopia. All selected households (HHs) were geo-referenced, and children were followed up through weekly house-to-house visits for two consecutive years to identify febrile episodes of P. falciparum and P. vivax infections. After confirming the spatial dependence of malaria episodes with Ripley’s K function, SatScanTM was used to identify purely spatial and space-time clusters (hotspots) of annual malaria incidence for 2 years follow-up: year 1 (July 2008-June 2009) and year 2 (July 2009-June 2010). Results In total, 685 P. falciparum episodes (in 492 HHs) and 385 P. vivax episodes (in 290 HHs) were identified, representing respectively incidence rates of 14.6 (95% CI: 13.4–15.6) and 8.2 (95% CI: 7.3–9.1) per 1000 child-months at risk. In year 1, the most likely (128 HHs with 63 episodes, RR = 2.1) and secondary (15 HHs with 12 episodes, RR = 5.31) clusters of P. vivax incidence were found respectively in southern and north-western villages; while in year 2, the most likely cluster was located only in north-western villages (85 HHs with 16 episodes, RR = 4.4). Instead, most likely spatial clusters of P. falciparum incidence were consistently located in villages south of the dam in both years: year 1 (167 HHs with 81 episodes, RR = 1.8) and year 2 (133 HHs with 67 episodes, RR = 2.2). Space-time clusters in southern villages for P. vivax were found in August-November 2008 in year 1 and between November 2009 and February 2010 in year 2; while for P. falciparum, they were found in September-November 2008 in year 1 and October-November 2009 in year 2. Conclusion Hotspots of P. falciparum incidence in children were more stable at the geographical level and over time compared to those of P. vivax incidence during the study period. Electronic supplementary material The online version of this article (doi:10.1186/s13071-017-2124-6) contains supplementary material, which is available to authorized users.