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Bank’s geothermal guarantee for Kenya will encourage private financing for renewable energy expansion

The African Development Bank (AfDB) has approved a $12.7 million partial risk guarantee (PRG) to “ease investor risk” for the initial phase of a major geothermal project in Kenya.

According to the AfDB, “this mitigation of perceived political risks will promote foreign direct investment in Kenya" and encourage private financing for power generation.

The PRG is for the first 105 megawatts (MW) of electricity to be generated by plants operated by three independent power producers (IPPs) at Menengai, which the AfDB said aims “to exploit a portion of Kenya’s geothermal potential to provide power to about 500,000 households and 300,000 businesses”.

The plants are being financed, designed, built, installed, operated and maintained on a build-own-operate basis by the IPPs.

The AfDB said: “The three IPPs will develop and construct three 35 MW geothermal power plants with a total capacity of 105 MW. This will help diversify Kenya’s energy mix, provide clean, reliable, low-cost power and strengthen the national grid by increasing national installed renewable power by approximately 10%.”

The Menengai geothermal steam field development project involves the supply of steam by the Geothermal Development Company (GDC) to the three power plants. The GDC is a wholly state-owned company formed as a ‘special purpose vehicle’ to fast track Kenya’s development of geothermal resources. The Kenya Power and Lighting Company Limited will purchase the power from the plants.

The director of the AfDB’s Energy, Environment and Climate Change Department Alex Rugamba said. “Eighty-four per cent of Kenya’s population does not have access to modern forms of energy and the country is currently suffering from insufficient generation capacity. Yet Kenya’s geothermal potential is among the greatest in the world. So we see the PRG as having three roles: attracting needed investors to realise the Menengai project, helping to tap unleashed geothermal potential, and helping to bridge the tremendous gap between supply and demand.”

The GDC said the first 100 MW will be generated in Menengai by the end of 2015 (2-page / 1.78 MB PDF). GDC said: “The success of 100 MW within four years after the drilling operations began is a result of an early-generation strategy developed at GDC. Normally geothermal power plants have had a history of long gestation periods ranging from seven years to over 15 years.”

By 2016, GDC said the Menengai project is expected to be generating 810 MW. “The 810 MW is about half of (Kenya’s) current total electricity generation. The difference is that 810 MW from geothermal is very cheap... its realisation means that the cost of production will come down and that more and more investors will be attracted to the country for its reliable and cheap power.”

The Menengai project “is an interesting one and one that will redesign the way we produce power in this country”, GDC said.

Power generation in Kenya has been liberalised since 1996. According to the country’s energy ministry, IPPs contribute about a third of the country’s domestic generating capacity, which currently stands at just over 1,600 MW and comprises hydro (770 MW), geothermal (241 MW), thermal (622 MW), co-generation (26MW) and wind (5MW). The maximum recorded demand is around 1,410 MW, while the ministry said actual demand is estimated at 1,700 MW, which is a shortfall of 536 MW after provision of a 30% reserve margin.

Kenya’s government aims to increase infrastructure partnerships with private investors to boost generating capacity. It is envisaged that this capacity will be made up of natural gas-fired plants (1,050 MW), geothermal (1,646 MW), wind (630 MW) and coal (1,920 MW).

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