Although public-private partnerships (PPPs) have been successful in reviving Kenya's geothermal industry, project finance still faces certain difficulties.
The current status of geothermal energy in Kenya is as follows:
Kenya presently has an installed geothermal power generation capacity of approximately 950 megawatts (MWe), constituting roughly 30% of the country's total installed electricity capacity. The Olkaria geothermal field remains the most productive site for geothermal energy generation in Kenya. Additionally, there is a 35-MW power plant in the Menengai area that is nearing completion, and further power plant development is already underway.
The Kenyan government has acknowledged the potential contribution of private investors to the growth of the country's geothermal sector. This model is already being applied in Menengai, where the steam field was developed by the state-owned Geothermal Development Company (GDC), while the power plants are being developed by independent power producers (IPPs).
Public-Private Partnerships (PPPs) enable the Kenyan government to leverage the expertise, innovation, financial efficiency, and quality assurance of the private sector. The framework for PPPs in Kenya is governed by the PPP Act of 2021, which aims to broaden the scope of arrangements to facilitate increased participation by private entities through methods such as Annuity-based Design, Build, Finance, and Operate, Strategic Partnerships, and Joint Venture Partnerships.
Currently, 13 IPPs have been granted licenses to undertake new geothermal projects in various locations, including Barrier, Longonot, Akiira, Elementaita, Homa Hills, Menengai North, Lake Magadi, Arus, Baringo, Emuruangogolak, Namarunu, and Emuruapoli.
The PPP model serves as a risk-sharing mechanism
The PPP model allows for the distribution of project risks among different stakeholders. These stakeholders include private developers, the Kenyan government, state-owned developers such as GDC and KenGen, as well as Kenya Power and Lighting Company PLC (Kenya Power) and the Kenya Electricity Transmission Company (KETRACO), responsible for the electricity transmission system and high-voltage transmission grid.
In the context of the 105-MW Menengai geothermal project, the risk-sharing arrangement can be summarized as follows:
The financing models for PPP (Public-Private Partnership) projects in Kenya, especially in the context of geothermal projects, have proven to be effective. In these projects, the public sector concentrates its resources on the riskier initial development phases, such as test drilling and field development, while private partners take on the capital costs associated with more advanced phases like power plant construction, operations, and maintenance.
One noteworthy example is the 155-MW Olkaria III geothermal power plant, which was the first privately funded and developed geothermal facility in Kenya. The government of Kenya conducted the initial exploration of the Olkaria field before Ormat Technologies Inc. took on the development under a Build-Own-Operate contract. Ormat financed the project through a combination of equity and debt financing. Debt financing was facilitated by a Power Purchase Agreement (PPA) with Kenya Power and Lighting Company (KPLC), along with a government security package and Political Risk Insurance (PRI).
A similar model was applied to the Menengai project, where Geothermal Development Company (GDC) supplied steam to the IPPs' power plants. The IPPs signed a PPA with KPLC as the sole electricity off-taker. This model identified certain critical risks, including payment risk by KPLC and steam supply risk by GDC. To assist private developers in securing debt financing, the African Development Fund provided a partial risk guarantee of USD 11.27 million, which lenders could utilize in case these risks materialized. Additionally, two of the projects received concessional financing of USD 15 million through the Dedicate Private Sector Program of the Clean Investment Facility Clean Technology Fund, enhancing their return on investment. Government Letters of Support from the Government of Kenya also bolstered the bankability of these projects by mitigating political and national risks.
However, there are ongoing challenges in financing geothermal PPPs in Kenya. One major hurdle is the absence of a well-developed financial market in Kenya capable of providing sustainable, long-term project financing. Commercial banks in Kenya are reluctant to offer loans with tenures exceeding 10 years, prompting private firms to seek offshore borrowing solutions. Negative publicity can further undermine investor confidence and deter private sector involvement in geothermal projects. Addressing this issue requires transparent procurement processes and consistent decision-making by government officials in the energy sector. An example of negative publicity was the government's recent push to renegotiate Power Purchase Agreements (PPAs) for contracts that had already been signed between the government and IPPs.
In conclusion, the adoption of PPPs has positively contributed to expediting geothermal development in Kenya. Nonetheless, there remain opportunities to refine this model for further improvement.
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