Kenya Taps into Renewable Energy
April 07, 2010—Pressure is mounting for countries to tap into their renewable energy resources and forego more polluting fossil-fuel technology. But renewable energy projects often involve significant up-front costs and require highly specialized and proprietary technology. Delivering these projects in emerging markets where regulatory frameworks may be unclear or the potential for political instability looms large can significantly diminish the risk appetite of investors and lenders. But these are also the markets where the demand is most pressing – an estimated 1.6 billion people in the developing world lack access to electricity.
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Africa, in particular, presents significant challenges and opportunities for renewable energy investment. The potential for wind, solar, hydro, and geothermal energy is vast in a continent where, in some countries, access to electricity is as low as six percent of the population. Yet costly, inefficient, and polluting diesel-fired generators seem to be the norm due to lack of investment in generation capacity and distribution networks. A key finding of the Africa Competitiveness Report 2009 published by the World Bank Group is that “Africa needs to do more to improve its energy generation and distribution through improving its institutional and legal framework; encouraging private sector involvement; and exploiting the enormous potential of renewable energy sources.”
The East African nation of Kenya is leading the way in developing its vast geothermal potential. Geothermal is a clean, renewable, and low-cost source of energy, but the up-front costs, especially drilling the wells to extract the steam, are substantial. According to the national utility, KenGen, the country has a geothermal potential of 7000 megawatts thanks to its location on the tectonic plates of the Rift Valley. KenGen has already developed two geothermal plants at the Olkaria site in the Rift Valley and substantial exploration of additional geothermal resources is under way by Kenya’s Geothermal Development Corporation, a state-run and financed body. The government of Kenya set up the corporation under its Energy Act of 2006, as the private market was largely unwilling to invest in steam exploration. Viable sites will be opened for bidding to independent power producers and KenGen. Although costly to build, geothermal plants are immune to the fluctuations of commodity prices, drought, and bottlenecks in transportation infrastructure.
In 1998, the Kenyan government awarded independent power producer Ormat Technologies a contract to develop a third geothermal plant at the Olkaria site. Ormat was the first private provider to enter this untested market. The project consisted of the design, construction, management and operation of a base-load geothermal power plant on a Build-Own-Operate basis. The Olkaria III plant came online with eight megawatts in 2000 – becoming the first privately funded and developed geothermal project in Africa. MIGA issued a guarantee of $37.5 million covering Ormat’s equity investment in this first phase – which also included an appraisal of the field for expansion. When the Kenyan government asked Ormat to go ahead with increasing the plant’s generation capacity to 48 megawatts, Ormat approached MIGA again for political risk insurance.
After prolonged discussions between the investor and the Kenya Power and Lighting Company, the parties signed a new power purchase agreement in 2007, which allowed the second phase of the project to move forward. However, the potential for more delay or disruption crept in as the country erupted in violence following the December 2007 disputed presidential elections. Although MIGA signed a guarantee with the investor in 2007, lenders were not forthcoming. But Ormat went ahead with the construction and well drilling by investing approximately $150 million of its own equity. The facility opened on schedule in December 2008 and Ormat was able to obtain a 10-year project finance loan in March 2009. This journey to successful operations and subsequent financial closure brought its own rewards when Euromoney’s Project Finance magazine recognized the project as the “African Renewables Deal of the Year 2009.”
The OrPower 4 facility is operating successfully and has the capacity to provide up to 55 clean, fuel-free megawatts to the grid. The facility is fully managed and staffed by locally-recruited employees who receive on-the-job training and competitive wages. The company also supports a number of community programs, with a special focus on girls’ education. Edith Quintrell, MIGA’s Director of Operations, notes that this is exactly the type of investment where MIGA can make a difference. “This is a complex infrastructure project with high development impact in what was a completely untested market for private participation in the sector. Our experience in underserved markets, the fact that host countries are also our shareholders, and our strict underwriting conditions can give both equity investors and lenders the confidence they need to move ahead.”