State dangles incentives to woo private investors in geothermal

Geothermal Development Company exploration site at Pakka Hills in Tiaty, Baringo County, on July 18, 2024. [File, Standard]

The Energy Ministry is proposing a raft of incentives as it seeks to attract more private sector players and accelerate the development of Kenya’s vast geothermal resources.

They include tax exemptions, longer-term power purchase agreements with Kenya Power, and cost-reflective tariffs amid slowing capacity growth and rising electricity demand. 

The proposals, outlined in the draft National Geothermal Strategy 2026–2036, are aimed at de-risking investment in a sector the government says can no longer rely solely on public financing to meet future power needs.

The push comes as the government says geothermal development has failed to live up to its potential due to high upfront exploration and drilling costs, limited public financing and rising electricity demand.

The ministry argues that without stronger incentives to de-risk projects and improve bankability, private capital will remain sidelined, undermining plans to scale up geothermal capacity, strengthen grid stability and reduce reliance on expensive thermal power.

Despite the potential for geothermal in Kenya estimated at over 10,000 megawatts (MW), the installed capacity stands at 984MW.

More than three-quarters of this capacity is by KenGen, whose latest annual report indicates that its geothermal power plants have a combined generating capacity of 753MW.

“Kenya’s geothermal sector continues to be constrained by a range of structural, operational and financial challenges that limit its full potential,” says the ministry in its Geothermal Strategy. 

“Key among these include non-cost-reflective tariffs, operational complexities in mature fields, protracted approval and procurement processes, skills and capacity gaps, infrastructure and financing impediments, limited local manufacturing, and overreliance on public funding.”

“Additional barriers relate to land acquisition, fragmented data systems, policy and tariff ambiguities for non-power geothermal applications, and insufficient instruments to crowd in private investment, particularly in high-risk exploration. Addressing these gaps is critical to unlocking the next phase of sustainable, inclusive and commercially viable geothermal development in Kenya.” The ministry has proposed a suite of incentives for the sector to help fast-track geothermal exploration and exploitation. The incentives include tax exemptions, standardised long-term agreements, tariff reform vehicles and procurement reforms.

To increase the number of private sector players in geothermal, the ministry wants to ease the issuance of geothermal licences, but also give geothermal firms “forward bankable PPA upon completion of geoscientific studies to secure financing,” and also to implement cost-reflective tariffs. 

The Ministry also adds that “If the industrial power users are not the power developers, the power developers would require off-take guarantees of at least 25 years.”

The ministry also notes that certain incentives should be put in place to ensure that retail prices of power do not spike even with increased exploitation of geothermal.

“To implement tariff reduction measures towards meeting the target tariff of not more than seven US cents  (Sh9 per kilowatt hour) by providing tax exemptions on geothermal development (drilling, equipment, and associated services); having longer PPAs of 30 years and above; facilitating infrastructure development; and undertaking development power interconnection infrastructure,” said the Ministry. 

Kenya is already facing a crisis as power demand keeps surging and has, in recent years, relied on imports, mostly from Ethiopia, to meet demand as consumption grew without a corresponding growth in local generating capacity.

According to the Energy and Petroleum Regulatory Authority (Epra), in the year to June 2025, Kenya “obtained 10.60 per cent of its energy through electricity imports from Ethiopia, Uganda and Tanzania, up from 8.77 per cent in the previous financial year”. 

The ministry warns that without major investments today, the country will get deeper into problems and its reliance on imports. 

“In the last three years, Kenya has experienced a 2.29 per cent decrease in the installed capacity from 3,312 MW (June 2023) to 3,236 MW (June 2025) owing to the retirement of aged plants. Conversely, the peak demand increased from 2,090 MW (June 2023) to 2,307 MW (June 2025), giving a 10.38 per cent increase,” says the ministry in the strategy.

The ministry further notes that peak demand is projected to grow to about 6,500MW by 2035 and further to 13,495MW by 2043, “driven by increased adoptions of electric vehicles and electric cooking, expected flagship projects and projected customer growth of 500,000 annually by 2028.”

“Kenya will be positioned as a net electricity importer if these two factors are not abetted by adequate and timely pipeline energy projects in the medium and long term.”

The current crisis that Kenya is experiencing has also partly been on account of a moratorium that was issued in 2018 on the signing of new Power Purchase Agreements between Kenya Power and privately owned power producers.

The freeze on the signing of new agreements was supposed to give the state time to address issues that have in the past resulted in the high cost of power. While the moratorium has recently been lifted, it led to a period of lull during which the power plant project pipeline dried up, with nearly all the projects with finalised PPAs having already come on board and feeding the grid.

Kenya now has to start a new project pipeline, and analysts have in the past noted that power projects can take years before they are commissioned.