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KenGen ‘to become world’s largest producer of geothermal power’

NEWS
By Moses Michira | December 8th 2015
One of Kengen's geothermal power production sites in Olkaria, Naivasha.

KenGen is expected to become the world’s largest geothermal power generator by 2023 with its planned massive investments in new plants, Renaissance Capital has projected.

The listed power firm’s installed capacity will rise to 1,500MW, leapfrogging Chevron’s plant in Indonesia and Calpine in the US that produce 1,339 MW and 1,250MW, respectively.

It is projected that the new plants will contribute up to Sh67 billion a year.

Analysts at Renaissance Capital said in a research note released yesterday, following a study, that KenGen could spin off the geothermal operations into a separate entity.

“We estimate that by 2023, KenGen’s total geothermal installed capacity will approach 1,500 MW, turning it into the world’s largest geothermal generator,” the researchers said in the note to investors.

Rights issue

Already, the firm has commissioned 253 MW of geothermal capacity this year alone, and is expected to grow its capacity aggressively using the proceeds of an upcoming rights issue.

Kenya is among countries with the highest utility of renewable energy in the world, mostly through KenGen’s hydro-generated electricity. New investments in wind farms and geothermal plants are set to alter the combination, with the result of retiring diesel generators fully.

But the change is capital intensive. KenGen has announced plans to raise Sh29 billion from shareholders in a rights issue scheduled for early next year. This would be the biggest cash call in Kenya’s history, would more than double the funds raised by Kenya Airways in its under-subscribed Sh20.68 billion issue three years ago.

Geothermal power is a significantly cheaper source of electricity when viewed over the life of the plants, even though the capital outlay can be massive.

The high cost of developing power plants has ensured KenGen is among the largest corporate borrowers, with its debts including a Sh15 billion 10-year bond issued in 2009 that matures in four years.

Renaissance projects the State, which has a 70 per cent stake in the firm, will likely convert its loan granted to the company to equity. Converting debt to equity would reduce the firm’s exposure to interest payments, and the enhanced geothermal capacity would “substantially” increase KenGen’s revenues, profits and valuation, according to the analysts.

For many years, the firm predominantly generated electricity from water, accounting for up to 80 per cent of all its power. However, the source’s reliability was compromised by droughts, with the drop in water levels leading to reduced electricity output.

It is in such times that emergency diesel-powered generators were called in. But the electricity generated this way is expensive, and the costs heavily influenced by global movements in oil prices.

Renaissance says geothermal energy is the cheapest power source and likely to be a game changer for KenGen.

“Over the next few years, we expect geothermal to expand and be the sole driver of profitability, despite requiring a substantial cash investment,’’ the analysts said, adding that the reliability of geothermal plants will offer a good foundation for regular dividends.

The firm is also projected to benefit from Kenya’s income tax rules, which provide for a 150 per cent tax allowance on investments outside the major cities. KenGen’s geothermal and wind plants will fall into this category, creating a tax gain for the company.

KenGen controls about 84 per cent of the country’s total geothermal capacity. US-owned Orpower runs the Olkaria III plant, which has a total installed geothermal capacity of 100 MW. Oserian Development Company also produces electricity from geothermal sources leased from KenGen, but only to provide power for its flower farms.

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