Search for geothermal energy hangs on the edge

By Njiraini Muchira and Macharia Kamau

 Geothermal energy has recently gained currency as the panacea to the country’s perennial power shortage.

The country’s total installed capacity currently stands at 1,350 MW against a peak demand of 1,200 MW — a fact that results in frequent power cuts and high cost of energy.

To plug the deficit, the government has spent billions of shillings in geological mapping of areas endowed with the resource, drilled exploration wells and even set up a parastatal to accelerate development.

However, after such massive investments, reality it is now dawning that use of geothermal energy to tackle perennial power problems and drive economic growth will be a Herculean task.

The project now stands on the precipice with a host of challenges threatening to derail the search for the alternative energy.

Already, it is emerging that inadequate capital stands in the way of harnessing and exploiting steam wells spread in various parts of the Rift Valley.

With demand for electricity expanding at an average of eight per cent per annum, the country anticipates to generate approximately 30 per cent of power from geothermal by 2030.

But to actualise the dream of making geothermal a main source of generation, estimates indicate a staggering $20 billion (Sh1.7 trillion) is required.

The estimate is based on the fact that Kenya Electricity Generating Company (KenGen) has made it clear it requires $4.5 billion (Sh382.5 billion) to exploit 1,200 MW in its field in Olkaria.

Dangerously exposed

And herein lies the biggest problem. Raising the enormous resources will be a tall order after KenGen, the company supposed to transform the steam to electricity alongside Geothermal Development Company (GDC), got dangerously exposed after borrowing heavily to finance the 280 MW Olkaria plant.

Having borrowed $700 million (Sh59.5 billion) from various international financial institutions for the plant whose total cost is $1.2 billion (Sh102 billion), the company has realised it might be catastrophic to its books if it were to absorb more debt to finance the remaining 920 MW.

“There is a limit of how much a company can borrow,” KenGen managing director, Eddy Njoroge, told Business Weekly. 

He added that while the company can still accommodate more debt, it has decided to explore other alternatives to build the geothermal plants. 

State-owned GDC, which was established two years ago with the mandate of accelerating the development of geothermal resources, is even worse off.

The Sh18 billion ($211 million) it was allocated in the 2012/13 budget for drilling in Bogoria-Silali and Menengai is a drop in the ocean compared to the massive recourses it needs. 

The two projects have a combined capacity of 2,400 MW with Bogoria-Silali estimated to cost $3.4 billion (Sh289 billion) and Menengai $1.2 billion (Sh102 billion). 

Already, a huge portion of its budget is being swallowed in acquiring rigs and drilling activities. On average, it costs about $4.5 million (Sh382.5 million) to drill one geothermal well.

The company must drill 400 wells for Bogoria-Silali and 120 wells for Menengai.  

Being State-owned and lacking any assets, GDC has extremely limited options out of the fix. That it cannot borrow directly from international financial institutions means it has to depend on the Treasury, something that further curtails its activities.

Efforts to get GDC managing director Silas Simiyu were fruitless and the company did not even respond to questions sent by Business Weekly. 

Dire consequences

However, the company’s corporate affairs manager, Paul Ngugi, in a research paper titled ‘Financing the Kenya Geothermal Vision’, contends that contradictory as it may appear, when it comes to financing of projects, money is not the main problem because there is a lot of money chasing after very few promising projects. 

“The issue is mainly whether the projects are bankable. Bankability of a project is a prerequisite for financing by financial institutions whose main criteria for assessing financial applications are technical, financial, economic and legal soundness, and appropriate risks mitigation,” he argues. 

He adds the agenda for financing the country 5,000 MW geothermal vision will then revolve around the issues of capital funds which include sources, availability and cost, projects viability which include technical, financial and economic and risks identification and mitigation.  

The realisation that efforts to exploit the geothermal resource could stall due to the massive investments required, an eventuality that would have dire consequences on the economy, has forced the two companies to explore other alternatives to make sure the plants come on stream as scheduled. 

KenGen has moved to partner with private investors to ensure earmarked projects are implemented.   

A fortnight ago, the company put out advertisements seeking for private investors to help develop 560 MW geothermal power plants at the Olkaria field in phases of 140 MW each through public private partnership (PPP).

“We have always depended on international financiers to get our projects done and that is why we are getting stuck. Now we have decided to look at other options,” said Njoroge.

KenGen is seeking to enter into joint ventures or sign energy conversion agreements under the tolling arrangement with experienced companies in the area of electricity generation to develop the plants.

Under the joint venture, KenGen will partner with an investor(s) who will be the majority shareholder to build the plants while under the energy conversion agreement, the company will provide steam to form a boot (build, own, operate, transfer) arrangement. 

The investor(s) would be required to design, finance, supply, construct and operate the power plant for a period of between 10 to 20 years after which ownership will revert to KenGen at a small payment.

Recovery time

“We intend to award the contract by end of next year and we expect the plants will be completed in 2017,” Njoroge stated.

He added the contracts are designed in a manner that will not translate to expensive electricity to Kenyans because the investors will have enough time to recover their investments. 

On its part, GDC has been seeking for equity investors to fund the implementation of 800 MW of steam at a cost of $800- million (Sh68 billion).

The company intends to enter into a joint venture with four equity investors to fund the Menengai II wells drilling project. The company has made it clear it can only raise between 20 and 40 of the capital.

GDC Chief Executive Silas Simiyu says Menengai Phase I project will cost approximately $488 million while the Menengai Phase II will be funded through a joint steam development (JDA) model.

“The JDA is a public-private partnership whereby GDC will obtain all land rights, permits and undertake construction of the road network, drilling water reticulation system, drilling of exploration wells to confirm presence of the resource,” Simiyu said.

In addition, jointly with the selected partners, GDC will undertake all the remaining drilling works (appraisal, production and re-injection), feasibility study(s) and construction of the necessary steam gathering and reinjection network.

GDC’s investment will comprise a total of 20% to 40% of the required capital. GDC will also bear the risk for failed wells.

After power plants commissioning, GDC will be responsible for reservoir management and the brine reinjection system.

On the other hand, investors under a joint steam development model will finance between 60% and 80% of the required capital.

The investors will recoup their investments through regular payments made from revenue generated through steam sales over a period of 20 years or any other agreed period.

Low interest

However, even with all these plans clearly laid out, GDC, which started the process of seeking for equity investors back in June, has remained mum on progress. It is now feared the silence raises concerns that probably no investors are showing interest thus far.

Considering that each investor is required to raise at least $200 million (Sh17 billion) and would recoup their investments through receiving regular payments from steam sales over a period of 20 years, the deal could have largely received cold reception going by GDC’s silence.

This worry is given credence by the fact that GDC was categorical the government would not offer the investors sovereign guarantees, leaving them to seek private insurance or guarantees from the World Bank.

Unfortunately for would-be investors, the World Bank has only set aside a small fund of $13 million (Sh1.1 billion) to underwrite risks in drilling of geothermal wells in East Africa.

Analysts contend that failure to invest in new electricity generation facilities during the1980s and 1990s is the main reason why Kenya finds itself in the current quagmire.

Back then, planning in the sector was pegged on gross domestic product (GDP) growth, a flawed strategy because the installed capacity then could serve the economic demands.