STATE-OWNED Geothermal Development Company plans to add an additional 200 megawatts of power to the 1,700MW-capacity national grid by December 2016.
This will take the capacity of geothermal steam generated by the GDC to 700MW from current 479MW.
The National Treasury on Thursday evening signed a Sh9.56 billion credit (€80 million ) with German Development Agency(KfW) with a grant component of up to 35 per cent towards of geothermal steam fields at the 3,000MW-capacity Bogoria-Silali project.
The concessional loan has an interest of 1.75 per cent to be repaid in 10 years with a five year grace period.
It will fund drilling 20 exploration and appraisal geothermal steam wells, infrastructural development and conduct further feasibility study in the area.
The Bogoria-Silali project - Kenya's third geothermal field after Olkaria and Menengai - is conservatively estimated to have a potential of up to 3,000MW.
Treasury Secretary Henry Rotich said the government was keen on cutting down power generation from the "unreliable" hydropower generators whose share is about 78 per cent.
Manufacturers have long blamed high cost of energy at 40 per cent of their total production cost for the high price of homegrown products that make them expensive locally and uncompetitive internationally.
"The government is committed to the diversification of energy sources," Rotich said.
KfW vice president Christian Kramer said the funding towards the first phase of Bogoria-Silali geothermal field whose capacity is estimated at 800MW was single largest by the agency.
"It will cover initial high cost associated with development geothermal power field paving the way for the private sector to come in and generate power from the steam," Kramer said. "We hope to co-operate in generation of wind and solar power as well as rural electrification projects in future."
The loan is part of the Sh27.93 billion(€233.7 million) committed by Germany for the period 2014-16 towards various development projects in energy, water, health and education.
The two also signed a Sh3.95 billion facility priced at 3.25 per cent interest a fortnight ago for improvement of water and sanitation services in Nairobi.