Kenya Drops IPPs for Kengen to Generate Clean and Cheap Energy

Kenya dropped Independent Power Producers as private project partners in geothermal power production due to their perceived "sluggishness" in supporting government efforts to generate clean and cheaper energy.

Energy Cabinet Secretary Charles Keter told The EastAfrican that the government will, instead, work with the state-owned power producer KenGen in the second and third phases of the 465MW geothermal power production at Menengai Geothermal fields, about 185 kilometres northwest of the capital Nairobi.

The initial phase involves generation of 105MW of geothermal power while the second and third phases are expected to add 60MW and 300MW of renewable energy to the national grid, respectively.

The policy shift comes after the African Development Bank (AfDB) released an assessment report on the status of the Menengai Geothermal Development power project this month, showing that three IPPs (Orpower 22 Ltd, Quantum Power East Africa, and Sosian Energy) have delayed the production of cheaper energy by more than two years.

"When it comes to phase two of geothermal production at Menengai we will have to do with KenGen the way we did with the Olkaria (280MW). These IPPs are very slow. If it were KenGen we would have finished a long time ago. Yes, KenGen will come in because they are the ones who know how to run the power plants and this is a model we want to pursue," Mr Keter told The EastAfrican in an interview last week.

"KenGen is getting another equity investor who will come in and invest in geothermal production. The new investor will take some equity in these geothermal projects and bring in more capital to strengthen KenGen's balance sheet so that they can have sufficient funds for investments without relying heavily on borrowing. KenGen is using steam like that at Olkaria to get investors in the geothermal power production," he added.

Under the proposed arrangement, KenGen could cede up to 70 percent of its shareholding in geothermal projects to strategic investors while it retains 30 percent with a view of growing the company's balance sheet and ensuring that its investments in clean energy projects are sustainable.

"When a new investor comes in with funds for geothermal projects, KenGen's percentage of equity can be 30 percent while the new investor takes up 70 per cent and this will grow KenGen's balance sheet. That is the model that we want to use going forward," said Mr Keter.

The three IPPs have failed to set up plants to generate a combined 105MW of clean energy largely due to delayed fulfilment of the conditions precedent including securing letters of comfort, carrying out feasibility studies on the availability of steam and failing to reach financial closures with financiers in time.

The first IPP was initially expected to break ground for the first 35MW of geothermal power in March 2018.

"There is a delay in start of construction of power plants by the IPPs due to delays in fulfilment of conditions precedent by both Geothermal Development Company and IPPs. It is expected that construction will start in the 2020/2021 financial year," according to the AfDB's Menengai Geothermal Development Project Completion Report dated October.

In 2018, the government decided to withdraw the financial and risk guarantees it offers under the PPP framework arguing that private investors have been abusing government support measures and exposing taxpayers to potential losses of millions of dollars.

Under the policy shift, it became apparent that the government will no longer automatically offer financial and risk guarantees to PPP projects, making it impossible for private investors to mobilise financing from either local or international lenders.

The National Treasury said it would only support projects that are considered strategic and in the public interest.

According to the AfDB, the delay in the commercial operations of the 105MW power plants by IPPs has impacted the government in terms of replacing expensive diesel-generated power that continues to cost the economy and hinder the competitiveness of the industrial sector. The long- term financial sustainability of the Menengai Geothermal Power project is dependent on the physical completion and operation of the power plants to off take steam from the Geothermal Development Company.

It is argued that a delay in the implementation of the IPP projects will translate into higher capital costs on the side of the Geothermal Development Company and loss of benefits to meet the intended project development objectives.

"While the financial performance of the Geothermal Development Company looks good, the firm continues to depend on government grants and revenues generated from Olkaria Wells. A further delay in the implementation of the IPP projects is likely to result in escalation in demand of government grants. The Geothermal Development Company continues to receive both revenue and capital grants," according to the report.

These IPPs are expected to construct three geothermal power stations each with a capacity of 35MW and buy steam from the state-owned Geothermal Development Company to produce power.

This meant that the Geothermal Development Company had to drill and prove enough resource for the 105MW project before the IPPs could proceed to secure funding and have them disbursed for construction.

However, the Geothermal Development Company was left with a fully developed steam-field (geothermal wells and steam gathering system), but with no power generation.

The Menengai Geothermal Power project was key in helping Kenya overcome acute power shortages due to the unpredictability of hydro generation, which forced the government to utilise the expensive emergency thermal generation in 2011 and 2012, which continued up to 2018. The project is expected to meet its full target after completion of the development of 105 MW power plants by IPPs.

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