Inside stories on climate compatible development

January 2013

Key messages Harnessing geothermal energy: ●● has relied on as a key low-carbon energy source The case of Kenya and a way of expanding ­energy services. However, droughts and erratic rainfall have made hydro- Kenya’s heavy reliance on hydroelectricity production has made the power unreliable, reducing the country vulnerable to climate change impacts, such as drought and country’s adaptive capacity. Nearly erratic rainfall patterns. Kenya needs to develop a more resilient and 77% of Kenyans still lack access to modern energy services, which stable supply of electricity, while rapidly developing its base load of impedes development efforts. electricity production to meet growing demand. Although the path of least ●● Kenya’s Vision 2030 prioritises resistance would be to expand its -based thermal production, low-carbon development. An Kenya’s Vision 20301 strategy places priority on low-carbon development expanded and diversified range of renewable electricity sources is including development – with geothermal playing a critical, and geothermal energy is at critical role. the forefront of low-carbon options. Geothermal is readily available and is not affected by climatic variability. Energy sector reforms in Kenya are From 2004 to 2011, increases in elec­ beginning to stimulate and fast-track the tri­city supply generally came from fossil ●● Kenya has catalysed a productive country’s geothermal industry in line with fuels and geothermal (see Table 12–4). geothermal sector by establishing a specialist government institution, the country’s vision of climate compatible Geothermal has shown the greater the Geothermal Development development. The country is finding proportional increase in installed capacity Company, which shoulders some ways to overcome constraints within the (58% compared to 45%), despite the fact of the financial risk for the private sector and obtain project financing. This that set-up costs are significantly higher sector at exploration, appraisal and is supported by several enabling factors than for fossil fuels. Launched over drilling stages. and concrete measures taken by the 50 years ago, geothermal energy is only ●● Kenya has accessed previously (GoK) with the now emerging as a significant electric unattainable funding sources by aim of creating a viable and sustainable power resource for Kenya. Assessments aligning further investments in geothermal energy with climate national geothermal industry. of geothermal hotspots indicate an change and development estimated potential of 7,000–10,000 objectives (e.g. carbon/climate megawatts (MW) in the Kenyan Rift finance, donor funding and local Kenya’s electricity mix Valley (Figure 1).5,6 By 2030, the GoK public finance). intends to tap into its rich geothermal The three main sources of electricity potential, drastically increasing geo­ generation in Kenya are hydropower, thermal capacity to twice that of fossil Authors diesel thermal and geothermal plants, fuels. Hydropower production is Pius Kollikho and Benoît Rivard, along with several minor sources. projected to remain relatively stable. LTS International

CDKN helps developing countries to design and deliver climate compatible development. When decision-makers in government, business and civil society speak to us about their aims and needs, they often ask about ‘best practice’ in other countries or, indeed, mistakes to avoid. What are the leading innovations in integrating climate change planning with economic growth strategies and poverty reduction? What are the biggest challenges faced along the way: institutional, financial, political, technical? This paper is one of a series of policy briefs that explore the ‘Inside stories on climate compatible development’: briefing papers that aim to answer these questions. Table 1. Changes in installed capacity of the three main electricity sources in Kenya, 2004–2011

Increase Increase Installed Installed in installed Increase Installed in installed Increase capacity capacity capacity in installed capacity capacity in installed Electricity in 2004 in 2011 2004–2011 capacity Vision 2030 2011–2030 capacity source (MW) (MW) (MW) (%) (MW) (MW) (%)

Domestic hydro 677 762 85 13 1,039 277 36

Geothermal 125 198 73 58 5,530 5,332 2,693

Fossil fuels 407 590 183 45 7,015 6,425 1,089

Sources: Column 1, Ministry of Energy (2004); Column 2, Ministry of Energy (2012); remainder of data in table GoK (2007).

Figure 1. Geothermal hotspots in the , Kenya Why geothermal in Kenya?

Kenya has put the energy sector at the forefront of its long-term strategic planning because many Kenyans still lack access to modern energy services: it is estimated that 77% of Kenyans are not connected to the grid.7 At the same time, demand for electricity is rising due to Kenya’s economic growth. The strategy for increasing renewable energy in Kenya to meet this demand highlights wind, solar, small hydro, biomass and geothermal as key sources, with geothermal being promoted most strongly: “Geothermal has numerous advan­ tages over other sources of power: it is not affected by drought and climatic variability; it has the highest availability at over 95% (i.e. relatively no intermittence); it is green energy with no adverse effects on the environment; it is indigenous and readily available in Kenya, unlike thermal energy that relies on imported fuel. This makes geothermal the most suitable source for base load in the country.” 8

The role geothermal energy plays in climate change mitigation and

Source: Based on Ministry of Energy (2011) and Kenya Electricity Generating Company Ltd. (2006). adaptation offers exciting synergies, such as the introduction of adaptation

2 benefits in emissions reduction projects A recent study on the eastern Baringo trickle-down effects. For instance, some (both voluntary and within the Clean lowlands in Kenya discussed the sugar companies have plans to upgrade Development Mechanism) and the use potential of geothermal energy to reduce their biomass co-generation capacity of afforestation and/or reforestation climate change impacts, particularly the because of expected savings.12 projects to improve the recharge of detrimental impacts associated with geothermal systems in drought-prone recurrent droughts, which were causing Getting the right institutions in areas.9 water levels and flow to fall below critical place thresholds for hydropower production. It The Energy Act of 2006 created more concluded that “the use of geothermal specialised institutions for the energy Development benefits of energy will improve food security, create sector, as all energy sector functions had geothermal energy employment, reduce drought-related been previously centralised within the losses and provide alternative source of Ministry of Energy and the Kenya Power The development benefits of geothermal income streams”.11 and Lighting Company. These reforms energy stem from both direct and indirect also contributed to the establishment uses, namely the provision of heat and of the Geothermal Development increased access to electricity, while Kenya taking action Company (GDC) to undertake inte­ also enhancing resilience to climate grated development of geothermal change impacts. The GoK has made widespread energy. It should also be noted that the sectoral reforms, focusing specifically Geothermal Resources Act of 1982 has Direct uses of geothermal energy on promoting the development of had significant implications for these usually occur within a 50 km radius renewable energy generation in Kenya. institutions and the sector. and include eco-tourism (hot baths and spas), small-scale liquid and dry milk Sending the right policy signals The GDC is a semi-autonomous state- processing (pasteurisation, etc.) and A commitment to renewable energy owned company, formed in 2009 under agriculture (greenhouses, crop drying). has been made by the GoK through the Companies Act as a special-purpose For example, the Kenya Electricity several policy developments, such as vehicle to fast-track the development Generating Company (KenGen) introducing feed-in tariffs, supporting of geothermal resources. With a target supplies steam from its geothermal public-private partnerships and backing of 5,000 MW of installed capacity by power station to Oserian Company loans. These have created a supportive 2030, the GDC’s mandate is to mitigate in Naivasha to grow flowers and policy framework for investment in financial risks in the early stages of leguminous crops, and the Hell’s Gate renewable energy, once again with geothermal development – exploration, Natural Health Spa at Olkaria aims to geothermal production at the heart appraisal and production drilling – as boost tourism in the area. of it. The feed-in tariffs policy, which the private sector is unable to absorb was introduced in 2008 and revised these risks. It also provides geothermal Indirect uses of geothermal energy in 2010, is already showing signs of steam to power plants, ensuring they arise mainly through electricity produce a more consistent and cost- production. Benefits related to rural effective electricity supply. electrification are widespread and well rovision of cheaper and documented. Access to electricity in environmentally friendly The GDC’s achievements include: Kenya “simultaneously enables and power, economic growth i. Building in-country capacity: A Geo­ improves the delivery of social and Pand creation of employment thermal Training Centre formed business services from a wide range of opportunities are some of the in partnership with Iceland offers village-level infrastructure (e.g. schools, key benefits of geothermal technical training in geochemistry, markets and water pumps) while geophysics and drilling engineering. energy utilisation. improving the productivity of agricultural ii. Attracting donor funding: The GG Muchemi, activities”.10 Geothermal Development Manager, KenGen Menengai field alone has the

3 Table 2. Sources of financing available for geothermal energy stablishing the GDC to development take upfront risks of Source Requirements Limitations Financing institutions geothermal development E(exploration and production Donor ●● Sovereign guarantee ●● Debt covenants ●● World Bank funding ●● Feasibility study ●● Sovereign guarantee ●● Multilateral drilling) has helped Kenya ●● Country limits/risks development banks make positive strides in ●● Bilateral donors building a geothermal industry. Venture ●● Feasibility study ●● Sovereign guarantee ●● Actis, Aeros, capital ●● Mandatory equity Globeleq Mitsunori Motohashi, Energy and Financial Expert, World Bank, Kenya Investment ●● Sovereign guarantee ●● Mostly finance ●● IFC, Proparco, DEG banks ●● Feasibility study public–private partnerships and potential to produce 1,650 MW, private companies

which is a major draw for donors. Sovereign ●● Country priority ●● Might not be country ●● Government funding funding project priority for drilling

However, the GDC faces challenges, Carbon ●● Additionality ●● Delay between ●● World Bank such as: markets ●● Feasibility study upfront transaction BioCarbon Fund i. Competing sectoral developments: ●● Project design costs and revenue ●● Private investors & ●● Document validation/ stream from project developers Due to a limited pool of highly verification issuance of credits ●● Donors (upfront skilled workers in Kenya, GDC has ●● Low/uncertain transaction costs) to be competitive with KenGen, for carbon price example, to attract Kenya’s brightest minds. require huge upfront investment Geothermal development is a ii. Difficult geology: Since the Menengai costs and drilling can yield wells highly specialised field, requiring field has a difficult geological that generate little or no steam. As the specific technical expertise formation, geology experts are returns for this phase are highly of geoscientists and engineers – forced to drill directly into volcanic uncertain, multilateral, bilateral expertise that is limited in Kenya. rocks. and private entities are generally unwilling to invest in exploration Financing sources Constraints and appraisal, preferring to commit funds for production drilling and Renewable energy development in While progress has been made, power plant construction. Kenya is financed by the government, Kenya still faces several constraints ●● Project sponsors require a development partners and the private preventing it from further developing guarantee if the project is deemed to sector (see Table 2). The government geothermal electrical production. From be high-risk. Dry wells and volcanic finances energy development via the the identification of exploration sites to hazards make national budget, while development the commissioning of an active power exploitation a high-risk activity, and partners provide loans and grants. station, the entire process in Kenya has perceived country risks (e.g. political Alternatively, the private sector uses been slower than expected. In 56 years, instability, challenges to doing debt and equity to fund its geothermal geothermal development has yielded business) can exacerbate this. projects. Debt financing occurs when only 207 MW of installed capacity, with Financial institutions are unwilling a firm raises capital by selling bonds, an average annual increase of 4 MW.10 to insure such investments, making bills or notes to investors; in return Limitations to geothermal energy the electricity too expensive to be for lending money, the creditors are development include: competitive. promised repayment of the principal and ●● There is reluctance from investors to ●● There is a very limited pool of interest. Equity financing raises money fund the high-risk early development experts with the technical capacity for company activities by selling stocks stages. Geothermal developments and skills in this specialised field. to investors. In return, shareholders

4 receive ownership interests in the Lessons and implications ●● Removing value-added tax (VAT) company. Risk guarantee facilities, on renewable energy materials, like ARCgeo and AUC-KfW, have Kenya’s experience in developing the equipment and accessories. provided financial mechanisms for the geothermal energy industry provides a Prior to 2011, there had been a high-risk initial phases of geothermal number of lessons for other countries 16% VAT on renewable energy development. and contexts. materials. 3. Establishing the GDC as a By aligning further investments in 1. Institutional reforms have government body has enabled geothermal energy with climate change decentralised key functions Kenya to work with international and development objectives, Kenya has within Kenya’s energy sector, financial institutions and accessed funding sources that would in order to have the necessary financiers to underwrite risk, have otherwise not been accessible. specialist institutions involved. secure insurance and secure Carbon finance has recently provided This suite of institutions includes development partner funding another financing option for geothermal those which regulate activities for the challenging exploration project developers; although with the (Energy Regulatory Commission), and appraisal phases. It could recent fall of prices for carbon credits develop favourable policies (Ministry also receive international support in the EU Emissions Trading Scheme, of Energy), generate electricity under the Nationally Appropriate it remains to be seen whether this type (KenGen) and carry out exploration Mitigation Actions, which are of financing can be sustained in the long and drilling (GDC). All of these national programmes established term. functions previously existed, with the by the United Nations Framework exception of the GDC, which has a Convention on Climate Change In Kenya, two geothermal projects have more specialised mandate. to enable developing countries been certified by the Clean Development 2. A toolbox of policies and measures to access finance for low-carbon Mechanism (CDM) and are now are stimulating investment in development actions that are suited contributing over 320,000 tonnes of CO2 geothermal: to their national context. equivalent in avoided greenhouse gas ●● Kenya’s feed-in tariffs policy 4. Public–private partnerships can emissions each year.13,14 In the Olkaria is expected to stimulate about be effective if they cover all ­major geothermal plant, existing capacity is 1,300 MW of electricity gen- project phases. The public sector increasing, resulting in greenhouse eration capacity from renew- focuses on riskier upstream ­phases, gas emission reductions by displacing able energy sources, including while the private sector partner fi- fossil fuel-based electricity generation in geothermal. Ac­cord­ing to UNEP, nances the capital costs in the proj- the Kenyan grid with clean geothermal “benefits targeted are a ‘triple- ect construction phase (KenGen is power. Early stakeholder engagement win’ of additional renewables- 30% private and 70% government and benefit-sharing mechanisms with based generation capacity to the owned). the local communities have been critical ­country; enhancing employment 5. It is paramount to invest in train- to the successful implementation of the and poverty alleviation in the ru- ing highly skilled technicians and project. ral areas; and increasing income researchers because geothermal ­opportunities for business devel- development requires highly quali- Through the Program for Scaling-Up opment”.15 fied people. KenGen and GDC have Renewable Energy in Low Income ●● Introducing zero-rated import partnered with the United Nations Countries, which is funded through the duty on renewable energy University to train geothermal ex- Strategic Climate Funds, the country has equipment and accessories. This perts. GDC is also establishing a received an allocation of US$50 million was unusual for Kenya since all geothermal training centre. with up to US$40 million earmarked for goods have an import duty unless 6. Experience in Kenya has shown geothermal development. explicitly exempted by an Act of that engaging stakeholders early Parliament. is critical to ensure broad support of

5 the project among communities living References in areas where geothermal resources 1. GoK (2007) . Abridged electric micro-grids can contribute to rural are being developed. Both CDM version. development: Evidence from Kenya’, World projects, for example, have ensured 2. Gok (2007) Op. cit. Development 37(7): 1208–1221. 3. Ministry of Energy. (2004) Sessional Paper 11. Ogola, P.F.A, Davidsdottir, B. and that communities are engaged with no. 4 on Energy. Government of Kenya. Fridleifsson, I.B. (2012) ‘Potential contribution the projects and benefit from them. Nairobi, Kenya. of geothermal energy to climate change adap- 4. Ministry of Energy. (2012) National Energy tation: A case study of the arid and semi-arid Policy (Third Draft). Government of Kenya. eastern Baringo lowlands, Kenya’, Renew- Conclusions Nairobi, Kenya. able and Sustainable Energy Reviews 16(6): 5. Ministry of Energy. (2011) Scaling-Up 4222–4246. Renewable Energy Program: Investment Plan 12. United Nations Environment Programme. The broad objectives of Kenya’s energy For Kenya. Government of Kenya. Nairobi, (2012) ‘Green economy success stories: policy are to ensure adequate and Kenya. Feed-in tariffs in Kenya’. UNEP Success 6. Kenya Electricity Generating Company Ltd. Stories. http://www.unep.org/greeneconomy/ affordable energy supply to maintain and (2006) Olkaria II Geothermal Expansion SuccessStories/FeedintariffsinKenya/tabid/ promote the country’s strong economic Project: Project Design Document. Version 6. 29864/Default.aspx Kenya Electricity Generating Company Ltd., 13. Muchemi, G. (2011) Presentation. Kenya development and to prioritise the use Nairobi, Kenya. Electricity Generating Company Ltd., Nairobi, of low-carbon energy for electricity 7. Ministry of Energy (2011) Op. cit. Kenya. 8. Ministry of Energy (2011) Op. cit. 14. Orpower 4 Inc. (2009) Olkaria III Phase 2 generation, where feasible. Against 9. Ogola, P.F.A, Davidsdottir, B. and Geothermal Expansion Project in Kenya: a background of challenges, Kenya’s ­Fridleifsson, I.B. (2011) ‘Opportunities for Project Design Document version 6. https://cdm. adaptation-mitigation synergies in geo­thermal unfccc.int/Projects/DB/RWTUV1252941041.99/ electricity sub-sector is making positive energy utilisation: Initial conceptual frame- view strides towards these objectives. By works’, Mitigation and Adaptation Strategies 15. United Nations Environment Programme (2012) for Global Change 17(5): 507–536. Op. cit. promoting an enabling environment 10. Kirubi, C., Jacobson, A., Kammen, D.M. for investment in a widening range of and Mills, A. (2009) ‘Community-based renewable energies and placing a strong focus on geothermal as a response to climate-related constraints and About CDKN opportunities, the nation is setting out on The Climate and Development Knowledge Network (CDKN) aims to help decision-makers in a low-carbon development pathway. developing countries design and deliver climate compatible development. We do this by providing demand-led research and technical assistance, and channelling the best available knowledge on climate change and development to support policy processes at the country level.

About LTS LTS International is a UK-based consulting and project management company with four decades of experience and now offering specialist services in innovative areas at the interface between development, climate change adaptation and mitigation (www.ltsi.co.uk).

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