CASE STUDY | JUNE 2018 Table of contents Executive Summary 5 Introduction 8 Context 10 Tracing the Menengai Implementation Process 14 Lessons from the Case Study 19 Potential for Scaling Up and Replication 21 How the Case Study Informs the Science of Delivery 22 Annex A: Geothermal Energy Development in Kenya 25 PROJECT DATA COUNTRY AND REGION Kenya, Africa Annex B: List of interviewees 31 PARTNER ORGANIZATION Climate Investment Funds PROJECT TOTAL COST Annex C: References and bibliography 32 African Development Bank (AfDB) Geothermal Menengai Geothermal Development Project Development Company (GDC) (AfDB – USD 120 million; CIF – USD 25 million) ORGANIZATION TYPE PROJECT DURATION Governmental agency 2011–2018 DELIVERY CHALLENGES ORGANIZATIONAL COMMITMENT This case study was financed by the Climate Investment Funds (CIF), and prepared by Jan Van Den Akker from Baastel. Mitigate resource, credit, and financial risks to attract A number of people contributed to the preparation of this case study. The author is grateful to Solomon ASFAW from public and private investment in geothermal energy CONTACT African Development Bank (AfDB) and George Mwenda from Kenya’s Geothermal Development Company (GDC) and their respective teams for sharing their extensive knowledge of years of experience in coordinating this project. The author is development CASE AUTHOR also grateful for the valuable contributions provided by Leandro Azevedo (AFDB), Emmanuel Kouadio, Sandra Romboli Jan VAN DEN AKKER (Baastel) DEVELOPMENT CHALLENGE and Rafael Ben from the CIF. Support from the World Bank’s Science of Delivery team was essential to ensure the final Secure a reliable, sustainable, and affordable power PROJECT EXPERT quality of the case study and prepare it for publication. In particular, Sruti Bandyopadhyay provided extensive input and supply to meet current and future demand Solomon ASFAW (AFDB) George Mwenda (GDC) guidance on the case study. Cover Photo: @AfDB Photo: Cover GEOTHERMAL ENERGY POWERING KENYA’S FUTURE From 2011 through 2018, the African Development Executive Bank (AfDB) supported the initial phase of GDC’s Menengai Geothermal Development Project Summary through financial contributions from AfDB and the Climate Investment Funds (CIF). By early 2018, Menengai Phase I was largely developed and ready to provide steam for 105 MW of power generation. Three IPPs were selected in a tender procedure and negotiations were finalized between the Securing a reliable, sustainable, and affordable steam provider, GDC, the power off-taker (Kenya energy supply to meet current and future demand Power and Lighting Company, or KPLC), and is a major development challenge for Kenya. The the three IPPs, as well as between the IPPs and country is fortunate to have great geothermal their lenders. The IPPs’ next step is to begin energy potential, offering a cost-effective construction of the power facilities, expected to @AfDB alternative to expensive fossil fuel power. In 2017, take approximately 18 months. In Brief installed geothermal capacity in Kenya stood around 660 megawatts (MW); the government has This case study covers the implementation of established a target of 5,000 MW by 2030. Menengai Phase I and draws some lesson learned in DEVELOPMENT CHALLENGE PROGRAM SOLUTION AND RESULTS relation to the following questions: Reaching this target requires more geothermal power Secure a reliable, sustainable, and affordable power Attaining Kenya’s geothermal development projects and more investment from the public sector, Question 1 supply to meet current and future demand. targets will require investment at a level beyond private developers, and development partners. Private How does the Menengai Kenya’s electricity supply has long been heavily what the government can make available. developers tend to invest in power plant construction public-private partnership model address dependent on large hydropower, accounting for While the private sector may be interested in and operation rather than energy exploration and barriers and challenges to attracting public almost half of the country’s installed capacity. developing the power supply (downstream), a field development. These are characterized by high and private investment? It has become increasingly unreliable due to combination of significant capital investment resource needs, significant risks, and long gestation. climate change impacts and short-term, high-cost, needs and high resource risks translates into The public sector and off-take agreements for the By absorbing the resource risks associated with fossil-fuelled thermal generation. Moreover, Kenya reduced private interest in exploration and sale of steam can provide appropriate compensation exploration and field development, the GDC model has not yet been able to meet its rapidly growing field development (upstream). In response, the mechanisms to cover risks. helps overcome the barrier to private sector entry demand for energy. Kenyan government established the Geothermal posed when the extent of the energy resource is Development Company to carry out surface In 2008, with a view to addressing this issue, largely unknown. The Menengai experience shows DEVELOPMENT SOLUTION exploration, exploratory and production drilling, the Government of Kenya set up the Geothermal that overcoming the resource risk barrier may be and sales of steam to third parties, including Development Company (GDC) to facilitate the entry a necessary—though not sufficient—condition for Increase renewable energy supply by independent power producers. The Menengai of independent power producers (IPPs) into the attracting private developers to generate power generating geothermal energy at an field is the first developed under this model geothermal sector. The public-private partnership using geothermal steam. IPPs also worry about affordable cost in appropriate public-private combining public and private financing, along approach that developed from this initiative is government entities involved (GDC and KPLC, partnerships. Kenya has significant with risk mitigation instruments, to improve known as the “GDC model” or the “Menengai model” in this case) not honoring their commitments. geothermal resources, estimated between the project’s commercial viability. The Climate after the first major project developed by GDC: the This makes attracting debt financing from 7,000 to 10,000 megawatts (MW). Its National Investment Funds and the African Development Menengai Geothermal Development Project. With private lenders more difficult. To address this Energy Policy set an ambitious goal of moving Bank provided resources to support the first activities stretching across three phases, the project creditworthiness risk, the Menengai Project put in from 660 MW of geothermal energy in 2017 to phase of the Menengai project. expects to produce enough steam from the site to place a security package in the form of a partial 1,600 MW by 2020 and 5,000 MW by 2030. generate 400 MW of power. risk guarantee (PRG). 4 5 GEOTHERMAL ENERGY POWERING KENYA’S FUTURE CASE STUDY 2018 BOX 1 MENENGAI GEOTHERMAL PROJECT: MAIN KENYAN PROJECT PARTNERS AND STAKEHOLDERS At the power tariff offered by the government under Assuming the IPPs successfully operate the plants its feed-in tariff policy, IPPs may not see the revenue in the years to come, Menengai demonstrates • The Geothermal Development Corporation (GDC). and enter into PISSAs with GDC and PPAs with KPLC. The stream from power sales as sufficient to reach their that public-private partnerships in geothermal GDC is responsible for undertaking the integrated three IPPs were selected after a tendering procedure in development of geothermal steam resources through which 12 firms expressed interest. required profitability while meeting the minimum development can be effective. the initial exploration, drilling, resource assessment, and • Energy Regulatory Commission (ERC), National levels of debt service required by lenders. To address promotion of direct utilization of geothermal energy. Environment Management Authority (NEMA), and Nakuru this, low-cost, concessional financing is another Other public-private partnership models involve GDC owns and operates the Menengai steam field County Council. IPPs must obtain power generation important ingredient in the financing package. joint development of the exploration and field and is the implementing agency for the steam supply licenses from the ERC, an environmental and social development phase or even full IPP development agreement (PISSA) with the IPPs. impact assessment (ESIA) license from NEMA, and local Question 2 of the geothermal field and power facility. However, • The Kenya Power and Lighting Co. (KPLC). KPLC is permissions from the local county council. the off-taker, buying power from the IPPs based on • The Treasury/Ministry of Finance. The Treasury/Ministry What role do development finance institutions involvement in the earlier development phase negotiated power purchase agreements (PPA) for onward of Finance issues tax and duty exemption licenses and, comes with higher costs that would have to be (DFIs) play in supporting the private supply and distribution to consumers. with the Ministry of Energy and Petroleum, backs the and public sectors in the development of matched by higher tariffs or other public sector • The Kenya Transmission Company (KETRACO). For Government’s Letter of Support of the PISSA and PPA, in geothermal steam fields and power plants? support. Higher tariffs may not be a priority