230 Oliver W. Johnson et al.
wells, the steam gathering system, and steam turbine technology – can reach
almost US$80 million (GEOCOM, 2015). Recent slow growth in demand due
to limited economic and industrial development
4
has led to growing concern
among government and Kenya Power officials that they will not have enough
customers to be able to pay for the electricity that the company has agreed to
purchase.
This economic risk associated with inability of the ‘offtaker’ – Kenya Power –
to pay for electricity it has contractually agreed to purchase is a key political and
institutional risk facing the geothermal sector. This may, in turn, greatly increase
the cost of borrowing capital for investment. In the private sector, investors with
a high tolerance for risk may be more amenable to investing in geothermal, but
they typically require strong guarantees before they are willing to lend to greenfield project developers or IPPs. In Menengai, GDC developed the geothermal
field and will sell steam to three IPPs. To mitigate investment risks, the IPPs have
a project and steam sales agreement with GDC to guarantee the steam they will
receive, and a power purchase agreement with Kenya Power to buy the power they
produce. But delays in closing financing for the IPPs have continued as letters of
support from the government have been slow in forthcoming, leaving some political risks unresolved. Investors, private developers, and government stakeholders
all appeared to have very different perspectives on who should bear which risk. As
such, geothermal remains dominated by grants and concessional loans (high
interest and long tenors) from development finance institutions, such as the European Investment Bank, the KfW Development Bank, the World Bank and the
Japan International Cooperation Agency (JICA).
Another political risk from the perspective of many different stakeholders is
the distribution of responsibility for energy planning and project approval
between the national and the county governments. County government representatives felt that too much national control was a risk to their ability to
manage their own affairs and ensure that the voice of county citizens was represented. National government representatives viewed added bureaucracy and
potential for political manoeuvring as a risk to project development and
approval, which many deemed was already overly convoluted. Meanwhile,
private developers sat on the fence, appreciating the role county government
could play in managing local issues but remaining wary that increased levels of
bureaucracy might lead to increased avenues for corruption, which already pervades so much of the Kenyan economy. The 2017 Energy Bill, still awaiting
final approval, may do much to clarify the allocation responsibilities among
national and county governments; however, limited capacity at the county
level, and ambiguities in the details, will take years to resolve.
The final risk associated with achieving further geothermal development is
community opposition to construction both at the geothermal site and for the
associated transmission lines to connect these sites with distant demand centres,
such as major cities and industrial areas. In the face of relocation – which occurred
in 2010 to facilitate development of the Olkaria IV power plant – or other restrictions on land use, communities are understandably often resistant to geothermal
wells, the steam gathering system, and steam turbine technology – can reach
almost US$80 million (GEOCOM, 2015). Recent slow growth in demand due
to limited economic and industrial development
4
has led to growing concern
among government and Kenya Power officials that they will not have enough
customers to be able to pay for the electricity that the company has agreed to
purchase.
This economic risk associated with inability of the ‘offtaker’ – Kenya Power –
to pay for electricity it has contractually agreed to purchase is a key political and
institutional risk facing the geothermal sector. This may, in turn, greatly increase
the cost of borrowing capital for investment. In the private sector, investors with
a high tolerance for risk may be more amenable to investing in geothermal, but
they typically require strong guarantees before they are willing to lend to greenfield project developers or IPPs. In Menengai, GDC developed the geothermal
field and will sell steam to three IPPs. To mitigate investment risks, the IPPs have
a project and steam sales agreement with GDC to guarantee the steam they will
receive, and a power purchase agreement with Kenya Power to buy the power they
produce. But delays in closing financing for the IPPs have continued as letters of
support from the government have been slow in forthcoming, leaving some political risks unresolved. Investors, private developers, and government stakeholders
all appeared to have very different perspectives on who should bear which risk. As
such, geothermal remains dominated by grants and concessional loans (high
interest and long tenors) from development finance institutions, such as the European Investment Bank, the KfW Development Bank, the World Bank and the
Japan International Cooperation Agency (JICA).
Another political risk from the perspective of many different stakeholders is
the distribution of responsibility for energy planning and project approval
between the national and the county governments. County government representatives felt that too much national control was a risk to their ability to
manage their own affairs and ensure that the voice of county citizens was represented. National government representatives viewed added bureaucracy and
potential for political manoeuvring as a risk to project development and
approval, which many deemed was already overly convoluted. Meanwhile,
private developers sat on the fence, appreciating the role county government
could play in managing local issues but remaining wary that increased levels of
bureaucracy might lead to increased avenues for corruption, which already pervades so much of the Kenyan economy. The 2017 Energy Bill, still awaiting
final approval, may do much to clarify the allocation responsibilities among
national and county governments; however, limited capacity at the county
level, and ambiguities in the details, will take years to resolve.
The final risk associated with achieving further geothermal development is
community opposition to construction both at the geothermal site and for the
associated transmission lines to connect these sites with distant demand centres,
such as major cities and industrial areas. In the face of relocation – which occurred
in 2010 to facilitate development of the Olkaria IV power plant – or other restrictions on land use, communities are understandably often resistant to geothermal