When it comes to sustainable power, meeting emission targets, and rolling back the advance of global warming, it would be hard to beat Kenya, which has no coal plants and very few diesel or heavy fuel oil (HFO) generating stations. The nation has no fewer than 14 hydroelectric schemes, on which it has traditionally relied for most of its power. Kenya has an estimated hydropower potential of about 6,000MW as of December 2014 comprising large hydros (sites with capacity of more than 10MW) and small hydros. Potential for small hydros is over 3,000MW, of which about 25MW has been developed. However hydro power, like wind power, a variable resource. Over the last three years at least, both the long and the short rains across East Africa have been disappointing and consequently many dams have dried up or been depleted.
Fortunately Kenya has another renewable resource, and one that is much more robust. Geothermal power generation has proven to be a highly effective technology in places, like the Great Rift Valley, where volcanic activity creates hotspots near the surface. In the decades since the inauguration of Olkaria I Power Station in 1981, the first geothermal power plant in Africa, Kenya has forged for itself a leadership position in this field. In Kenya, more than 14 high temperature potential sites occur along the Rift Valley with an estimated potential of more than 10,000 MW. Other locations include Chyulu, Homa Hills in Nyanza, Mwananyamala at the Coast and Nyambene Ridges.
Geothermal now accounts for 51 percent of the national power generation mix, and has averaged 41 percent over the last six months. This has resulted in a decline in reliance on hydro and thermal sources leading to a reduction in the cost of electricity by more than 30 percent and a more reliable base – at best hydroelectric stations can only run at around 70 percent efficiency whereas geothermal plants typically achieve over 90 percent.
KenGen is not resting on its laurels: by 2018 a further 460 MW of geothermal may be developed. If this is achieved, the amount of electricity generated by hydro power could be reduced to 28 percent of the total mix. Decreasing the country’s reliance on hydro power would likely be beneficial, because lower rain levels have decreased hydro power output. Drought can be a big problem when it occurs because river flows often reduce to a trickle. Climate change is believed by some to intensify droughts, so shifting away from hydro power is probably a good decision.
Mr Albert Mugo was appointed as Managing Director and CEO of KenGen in January 2014, having previously served for close to six years as its Business Development and Strategy Director. His first task was to complete development of 280MW of geothermal power plants in order to help the country reduce reliance on expensive thermal power and weather dependent hydropower generation. A year into his job he had grounds for considerable satisfaction when on February 19th, Olkaria I units 4&5 were inaugurated by Paul Kagame, President of Rwanda, accompanied by his Kenyan counterpart Uhuru Kenyatta. The inauguration of the two units marked the final phase of the 280MW geothermal power project at Olkaria. Mugo estimates that Olkaria now saves the country $273 million (about Sh24 billion) a year compared with the cost of thermal generation.
But Mugo’s task is far from done. He now aims to increase the installed capacity from the current 2,000MW to 5,000MW over the next three years. “Our strategy now is to push forward with the projects that we have lined up, and in the next 1-2 years we hope to bring in additional capacity of up to 385 MW, all from geothermal.” Geothermal sites need to be determined with care, he explains. “We have been fortunate in the Olkaria area, where we’ve identified potentially 1,000 MW. So far we have only developed 440 MW there, so we still have a lot more to do.”
The future is geothermal, he firmly believes, but he is far from presiding over a one-resource policy. Hydropower will always be an important part of the mix, and he keeps an eye on the natural gas reserves lately discovered in Northern Kenya, near Garissa, and at the coast. Additionally, KenGen has a wind farm generating 25 MW very close to Nairobi, and plans to develop another 100MW of wind power by 2018. In addition private companies are interested in creating up to 500MW. “We see a lot of potential in wind power,” says Albert Mugo. “Wind looks like becoming a big thing in Kenya, and we are part of a group of businesses developing wind power in the country.”
Coal is another possibility, as Kenya contemplates becoming a coal producing nation. According to the Ministry of Energy, the Mui Basin 180 kilometres to the east of Nairobi could yield an estimated one billion tonnes of coal, valued at $75 billion, and could produce 5,000MW of electricity if a thermal generating station could be built close by. The government is currently looking for mining companies to exploit the coal, so that project is some way down the line.
For the time being the most promising area remains geothermal technology, in which KenGen has unique expertise. “We are expanding quite rapidly,” says Mugo, “and looking at the company to provide leadership in the geothermal area. We have been cooperating with countries round the region in terms of providing expertise and have been called in as a consultant in Rwanda, the Comoros, Zambia, and Sudan. Uganda also has shown interest in asking our people to go and help them develop geothermal capacity.” He is also looking at innovative means of financing new geothermal projects. “So far we have always developed our power plants though debt finance, with KenGen providing some equity: now we are looking at going into joint ventures, with private companies joining with KenGen in a public/private partnership (PPP) and developing that project together. That is what we are trying to do with Olkaria VI.” The first step, he explains, is to invite an expressions of interest (EoI) from potential bidders, then to issue a request for proposal (RfP) to those that offer best value.” EoIs have already been issued for the next phase of Olkaria, Olkaria VI, which will be the first test for the PPP model, he says.
The land holding at Olkaria is very large compared with the footprint of the installed plant and the drilling locations. This means potential for industrial development right above the geothermal resource. Factories on the site would benefit from inexpensive and dependable power, and in addition a source of steam, which many industries require. “This idea has attracted quite a lot of interest, and we are getting a consultant to look at the Olkaria area to see where we could establish these industrial parks, what infrastructure would be required and which industries would benefit most. The government is very keen to see this happen!” The income from leasing out the land for industrial development, and more importantly the sale of both electricity and steam, would go straight to KenGen’s bottom line.
As we spoke, Albert Mugo was fresh from a meeting at which he shared his 2014 financial results with his shareholders. It was an agreeable occasion for all: geothermal has really impacted the top line, with revenue to December 2014 up 37 percent on the previous half year. Revenue from electricity sales jumped by a third to Ksh11.6 billion from Ksh8.4 billion in December 2013. Profit before tax showed a 100 percent improvement. The shareholders, including the Kenyan government which holds a 70 percent stake, are very much behind KenGen since it cleared with no problem a $300 million loan from the French Development Agency to fund Olkaria development back in 2009.
Not surprisingly they are keen – even impatient - to support future development, he says. “We are also looking at restructuring our balance sheet to give us more headroom for debt: so we are planning a rights issue and asking investors to put Ksh 30 billion into the company.” Mugo also said the firm is in discussions with the government to convert up to KSHs 20 billion of loans to KenGen into equity during the rights issue. If this can all happen by September this year as planned the company will be in excellent shape to meet its future obligation to catalyse Kenya’s growing prosperity.
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