AfDB eases investor risk in large African geothermal project
The Board of Directors of the African Development Bank (AfDB) approved an USD 12.7 million African Development Fund partial risk guarantee (ADF PRG) for the 105 MW Menengai Independent Power Producers project. The global Menengai project will exploit a portion of Kenya’s geothermal potential to provide power to about 500,000 households and 300,000 businesses. The ADF PRG will mitigate the risk to independent power producers (IPPs) – and the providers of debt financing to IPPs – of non-payment by state-owned enterprise Kenya Power and Lighting Company Limited under the Power Purchase Agreement (KPLC) and non-supply of steam by state-owned enterprise, Geothermal Development Company (GDC) under the Project Implementation and Steam and Supply and Agreement.
The Menengai geothermal steam field development project involves the supply of steam by the GDC to three power plants at the Menengai Geothermal field, as well as the purchase by KPLC of the power generated by those plants. The plants are to be financed, designed, constructed, installed, operated and maintained on a build-own-operate basis by three independent power producers – Sosian Menengai Geothermal Power Limited, QPEA GT Menengai Limited and OR Power Twenty-Two Limited.
Alex Rugamba, Director of the AfDB’s Energy, Environment and Climate Change Department, put the project into context: “Eighty-four per cent of Kenya’s population does not have access to modern forms of energy and the country is currently suffering from insufficient generation capacity. Yet Kenya’s geothermal potential is among the greatest in the world. So we see the PRG as having three roles: attracting needed investors to realize the Menengai project, helping to tap unleashed geothermal potential, and helping to bridge the tremendous gap between supply and demand.”
By covering GDC Steam supply obligations and KPLC’s Power Purchase obligations associated with non-payment, the PRG is providing credit enhancement to the overall project structure, securing cash flows for repayment purposes for debt providers. This mitigation of perceived political risks will promote foreign direct investment in Kenya and “crowd in” private financing for power generation.
To meet the demand for electricity, the Government of Kenya currently relies on providers of costly emergency generation capacity. The three IPPs will develop and construct three 35 MW geothermal power plants with a total capacity of 105 MW. This will help diversify Kenya’s energy mix, provide clean, reliable, low-cost power and strengthen the national grid by increasing national installed renewable power by approximately 10%.
The ADF PRG is a risk mitigation instrument that covers private lenders and investors against the risk of a possible government failure to meet contractual obligations to a project.