KenGen tightens grip on geothermal wellsTuesday January 31 2023
Listed power producer KenGen has secured first-refusal rights on geothermal wells drilled by the Geothermal Development Company (GDC), opening the way for the generator to set up new plants away from its Olkaria base.
The two State-owned companies signed a memorandum of understanding last year which will see KenGen given the first opportunity for utilisation of GDC’s existing and new geothermal wells, where it has the option of putting up power plants, wellheads or any other direct use of the steam.
A right of refusal means that GDC will only be able to go to other independent power producers after KenGen confirms it would not bid for the wells.
GDC has been drilling prospecting wells at the Menengai site in Nakuru and Silali in Baringo and has previously developed wells in the Olkaria basin from where it sells steam to KenGen.
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KenGen managing director Abraham Serem told the Business Daily last week that the two companies have lined up a meeting to work out the finer details of the new steam purchase agreement.
“Indeed the relation with GDC in terms of our right of refusal is there and it exists. There is a meeting which has been convened by the Principal Secretary [Alex Wachira] between GDC and ourselves to discuss ways of working together in terms of exploiting some of the steam that GDC has drilled,” said Mr Serem.
Currently, an estimated 80 percent of Kenya’s electricity is from clean sources, and the government has set the ambitious target of a 100 per cent transition to clean energy by 2028.
KenGen, which currently generates 799 megawatts from geothermal sources, has been spending between Sh2.7 billion and Sh3.5 billion every year since 2015 to purchase steam from GDC wells in Olkaria.
In the year ending June 2022, KenGen paid GDC Sh3.09 billion in steam costs, having generated Sh4.36 billion worth of revenue from these wells.
The GDC wells are used to run KenGen’s Olkaria I additional units four and five and Olkaria IV, which have a combined installed capacity of 320MW, and also wellhead plants.
In the Menengai geothermal field, GDC intended to provide steam for independent power producers, with a first phase target of 105MW from three producers.
Financing issues and a lack of risk guarantees from the National Treasury for the producers have, however, hampered the development plans in the area, leaving the drilling firm unable to generate a return from the investment worth billions of shillings.
A report by the Auditor-General covering the year ending June 2021 put the amount invested by GDC in wells and associated infrastructure at the Menengai site at Sh69 billion.
The company had sunk 52 wells at the site by June 2021, out of which 21 were producing steam and were tested and had their steam gathering systems commissioned.
In 2014, GDC entered into project implementation and steam supply agreements with Orpower 22, Quantum Power and local firm Sosian Energy to build a 35-MW power plant each in Menengai under a build–own–operate model.
Despite years of delays, Orpower 22 and Quantum Power are optimistic about starting work on their plants this year after securing funding for the projects.
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UK investment firm Globelec, which owns a controlling stake in Quantum Power, said last month that it had reached a Sh8.9 billion debt financing agreement with the African Development Bank (AfDB), the Eastern and Southern African Trade & Development Bank (TDB) and Finnfund for the Menengai project.
“Construction of the project is expected to commence during the first quarter of 2023 once financial close has been reached,” Globelec said after announcing the financing deal.
Earlier this month, New York-based Orpower 22 said that it secured funding worth Sh12 billion ($97 million) towards its power plant.