Kenyan insurers and the UK government-backed Financial Sector Deepening (FSD) are teaming up with UK-based energy and climate risk finance company Parhelion to cushion local investors in renewable energy projects from unexpected losses.
FSD said the parties will launch a first-of-its-kind underwriting facility, backed by local insurers, to de-risk early stage development of geothermal energy projects in Kenya and Ethiopia with the capacity to significantly expand electricity access.
The initiative is expected to create 2,600 jobs in renewable energy and insurance sectors while bringing electricity to 5.25 million people who currently live without power, said FSD.
"Kenya and Ethiopia have large geothermal potential; however, growth in the sector is held back by high upfront investment coupled with the risk of drilling wells that are found to be commercially unviable," said FSD.
"Parhelion will work with East African insurers to create an underwriting facility that mitigates the low probability, high-cost risk of unviable wells. This will use insurance capital to de-risk the early-stage development of geothermal projects, making it easier for projects to attract private investment."
Parhelion is also planning to launch the GeoFutures Fund, which would invest in nascent geothermal projects.
High upfront costs are associated with infrastructure development in greenfield projects hampering efforts to harness geothermal energy.
A geothermal well costs about Sh650 million to drill, highlighting the capital-intensive and risky nature of the investment.
East Africa has a potential geothermal capacity of 15,000 megawatts (MW), FSD said, with Kenya accounting for the bulk of installed capacity at about 860MW, while Ethiopia has seven megawatts.
"With support from the programme, Parhelion and FSD Africa forecast a 20 percent increase in geothermal output for Kenya and a 500 percent rise in Ethiopia, preventing more than 515,000 tonnes of CO2 per year."
Kenya has pushed hard to harness its geothermal capabilities, having grown from generating just 45 megawatts of geothermal power in 1985.
The rise of Kenya’s geothermal output to rank ninth in the world has helped reduce further electricity rates and expand access to electricity.