KenGen Increases its Hold Over Geothermal Wells

KenGen has secured first-refusal rights on geothermal wells drilled by the Geothermal Development Company (GDC), allowing the generator to establish new plants away from its Olkaria base.

Last year, the two State-owned enterprises signed a memorandum of understanding that will give KenGen first access to GDC’s existing and new geothermal wells, with the option of putting up power plants, wellheads, or any other direct use of the steam.

With a right of refusal, GDC will only be able to approach other independent power producers after KenGen confirms that it will not bid on the wells.

Abraham Serem, managing director of KenGen, revealed to the Business Daily last week that a meeting between the two businesses has been scheduled to iron out the specifics of the new steam purchase arrangement.

“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.

The government of Kenya has set the ambitious goal of a complete transition to clean energy by the year 2028. Currently, it is estimated that 80% of Kenya’s electricity comes from clean sources.

Since 2015, KenGen has spent between Sh2.7 billion and Sh3.5 billion annually to purchase steam from GDC wells in Olkaria, where it currently produces 799 megawatts of power.

KenGen paid GDC Sh3.09 billion in steam expenses in the fiscal year that ended in June 2022 after earning Sh4.36 billion from these wells.

The Olkaria I additional units four and five, Olkaria IV, with a combined installed capacity of 320MW, and wellhead plants are operated by KenGen using the GDC wells.

GDC intended to provide steam for independent power producers in the Menengai’s geothermal field, with a first phase target of 105MW from three producers.

However, financing issues and a lack of risk guarantees from the National Treasury for the producers have hampered development plans in the area, leaving the drilling firm unable to generate a return on its billions of shillings investment.

According to the Auditor-report General’s for the fiscal year ending June 2021, GDC invested Sh69 billion in wells and associated infrastructure at the Menengai’s site.

By June 2021, the company had sunk 52 wells at the site, 21 of which were producing steam and had their steam gathering systems tested and commissioned.

GDC signed project implementation and steam supply agreements in 2014 with or power 22, Quantum Power, and local firm Sosian Energy to build a 35-MW power plant in Menengai’s under a build-own-operate model.

Despite years of delays, or power 22 and Quantum Power are optimistic about beginning construction on their plants this year after securing funding.

Last month, the African Development Bank (AfDB), the Eastern and Southern African Trade & Development Bank (TDB), and Finn fund announced that they had reached a Sh8.9 billion debt financing agreement for the Menengai project. Globelec, a UK investment firm, owns a controlling interest in Quantum Power.

“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 or power 22 said that it secured funding worth Sh12 billion ($97 million) towards its power plant.