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Geothermal Power in East Africa

Last week, London-based firm EnergyNet held its “Powering Africa Summit” in Washington.  The Summit, opened by U.S. Secretary of Energy Moniz, attracted project developers, equipment suppliers, financiers, the U.S. Government’s Power Africa team, and African government officials. Unfortunately, due to the African Union Summit that was being held at the same time in Ethiopia, no minister of energy from Africa attended.  This wasn’t the first event of its kind, but it did draw a much more diverse group of actors, which suggests more developers and energy companies are looking to Africa for new business opportunities.  

On the margins of the conference, other institutions in DC convened panels of experts to examine a few specific issues, including ideas for accelerating the development of the Rift Valley’s prodigious, and environment-friendly, geothermal resources.  Studies have shown that the Rift Valley has the potential to generate between 15,000 and 20,000 MWs.  And with countries such as Kenya and Tanzania struggling to keep 2,000 or so megawatts on line and operational, it is a very reliable base-load resource.    

So, what’s keeping a relatively cheap, reliable, and clean resource from being converted into power?  Simply put, there are a lot of risks, and capital generally avoids risk.  Those who operate in the industry identify “drilling risk” as a major inhibitor to geothermal development.  It’s quite costly at $6 – $10 million a well, and in the past one had to have both good studies and a “steam diviner” to find the perfect resource.  Recent improvements in technology have actually reduced the risk.  Geo-physics studies have become more precise in locating the resource, while multi-directional drilling has become a game-changer.  A recent World Bank report concluded that the success rate in drilling has climbed to 80%. 

Even with these improvements, a 20% risk can still be too high.  To mitigate risk further, donors, industry, and government  have developed several “de-risking” tools, which so far haven’t proved to be as effective as hoped.  Munich Re offers a commercial, and costly, insurance product for drilling.  Some countries are considering to take on the drilling risk themselves.  Kenya, for example, has created the Geothermal Development Corporation (GDC), whose mandate is to develop geothermal sites, drill wells, and bid concessions.  Other countries are considering a similar model in hopes of attracting capital.  On the donor side, Germany’s KfW created a “Geothermal Risk Mitigation Facility” that is housed within the African Union, and the AfDB hosts a number of instruments and funds under its Sustainable Energy Fund for Africa.  Iceland, Germany, the UK, the US, among others, also have their own important programs, but each has its own unique set of criteria for applicants.  Simply put, though intentions are good, the instruments are too restrictive in their use and too diffuse, spreading across a multitude of organizations.  To make a project bankable, a developer will often have to use several of these tools, and that means timing and sequencing of their application are critical factors in successfully closing projects.  The (up-to) 1,000 MW Corbetti project in Ethiopia provides a useful example of artful deployment of many tools on the part of lead developer Reykjavik Geothermal, but it has taken many years to get to this point.

As industry examines the best means of accelerating project development and, more important, the actual delivery of power, below are several recommendations for consideration:

(1) Develop a geothermal resource center that is on every donor’s and industry association’s website.  The resource center would ideally list all the geothermal projects in the Rift Valley in operation, those that are being developed, and ones likely to come up for bid.  It would contain (non-propriety) information on each project, the project costs and terms, and further help prospective developers by identifying de-risking tools (commercial and donor-supplied), how and when to apply for them, and potential financing options.

(2) The donors should consolidate their funds and de-risking mechanisms wherever possible, and identify one single donor to lead and coordinate.  The logical choice for leading the donors is the African Development Bank (AfDB).  With its very strong regional office in Nairobi, technical expertise, and a number of instruments to support geothermal development, the AfDB as the development bank for the continent is by far best positioned to triangulate the interests of developers, financiers, and host governments.

(3) On consolidation, the industry should look hard into whether the Geothermal Risk Mitigation Facility (GRMF) should continue to reside within the African Union Commission in Addis Ababa.  The AU is largely a political and policy-making institution.  Maintaining a facility that supports commercial interests under its control is affecting implementation.  For example, when decisions on how Round I funding would be allocated, staff suggested funds should be “fairly distributed” among the countries and not based on project merits.  The political lens should be removed from this facility.

The GRMF is a good concept – actually a very good one.  Effective execution has been lacking, however.  The AfDB is better suited to run this important de-risking program and make it more timely in evaluating projects on a rolling basis, and allocating funds based on data-driven, technical decisions.

(4) Project developers, equipment suppliers, and EPC (engineering, procurement, and construction) contractors should form partnerships and alliances early on in the process to broaden the range of equity partners in order to cover early project development costs. 

The Rift Valley presents exciting opportunities for renewable energy projects that will help the countries of East Africa fill its severe electricity deficit.  Millions of Africans could have reliable, relatively cheap power if the tools to attract investment were sharpened. 

© 2019 Covington & Burling LLP

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