Financing of Geothermal Power Projects in Kenya: A Developing Country Model

Abstract

World over , financing of geothermal power projects takes the nature of project finance (as opposed to alternative conventional financing), a long-term financing based on the projected cash flows of the project rather than the balance sheets of the project sponsors. The financing structure involves equity investors, a syndicate of debt- holders providing non-recourse loans to the operations and secured by the project assets, including the revenue-producing contracts and paid entirely from project cash flows, rather than from the general assets or creditworthiness of the project sponsors; a decision supported by financial modeling. Generally, a special purpose entity which has no assets other than the project is created for each project. Project financing has been commonly used in geothermal projects applying project financing principles under public–private partnerships (PPP) and Private Finance Initiative (PFI) transactions. Kenya is the leading geothermal power producer in Africa and ranks ninth in the world. Financing of Geothermal projects in Kenya takes similar approach in cognizance to the worldwide geothermal project financing practices. Projects technical, environmental, economic and country/political risks identification and allocation is critical for Kenya. The government’s strategic development interests, in tandem with the socio-economic and political development agenda, coupled with the obvious universal upfront risks associated with geothermal development makes the financing mix and/or models depart considerably from pure project financing approach. Geothermal Development Company Limited (GDC) business model and design describes the rationale of how Kenya captures, creates, and delivers socio-economic and technological value from geothermal energy, development approach as part of the business strategic process to the projects, and business relationships with investors. GDC’s major capital budgeting and investments decisions are guided and geared towards making the projects attractive for funding purposes. These long-term choices comprise of which projects receive investment (investment decision), whether and to what extent to finance that investment (project) with equity or debt (financing decision). Project’s evaluation is done for financial decisions by the standard financial tools and techniques to include Weighted Average Cost of Capital (WACC), Net Present Value (NPV), Internal Rate of Return (IRR) and Payback Period. Projects proactive packaging/structuring at all stages is critical for financing purposes.