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Tuesday, October 14, 2014


 Kengen, the power generator, is on a roll and in a fix at the same time. This coming Friday, it has invited President Uhuru Kenyatta to commission the 140Mw power station it has done at Ol Karia IV. MD Albert Mugo says that as a result of the injection of the geothermal power into the national grid, the fuel cost charge on consumer electricity bills has fallen from Sh7.22 per Kilowatt Hour (Kwh) in July/August to 5.39/Kwh in September and 4.79/Kwh in October. With another 140Mw in Ol Karia I phase II coming online, this charge is expected to go down to about Sh3/Kwh. That will certainly be a relief.

Better yet, the wells drilled by Kengen in Ol Karia that were expected to yield 5 Megawatts equivalent ended up doing double that, around 13Mwe. One world record breaking well is doing 30Mwe.

What this means is that to generate the 280Mw this total project was meant to do, Kengen ended up doing fewer wells than initially projected. Keep in mind, some of these wells cost US$6million (Sh534million) to drill.

So instead of the US$1.2billion (Sh106billion) it would have spent, it ended up doing about $960 (Sh85.5billion) including drilling.

The decision has been made to use the savings and the generous steam, to do an additional 70Mw plant to bring the total to 350Mw (by far Africa's largest geothermal power plant).

Financiers are happy. Take JICA (Japanese International cooperation Agency). They funded Ol Karia I Phase II. The project has gone so well, they have come to Kengen wanting to fund Ol Karia V. Those talks are ongoing.

But therein also lies Kengen's dilemma. The company is highly leveraged.

Its current funding structure is approaching 70% debt and 30% shareholders contribution (equity).

It cannot accept JICA's money, as soft as the terms are, without increasing its shareholder's equity.

This is why Kengen is doing a rights issue. As the company is 30% owned by the government, it is waiting to get word back from Treasury as to whether they will take up their rights. It is expected they will. Since the rights issue is for Sh15billion, government will be expected to come up with Sh10.5billion and shareholders Sh4.5bn.

Institutional investors should be easy to bring on board.

Kengen's geothermal power plants have an Internal Rate of Return of about 12.5%, according to Mugo, the MD. This means they will repay the investment in 8 years or thereabouts.

Which is why it will develop Ol Karia 6 and 7 using a Public-Private Partnership (PPP) model.

Already two firms have approached it expressing interest.

The RFPs (Request for Proposals) for a transaction advisor will be opened tomorrow (Wednesday 15, October 2014).

The company will seek a partner with whom to set up a joint-venture using a Special Purpose Vehicle. The partner should be able to source for equity as well as the debt required to finance the project.

One key takeaway is the amount of experience Kengen has gained from handling such a project with so many different players and contracts to implement.

The power plants have been built by Hyundai Heavy Industries, the South Korean conglomerate.

The Turbines were supplied by Toshiba of Japan.

The substation and transmission lines were done by KEC International of India.

Sinopec of China did the steamfield development.

Development of the steamfield was financed by World Bank and KfW of Germany.

The consultant for the design of the project and supervision of implementation was SKM of New Zealand.

Financing of actual construction was by KfW.

Financing of the power plant was by European Investment Bank (EIB)and French Agency for Development (AfD) - not to be confused with its more commercial arm, Proparco which finances projects on more commercial terms.

The substation and transmission line were financed by EIB.

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