NAMA for accelerated geothermal electricity development in Kenya. Supporting Kenya s 5000+MW in 40 months initiative and Vision 2030.

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1 NAMA for accelerated geothermal electricity development in Kenya Supporting Kenya s 5000+MW in 40 months initiative and Vision 2030 Proposal

2 Foreword This Nationally Appropriate Mitigation Action (NAMA) proposal has been developed under the MitigationMomentum project on behalf of the Ministry of Energy and Petroleum (MoEP) and Ministry of Environment, Water and Natural Resources (MEWNR) of Kenya. The contents of this proposal are the result of a multi-stakeholder consultation process that began in September 2012 and continued for over 16 months. This abridged version of the proposal outlines the concept for the NAMA to potential international supporters. A full proposal has also been developed, which defines in detail the NAMA implementation, which will be used in the financing (including final detailing and negotiations) and subsequent implementation stages. The full proposal will be finalised jointly with potential NAMA supporters, taking into account new developments in the sector and specific donor terms and conditions. Acknowledgements The development of this proposal would not have been possible without the overall coordination from Stephen King uyu and Fatuma Hussein of the Climate Change Secretariat, Ministry of Environment, Water and Natural Resources, and Timothy Mulaha and Esther Wang ombe of the Minstry of Energy and Petroleum. The development of the proposal document also relied on the in-depth feedback and review by the following persons: Jectone Achieng (GDC), Dr. Peter Omenda (GDC), Pacifica Achieng (KenGen), Antonie de Wilde, Mits Motohashi (World Bank), Kirsten Offermanns (KfW), Murefu Barasa (EED Advisory), Nick Percival (Parhelion Underwriting), Frauke Röser (Ecofys). Authors James Falzon, Karina Veum, Xander van Tilburg, Matthew Halstead, Sophy Bristow (ECN Policy Studies) Tom Owino, Deborah Murphy, Seton Stiebert, Peterson Olum The preparation of this report was supported by the Mitigation Momentum project. The contents of this publication do not reflect the views of the German Federal Ministry of Environment, Nature Conservation and Nuclear Safety. NAMA for accelerated geothermal electricity development in Kenya I ii

3 Table of Contents Executive Summary 1 1. Introduction 3 2. Developing a NAMA for geothermal power in Kenya Alignment with Kenya Vision 2030 and National Climate Change Action Plan Transforming the geothermal sector: Rationale for the NAMA Scope of the NAMA NAMA objective and components Objective of the NAMA Supported Components Implementation Mitigation potential, sustainable development impacts and financial ambition GHG emissions reduction Sustainable development impacts Financial ambition Measurement, Reporting and Verification of the NAMA Government of Kenya MRV+ System NAMA MRV system concept Moving the NAMA forward 33 References 34 ANNEX A: Monte Carlo Simulation Assumptions 36 ANNEX B: Calculation methodology for emissions reductions 37 NAMA for accelerated geothermal electricity development in Kenya I iii

4 Executive Summary As part of Kenya s efforts to show continued leadership in addressing global climate change and to underpin its low carbon development, this proposal outlines a Nationally Appropriate Mitigation Action (NAMA) for accelerating geothermal power development. The Government of Kenya is proposing this NAMA, which will build on existing and on-going efforts to support the transformation of the Kenyan geothermal sector such that private sector investment and participation is scaled-up in a significant manner. Kenya launched its National Climate Change Action Plan (NCCAP) in 2013, in which accelerated geothermal power development was identified as a mitigation option that has large greenhouse gas (GHG) emissions reduction potential and highly positive co-benefits. Kenya s short-term ambitions for geothermal are outlined in the 5,000+ MW in 40 months initiative launched by the Government of Kenya (GoK) in This initiative aims to bring online approximately 1,500 MW of additional geothermal capacity by 2017 from the current capacity of approximately 200 MW (MoEP, 2013). In the longer term, Kenya s Vision 2030 states an ambition of 5000 MW of installed geothermal capacity by If the geothermal sector fails to deliver new capacity in a timely manner, Kenya is likely to prioritise alternative options. Recent discoveries of petroleum, coal and natural gas indicate that fossil fuels likely will increase in the electricity generation fuel mix. As high carbon intensity power sources, this would put the Kenya power sector on a high-carbon development pathway. There is, however, an accelerated growth scenario for geothermal power development in the NCCAP, which this NAMA intends to support. This accelerated growth scenario foresees significant up-scaling in private sector investment, as well as new actors (developers and Independent Power Producers [IPP]) entering the sector. In the scenario, the private sector will cover approximately % of the required USD 20 billion investment to reach the 5,000 MW goal, compared with the historical 10-15% level (NCCAP, 2012). The BAU scenario in the NCCAP analysis identified two main constraints to the accelerated scenario: capital limitations of current (largely publically owned and financed) geothermal developers active in Kenya, and the limited number of private sector developers. Although there is significant ambition and political will, reaching the short, medium and even long-term geothermal ambition will be a major challenge. According to the Business As Usual (BAU) scenario defined in the NCCAP, geothermal power will continue to expand to approximately 2500 MW by 2030 (NCCAP, 2012). This falls well short of Kenya s stated ambitions. In recent years, Kenya has already undertaken significant steps to support the transition towards the accelerated scenario (the transformation ), including the establishment of the Geothermal Development Company (GDC) that seeks to promote development of geothermal with large private sector participation. However, engagement with Kenyan stakeholders, international IPPs and developers, potential investors and development banks indicated that significant gaps remain in the support for geothermal development. Figure 1: Geothermal energy presents a great opportunity for powering development in a reliable, economic and climatefriendly manner (left). Figure 2: The NAMA proposal was developed in a multi-stakeholder consultation process over 16 months (right). NAMA for accelerated geothermal electricity development in Kenya I 1

5 What are the gaps and how is the NAMA designed to support on-going efforts to transform the Kenyan geothermal sector? Three main gaps in the efforts to support increased private participation were identified during a sector analysis performed through a multi-stakeholder consultation process that began in September 2012 and continued for over 16 months. These three gaps include an inadequate risk/return profile for IPPs and other developers, a need for targeted technical assistance focused on commercial and financial aspects in the short and medium term, and a potential human capacity gap for large up-scaling of the sector in the medium and long term. The NAMA aims to address the gaps in the existing and ongoing efforts to transform the sector through new, complementary, low-regret actions. The NAMA proposes four specific components: Financial: 1. Risk mitigation instruments 2. Premium payment mechanism Capacity: 1. Technical Assistance Facility 2. National Geothermal Capacity Building Programme The new, complementary components of the NAMA, in the short and medium term, will directly target an estimated 820 MW of geothermal developments of the 1500 MW outlined in the 5000MW+ in 40 months initiative. They will also indirectly support achievement of the longer term ambitions in the long term. In terms of greenhouse gas (GHG) mitigation potential, the NAMA will contribute to directly abating approximately 3.77 MtCO2e per year in Sustainable development co-benefits of the NAMA include improved energy security through increased domestic supply, GDP growth through lower energy prices and increased employment. Climate resilience will be improved insofar as the electricity supply will be less dependent on hydroelectricity, and thus less exposed to changes in precipitation patterns due to climate change. The Kenya geothermal NAMA has significant financial ambition. This NAMA proposal outlines a request for support of USD million in the first phase of the NAMA, and USD million in the second phase. Along with the already committed 1.1 billion USD from the Government of Kenya and international donors and development finance institutions, this would leverage approximately 3 billion USD of private investment. Support for the first phase of the NAMA is sought to enable the commencement of implementation in the second half of Table 1: Summary of NAMA components seeking support The Gaps Risk/return inadequate Need for responsive technical support Future human capacity constraint NAMA to address Gap through. Risk mitigation instruments Premium payment mechanism Technical Assistance Facility National Geothermal Capacity Building Program Key Features Three sub-components are proposed for the early stage risks: Provision of contingent grants, complemented by a drilling risk insurance, and a Long Term Risk (LTR) guarantee. A premium payment mechanism would entail disbursement of a pre-defined additional income per MWh to increase financial attractiveness on specific fields for a limited period. A Technical Assistance Facility (TAF) will provide advisors, training, secondments and workshops addressing IPP integration, mobilising finance and expediting environmental and social approvals. The NAMA will support a National Geothermal Capacity Building Program that undertakes training, research, mapping, planning and database development. Figure 2: The NAMA proposal was developed in a multi-stakeholder consultation process over 16 months. NAMA for accelerated geothermal electricity development in Kenya I 2

6 1. Introduction Geothermal energy presents a great opportunity for powering development in Kenya. This proposal shows how a Nationally Appropriate Mitigation Action (NAMA) 1 can support the Government of Kenya in accelerating expansion of geothermal power capacity. The objective of this abridged proposal is to outline to potential international NAMA supporters the background to the NAMA, the rationale for a NAMA in the geothermal sector, and its design. It also illustrates the anticipated mitigation and sustainable development impacts, and how these impacts will be measured, reported and verified. A full proposal has also been developed, which defines in detail the NAMA implementation, which will be used in the financing (including final detailing and negotiations) and subsequent implementation stages. The full proposal will be finalised jointly with potential NAMA supporters, taking into account new developments in the sector and specific donor terms and conditions. The NAMA proposal is the result of a multi-stakeholder consultation process that began in September 2012 and continued for over 16 months. It involved three in-depth stages of stakeholder consultations, during which the following organisations were consulted: Ministry of Energy and Petroleum (MoEP) Ministry of Environment, Water and Natural Resources (MEWNR) Geothermal Development Company (GDC) Kenya Electricity Generating Company Ltd (KenGen) Energy Regulatory Commission (ERC) Kenya Power The National Treasury of Kenya Ministry of Devolution and Planning Agence Française de Développement (AFD) KfW Japan International Cooperation Agency (JICA) World Bank International Finance Corporation (IFC) United Nations Development Programme (UNDP) Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) African Development Bank (AfDB) Private sector developers Munich RE WWF, Kenya Climate Network Africa University of Nairobi Kenya Climate Change Working Group (KCCWG) This proposal is jointly put forward by the Ministry of Energy and Petroleum (MoEP) and Ministry of Environment, Water and Natural Resources (MEWNR). 1 This note assumes a basic understanding of the NAMA concept. For a good introduction to NAMAs, see Sharma (2013). NAMA for accelerated geothermal electricity development in Kenya I 3

7 2. Developing a NAMA for geothermal power in Kenya NAMAs have emerged, under the umbrella of the UNFCCC, as a central concept to promote climate change mitigation actions in developing countries. NAMAs are considered to have the potential to encourage large-scale emission reductions in developing countries, while enabling sustainable development in the context of their national development strategies and plans. Recently donors have expressed specific interest in NAMAs that are deemed transformational 2. NAMAs may be seen as the delivery mechanism for national low-carbon development strategies, offering an opportunity for developing countries to engage in climate change mitigation beyond the project-based carbon offsetting structure of the Clean Development Mechanism (CDM). To that end, NAMAs are expected to mobilize investment for transformational change of a sector s development. 3 This section describes the precursors, rationale and scope of the NAMA developed for the geothermal sector in Kenya. 2.1 Alignment with Kenya Vision 2030 and National Climate Change Action Plan In Kenya, the National Climate Change Action Plan (NCCAP), launched in March 2013, is the final product of a comprehensive process that began in 2011 to develop a holistic plan to implement the National Climate Change Response Strategy (NCCRS), which was developed in The plan aims to ensure that Kenya takes steps to reduce its vulnerability to climate change and adopts a low-carbon development pathway. The NCCAP development process included a low-carbon assessment in six mitigation sectors, including the energy sector. This included a bottom-up assessment of mitigation opportunities and top-down economy-wide economic, energy and emissions modelling. It thereby provides the evidence base for prioritizing low-carbon development opportunities and ultimately developing investment proposals to attract international climate finance through NAMAs. The NCCAP is anchored in Kenya Vision 2030, and provides direction for priority NAMAs for Kenya (see Figure 3). Figure 3: Relationship between Kenya Vision 2030, NCCAP, and NAMAs in Kenya (Kinguyu, 2013) 2 See for a definition of transformational provided by the International NAMA facility. 3 The International NAMA Facility, the first fund directed toward NAMA implementation, expects the NAMA to contribute to a transformation of the national or sectoral development towards a less carbon intensive development path. See: NAMA for accelerated geothermal electricity development in Kenya I 4

8 The action plan concludes that geothermal power has by far one of the largest abatement potentials in the energy sector (14 Mt CO2eq. per year) in 2030, compared to other technologies (see Figure 4). This is supported by the observation that four of the seventeen CDM projects registered in Kenya are geothermal projects. 4 Furthermore, the action plan reaffirms that increasing the share of geothermal power can provide low-cost base load generation while facilitating economic activity and development, such as increased access to energy. These are key aspects with regard to supporting Kenya s ambitions to become a middleincome country by 2030 through the provision of reliable, affordable and sustainable energy (GoK, 2012). In particular, geothermal power generation will play a key role in reducing the current reliance on hydropower, thereby improving climate resilience. Figure 4: GoK (2012) mitigation reduction potentials for Kenya in the electricity generation sector up to Reference case projection is lower than the wedges due to suppressed demand approach utilised in the analysis. Due to the significant development benefits and the large mitigation potential, the Government of Kenya has thus decided to bring forward geothermal generation expansion as a national priority and the Nationally Appropriate Mitigation Action (NAMA) approach is a key way of facilitating the expansion. 4 See NAMA for accelerated geothermal electricity development in Kenya I 5

9 2.2 Transforming the geothermal sector: Rationale for the NAMA THE SITUATION Since 2006 a supply-demand imbalance (with a current shortfall of 536 MW) has contributed to regular power rationing, particularly during dry seasons due to the dependence on hydro which accounts for about 50% of the existing capacity. The sector resorts to expensive and emission intensive quick fixes such as Medium Speed Diesel (MSD) plants running on Heavy Fuel Oil (HFO) and High Speed Diesel (HSD) plants running on Automotive Gas Oil (AGO). Electricity is therefore expensive with these plants currently contribute to nearly 40% of the effective capacity. The cost of energy generated from these plants ranges from US$ cents per unit. Their contribution increases during dry periods, making electricity even more expensive (MoEP, 2013). As a relatively cheap, base load power source, Kenya has in recent years prioritised and invested in expanding its geothermal power stock to counter increased costs and dependence on hydro and fossil fuel-based power, with technical and financial support from development partners. There is currently 250 MW of geothermal power generation (out of 1,765 MW total installed power capacity nationally) (Kenya Power, June 2013). Moving forward, Kenya has significant ambitions to scale-up geothermal capacity. In the short-medium term (by 2017), an increase of approximately 1,500 MW of geothermal capacity is targeted by the GoK as part of the MW in 40 months initiative launched in August This initiative outlines a roadmap for the rapid up-scaling of capacity in the Kenyan power sector, to match the rise in electricity demand as new County Governments take shape, and increase economic activity (MoEP, 2013). Resource New : Time to Commissioning in Months from August Total GDC Geothermal KenGen Geothermal Wind Hydro Thermal Diesel Conversion LNG IPPs Geothermal Thermal Diesel Wind Co-generation LNG IPPs Coal IPPs Total GDC, KenGen and IPPs , ,745 5,538 Table 2: MW in 40 months initiative targets. Source: MoEP (2013) In the longer term (up to 2030) 5,530 MW of geothermal capacity is targeted. This is articulated in Kenya s 2013 Draft National Energy Policy (Ministry of Energy and Petroleum, 2013). NAMA for accelerated geothermal electricity development in Kenya I 6

10 THE PROBLEM Although there is significant ambition and political will, reaching the medium and even long term ambition will be a major challenge. The medium term ambition of 1500 MW of geothermal capacity (in the MW in 40 months initiative) will be particularly challenging. The situation of the five countries with the largest installed geothermal power capacity in 2013 (USA, Mexico, Italy, Philippines and Indonesia) provides context on this ambition. Together, these five countries are expected to install only 1485 MW of new capacity by 2017 (IEA, 2012). According to the Business As Usual (BAU) scenario in the NCCAP, geothermal is estimated to expand to 2,500 MW by 2030, falling short of the stated ambitions of the GoK stated in the 5000MW+ in 40 months initiative and the Vision 2030 (NCCAP, 2012). If the geothermal sector fails to deliver new capacity in a timely manner, Kenya is likely to prioritise alternative options. Recent discoveries of petroleum, coal and natural gas indicate that fossil fuels likely will increase in the electricity generation fuel mix. The MW initiative plans for significant coal-fired power development, above that which was foreseen in the LCPDP 5. As high carbon intensity power sources, this would put the Kenya power sector on a high-carbon development pathway. 6 The NCCAP also presents an accelerated growth scenario which leads to 5,000 MW of installed geothermal power by 2030, allowing Kenya to at least reach its longer-term geothermal ambitions. 5 For LCPDP See 6 Undertaking future projections of Kenya s energy mix is a complicated endeavor, and this statement should not be taken as a definitive projection. NAMA for accelerated geothermal electricity development in Kenya I 7

11 BAU versus accelerated growth scenario The BAU scenario, which falls short of reaching Kenya s geothermal ambitions, is characterised by public and donor sources of finance channeled through two main actors KenGen 7 and GDC. This scenario predicts a shortfall in development for two main reasons: Capital limitations of the two main geothermal developers, KenGen and GDC, will limit further investment there is a limit to the amount of additional debt that these players can support on their balance sheets over the time frame of the scenario. Long lead-time for bringing additional capacity online KenGen and GDC can only develop a limited number of fields at any one moment other actors are needed to develop sites in parallel. The accelerated growth scenario thus foresees significant up-scaling in private sector investment, as well as new actors (IPPs and developers) entering the sector. In the scenario, the private sector will need to cover approximately % of the required USD 20 billion investments to reach the 5,000 MW goal for geothermal, compared with the historical 10-15% level (Falzon and Veum, 2013). The GoK has already undertaken significant efforts to shift to the accelerated growth scenario (see examples in Figure 5), however, engagement with Kenyan stakeholders, international IPPs and developers, potential investors and development banks indicate the need to address significant gaps in the on-going efforts. THE QUESTION Building on existing and on-going efforts, how can a NAMA support the on-going transformation of the Kenyan geothermal sector such that private sector investment and participation is scaled-up in a significant manner, corresponding to the accelerated growth scenario outlined in the NCCAP? THE RESPONSE The Government of Kenya is proposing this NAMA, which will build on existing and on-going efforts to support the transformation of the Kenyan geothermal sector such that private sector investment and participation is scaled-up in a significant manner. A variety of approaches with different levels of involvement of public and private actors and varying sources of finance can be used to develop geothermal power, which allows for innovation. However each approach entails specific challenges. Several models combining public and private efforts have already been applied in Kenya to develop geothermal across the development cycle. Figure 5 illustrates some potential combinations of different geothermal development approaches that have been utilized historically in Kenya, as well as models that could be applied in the future. 7 KenGen is 30% privately owned, however its geothermal developments are primarily funded by public sources of funding namely government of Kenya loans and concessional finance from development banks and donors. NAMA for accelerated geothermal electricity development in Kenya I 8

12 Figure 5: Different development models and application in Kenya. Adapted from Audinet (2013) With reference to the different models in Figure 5, the following observations can be made about geothermal development in Kenya: The predominant mode of historical development has been fully integrated single national public entity (Model 1). This development has been applied in the Olkaria field by KenGen, and has been relatively successful, however it has relied on mobilisation of large amounts of concessional finance. In more recent years, GDC has co-developed (drilled) in the Olkaria field, and KenGen will develop the power plant. GDC retains ownership of the wells (Model 2). Models 3&4 have not been applicable in Kenya due to the structure of the sector. The GoK created the Geothermal Development Company (GDC) in 2009 as a special-purpose vehicle to develop geothermal according to Model 5, and is being implemented in the Menengai phase 1 development. This has required significant investment in drilling activities and acquisition of rigs to support the GDC model. This model is yet to be proven in Kenya. GDC is exploring how to move towards greater levels of private participation, corresponding to models 6 & 7. The Orpower development in the Olkaria field which was successful corresponds to Model 6 (Orpower initially received several wells from the GoK to develop their field), however this particular case is not necessarily replicable nor scalable (Falzon and Veum, 2013). Three concessions were allocated to private developers, corresponding to Model 8 (Suswa in 2008, Akira Site in 2007, and Longonot in 2009). Little progress has been made on these sites, and the Suswa concession was revoked in The government of Kenya has taken significant measures to increase private participation in the development of geothermal. Nonetheless, many of the models with increased private participation are yet to be proven. A detailed analysis of the sector as NAMA for accelerated geothermal electricity development in Kenya I 9

13 part of the development of the NAMA indicated that gaps remain in existing and on-going efforts that need to be addressed if increased private participation is to be realised. What are the gaps in existing and on-going efforts? The three main gaps identified in the existing and on-going efforts are: 1. Inadequate risk/return profile for IPPs and developers and 2. Need for targeted technical assistance focused on commercial and financial aspects in the short and medium term 3. Potential human capacity gap for large up-scaling of the sector in the medium-long term. Inadequate risk/return profile In recent years much of the early stage risk has been shifted to GDC, and the availability of certain risk mitigation instruments enables developers to further manage risks. The returns (tariffs) being offered have conversely been falling (Falzon & Veum, 2013), partially due to the risks being mitigated, but also due to pressure on the GoK to reduce tariffs (see Figure 6). Although the risk/return balance has started to create significant interest from private investors and developers, the fact that Kenya is competing globally for limited geothermal development capacity (human expertise, technology and funding), a more competitive risk-return profile is necessary to significantly boost private sector investment in geothermal power in Kenya. Risk-return attractive Figure 6: Risk-return profile for private sector investment. The further the risk-return profile (represented by the green dot) is above the blue line, the more attractive to the private investor. Movement of the risk-return profile can be achieved by (1) reducing risk, (2) increasing return or (3) a combination of both. Commercial and financial technical assistance gaps MoEP, GDC, ERC, KenGen and Kenya Power are still in a learning process with respect to dealing with IPPs and private sector developers who have different (often more rigorous) needs concerning contractual documents. According to developers and investment banks, insufficient attention has been paid by government and GDC to contractual/commercial risks, such as with the Steam Sale Agreements and Power Purchase Agreements. 8 To date the focus has been mainly on technical risk. In addition, KenGen and GDC have expressed a desire to access wider capital markets through equity and fixed income instruments (such as Asset Backed Securities, Infrastructure Bonds), although little progress has been made to date. The required expertise to undertake this kind of financial innovation is lacking, and expensive to mobilise. 8 Several developers indicated that sovereign guarantees for the PPA would be effective. However, the GoK has stated that, as a policy, it will not provide any sovereign guarantees. This has been taken into account when evaluating the NAMA options (Workshop proceedings, 2013). NAMA for accelerated geothermal electricity development in Kenya I 10

14 Finally, obtaining the permits and approvals (environmental, exploration, resource permits, drilling permits, water permits, building permits) has proven to be a major contributor to delays for developers entering the sector. Human capacity constraints in the medium-long term Sufficient availability of human resources locally with geothermal related knowledge and skills will play a key role in attracting and enabling developers and IPPs to develop and invest in geothermal in Kenya. Likewise, the availability of good data sets and information on resources, in particular for surface explorations, and other measures which could contribute to reducing the cost of developing geothermal (over time), will also play an important role in attracting IPPs to Kenya. Kenya has made considerable investments in human resources in the geothermal sector over the last decade, in particular through KenGen s developments in the Olkaria field and also more recently, though GDC s sub-surface explorations and drilling activities in the Menengai field. However, reaching Kenya s ambitious goals for geothermal power generation will require a significant scaling up of human resource capacities and know-how. This will include both knowledge development through university and college curricula, as well as skills development, through on-site training in geothermal fields. The Kenya NAMA will be oriented towards addressing gaps in existing and on-going efforts to transform the geothermal power sector in Kenya. NAMA for accelerated geothermal electricity development in Kenya I 11

15 2.3 Scope of the NAMA In Kenya, many initiatives are currently contributing to geothermal development. The NAMA will focus specifically on innovative measures that will contribute to the transformation of the sector. Referring back to Figure 5 above, this implies that the NAMA will focus on actions targeting models 5-8, whereas models 1-4 will not fall within the scope of the NAMA. It is important to note that there are already actions on-going or planned that fall within the scope of the NAMA. These are unilateral in the sense that they are not seeking further additional support, however they are in fact a mixture of domestic and international (ODA) funding. These actions are shown in relation to the new components seeking additional support under the NAMA are illustrated in Figure 7 below. Included in the scope of the NAMA Kenya NAMA for accelerated geothermal development Not included in the scope of the NAMA Business as usual development Existing and on-going initiatives, financed domestically and/or with support from Official Development Assistance The establishment of and support for GDC Investment in drilling activities in Menengai field supported by the French Development Bank (AFD), African Development Bank (AfDB) et al. Existing technical assistance GRMF facility KfW Concessional finance awarded to private sector developers (such as Clean Technology Fund) New, complimentary actions seeking additional support under the NAMA Actions to: Improve further the risk/return for IPPs and developers Providing responsive technical assistance Building a pool of capacity necessary to underpin the growth of the sector Developments covered entirely by public/oda money (models 1-4 in figure 5) Concessional finance raised for fully integrated development by public entity (e.g. recent KenGen developments in Olkaria) Figure 7: NAMA scope, NAMA consists of on-going actions (domestically and internationally financed) not seeking additional support, and new, complimentary actions seeking international support. NAMA for accelerated geothermal electricity development in Kenya I 12

16 3. NAMA objective and components 3.1 Objective of the NAMA The objective of the overall NAMA in Kenya is to transform the geothermal sector and promote significant private participation in line with the accelerated geothermal development scenario under the NCCAP to meet Kenya s geothermal ambitions outlined in the 5000 MW+ in 40 months initiative (MoEP, 2013), Updated Least Cost Power Development Plan (ULCPDP)(MoEP, 2012), and the Kenya Vision 2030 (GoK, 2007). The NAMA will seek further international support for additional components (described in this proposal), with the specific objective to build on the existing and on-going efforts to support the scaling up of private participation (investment and actors) in the Kenyan geothermal sector. 3.2 Supported Components The components seeking further support under the NAMA will address the three specific gaps in the existing and on-going effort to transform the sector, with four specific components. There are two financial components: (1) a set of geological risk mitigation instruments aiming to reduce risk, and (2) a premium payment mechanism aiming to increase return. In addition to the two financial components, the NAMA also includes two capacity development components: (3) a Technical Assistance Facility and (4) a National Geothermal Capacity Building Program. These capacity components aim to address human capacity constraints in the short term (technical support) and medium-long term (indigenous capacity development). The Gaps Risk/return inadequate Need for ad-hoc technical support Future human capacity constraint NAMA to address 1. Risk mitigation 2. Premium pay- 3. Technical 4. National Geothermal Gap through. instruments ment instru- Assistance Facility Capacity Building Program ment Figure 8: Outline for supported part of Kenya NAMA for accelerating geothermal power development These components have been scoped and designed to complement on-going GoK and donor-driven support and investment activities. NAMA for accelerated geothermal electricity development in Kenya I 13

17 3.2.1 Risk mitigation instruments Geothermal developers, particularly in the early stages of developing a field, face high costs for field development coupled with high risks associated with resource exploration and development/appraisal drilling. Geothermal developers have indicated a strong interest in instruments that mitigate these risks across the development cycle. Key features A component bringing forward a set of geological risk mitigation instruments would both address the high risks which occur in the early stages of field development as well as guarantee long-term performance. Two instruments are proposed for the early stage risks: A contingent-grant facility based on the existing Geothermal Risk Mitigation Facility (GRMF) for East Africa, complemented by a drilling risk insurance. A Long Term Risk (LTR) instrument is proposed to address the long-term performance risk. Figure 9 illustrates at which points in the project development cycle the three subcomponents would apply, highlighting their complementary nature. Figure 9: Project risk and associated risk mitigation instruments under the NAMA. Test drilling is equivalent to exploration drilling. Drilling in the above figure includes appraisal/ development drilling and also production drilling. Adapted from ESMAP (2012). Sub-component 1: Contingent-grant facility based on GRMF, specifically for Kenya In the case that little is known about the field (i.e. the resource is still in the exploration or test phase) the idea would be to provide contingent grants through a national risk mitigation facility. The concept is to adapt a GRMF type facility (see here for more details) specifically for Kenya, modifying the GRMF modus operandi for the Kenyan context. The facility would be funded through the NAMA, and would come online after the current GRMF terminates, which would be by The GRMF-type facility specifically for Kenya could support: Surface studies to determine the optimal location for reservoir confirmation wells at geothermal prospects that have previously been identified (i.e. following initial geological and geophysical, resistivity and related surveys). Feasibility studies and resource assessment and modelling. Drilling projects at geothermal prospects once the optimal locations for the drilling and testing of reservoir confirmation wells have been determined. NAMA for accelerated geothermal electricity development in Kenya I 14

18 Adapting the risk mitigation facility specifically for Kenya s needs will make it more effective. As an example, different financing modalities could be employed for the Kenya scheme. Initial finance could be converted into equity in the developer/ipp with a premium of 25 to 30% if the wells are successful, rather than contingent grants being awarded by default. Any shares acquired as a result of the above are not intended to be held for the long term (i.e. over the project s life), but instead will be sold as soon as practicable and the proceeds used to support other explorations by the NAMA Fund. Sub-component 2: Drilling risk insurance with grants to cover premiums The second instrument, which can be applied when sufficient information about the field is available (potentially after a developer has benefited from the previous instrument), is the establishment and scaling-up of drilling insurance through the NAMA, which will take a role in providing insurance products until the market is mature enough. The insurance is to be offered by private sector (re)insurance companies that would insure the commercial success of wells. The insurance would pay-out in case the wells produce less enthalpy than is required to operate the well commercially. Private sector players have carried out initial investigations regarding the establishment of a geothermal drilling well output programme, which could include a multi-well insurance coverage against insufficient aggregate geothermal power output being produced. The insurance premium will depend on a number of project-specific factors and investors risk tolerances. A comprehensive risk assessment is therefore necessary to calculate the insurance premium for each individual project that could be supported by the NAMA. The risk of drilling unproductive wells is generally higher in the earlier stages of a field s development, and the higher the risk the higher the insurance premium will be. The NAMA will support the payment of the premium (see Figure 10) so that it improves the business case for developers. The long-term goal, once the insurance tool is sufficiently established and sufficient field experience achieved, is a reduction of the premium and an insurance product driven entirely by the private sector. Figure 10: The drilling risk insurance is expected to decrease, to the point where support can be phased out. The quality of and the results from the initial data, surveys, feasibility studies and exploratory drilling (amongst others) also have a major bearing on the ability of a project to be insured and the premium that should be paid. It would therefore be desirable to have a direct and very positive link between the GRMF-like facility and the insurance, in order to facilitate the development of the latter. NAMA for accelerated geothermal electricity development in Kenya I 15

19 Sub-component 3: Long Term Risk mitigation instrument (LTR) The long-term performance of wells contains some uncertainties. Due to different development models, this leads to two different risks, namely performance risk and counterparty risk. This instrument will largely focus on the performance risk. The counterparty risk will be addressed in the technical assistance instrument (see section 3.2.3). When there is a higher than expected decline in well output, this leads to performance risk for the owner/operator. This holds for private developers that are responsible for developing a full concession, but also (and perhaps more importantly) for GDC or KenGen, for their own developments and also those developed in a joint-venture arrangement where there is a counter-party to whom they sell steam. The geothermal insurance scheme, AQUAPAC, in place in France since the mid-1980s, covers the potential long-term decline in geothermal well output. Alongside a short-term instrument (similar to the geothermal risk insurance instruments outlined above), AQUAPAC spurred growth of geothermal energy, and led to 100s of wells being drilled (Bézèlgues-Courtade S and Jaudin F, 2008). Taking inspiration from the French AQUAPAC, this NAMA instrument will aim to guarantee the long-term performance of the wells for a particular project, thereby reducing the risk that there will be an unexpectedly large decline in the performance of the wells. The development of this insurance, as well as the premiums, will be covered by grants under the NAMA in a similar fashion as sub-component 2, with the long-term view that the insurance will be commercially viable and self-sufficient. Potential benefits Through the provision of a GRMF contingent grant type instrument (sub-component 1) and a drilling risk insurance product (subcomponent 2), it is anticipated that there will be improved access to equity or other funding sources as exploration and drilling risks are lowered, improving the risk-return profile. A study commissioned by the World Economic Forum (WEF, 2012) determined that the potential benefits of a geothermal well output insurance programme could be significant, particularly if it were applied to multiple developments. By mitigating well output risk during the initial development drilling phase, the insurance can: Encourage the crowding in of domestic investors (public and private), international private equity and other 3rd party capital to finance the development stages of geothermal reservoirs by substantially improving risk-adjusted returns. Enable project developers to receive greater certainty that their drilling programme will be sufficiently de-risked to allow the second stage-financing of the associated power plant to commence. Provide protection for project developers and other 3rd parties equity, allowing it to be recycled into additional opportunities. Reduce capital requirements by providing coverage against early unsuccessful wells and de-risking projects more generally. Reducing capital requirements also potentially allows quicker development of other resources. Encourage domestic insurers to support Kenyan geothermal development and provide new premium income opportunities. Additionally, both of these sub-components, by improving projects risk/return profiles, allow the possibility of more innovative forms of financing and financing structures, which can have the impact of maximising the leverage of donor funds provided. By providing a guarantee for the long term performance of the well (sub-component 3), the ability of KenGen/GDC to enter into joint-venture arrangements with private developers at the drilling stage will be improved, leveraging external private capital to help in achieving Kenya s geothermal development goals and accelerating the development process. This kind of instrument will also facilitate new approaches to structuring finance within the geothermal sector in Kenya, including securitisation of assets that promotes more rapid capital recycling (see figure 11 below). NAMA for accelerated geothermal electricity development in Kenya I 16

20 Figure 11: Asset Backed Securities, backstopped by long term risk insurance, permit rapid capital recycling Quantification of impacts on risk/return An exact quantification is difficult due to the many different assumptions that can be made about investment costs, timing and risks of failure of drilling. Nonetheless, a statistical (Monte Carlo) simulation was undertaken for a 50 MW geothermal project to attempt to quantify the impact on the IRR of the suite of risk reduction instruments for a full equity investor (see Annex A for a full list of assumptions). The simulation with instruments applied generated a mean IRR value of 11.1% in comparison to 9.5% without risk mitigation instruments (see Figure 12 below). Although there is a high level of uncertainty as to the absolute IRR values due to the many assumptions made, there is some confidence in both the relative IRR values (i.e. an improvement in 1.6% of equity IRRs with risk instruments) and the distribution of IRRs (reduced variance with risk instruments). Figure 12: Monte Carlo Simulation for equity IRR with and without risk mitigation. Observations are grouped under discrete bands, thus y-axis is not representative of total number of observations. (Source: ECN) NAMA for accelerated geothermal electricity development in Kenya I 17

21 3.2.2 Premium Payment Mechanism Potentially attractive geothermal projects may not be considered with Kenya s current FiT framework because Kenya is competing on a global market to attract developers to invest in geothermal fields, This is particularly the case in less developed fields which are considered to have higher resource and development risks (i.e. fields other than Olkaria, which itself has been in operation for more than 30 years). In order to attract private sector investments, a premium payment mechanism is proposed as one component of the NAMA, in a similar manner to that proposed in the Global Energy Transfer Feed-in Tariffs for Developing Countries (GET FiT) Program supported by KfW. The premium payment mechanism proposed in the GET FiT programme was designed with a similar objective as this NAMA, namely to accelerate growth of renewable energy deployment in developing countries by accelerating growth above BAU. Key features The PPM in Kenya would involve an additional payment per MWh, above and beyond the regulated FiT and outside the negotiated PPA. Rather than spreading out payments over the operational phase of the project (as is the case in the Clean Development Mechanism [CDM]) payments will be made up front. A similar approach to the GET-FiT scheme applied in Uganda will be adopted. The Ugandan scheme applies a two-staged disbursement, with 50% of the FiT premium to be disbursed upon Commercial Operation Date (COD), after successful completion of plant and demonstration of ability to produce, as certified by the Uganda Energy Transmission Company Limited (UETCL, single buyer) in accordance with the PPA. The remainder of the FiT premiums (50%) is to be disbursed alongside the PPA against energy delivered, but limited to a 5- year period (GET-FiT, 2013). 9 This is illustrated in figure 13 below. Figure 13: The PPM provides up-front payments to improve IRR for the investor (arbitrary values are utilised to illustrate the concept) The source of the funds to be disbursed in the first phase of the NAMA will be predominantly grant based. However, this first phase will explore mechanisms to minimise the grant component. 9 For more information on the GET-FiT programme, see NAMA for accelerated geothermal electricity development in Kenya I 18

22 As an example, a similar scheme is being investigated for geothermal in Indonesia, which involves a premium being disbursed by a fund, which is then repaid by the recipient (or the off-taker, depending on the arrangement) a so called Feed-In Tariff Fund. The fund aims to be self-sufficient, not requiring grant funding, by taking advantage of the possibility to link PPAs in Indonesia to commodity prices. Although this approach may not be feasible in Kenya due to different tariff arrangements, it is an example of financial innovation that could be adapted in the Kenyan context. Potential benefit The Premium Payment Mechanism has the potential to incentivise private developers to enter the Kenyan geothermal sector, and if carefully designed, to speed up their efforts to reach financial closure and bring MW of geothermal online. This instrument would have to be carefully aligned with the other instruments aimed at improving the risk-reward profile of projects. Stakeholders have indicated that this instrument should be introduced on a needs basis, and should not result in excessive wind-fall profits for developers (i.e. it should stimulate development beyond business-as-usual). Since the premium payment would be financed by international support and will not be integrated in the PPA, the additional payment will not create any upward pressure on the tariffs to end consumers Technical Assistance Facility Transforming a sector from a public/donor driven sector to one that has significant private investment and new actors requires significant technical expertise in a variety of domains. The Kenyan geothermal sector is already receiving a variety of short term technical assistance from a several donors. This includes: World Bank and IFC investment climate support to the Ministry of Energy and Petroleum (MoEP) and the Energy Regulatory Commission (ERC) to develop a standardized PPA with input from financiers. Support for a transaction advisor to support GDC from AfDB; TAF supported by AUC-KfW, associated with the UNEP ARGeo project, focusing on feasibility studies that combine exploration drilling results and engineering together with market, regulatory and technical considerations with the aim of securing finance for the next stage of resource exploration. USAID is also currently involved in providing technical assistance in the geothermal sector in Kenya. Despite the above initiatives, during the NAMA development consultation process, stakeholders underlined the importance of technical assistance to facilitate the transformation of the sector. Stakeholders highlighted that further assistance is needed in three main areas: transaction support for IPPs and government entities, mobilising finance and expediting approvals for environmental and social statutory and regulatory approvals. NAMA for accelerated geothermal electricity development in Kenya I 19

23 Transaction support Finance Environmental and Social Barrier and support required The MoEP, GDC, ERC, KenGen and Kenya Power are still in a learning process with respect to dealing with IPPs and developers, which have rigorous needs concerning contractual documents. Concretely, support is required to facilitate finalisation of bankable Power Purchase Agreements (PPAs) and/or Steam Sale Agreements (SSAs). Support in this area includes facilitating negotiations, as well as obtaining guarantees, such as Partial Risk Guarantees offered by the World Bank and AfDB. Stakeholders identified an opportunity to mobilise private finance through financial structures that have yet to be employed in the sector. In order to do this, specific expertise is required. Support in this area could include: Supporting development of asset backed securities or other similar instruments for GDC/KenGen to access local capital markets Engaging with local financial institutions, such as banks, insurers and other similar funds, to identify ways to channel local finance to the sector According to consultations, some of the key steps take significantly longer in Kenya than in other countries. For example, obtaining a PPA in Kenya it was reported to take three years compared to 1.5 to 2 years in other countries. Support for streamlining processes related to environmental and social approvals, as well as direct support, will be needed to reduce costly delays. Actors requiring support ERC, KenGen, GDC, MoEP, IPPs, developers, Law Society of Kenya Local and international financial institutions, IPPs, KenGen, GDC IPPs, National Environment Management Authority (NEMA), other relevant entities Table 3: Target areas of technical assistance facility Key features The Technical Assistance Facility will be designed to be flexible and responsive, and will also target regulators, IPPs and developers. There will be two components to the facility a fixed part focussing on supporting key government and parastatals and a component that will respond to ad-hoc requests through technical assistance grants. Fixed component The fixed component of the technical assistance facility would be specifically dedicated to assisting the GoK and KenGen/GDC in the short-to-medium term to liaise with and support IPPs and private developers. The technical assistance provided to the government agencies would target existing IPPs and developers with concessions to develop a geothermal field and/or IPPs currently in dialogue with GDC and KenGen on developing joint ventures. However, new and potential developers/investors would also be targeted. Technical Assistance Grants Through the issuance of technical assistance grants, which will cover costs associated with advisors, training, secondments and workshops, the TAF will provide mechanisms for delivering short-term and medium-term projects of technical assistance and capacity building. The process for these grants is outlined in figure 14 below. NAMA for accelerated geothermal electricity development in Kenya I 20

24 Eligible entity makes an application for a short term/medium term technical assistance and capacity building TAF mobiles funds for the expertise through grants Experts mobilized and funded by NAMA, responding to ad-hoc request Figure 14: Technical assistance grants process for award Potential benefit Engagement with IPPs and developers actively exploring the geothermal sector in Kenya (such as the failure of IPPs and developers to advance in recent years), have indicated that the kind of barriers being addressed by the TAF were of equal importance to financial/risk considerations. It is anticipated that the provision of assistance targeting transaction support, mobilising finance, and expediting permit and approval processes will play an important part in creating the enabling conditions for private investment and new actors entering the sector National Geothermal Capacity Building Program A critical factor that will underpin a large up-scaling of geothermal capacity in Kenya will be the availability of sufficient human capacity in a variety of domains. Although significant capacity has already been built, stakeholders have indicated that a coordinated approach is required to ensure adequate capacity is available in the medium and long term. Indonesia, facing a similar need for up-scaling capacity to match its geothermal ambitions, is currently implementing a National Geothermal Capacity Building Programme (see Figure 15 below). When fully implemented, the programme will support training, research, mapping, planning and database development, and strategy for increasing direct use of geothermal resources. A structured National Geothermal Capacity Building Program (NGCBP) for Kenya is thus proposed, which would aim to create sufficient indigenous capacity in the medium term and long term horizon such that Kenya can source necessary capacity locally, for public sector and private sector actors. Key features In this NAMA, it is proposed that Kenya implements a similar coordinated initiative as the Indonesian Geothermal Capacity Building Programme. An overarching programme would provide a coherent and coordinated approach to overcome barriers which exist as a result of lack of coordination, and ensure that necessary capacity is available in the medium to long term. It will be critical that the NGCBP be aligned with other on-going and planned initiatives. As such, it is anticipated that the first phase of the NAMA will involve an in-depth needs assessment and detailed design of the Program. Potential benefit Sufficient local expertise is a pre-condition for significant expansion of the geothermal sector. A NGCBP will support this mediumlong term requirement. NAMA for accelerated geothermal electricity development in Kenya I 21

25 The establishment of a NGCBP will increase knowledge, capabilities and skills to carry out activities within the geothermal exploration, drilling and operation and maintenance, both from a technical and business point of view. Likewise, the programme implementation will create improved conditions and capacities within government and industry for identifying, mapping, and investigating geothermal potential at both high and low levels of enthalpy 10, as well as identifying opportunities for direct uses. Figure 15: Components of the Indonesian National Geothermal Capacity Building Program can be used as inspiration for a future Kenyan program Stakeholders indicate the need for a dedicated training institute in Kenya which would cater for the growing needs of training personnel and provide for the necessary laboratories and equipment for research and testing. Such an institute could provide a coordinated and coherent training programme, incorporating courses and workshops that are currently being offered through collaborations with donor partners, such as the UNU GTP. A training institute could also cater for prioritising and facilitating coordinated research activities which could contribute to improved exploration, drilling and operation and bring the cost of geothermal development in Kenya down, as well as identify and facilitate direct use applications. Such a training institution would also enhance Kenya s leading role in geothermal development in the Sub-Saharan region. 10 Enthalpy refers to the temperature of the steam exiting the well. Higher temperature steam is easier to exploit in a profitable manner. NAMA for accelerated geothermal electricity development in Kenya I 22

26 3.3 Implementation Stakeholder roles and responsibilities The broad scope of the NAMA means that a variety of different actors will be involved in the implementation. Figure 16 describes the different actors, their roles and the interactions between the actors. Ministry of Energy and Petroleum Geophysical department Ministry of Environment, Water and Natural Resources Climate Change Secretariat High-level advisory committee The high-level advisory committee will be formed in order to advise the MoEP as to the effectiveness of the intervention and any need for strategic changes. The advisory committee will include representatives from MoEP, MEWNR, GDC, KenGen, Kenya Power, The Energy Regulatory Commission, the donor community and private sector actors in the geothermal sector. Leading international geothermal experts will be invited to participate in this committee also. As the primary proponent of this The MEWNR/CCS will have joint NAMA, the MoEP will be the lineministry and have oversight and ensure that it fulfils its MRV role. It oversight over the NAMA-IS to final decision on all major strategic will also be responsible for matters related to the NAMA. The collecting the information required MoEP will also be responsible for for preparation of reports for the the facilitation and implementation United National Framework Convention on Climate Change (UNFCCC), of any policy/regulation components of the NAMA. including national communications and biennial update reports. NAMA implementation support (NAMA-IS) [embedded in MoEP] The NAMA-IS will be responsible for implementing the tasks associated with the NAMA. It will coordinate all the relevant associated tasks assigned to it for different instruments and management of MRV, and will be responsible for engaging different expertise as required. The procurement procedures to be applied will depend on donor requirements. NAMA instruments Figure 16: Institutional arrangement. Blue indicates existing bodies, green indicates new bodies created under the NAMA. Connections illustrate oversight. The institutional arrangement, as well composition of the NAMA-IS are detailed further in the full NAMA proposal Timing The NAMA implementation is planned in two main phases. In the first phase, several of the instruments will be fast-tracked in order to support short term ambitions outlined in the 5000+MW in 40 months initiative. There will also be a focus on setting up the NAMA operational structure, the NAMA-IS team, subsequent detailing of the components (including detailed financial structure) and pursuing further support, including potential linkages to the Green Climate Fund. In the second phase, instruments should be operational. Alignment with the MW in 40 months initiative is critical, in particular for the financial instruments. Comparing the timing of the NAMA implementation with anticipated geothermal expansion (see table 4 below), it is possible to estimate where the financial instruments of the NAMA could feasibly target, and the duration of the phases. NAMA for accelerated geothermal electricity development in Kenya I 23

27 MW of geothermal coming online Feb 2014 Aug2014 Feb 2015 Aug 2015 Feb 2016 Aug 2016 Feb 2017 Total GDC KenGen IPPs NAMA Implementation Phase 1 Phase 2 -> Pilot drilling risk insurance Application of financial instruments Table 4: NAMA implementation aligned with 5000+MW initiative. MW highlighted in blue could be feasibly supported by certain of the NAMA financial components. In the first phase, the NAMA will work with a private developer, GDC or KenGen (depending on timing) to pilot a drilling risk insurance product, equivalent to 35 MW. In the second phase, the different financial instruments will be applied where appropriate. It is likely that these instruments will be only feasibly operational for the later MWs planned in the initiative. This corresponds to approximately 785 MW of geothermal development. However, as this plan only extends to 2017, it is possible that greater amounts could be targeted Support requirements For the new, complementary actions seeking additional support, the amount and nature of support required for the first phase has been estimated in detail. The total amount requested for the supported part of the NAMA for Phase 1 is anticipated to be between 7.8 and 10.5 million USD. For the second phase, as the sector is rapidly evolving it is not possible at this stage to give an accurate estimate of the amount of support required. In addition, the nature of the support required for the financial instruments, whether it be grants, convertible equity, seed funding or concessional loans will be determined in the first phase. It is estimated, however that the total amount of funding required will be between 172 and 278 million USD. NAMA for accelerated geothermal electricity development in Kenya I 24

28 The details of the above requirements for the new complementary actions seeking additional support are indicated in table below. New, complimentary actions seeking additional support under the NAMA Action Estimated resources required Phase 1 (Aug 2014 Dec 2015) Phase 2 (Jan 2016 Dec 2019) 11 Financial Capacity Financial Capacity NAMA implementation support M USD 5 FTEs M USD 5 FTEs 12 Geological risk mitigation instruments: Contingent grant facility Geological risk mitigation instruments: Drilling risk insurance Geological risk mitigation instruments: Long term risk man-days M USD 5 FTEs 3-5 M USD 350 man-days M USD 5 FTEs man-days M USD 5 FTEs Premium payment mechanism man-days M USD 5 FTEs Technical Assistance Facility 2 M USD N/A M USD N/A National Geothermal Capacity Building Program M USD 300 man days 5-15 M USD 3 FTEs Totals million USD grant finance million USD, combination of grants, convertible equity, seed funding Table 5: Summary of financial and capacity support requested in this proposal for phase 1 and phase 2 of the geothermal NAMA 11 The amounts for the second phase are an estimate the exact amount required will be determined in the first phase. 12 FTE = Full time equivalent for 1 year 13 Implementation of the TAF will be the responsibility of the NAMA-IS 14 For capacity instruments, conversion to financial support was made assuming 1 FTE costs on average 100kUSD per year and a man-day is on average 800 USD per day. NAMA for accelerated geothermal electricity development in Kenya I 25

29 Existing and on-going initiatives, financed domestically and/or with support from ODA Action Resources mobilised Estimations of amounts mobilised to date and those foreseen up to 2020 (additional streams possible) The establishment and support for GDC Investment in drilling activities in Menengai. Bogoria Silali exploration activities GRMF facility - KfW Technical assistance - JICA Standardised PPAs FiT development, Regulatory and fiscal incentives Totals Investment by GoK (finance, capacity). Support for acquisition of rigs: GoK/AFD support (approx. 30 M USD concessional loan from AFD) Total: US$ 708 million Concessional loans to GDC GoK ~330 M USD AFDB, AFD, WB, EIB ~ 380 M USD Drilling to start soon, and a loan of USD 400 million was acquired from the US Exim Bank and KfW for this purpose. 15 Approximately 30 M USD contingent grant finance mobilised in first round. Future amounts unknown. USAID supporting the GRMF activities to a tune of USD 1-2 million per year. Pool of technical assistance to be provided by JICA in areas related to conceptual models of reservoirs and siting successful drilling locations, identifying and striking drilling targets, interpreting wellbore data, establishing calibrated reservoir models and evaluating geothermal resources, preparing economically and environmentally viable business plans, and building capacity on multi-purpose use of geothermal energy. Supported by World Bank/IFC. Level of international grant support unknown. Total costs unknown. Approximately 1,100 M USD concessional/sovereign loan and 50 M USD grant finance from domestic and international sources Table 6: Summary of resources contributing to NAMA objectives that are already committed (actions not requesting further support under this proposal) See NAMA for accelerated geothermal electricity development in Kenya I 26

30 4. Mitigation potential, sustainable development impacts and financial ambition NAMAs are expected to generate GHG emissions reductions and positive sustainable development co-benefits aligned with the national plans. 16 In this section preliminary estimates are made as to the magnitude of emissions reductions and types of impacts. 4.1 GHG emissions reduction The BAU scenario under the NCCAP is associated with development of the sector through traditional instruments such as concessional finance or sovereign loans directed at public sector actors. The accelerated growth scenario corresponds to privately driven (and financed) development. In order to estimate the direct GHG emissions impacts of the NAMA, it will be assumed that if a development occurs that corresponds to the models that are being targeted by the NAMA (models 5-8 in Figure 6), it can be considered NAMA-enabled (to align with the timing of the NCCAP, and to recognise existing efforts already put in place). Using a CDM methodology, an estimate was made for the total direct emissions reductions attributable to the NAMA. It is estimated that approximately 820 MW of geothermal developments could be directly supported by the additional components. A preliminary ex-ante estimate of associated emission reductions was calculated using the CDM methodology for an existing project (Project 8643: Olkaria I Units 4&5). Total emission reduction is estimated to be approximately 3.7 Mt CO2-eq. per year in 2020 (representing 8% of Kenya s 2005 GHG emissions). Assumptions and detailed calculations of the estimate are provided in Annex B. This CDM methodology will be used to estimate the total direct emissions reductions attributable to the NAMA (discussed in greater detail in Section 5: MRV). 4.2 Sustainable development impacts NAMAs, as agreed under the UNFCCC, are expected to generate emissions reductions and contribute to sustainable development in a nationally appropriate manner. The development impacts of this accelerated geothermal NAMA will be assessed using the four impact categories presented in the NCCAP, namely climate resilience, economic development, environmental, and social benefits. The assessment will also consider impact categories that help to assess contributions to meeting the Millennium Development Goals, the goals of Sustainable Energy for All (SE4ALL) and Vision Economic Development The NCCAP determined that the accelerated development of geothermal is expected to contribute to improved energy security through increased domestic supply, GDP growth through lower energy prices, increased employment and an increase in foreign direct investment. The NAMA can be expected to contribute to these benefits. The increased electricity supply will contribute to Kenya s longer-term development goals through the provision of reliable, affordable and sustainable energy. 16 The term impacts in this section covers the range of activities, outputs and outcomes resulting from the Geothermal NAMA, all of which would need to be assessed and which are further described in section 5 on MRV. NAMA for accelerated geothermal electricity development in Kenya I 27

31 Climate Resilience With a scale up of geothermal development, the electricity supply will be less dependent on hydro and fossil fuel-based electricity, which has greater exposure to changes in precipitation patterns due to climate change and international petroleum prices. Hence, climate resilience will be improved. Note that the adaptation assessment of the NCCAP identified a clear need for diversification of electricity supply. One of the main water sources outside Moyale in Kenya runs dry. Photograph: Sarah Elliott/EPA Job creation Environmental The NAMA should lead to a reduction in air pollutants (e.g. NOx, Sox) as a result of a displacement of fossil fuel by geothermal generation. The negative effects sometimes associated with geothermal developments, such as changes in wildlife habitat and vegetation, are dependent on local circumstances and would need further investigation. Social The NAMA will have both positive and negative impacts on local communities. For example, some communities may benefit from job creation, but some communities may also be relocated. Positive impacts on health may result from reduced air pollution. Development goals Access to affordable energy will be facilitated through lower average tariffs, which is critical to achieving the MDGs and SE4All objectives. The NAMA may also enable indirect use of the steam in particular project locations, such as establishing fish farms, drying of agricultural produce, running a cold storage facility for the local farmers, distilling of essential oils, etc. Vision 2030 The NAMA will support broader Vision 2030 objectives that aim to transform Kenya into a middle-income county. Increased electricity generation is identified as one of the major enablers for the Vision 2030, which will be supported through the NAMA. 4.3 Financial ambition The Kenya geothermal NAMA is ambitious. The total amount of funds mobilised under the existing/on-going element of the NAMA is approximately 1,100 million USD, and contains a significant GoK contribution (approximately 50% - see section above). The total amount of support sought for this NAMA is approximately 200 million USD. It is expected that as a result of the NAMA, 850 MW of private investment could be enabled by This would correspond to approximately billion USD of investment (ESMAP, 2012). The leverage ratio of public funds in this case would be approximately 3. NAMA for accelerated geothermal electricity development in Kenya I 28

32 5. Measurement, Reporting and Verification of the NAMA The UNFCCC states that NAMAs are to be undertaken in a measurable, reportable and verifiable manner. This section presents the building blocks for conducting Measurement, Reporting and Verification (MRV) for the Kenya geothermal NAMA. It is a preliminary concept, and will be adjusted and expanded upon in detail during the final negotiations with a potential financier. 5.1 Government of Kenya MRV+ System The NCCAP presents an integrated framework for measuring, monitoring, evaluating, verifying and reporting results of mitigation adaptation and development actions, and their synergies, known as the MRV+ system (GoK, 2012). The MRV+ system sets out an overarching MRV framework for all NAMA implementation in Kenya, including overall set-up with responsibilities and coordination, as well as data provision/flows/registration, and required agreements. It also defines human resource needs to implement MRV. The MRV+ system is a proposed process containing three main stages as follows: Measurement, Monitoring (and Evaluation): data and information needs to be gathered and fed into the system, the data and information needs quality checking and then the evaluation of the data can be carried out Verification: the analysis will produce results that will need to be cross checked and verified in some way to ensure they are a realistic estimate of the outcomes being monitored. Reporting: once the results have been verified they can then be reported in whatever format is required The framework to measure, monitor and report on the impacts of the geothermal NAMA, described below, is expected to work within the MRV+ System that is established by the Government of Kenya. 5.2 NAMA MRV system concept The framework to measure, monitor and report on the impacts of the geothermal NAMA, described below, is expected to work within the MRV+ System that is established by the Government of Kenya. NAMA for accelerated geothermal electricity development in Kenya I 29

33 NAMA aims and objectives Entity requiring this information Information needed to provide a response Contribution to geothermal development aspirations Contribution to reducing GHG emissions Contribution to Kenya s sustainable development Effective management of NAMA programme Ministry of Energy and Petroleum Donors National: MEWNR, MOEP MRV+ working groups International: Donors UNFCCC (through MEWNR) Ministry of Energy and Petroleum Ministry of Economy and Planning Donors Owner of NAMA - MoEP Implementing body: NAMA-IS MW of geothermal online GHG emissions reductions Changes from the baseline for economic, social and environmental indicators Amount of inputs mobilised Activities performed Accountability of mobilised funds Donors Amount of inputs mobilised Activities performed Table 7: Summary of resources to be mobilised under the NAMA The MRV system for the geothermal NAMA, once operational, will have multiple actors (already identified in previous sections) with different measurement, verification and reporting responsibilities. Where possible, the system will build on existing data collection and reporting flows. MRV system overall coordination and management The NAMA-IS will be responsible for ensuring the correct functioning of the MRV system. The terms of reference of the NAMA-IS will explicitly outline MRV roles and responsibilities, including tracking to ensure that the pre-determined reporting flows take place, ensuring the quality of the reporting and data collection is sufficient, and managing any required interface with Kenya s proposed MRV+ system. MRV system oversight Oversight from the MoEP and relevant donors is anticipated to promote transparency, given that the NAMA-IS is a main actor in the MRV system. A proposed structure for oversight may emerge through the Kenyan MRV+ process, and the NAMA would need to adhere to any suggested process. Methodologies and Procedures for Monitoring, Reporting and Verification actions Specific methodologies and procedures (including roles and responsibilities) to conduct baseline setting, collect data and carry out measurement, reporting and verification are outlined in the proposed MRV framework in the full NAMA proposal. Interface with MRV+ system It is important to design the MRV framework for the geothermal NAMA in such a way that it can interface easily with MRV+, which is still in the concept stage and likely to progress in the future. Nonetheless, elements that will be important to take into account include the overall approach to MRV, administrative and management arrangements, feedback loops, consistent reporting to the UNFCCC, Data Supply and Reporting Obligation Agreements (DSROAs) and methodologies. NAMA for accelerated geothermal electricity development in Kenya I 30

34 Indicators All MRV indicators will be developed in the context of the structure proposed by MRV+ (and outlined below in Box 2) inputs, activities, outputs and outcomes. Concrete framework The full proposal sets out a framework for measuring and monitoring the progress of the NAMA in achieving GHG emission reductions and sustainable development impacts, describing the assessment boundary, measurement of GHG emission reductions, and measurement of sustainable development impacts. The NAMA proponents will monitor their NAMA-funded actions and report to the MoEP and MEWNR on inputs, activities, outputs and outcomes. It is expected that the MWENR will provide templates, which will ensure the collection of consistent and comparable information, as well as facilitate international reporting. In addition, the government will be responsible for validating the emission reductions and sustainable development benefits, in accordance with frameworks established by and direction from the UNFCCC. The MRV framework will be updated according to specific requirements of eventual funders of the NAMA. NAMA for accelerated geothermal electricity development in Kenya I 31

35 Box 2: MRV indicators proposed by Kenya s MRV+ system Input level indicators: Assess a range of inputs to the project, for example, money, staff, skills, knowledge, technology and natural resources. Monitoring inputs is important if value for money is to be assessed. Activity level indicators: Assess activities associated with the NAMA, and are particularly relevant for MRV at the individual component level, which is of use for donors. Examples include: sites identified for geothermal development, number of trainings carried out on performing site assessment, stakeholder consultation for geothermal power plant development, number of geothermal projects receiving a top up bonus etc. Monitoring of input and activity level indicators can begin early in the NAMA activity. Output level indicators: Assess outputs from the NAMA, for example, GW of geothermal power plants installed, and number of households with electricity connections. Output level indicators are at a medium strategic level and involve a medium level of processing. They are what comes out of an activity and are usually measured at the end of a NAMA activity. Outcome level indicator: Assess progress against higher-level objectives of the NAMA. Outcomes can be at the level of individual geothermal developments, or at a higher aggregated level. Sometimes it may take significant time for an outcome to become apparent. Examples of outcome indicators include: percentage by which carbon intensity of power generation was reduced due to the NAMA, percentage of GHG emissions achieved attributable to the NAMA, or using several output level indicators to assess contribution of the NAMA towards low-carbon development. NAMA for accelerated geothermal electricity development in Kenya I 32

36 6. Moving the NAMA forward Operationalization of this NAMA will help Kenya take a major step towards the implementation of its National Climate Change Action Plan, and help Kenya demonstrate its continued leadership in addressing global climate change. In addition, it will support Kenya s short term (5000+ MW in 40 months initiative) and long term (Vision 2030) geothermal ambitions. The concept for the NAMA and instruments outlined in this abridged proposal put forward jointly by the Ministry of Energy and Petroleum (MoEP) and Ministry of Environment, Water and Natural Resources/Climate Change Secretariat (MEWNR/CCS) have been validated by key Kenyan stakeholders, including the Geothermal Development Company (GDC) and KenGen. Parties interested to support the first phase of the geothermal NAMA are encouraged to contact the MEWNR/CCS and the MoEP. A full proposal that provides more details on the timing, implementation arrangements and MRV has also been developed by the NAMA team, and will be shared with these parties in order that a bankable proposal can be agreed upon. Ministry of Energy and Petroleum Nyayo House, 23rd floor Kenyatta avenue Nairobi, KENYA Ministry of Environment, Water and Natural Resources/Climate Change Secretariat Maji House, Ngong Road P.O Box Nairobi, KENYA The Government of Kenya aims to secure support for the first phase of the NAMA in the first half of 2014, in order to begin implementation of the NAMA before the end of NAMA for accelerated geothermal electricity development in Kenya I 33