In 2008, Kenya needed new sources of electricity to fuel its growing economy. Geothermal energy was a cost-effective alternative to expensive fossil fuel power that produced no greenhouse gas emissions. But developing geothermal power facilities was resource-intensive and carried financial risks that scared off private sector power companies. The Kenyan government believed that a public-private partnership model could overcome these challenges. Working with development finance institutions and private sector partners, Kenya successfully implemented an innovative geothermal development project at the Menengai field in western Kenya’s Great Rift Valley. By 2018, the project was ready for independent power producers to turn steam from the geothermal development into electricity for the Kenyan people.
The successful implementation of the Menengai project is documented in one of two newly-published case studies in the Global Delivery Library that examine how developing economies tackled the difficult problem of mobilizing resources for large-scale renewable energy projects by utilizing public-private partnerships. Comparing the successes and challenges documented in these two case studies offers valuable lessons about how to craft financial incentives to attract private companies and implement risk guarantees to encourage lending for renewable energy projects.
Meanwhile, around the same time, Thailand’s energy security faced rapid increases in demand. Wind power was an appealing renewable energy option, but wind power projects had high up-front capital costs and minimal operating costs and the variable nature of wind speeds led to uncertainty in energy production, resulting in considerable sales and revenue risks for investors. This uncertainty was heightened in a country with relatively low wind speeds. The second case study looks at how Thailand overcame this uncertainty and risk using another public-private partnership model. To develop the wind power sector, the government supported decentralized power generation through programs that allowed private developers to build, own, and operate power projects and enter into power purchase agreements with the country’s electricity authorities. Construction began in September 2012, and the wind farm began commercial operations in July 2013.
Lessons and Takeaways from the Case Studies
Reading these case studies together reveals several important lessons:
Different renewable energy projects require governments to take on risks and responsibilities in different ways. For the geothermal project in Kenya, the government’s geothermal development company worked with external partners to develop the fundamental steam infrastructure so that the private sector could take on the less risky power production phase. In the case of wind power in Thailand, the government did not take on the same degree of initial infrastructure investment, but the project’s partners had to create a financial model that reduced the perceived risk for the commercial banking sector and independent power producers.
In both cases, the lack of precedent for the projects required sustained negotiation and cooperation among partners before finding the right mix of incentives and guarantees. There is no one-size-fits-all solution for renewable energy financing, but these case studies offer many practical lessons that renewable energy champions in other contexts can learn from. The Kenyan case study suggests that more standardized risk mitigation instruments, covering political, financial, and other risks, could speed up future negotiations on steam supply and power sales.
Development finance institutions played an essential role in making these public-private partnership models viable. In Kenya, the African Development Bank and the Climate Investment Funds helped fill in financial gaps while the African Development Fund provided a partial risk guarantee that would pay independent power producers for revenue lost in the case of non-payment by the Kenya power company or failure of the geothermal project to generate steam. In Thailand, the Climate Trust Fund, part of the Climate Investment Funds, provided a loan to reduce the risk borne by a commercial bank that contributed to project financing. There will be a role for DFIs to play in underpinning the financial incentives and risk guarantees needed to finance such projects, especially in countries unfamiliar with such large-scale renewable energy development. DFIs also provide technical experience and expertise that can help local banks understand and accept project risk.
The work put into one renewable energy project can enhance the business viability of subsequent projects. This can be seen in Thailand, where the success of the initial Theppana wind farm development led to an extension of the original project. Soon major wind power developers contributed to a growing portfolio of projects in the country, most of which did not require any concessional financing.
Legislation and regulation are another piece of the puzzle. Energy markets are highly regulated, so investment can typically only take place within a conducive framework of policy instruments, such as tax incentives, standardized power purchasing agreements, and feed-in tariffs. Without such regulations, private investors would not have enough confidence in the sector.
There is an interesting tension in these case studies between the need for electricity tariffs that are high enough to incentivize private sector investment and the government’s desire to keep electricity rates low enough that they are affordable to end users. Those considerations may have a major impact on the final financing arrangement.
The Global Delivery Library
The Global Delivery Library, part of the Global Delivery Initiative, house GDI's case studies, and helps connect practitioners around the world to share practical experiences about how they overcame challenges to achieve their development goals. The Kenya and Thailand case studies are part of a set of case studies written in collaboration with the Climate Investment Funds.