Using Public Finance to Attract Private Investment in Geothermal: Olkaria III Case Study, Kenya

This case study examines the Olkaria III geothermal power plant in Kenya, the first privately funded and developed geothermal project in Africa. It analyzes how a combination of public sector risk mitigation, phased development, and international development finance enabled a private developer, Ormat Technologies, to successfully deploy a 110 MW binary plant. The document highlights the role of the Kenyan government in reducing exploration and credit risks to attract private capital and provides lessons for scaling geothermal energy in East Africa.

• The Olkaria III project utilized a phased development strategy to manage risk, expanding its capacity from an initial 8 MW to 110 MW over 16 years. This modular approach allowed for the progressive exploitation of the reservoir and reduced investment exposure during the early, high-risk years.
• Public financial support significantly lowered the cost of electricity for Olkaria III. The project achieved a Levelized Cost of Electricity (LCOE) 13% lower than the average for similar geothermal projects in Kenya, and public support (including in-kind grants and loans) reduced the cost per unit of geothermal power by 31%.
• The Kenyan government mitigated exploration risk by providing data and donating eight wells (with 8 MW capacity, valued at approximately USD 24 million) to Ormat Technologies. Without this support, the project's internal rate of return (IRR) would have dropped from 16% to 13%, which would have required a 15% increase in the power purchase agreement (PPA) tariff to attract private investment.
• To unlock long-term debt financing, the Government of Kenya provided a security package to back payments from the off-taker, Kenya Power and Lighting Company (KPLC). This package included a letter of credit and a letter of comfort, which improved the creditworthiness of the off-taker.
• The project's financial structure evolved from initial equity funding to a heavy reliance on debt from Development Finance Institutions (DFIs), which eventually accounted for 85% of overall investment costs. Key loans included a USD 105 million loan from a consortium headed by Germany's DEG and a USD 310 million senior loan from the U.S. OPIC.
• The 20-year PPA included specific clauses to mitigate operational and financial risks: a tariff pegged to the US dollar to shield the developer from currency exchange risk, partial adjustments to the Consumer Price Index for O&M costs, and a relief formula treating resource degradation as 'force majeure' to ensure capacity payments.
• Political risk was mitigated through Political Risk Insurance (PRI) provided by the Multilateral Investment Guarantee Agency (MIGA), which covered equity exposure against transfer restriction, war, civil disturbance, and expropriation at an annual premium of approximately 2%.
• The project is estimated to reduce Kenya's power sector emissions by 3% to 4%, with annual net carbon emissions reductions of approximately 450,000 tCO2e through 2038 by displacing fossil fuel-powered generation.
• Kenya has introduced the Geothermal Development Company (GDC) to further stimulate private investment by assuming upfront exploration risks. Under the 'GDC model' (or PISSA), GDC proves the resource and sells steam to private Independent Power Producers (IPPs) who then finance and operate the power plants.
• The document identifies a regional geothermal potential of 14,000 MW in East African countries along the Great Rift Valley. It suggests that the Kenyan experience—combining government exploration, regulatory frameworks, and creditworthy off-takers—can be replicated in countries like Ethiopia, Rwanda, Tanzania, and Djibouti.

APA

Micale, V., Trabacchi, C., & Boni, L. (2015). Using Public Finance to Attract Private Investment in Geothermal: Olkaria III Case Study, Kenya. Climate Policy Initiative. https://www.climatepolicyinitiative.org/wp-content/uploads/2015/06/150601_Final_Olkaria_ForWeb.pdf

Chicago

Micale, Valerio, Chiara Trabacchi, and Leonardo Boni. Using Public Finance to Attract Private Investment in Geothermal: Olkaria III Case Study, Kenya. Climate Policy Initiative, 2015. https://www.climatepolicyinitiative.org/wp-content/uploads/2015/06/150601_Final_Olkaria_ForWeb.pdf.

Wikipedia

{{cite report |last1=Micale |first1=Valerio |last2=Trabacchi |first2=Chiara |last3=Boni |first3=Leonardo |title=Using Public Finance to Attract Private Investment in Geothermal: Olkaria III Case Study, Kenya |publisher=Climate Policy Initiative |date=June 2015 |url=https://www.climatepolicyinitiative.org/wp-content/uploads/2015/06/150601_Final_Olkaria_ForWeb.pdf |access-date=17 August 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{micale2015using, author = {Micale, Valerio and Trabacchi, Chiara and Boni, Leonardo}, title = {{Using Public Finance to Attract Private Investment in Geothermal: Olkaria III Case Study, Kenya}}, institution = {Climate Policy Initiative}, year = {2015}, month = jun, url = {https://www.climatepolicyinitiative.org/wp-content/uploads/2015/06/150601_Final_Olkaria_ForWeb.pdf}, urldate = {2026-08-17}, note = {Indexed by Climate Insights Directory} }