Assessment of royalties on cost of geothermal power generation in Kenya

Abstract

Kenya has been utilising geothermal resources for electricity generation since 1981. Over time, the utilisation has expanded and now includes recreation facilities and horticulture. The policies governing the utilisation of geothermal resources mentioned royalties (regular payments made by the lessee of a subsoil asset to the owner of the asset) but those were not specified until the Energy Act 2019 was enacted. The Olkaria I rehabilitation project was used to assess how sensitive the LCoE (levelized cost of electricity) would be to various variables, i.e. specific Capex, project lifetime, WACC (weighted average cost of capital), O & M (operation and maintenance) and the plant load factor. Using the FiT (feed in tariff), it was easy to see that the LCoE was most sensitive to the load factor. A major reduction of the load factor could lead to a LCoE above the FiT, meaning that the developer would suffer a double loss; the difference above the FiT and extra payments for the royalty.