Précis W O R L D B A N K O P E R A T I O N S E V A L U A T I O N D E P A R T M E N T S U M M E R 1 9 9 8 N U M B E R 1 6 2 Kenya's Geothermal Development Program B ETWEEN 1979 AND 1996, THE BANK CARRIED OUT five projects to support Kenya's program to develop geo- thermal power resources--the first such program in Africa. An OED audit* of the five projects found that they were success- ful, but warned that the sustainability of the last two projects is unlikely without further government support. The audit highlights actions that both the Bank and borrowers could take in the future to increase the chances of success for similar power projects in the region The Bank could have taken greater advantage of its in- house technical expertise in geothermal drilling, and could have made the procurement process more flexible to respond more rapidly to drilling problems as they arose. For its part, the gov- ernment could intensify its commitment to expanding geothermal exploration and development, boost its expertise in the field, and provide sufficient resources for maintenance, while pursuing pri- vate sector participation. Between 1979 and 1989, the Bank ap- The first three projects (approved in proved three loans and two credits, for a 1979, 1980, and 1983) drilled wells, set total of $117.2 million, to support the up transmission facilities, and built a development of Kenya's geothermal power plant with 45 megawatts (mw) of power program and resources. The five capacity in the Olkaria Geothermal field projects, carried out between 1979 and of Kenya's Rift Valley. After the plant 1996, helped the Kenya Power Company was successfully put into operation, the (KPC) install the first geothermal-based government decided to greatly expand its power plants in Africa. geothermal development program, with a 2 World Bank Operations Evaluation Department Implementation Issues The Olkaria power plant ex- perienced problems in main- taining adequate steam levels to its turbines. After operat- ing above its rated capacity through 1985, the Olkaria power plant began to have production problems because of inadequate investments in new wells, which were needed to offset steady declines of 3-5 percent a year in steam pro- duction from existing wells. Steam and power production gradually fell from 45 MW in 1989 to 30 MW in 1995. KPC was expected to use inter- nally-generated funds to pay for urgent work needed to connect replacement wells and drill five new wells. How- view to making it one of the main pillars of its future ever, although the savings from reduced fuel oil imports power generation system. The Bank supported this ob- could have offset the investments, KPC was unable to fi- jective with two credits (approved in 1984 and 1989) for nance the work. Only in 1992, when production fell exploration, appraisal, and drilling in other parts of more than 20 percent, was an agreement reached to di- Olkaria and at the extinct volcano of Eburru. vert funds from another Bank project to pay for the well connections. Performance The Bank's procurement procedures were too in- The first three projects were completed essentially on flexible to meet the project's needs. The Bank's Pro- time and within cost estimates, though drilling perfor- curement Unit refused to accept the results of a limited mance was below par. All power generation units oper- international tender for cementing services when it ated at or above capacity for a number of years and all produced only one bid, and requested that KPC issue are currently operating at their installed capacity with- an international competitive tender, although only a out significant operating problems. handful of companies worldwide provided this service However, the fourth project was plagued by poor and there was no evidence that other bidders would drilling performance, a problem that had emerged ear- participate. KPC eventually financed the services it- lier but that the Bank began to address effectively only self. In addition, the Bank stopped the use of an off- in 1987, when it organized bilateral aid for a technical shore agent for the rapid purchase of drilling equip- assistance program designed to enable Kenyan staff to ment and materials that were urgently needed, even take over full operation of the program. By early 1988, though the revised procedures added an additional drilling performance began to improve dramatically. three to six months to the procurement process, creat- The fourth and fifth projects drilled 29 wells at ing considerable difficulties for KPC. Olkaria and demonstrated that the geothermal field there could support a total of 78 MW of steam, which The Private Sector. will be used by a power plant currently financed under a The Bank has been suggesting that most, if not all, the Bank-funded follow-up project. The drilling program at future growth of Kenya's power supply should be met by Eburru began three years behind schedule and was much the private sector. The government has agreed to offer less successful, eventually demonstrating that geother- the Olkaria West fields for private development and to mal potential was significantly below expectations. promote private sector participation in conventional Précis 3 coastal power generation plants. At the time of the au- Recommendations dit, several private sector generation proposals were un- For the Bank: der discussion. s The Bank needs to make greater use of technical staff in reviewing drilling and resource development pro- Conclusion grams during both the appraisal and supervision The five projects were all successful. Drilling pro- stages of geothermal projects. duction levels of the first three projects (1979-86) s The Bank needs to be more flexible in its procure- were unacceptably low but production greatly im- ment to allow the borrower to make unscheduled proved by 1987 and remained high throughout the rush orders more efficiently and at minimum costs. remaining operations. KPC has increased its own ca- pabilities to the point that it can now operate its geo- For the Borrower: thermal program entirely with its own staff, without s KPC needs to review its commitments to geothermal full-time external consultants. However, its equip- exploration and development drilling and needs to ment is old and will need replacement if effective op- identify the resources needed to implement its pro- eration is to continue. gram efficiently. Geothermal development should The Bank was late in taking action to strengthen become a self-supporting profit center within KPC's KPC's drilling operations and was unable to take ef- power generation activities, with the resources fective action to help KPC stem production drops un- needed to support maintenance and expansion. til output had fallen by one-third, at a substantial s KPC needs to expand training in the areas of surface cost in increased oil imports. For its part, KPC was facilities design for steam gathering systems. slow in addressing the fall in power output and was unable to fund the ongoing costs of connecting the For the Bank and Borrower: required new wells. s If the private sector cannot be attracted to partici- KPC has yet to develop a geothermal organization pate in Kenya's geothermal development on equitable with sufficient autonomy, authority, and financial inde- terms, the government and the Bank will need to pendence to procure the necessary resources in a rea- prepare an alternative approach, in which govern- sonable time or to meet the objective of using its invest- ment institutions play a more significant role. Such ment resources efficiently. The sustainability of KPC's a strategy might include the provision of drilling ser- exploration and appraisal efforts is unlikely unless addi- vices to investors or guarantees of competitive prices tional resources are provided for new drilling rigs and for steam, allowing the private sector to invest in for its geothermal unit. lower-risk generating plants. Précis * Performance audit report: "Kenya: Olkaria Geothermal Engi- Please address comments and inquiries to the Editor-in-Chief, neering Project, Olkaria Geothermal Power Project, Olkaria Geo- Elizabeth Campbell-Pagé, tel: 1-202/473-5365, thermal Power Expansion Project, Geothermal Exploration Project, fax: 1-202/522-3125, e-mail: ecampbellpage@worldbank.org Geothermal Development and Energy Pre-investment Project," by Please address publication requests and inquiries to OED, Richard Berney, Report no. 16842, June 1997. Available to Bank tel: 1-202/458-4497, fax: 1-202/522-3200, Executive Directors and staff from the Internal Documents Unit and e-mail: eline@worldbank.org from regional information service centers, and to the public from the World Bank InfoShop: This and other OED publications can be found on the Internet, 1-202/458-5454 at http://www.worldbank.org/html/oed fax 1-202/522-1500 e-mail pic@worldbank.org. DISCLAIMER OED Précis are produced by the Operations Evaluation Department, Partnerships and Knowledge (OEDPK) of the World Bank. The views here are those of the Operations Evaluation staff and should not be attributed to the World Bank or its affiliated organizations.