Tuesday, April 12, 2011

Steamin' It Up in Kenya

The hot springs of Kenya are the seventh most significant geothermal resource in the world, and the largest on the African continent.  We mentioned the Rift Valley geothermal resource in our earlier posts on geothermal power in November 2010 and December 2010.

Representatives of of Kenya Electricity Generating Company Limited or KenGen, one of Kenya’s most important power companies, made an appearance this week at the Africa Investment Conference in New York to pitch their next geothermal power project.

KenGen produces over 80% of the country’s electricity through a combination of hydro, thermal, geothermal and wind-generated power plants.  Hydro is the leading source with capacity to produce up to 777 megawatts, which is about 65% of the company’s installed capacity. 

KenGen has two geothermal-powered plants called the Olkaria 1 and 2 facilities.  The Olkaria I power plant was the first geothermal power plant in Africa. Its 45 megawatt generating capacity was impressive until the Olkaria II plant was commissioned in 2010.  It is now Africa’s largest geothermal power plant, generating 70 megawatts.  

Geothermal is increasing in importance.  KenGen is teaming up with the government’s Geothermal Development Company to undertake an ambitious project involving over 900 wells into the Olkaria field in the Rift Valley in Central Kenya.  If completed on time, the project would yield 3,200 megawatts of electricity by 2016.

The Kenya national government plans to support as much as 70% of the project cost near $12 billion.  This is an expensive project  -  approximately $3 million per megawatt.  However, geothermal is expected to produce higher margins than the hydro-generation that is currently KenGen’s primary power source.

Investors can get a taste of Kenya power generation through shares in KenGen.  The government of Kenya sold off 30% of KenGen in 2006.  The shares trade on the Nairobi Stock Exchange under the symbol KEGN.  Alternatively, investors can take a position in Kengen Public Infrastructure Bonds, which also trade on the exchange.  KenGen's cash flows declined in 2010 compared to the prior year.  However, the balance sheet was strengthened by capital raising activity.  It is likely KenGen will be back to the capital markets in 2011 to raise funds for its ambitious capacity expansion program.

We are adding KenGen to our Earth, Wind and Fire Index in the Geothermal Group and suggest investors watch their progress.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

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