FEATURE: Why insurance is key for geothermal expansion in Kenya
Nearly 77% of Kenyans still lack access to modern energy services. Kenya’s Jubilee Government has ambitious plans to add 1600MW of geothermal energy during the current presidential term, but there are financial barriers in the way. Drilling risk insurance can be one part of the solution. CDKN learns more from the insurance world.
A 5000MW geothermal expansion is central to Kenya’s vision of becoming a middle-income country by 2030. The expansion offers large greenhouse gas reduction potential and positive co-benefits. However, a major barrier to the project is the lack of financial support and capacity to facilitate increased private sector investment.
CDKN is supporting two projects to accelerate the expansion of Kenya’s geothermal energy capacity. The first seeks to bring Kenya’s Geothermal Nationally Appropriate Mitigation Action (NAMA) to financing, while the second supports the development of a geothermal drilling risk insurance product for the Kenyan and Ethiopian markets.
This second project sees the development of an innovative risk finance solution to reduce the risk associated with the appraisal/development drilling phase of geothermal project development.
Geothermal developers face high costs for field development coupled with high risks associated with resource exploration and development/appraisal drilling. These high costs and high risks are acting as a significant barrier to private sector financing. In this context insurance is key. An insurer takes away the risk imposed by disasters and even shortfalls – if the number of mega watts forecast is not reached. Through the removal of risk, finance to the industry would flow better.
Geological risk mitigation instruments are however still limited to grant funding and/or in their infancy for the private sector. They therefore face the many structural barriers associated with developing innovative risk solutions in the private sector.
Julian Richardson, CEO of underwriting company Parhelion, argues that this significant gap in the insurance industry is partly related to the fact that brokers are not involved in the research and development function of insurance companies. “The industry isn’t very good with coming up with products. Brokers can be a critical part of the innovation process within the industry as they bring syndication services and create constructive competitive tension between insurers, which could lead to innovation in the industry.”
The current gaps in geological risk mitigation instruments also raise a more general point about how insurers approach climate change, argues Richardson: “Insurers tend to do a lot of reporting on climate, but always from a defensive standpoint. “Should we be increasing premium or withdrawing cover?” … They are not thinking in a constructive manner where they might offer tools to increase the flow of finance to [low carbon climate resilient] industries.”
Creativity within the industry is needed to make products appropriate for climate change. “That’s the role we’ve taken on as Parhelion. We are the innovators.”
But the major problem is funding. It takes a lot of work and finance to create a “backbone product”. It takes research within the sector: risk analysis, distribution, an understanding of the market and more. “To get the insurance industry on board is no small task” explains Richardson. “First, we develop a product, then we generate deal flow, as well as disseminating information so that people in Kenya know what geothermal is all about. Finally, we generate underwriting capacity to support the product.”
Parhelion’s work has been possible due to IFC and CDKN support. Ultimately, the project seeks to develop a local geothermal risk market made up of insurers, project developers, financiers and public bodies, and one which is informed and engages on the concept of geothermal risk insurance. The project also aims to improve local insurance industry technical skills and capability for geological risk mitigation instruments, as well as knowledge of opportunities for climate compatible development.