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SUSTAINABLE ENERGY REGULATION AND POLICYMAKING TRAINING MANUALpage 9.24The draft National Energy Policy provides a target for the contribution of geothermalelectricity generation in Kenya. The policy provides that by the year 2020,the installed capacity of geothermal energy is expected to account for a quarterof the total installed generation capacity up from the current 9.7 per cent (Mbuthiand Andambi, 2004). Consequently, to encourage investment in geothermaldevelopment for electricity generation, the energy policy provides the followingincentives (Republic of Kenya, 2004): Ten-year tax holiday for geothermal plants of at least 50 MW; seven years forplants in the range of 30-49 MW; and five years for plants between 29-10 MW. Seven-year tax holiday on dividend incomes from investments made fromdomestic sources. Duty and tax exemptions on the procurement of plant equipment and relatedaccessories for generation and transmission during project implementation. Inaddition, the procurement of spare parts would be made free of duties and taxes.Consequently, Kenya’s geothermal energy developed has realized an installedcapacity of 127 MW, of which 12 MW is exploited by ORMAT International, an independentprivate power producer (KPLC, 2003; Mbuthi and Andambi, 2004).6.3. South-east Asia: standard PPAs for smallhydropower developmentSmall hydropower development in NepalAs a direct result of the liberalization in the power sector brought about by theElectricity Act (1992), international independent power producers (IPPs) investedin two medium hydropower projects in 1995: the Khimiti Hydro Electric Project(60 MW) and Bhote Koshi HEP (36 MW). The PPAs for these projects were negotiatedon a case-by-case basis between the utility and the IPP. In October 1998,the government of the time announced that the national utility, Nepal ElectricityAuthority (NEA), would purchase all energy produced by small producers (5 MWor below) at a standard “power puchase agreement (PPA)” 3 . By early 1999, thefirst small hydro IPPs began to carry out feasibility studies and approach financialinstitutions with the standard PPA in hand. The first financial closure by localbanks took place in 2000 and the Syange project (183 kW) was on line in January2002 followed by the Piluwa Khola (3 MW) project October 2003.Even after the standard PPA was announced, prospective IPPs remained skepticalabout the credibility of the utility’s offer. There was only limited confidence3The rate was Rs 3.00 (4 US cents) for the dry season and Rs 4.25 (5.7 US cents) with an escalationof 6 per cent per year for five years on the local currency rate.
MODULE 9: RENEWABLE ENERGY: REGULATORY AND POLICY OPTIONSpage 9.25that small hydropower could be developed into a profitable sector at the ratesbeing offered. Support was provided by Winrock International and GTZ to entrepreneursand their engineering consultants by sharing feasibility costs, providingfree technical reviews of feasibility studies and site construction, and byhelping them negotiate with the utility, banks and insurance companies.After the “standard PPA” was announced, over 50 feasibility studies were completed,20 PPAs signed, 10 projects reached financial closure, and seven projectshave commenced construction resulting in five completed projects. The projectsthat were financed after the “standard PPA” came into force are marked in boldin the table below. Once the barrier of market uncertainty for the produced electricitywas removed through the “standard PPA” and developers gained confidencein the sector, hydropower has become attractive as an investment sector to bothprivate developers and financing institutions, despite the ongoing insurgency inthe countryside. All financing for these hydropower projects has come from localbanks. Nepal has seen an investment by local banks of some US$ 47 million innew small hydropower projects in the last seven years, of which US$ 13 millionhas gone to smaller projects under the “standard PPA”.Table 3.Private sector investment in small hydro in NepalDate of Total cost Local financingProjects Size (MW) commissioning (US$M) (US$M)Khudi 4.0 June 2006 6.36 4.47Sisne 0.75 2006 1.4 0.99Chaku 1.5 Jun 2005 1.64 1.15Sun Koshi 2.6 Mar 2005 3.6 2.51Rairang 0.5 2004 0.45 0.29Piluwa 3.0 Oct 2003 5.5 3.16Chilime 20 Aug 2003 30 19.86Indrawati 7.5 2002 20.5 14.29Syange 0.2 Jan 2002 0.3 0.16Jhimruk 12 1995 20 Norwegian grantAndhi Khola 5.1 1991 3.8 Norwegian grantNote: Jhimruk and Andhi Khola have been privatized and are now operated by the Butwal PowerCompany.Small hydropower development in Sri LankaIn 1996, as part of the liberalization in the power sector started in 1994 by theSri Lankan government, the Central Electricity Board (CEB) allowed the grid connectionof private small hydro (
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