7 October 2013 – Lake Turkana, which could become Africa’s biggest wind power project, involves the development of a 300 MW wind farm comprising 365 wind turbines of 850 kW capacity each. This project has just seen the African Development Bank (AfDB) approve the Lake Turkana transmission line delay partial risk guarantee for US$27.2 million, the first of the African Development Fund’s partial risk guarantees (ADF PRG). The ADF PRG is a risk mitigation instrument that covers private lenders and investors against the risk of a possible government failure to meet contractual obligations to a project.
The average electricity production of the Lake Turkana project is estimated at 1,440 GWh a year, equivalent to the annual generation capacity of Namibia in 2010.
Under the wind project, the Lake Turkana transmission line delay PRG will be used to alleviate the risk for the construction of a 428 kilometre publicly owned transmission line between Loyangalani and Suswa and associated substations needed to connect the project to the national grid. The PRG will support the Kenyan government’s on-time delivery of the transmission line and will reduce the risk of it being unable to meet payment obligations. More specifically, the ADF PRG will provide partial risk mitigation to Lake Turkana Wind Power Limited and the providers of debt financing to the project for risks associated with construction delays.
The objective of the Lake Turkana wind power project is to provide reliable, low-cost power and to strengthen Kenya’s national grid by increasing national installed power by approximately 17%. The transmission line will also include a fibre-optic cable that will carry communications data. Over the long term, the project will help decrease the cost of energy to end-users, increase access to energy in rural areas, increase the national electrification rate and decrease fossil fuel dependence.
There is growing demand for electricity in Kenya. In the context of the importance of low-cost generation capacity additions and regional power interconnections for supply security, particularly during periods of severe drought, the government of Kenya has traditionally relied upon providers of emergency generation capacity, which has the advantage of a rapid installation time, but is very expensive and load shedding frequently occurs.
The AfDB Group provided a US$156 million loan to the Lake Turkana project and has led its development since 2009. Kurt Lonsway, acting director of the AfDB’s energy, environment and climate change department, says, “This ADF PRG will promote foreign direct investment in Kenya and crowd in private financing for power generation. Also, by reducing the risk profile for the sponsors of and lenders to the Lake Turkana project, the PRG will accelerate financial closure and reduce the overall cost of capital to the project.”
Since 2004, the AfDB has made PRGs available to catalyse private investment in middle-income countries. With the introduction of the ADF PRG in 2011, the instrument was made available to ADF low-income countries.
The AfDB’s energy, environment and climate change department established in 2012 is a multi-skilled task force comprising of the treasury, legal and energy, environment and climate change (ONEC) departments to deploy the PRG product and is leading the bank’s work on the use of PRGs in terms of originating projects and reaching out to co-guarantors. The power sectors of various east African countries, as well as southern and west African countries, will also benefit from PRGs in the near future.