World bank prepares Djibouti’s geothermal project for private sector expertise

WASHINGTON, D.C. -- Developing countries that are interested in geothermal energy may see transformational results by approaching World Bank and other institutions, as Djibouti did. In an interview, the World Bank Djibouti geothermal project team talks about the project investment, lessons from Kenya’s experience, and preparations that are being made for the private sector to take up the next steps.

In October, the World Bank Group and the Government of Djibouti signed geothermal project financing agreements for the Lake Assal project in Djibouti. World Bank will provide a US$6 million highly concessional credit to support assessment of the site’s commercial potential through its International Development Association arm.

With exploration as far back as the 1970s, and facilities now operating in Kenya and Ethiopia, geothermal power development in the hot reservoir areas of East African countries is supported by World Bank as well as U.S. programs under the Obama administration’s Power Africa initiative, like the Geothermal Energy Association’s East Africa Geothermal Partnership with the U.S. government. The World Bank Djibouti geothermal project team answered a few questions. (Many thanks to Ilhem Salamon, Charles Cormier, and the rest of the World Bank Djibouti geothermal project team.)

Djibouti geothermal project area. Credit: World Bank.

LB: Why did World Bank choose the Djibouti geothermal project as its first exploration financing venture in almost 20 years?

WB: The Djibouti Geothermal Power Generation Project came to fruition primarily as a result of Djibouti’s strong confidence in its geothermal potential. Since the 1970s, the Government of Djibouti has shown an enduring commitment to develop its geothermal fields and two exploratory drilling programs conducted in the Lake Assal have shown the existence of significant, albeit highly saline, geothermal resources. Following failed attempts to develop the resource through the private sector, Djibouti reached out in early 2010 to the World Bank to seek support for the exploration phase of the development of geothermal power generation.

In response to Djibouti’s request, a thorough technical review of previous exploratory drilling programs was carried out with financing from the Energy Sector Management Assistance Program (ESMAP), a multi-donor technical assistance trust fund administered by the World Bank. The findings proved that, based on available geo-scientific results, the Fiale Caldera in the Assal Rift is a very promising candidate for geothermal development. The Djibouti geothermal exploration program was subsequently developed by the Government of Djibouti, the World Bank and six other co-financiers.

(The project has 7 co-financiers: the World Bank (US$6 million), the Global Environment Facility (US$6.04 million), the OPEC Fund for International Development (US$7 million), the African Development Bank (US$5 million), the Sustainable Energy Fund for Africa (EUR 1.8 million), the French Development Agency (EUR 2.5 million) and the Energy Sector Management Assistance Program (US$1.1 million). Finally, the GoDj will make an in kind contribution of US$0.5 million.)

The project will focus on assessing whether large scale geothermal power generation is possible and is the first phase of a two-step process to develop local geothermal generation capacity. If the resource is confirmed for large scale power generation, the intent is to follow up with a tender to attract private sector know-how to develop, operate and maintain a power plant, provided investment risks can be identified and mitigated.

The use of concessional financing for the exploration phase reduces the overall cost of geothermal power development in Djibouti by US $52 million, compared to a project that would be fully funded by the private sector. This translates in savings amounting to around 4 US cents/kWh. Geothermal electricity cost is expected to be around 9 US cents/kWh, significantly lower than current tariffs in Djibouti. In terms of overall impact of the project on Djibouti’s finances, the replacement of thermal capacity by geothermal power generation is expected to save around US $57 million per year.

Overall, geothermal power has the potential to help reduce Djibouti’s electricity production costs by 70 percent, boost access to electricity for the population and alleviate the country’s energy dependency. Given its potentially transformational impact, the project is a clear priority for the government and the people.

LB: Many countries across the region are interested in developing their first geothermal projects and are struggling to find the right balance of rules, legislation, and business incentives to attract investors. What made World Bank choose this one?

WB: As outlined above, concessional finance is used to enable the implementation of the exploration phase of geothermal development in Djibouti and subsequently encourage private sector involvement. If the exploration phase is successful, the intent is that the geothermal resource will be tendered to the private sector, which has the know-how and capacity to develop geothermal resources.

In order for the power plant development phase to be successful, the public private partnership (PPP) infrastructure and institutional and legislative framework in Djibouti needs to be markedly strengthened. The World Bank with the Public-Private Infrastructure Advisory Facility is currently providing technical assistance to Djibouti to strengthen its PPP framework. Other international donors, such as USAID and the Japanese International Cooperation Agency, have expressed their interest in providing support on this.

LB: World Bank has supported geothermal in Africa before, back as far as 1978 in Kenya. What were some lessons that the Bank is implementing into its Djibouti experience?

WB: The World Bank Group has been supporting Kenya’s geothermal development since the 1970s. Geothermal power now accounts for over 12 percent of the installed capacity in Kenya’s national grid, including a geothermal IPP, and the vulnerability of the country’s power supply to hydrological risks and fuel price volatility has been reduced. It has significantly contributed to stabilize supply of electricity, which has helped improve people’s livelihoods and fostered income-generating activities. The video link below shows some of the impacts geothermal power has had in Kenya:

Some of the key lessons learned from the Kenya experience include: (i) government commitment and support to geothermal development is key; (ii) approach to geothermal development should be tailored depending on site and stages of development; (iii) having a dedicated unit accountable for geothermal activities is important; and (iv) there must be conscious effort to accumulate technical capabilities on the ground through learning-by-doing and extensive capacity development activities.

These lessons have been incorporated into the Djibouti Project through (i) the Government’s investment and acceptance of concessional financing for exploratory drilling, (ii) the development of a site-specific drilling program resulting in certified well test results which will be incorporated into any future tendering documents of (iii) the establishment of a clear chain of responsibility and authority over the project that runs through the project management unit (PMU) to the Director General of the electricity utility Electricite De Djibouti (EDD), and (iv) capacity building through direct interface and training of the EDD and Centre for Studies and Research of Djibouti (CERD) staff with international geothermal teams which are taking the project lead.

LB: Africa’s economy is growing faster than any other continent, something that then-Kenyan ambassador Elkhana Odembo mentioned at a Geothermal Energy Association event earlier this year. How does WB react to this draw and related aspects like involving the local community and ensuring environmental steps?

WB: To accommodate and foster rapid growth in the continent, investment in key infrastructure including reliable power supply will be crucial. Geothermal power presents a unique opportunity by enabling clean and sizable baseload power supply in a cost-competitive manner. In many countries, it also enables both mitigation and adaptation to climate change by allowing low carbon growth while reducing vulnerability of the electricity grid to hydrological risks. Governments in the region are trying to harness geothermal resources in an environmentally and socially sustainable manner. In Kenya, for example, consultations with local communities are undertaken and the entities concerned are supporting livelihood improvement activities benefiting them. In the future, geothermal resources could also support social development through direct use of residual heat. The World Bank is also encouraging the entities to conduct cumulative environmental impact assessments whereby environmental impacts are assessed holistically in targeted geothermal fields.

LB: At geothermal industry events in the U.S. we have seen growing interest and excitement in regard to opportunities in East Africa. How is geothermal energy being received in Djibouti?

WB: Geothermal exploration started in the 1970s in Djibouti and several attempts were made to develop the country’s potential. The development of geothermal energy is today a national priority of the Government of Djibouti, and Djiboutians are eager to see it finally happen, as it would help replace expensive thermal power generation and reduce electricity cost, thus enabling a greater access to electricity.

In other parts of East Africa, and spearheaded by Kenya, geothermal development has been progressing steadily since the 1970s. East African countries, such as Ethiopia, Kenya, Tanzania, Uganda, have been experiencing steady economic growth over the last several years. This economic growth increased the electricity demand in general, and the countries have to look for new energy resources to meet this growing demand. Countries with limited energy resources had to depend on expensive thermal power plants running on imported fuels. To ensure sustainable growth and competitiveness, countries decided to invest in developing indigenous renewable energy sources. Initially, the countries started with developing their hydro power resources and then continued to tap into their wind power resources. Given the relatively higher risk perception and upstream capital requirement to develop geothermal energy, progress in this area was initially limited. However, the high level of reliability, the low level of meteorological risk, and the baseload power supply characteristics of geothermal energy have increased East African countries’ interest to invest in this energy resource over the past years.

LB: World Bank’s funding will be for the assessment phase. What are the biggest factors and risks considered at the current stage? 

WB: During the exploration phase, the highest risks are geological in nature. In the case of Djibouti’s geothermal program, geological mapping identified the rift anomaly and confirmed potential geothermal resources through exploratory drilling starting in the 1970s. More recently, additional professionally executed geological surface studies were performed by Reykjavik Energy Incorporated (REI) in 2010. These studies have led to the identification of the Fiale Caldera area drilling targets. Given the vertical fracturing of the caldera, directional drilling will be used to reduce risk by increasing the probability of locating the fluids that move through these permeable fractures. Finally, the drilling program design includes the engagement of a qualified international Geothermal Consultant, whose responsibilities will include development of the final well design, the targeting of four full size production wells, and the management of the technical field drilling operations.

Djibouti’s 36-month exploratory drilling program is currently in the initial stages of tendering the program positions that will be held by international companies with proven technical and management expertise in the geothermal arena.

LB: Djibouti’s present energy needs are estimated at 50 MW; is there an expected timeline on when energy needs will be reached, and is there potential for exporting extra power?

WB: The World Bank has recently completed a least cost generation study for Djibouti with funding provided by the Public-Private Infrastructure Advisory Facility (PPIAF). This study provided recommendations to the Government concerning the most effective means by which Djibouti can continue to maintain and as necessary, renew, its existing power plants to meet projected electric demand through the year 2022. The study recommendations have taken into account the coordination of bringing a 50-MW geothermal plant on the line by year 2022 to support Djibouti’s electricity demand. In the event that the exploratory drilling does not result in geothermal power generation potential, the least cost generation plan will require revision to schedule an alternate generation technology to meet Djibouti’s year 2022 demand. Given the anticipated coordination between Djibouti’s current generation base and the introduction of 50 MW of geothermal power, geothermal power export is not currently being considered.

LB: Apart from Lake Assal, Djibouti has six other prospect areas for geothermal potential (Nord-Ghoubbet area, Manda Inakir area, Abhe bad area, Obock site, Roueli area, Garabayis site); does World Bank have interest in any of these sites?

WB: At this stage, World Bank engagement focuses on the potential of geothermal energy in Djibouti and paving the way for private sector interventions. If the exploration phase is a success, the private sector will be enticed to invest in geothermal in Djibouti.

Approximately twelve geothermal provinces have been identified in Djibouti based on the locations of surface hydrothermal manifestations. In preparing the Djibouti Power Generation Project, priority was given to the prospects of Lake Assal, Nord-Goubhet and Lake Abhé. The Lake Assal site was ultimately selected for the project due to the fact that, since the 1970s, geologic research and testing and two exploratory drilling programs in the area have shown the existence of a significant geothermal resource.

To our knowledge, there has been no exploratory drilling or definitive confirmation of a geothermal resource suitable for power generation in Nord-Goubhet and Lake Abhé. The geologic features of these areas and the surface studies performed to date show that these sites are promising prospects for further geothermal study in the form of exploratory drilling, potentially to be carried out by the private sector.

LB: World Bank has announced their Global Geothermal Development Plan. Can you tell us about upcoming plans or prospects for this, especially in the East Africa area?

WB: The Global Geothermal Development Plan (GGDP) is a call to donors, multilateral development banks, government and developers to work together around an investment plan to scale up geothermal power in the developing world.

The GGDP focuses on exploratory drilling, which is the most difficult to finance given the high geological risks. The goal of the GGDP is to develop a pipeline of commercially-viable projects that are ready for funding. The GGDP is led by ESMAP, the energy trust fund of the World Bank and developed in collaboration with multiple stakeholders. To reach its goal, the GGDP:

• Deploys technical assistance to identify and structure investments that by definition include a high risk and require significant co- and parallel financing to share the risk among a range of funding entities.
• Helps mobilize concessional capital to finance the projects identified
• Facilitates knowledge dissemination to share lessons learnt about geothermal exploratory drilling project design and implementation.

Through the GGDP, a new window of US$115 million has been established by the Clean Technology Fund for support to the private sector for geothermal exploratory drilling. These funds will be deployed to eligible middle income countries with high geothermal potential, such as Chile, Indonesia, Mexico, and Turkey. In addition, ESMAP has provided some support to poorer countries in scoping out options for support to governments or private sector to finance geothermal resource validation projects with a focus on Kenya, Ethiopia, and possibly Tanzania and Rwanda.

Djibouti geothermal project area. Credit: World Bank.

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