Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No. 8892

PROJECT COMPLETION REPORT

REPUBLIC OF KENYA

THE OLKARIA GEOTHERMAL ENGINEERING PROJECT,THE OLKARIA GEOTHERMAL POWER PROJECT AND

THE OLKARIA GEOTHERMAL POWER EXPANSION PROJECT(LOANS S-12-KE, 1799-KE AND 2237-KE)

JUNE 29, 1990

Industry and Energy Operations DivisionCountry Department IIEastern Africa Regional Office

This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS

Name of Currency: - Kenya Shilling (Sh)US$1.00 - Sh 8.0 (March 1978)

- Sh 7.5 (December 1979)- Sh 10.6 (March 1982)

GLOSSARY OF ABBREVIATIONS

CDC Commonwealth Development CorporationCIDA Canadian International Development AgencyEAP&L The East African Power and Lighting Company, LimitedGENZL Geothermal Energy of New ZealandKPC Kenya Power and CompanyKPLC Kenya Power and Lighting CompanyMOE Ministry of EnergyOGDP Olkaria Geothermal Development ProgramODA Overseas Development AdministrationTRDC Tana River Development Authority

FISCAL YEAR

Government: July 1 - June 30KPC : January 1 - December 31

THE WORLI BANK OIC US ONLYWashington. DrC 20433

USA

Ofti Ci Ov.ct1W.CeflaiOp#gma-s Ivhsitvin

June 29, 1990

MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT

SUBJECT: Project Completion Report on KenyaThe Olkaria Geothermal Engineering Project,The Olkaria Geothermal Power Project andThe Olkaria Geothermal Power Expansion Project(Loans S-12-KE, 1799-KE and 2237-KE)

Attached, for information, is a copy of a report entitled"Project Completion Report on Kenya - The Olkaria Geothermal EngineeriagProject, The Olkaria Geothermal Power Project and The Olkaria GeothermalPower Expansion Project" prepared by the Eastern Africa Regional Officewith Part II of the report contributed by the Borrower. No audit of thisproject has been made by the Operations Evaluation Department at this time.

Attachment

This document has a restricted distribution and may be used by recipients only in the performanceof their official duties. Its contents may not otherwise be disclsed without World Dank authorization.

FOR oFFciAL USE ONLYPROJECT COMPLETION REPORT

REPUBLIC OF KENYA

THE OLKARIA GEOTHERMAL ENGINEERING PROJECT,THE OLKARIA GEOTHERMAL POWER PROJECT

AND THE OLKARIA GEOTHERMAL POWER EXPANSION PROJECT(Loans S-12-KE, 1799-KE. and 2237 KE)

Table of Contents

Page No.

Preface ...... iEvaluation Sutmary ................................- ii

PART I. BACKGROUND

1. Power Sector Development Objectives . . . . . . . . . . . . . . . 1

2. Linkages between the Project. Sector, and Macro Policy Objectives 1

3. Project Objectives and Description . . . . . . . . . . . . . . . 2

4. Project Preparation, Appraisal and Negotiations . . . . . . . . . 3A. Preparation.. ... 3B. Appraisal . . . . . . . . . . . . . . . . . . . . . . . . 4C. Negotiations . . . . . . . . . . . . . . . . . . . . . . 5

5. Project Implementation . . . . . . . . . . . . . . .. . . . . 6A. Financial Performance.. .... . 6B. Procurement . . . . . . . . . . . . . . . . . . . . . . . 8C. Project Costs . . . . . . . . . . . . . . . . . . . . . . 8D. Consultants . . . . . . . . . . . . . . . . . . . . . . . 9E. Training.9. ... gF. Moi South Lake Road.. ... . 9G. Technology . . . . . . . . . . . . . . . . . . . . . . . 10H. Environmental Impact. . . . . . . . . . . . . . . . . . . 11I. Extension of the Closing Date . . . . . . . . . . . . . . 12

6. Project Results .12

7. World Bank Performance . . . . . . . . . . . . . . . . . . . . . 13

8. Lessons Learned .13

PART II. BORROWER'S SUMMARY

1. Introduction ....... 15

2. General ....... 15

3. Engineering . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

4. Contractual . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

PART III. STATISTICAL ANNEXES ..... .21

MAP IBRD 16389R

This document has a restricted distribution and may be used by recipients only in the performanceof their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

PROJECT COMPLETION REPORT

REPUBLIC OF KENYA

THE OLKARIA GEOTHERMAL ENGINEERING PROJECT,THE OLKARIA GEOTHERMAL POWER PROJECT

AND THE OLKARIA GEOTHERMAL POWER EXPANSION PROJECT(Loans S-12-KE, 1799-KE, and 2237-KE)

PREFACE

This is the Project Completion Report (PCR) for three loans. TheOlkaria Geothermal Engineering (Loan S-12-KE), the Olkaria Geothermal Power(Loan 1799-KE) and the Olkaria Geothermal Power Erpansion (Loan 2237-KE)Projects in Kenya for which World Bank loans of US$9.0 million, US$40.0million and US$12.0 million were approved respectively in March 1978,January 1980 and February 1983 respectively. These loans were closed onJune 30, 1981, January 31, 1987 and March 31, 1986 respectively. Theclosing date for the second operation (Loan 1799) was extended by 3 yearsfrom the appraisal estimate and by one year in the case of the thirdoperation (Loan 2237).

The PCR was prepared on the basis of discussions with appropriateBank staff and a review of several reports. These included: the PCRsubmitted by the Kenya Power Company (KPC), of which a condensed version ofthe highlights, from the Borrower's perspective, is presented in Part II;the Bank's Staff Appraisal and Supervision Reports for the three projects;and relevant files from the Africa Region Services Information Center.

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PROJECT COMPLETION REPORT

REPUBLIC OF KENYA

THE OLKARIA GEOTHERMAL ENGINEERING PROJECT,THE OLKARIA GEOTHERMAL POWER PROJECT

AND THE OLKARIA GEOTHERMAL POWER EXPANSiON PROJECT(Loans S-12-KE, 1799-KE, and 2237 KE)

Evaluation Summary

1. The Olkaria Geothermal Engineering Loan (Loan S-12-KE), theOlkaria Geothermal Power Project (Loan 1799 KE) and the follow up OlkariaGeothermal Power Expansion Project (Loan 2237-KE) were the firstgeothermal projects operating on a commercial basis in Africa. Althoughthe potential for geothermal power development in Kenya had beenrecognized for some time, it was not until 1978 that the comparative costof imported oil and hydropower development and the growth in demand madeit attractive enough to warrant development as part of Kenya's least costpower development program.

2. The primary objective of the first phase of the Olkaria GeothermalDevelopment Program (OGDP) under (Loan S-12-KE)) was to gauge theproductivity of the Olkaria steam field and ensure there was sufficientsteam for generation under the proposed project. The aim under thesecond phase of the project (Loan 1799-KE) was to provide, at least cost,a firm source of power and energy within the country to meet the growthin demand expected from 1981 to 1985 and to assist in reducing thecountry's heavy dependence on impotzed oil. The third phase of theproject, (Loan 2237-KE) aimed to assure the availability of domesticpower and energy resources to meet the growth in demand projected toexceed the capacity of the existing facilities in 1984.

3. The Olkaria Geothermal Engineering Project was financed with aBank loan of US$9.0 million and provided for the drilling of additionalwells north and south of existing producers in order to try to delineatethe shape and size of the productive area of the Olkaria steam field.The Olkaria Geothermal Power Project was financed with a Bank loan ofUS$40 million and provided for the construction of an electric generatingstation comprising two 15 MW units with associated auxiliaries and othernecessary civil works. The Olkaria Geothermal Power Expansion Projectadded a 15 MW turbine and generator to the existing powerhouse; expandedthe system to bring steam from the wells generated under the second phaseof the OGDP; provided technical assistance for project design andconstruction supervision and provided for a detailed study of thegeothermal potential of the site. Phase III of the OGDP was financedwith a Bank loan of US$12.0 million.

4. Geothermal reserve estimation continues to be a relatively newfield characterized by a level of unreliability including risks relatedto the sustained volume of steam output, temperature and pressurevariations and the success rate in the drilling of production wells. Asexpected, the Olkaria geothermal projects did encounter some 'teething,problems but these were relatively minor considering the enormity of thepotential risks. Under the three projects, drilling for steam productionwells produced satisfactory results and the construction works proceeded

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substantially according :o schedule and within cost estimates. By 1982,the physical components of the first and second phase of the OGDP were innormal operation generating almost 32 MW continuously. Erection of thethird unit under phase III of the OGDP was successfully completed on May17, 1985 fairly close to the SAR estimate of March 1985.

5. The projects' financial performance was mixed. Kenya PowerCompany's (KPC) rate of return was below the levels required under theLoan Agreement for the years 1983, 1984, and 1985. The company'sbillings and collection, however, were efficient with average accountsreceivable equal to under 2 and 112 months.

6. The training component of the OGDP after getting off to a slowstart, picked tp momentum and met its objectives in terms of numbe-strained. Over the program period, over 1,500 staff of the KPC wereenrolled in short-term courses (two weeks to six months) locally andabroad in geothermal, hydro power systems, electronics and computers.Over 90 staff were enrolled in university programs.

7. The environmental impact of the three projects was consideredacceptable given the nature of emissions and the actual small size of thegeothermal field at Olkaria. An environmental impact study ofcountrywide geothermal development is currently being undertaken underthe Geothermal Development and Energy Pre-Investment Project (Credit 1973-KE).

8. Three main lessons were learned under the three projects. First,given the uncertainties and risks associated with geothermal reserveestimation, it was particularly important under the OGDP to find anappropriate way of sequencing the Bank's investment. The Bank's three-step approach, implemented on time and without cost overruns supports thewisdom of this approach. Second, the Bank learned to temper thediscipline imposed by the projects' financial covenants with sensitivityto the hard political realities faced by the borrower. Finally, the Banklearned (and is still learning) to balance the borrower's strong desireto acquire new technology as rapidly as possible against the implicitfinancial risks of doing so.

PROJECT COMPLETION REPORT

REPUBLIC OF KENYA

THE OLKARIA GEOTHERMAL ENGINEERING PROJECT,THE OLKARIA GEOTHERMAL POWER PROJECT

AND THE OLKARIA GEOTHERMAL POWER EXPANSION PROJECT(Loans S-12-KE, 1799-KE, and 2237 KE)

PART I. THE BANK'S SUMMARY

1. Power Sector Development Obiectives

1.1 Imported crude oil and petroleum products have accounted forover 852 of Kenya's commercially traded energy. Following the steep risein petroleum prices in 1973 and again in 1980, the requirements of crudeoil imports severely taxed the resources of the Kenyan Government. By1981, Kenyan imports of petroleum products represented about 30 percentof all imports compared to 13 percent between 1973-77. As long as oilremained the major source of primary energy and substantial amounts offoreign exchange were expended in paying for crude oil imports, Kenya'seconomy was vulnerable to sudden increases in petroleum prices. TheGovernment's strategy in the power sector (as stated in the DevelopmentPlan of 1979-1983) was thus to rationalize the use of imported petroleumand to find viable alternatives for domestic power generation. In theabsence of indigenous fossil fuel, the Government has sought to harnessits own hydroelectric and geothermal resources to meet steadily growingdemand at least cost.

2. Linkages between the Project, Sector, and Macro Policy Objectives

2.1 As noted, the rising costs of petroleum had an adverseeffect on Kenya's foreign exchange resources with concomitant effects oneconomic growth. Kenya's annual average economic growth rate of 6.5percent achieved over the period 1964-72 was almost halved to 3.4 percentfor the period 1973-75 and recovered somewhat to 4 percent between 1979and 1981 partly because the international oil crisis had resulted inhigher import prices which contributed to the enactment of restrictiveeconomic policies.

2.2 To reduce Kenya's dependence on crude oil imports, theGovernment began to search for domestic power resources. Gas, turbineand diesel fuel were unattractive because of their high cost. Hydro-power development also had only limited prospects and was becomingincreasingly expensive. Although the hydropower potential of Kenya wasestimated to be about 6,000 MW, half of this was in small rivers and wasuneconomic to develop. Most of the remaining potential was on the TanaRiver and of this, only 800 MW was economically justifiable.

2.3 The potential for geothermal power had been recognized forsome time, but it was not until 1978 that the comparative cost ofimported oil and the growth in demand made it attractive enough towarrant development in the context of a least cost power developmentprogram. The most attractive geothermal area was at Olkaria in the RiftValley near Lake Naivasha, about 100 km north of Nairobi. The Olkaria

site had been systematically investigated and explored and, according toestimates, was capable of supporting power generation of several hundredMW. Other potential geothermal sites along the Rift Valley like Eburruand Meneugai, had not been explored, but were expected potentially tomake a significant contribution to meeting Kenya's power needs.

3. Project Objectives and Description

3.1 In 1979, there were very few geothermal projects indeveloping countries and even in the developed world, geothermaldevelopments were limited. Prior to the oil crises in the early and mid-1970's, development of geothermal energy was considered uneconomic.Before then, geothermal energy was used mainly in Italy, Iceland and NewZealand. In fact, the Olkaria geothermal power projects in Kenya werethe first such projects operating on a commercial basis in Africa. TheOlkaria Geothermal Engineering Loan (LN S-12 KE), followed by the OlkariaGeothermal Power Project (Loan 1799 KE) and the Olkaria Geothermal PowerExpansion Project (Loan 2237 RE) four years later are reviewed togetherhere because, in many respects, they are part of the same story.

3.2 The primary objectives of the Olkaria Geothermal EngineeringLoon (phase I of the OGDP)were to gauge the productivity of the Olkariastea'-' field and to ensure that there was sufficient steam for eachgenerating unit proposed under the follow up project. The OlkariaGeothermal Power Project (phase II of the OGDP) aimed to provide a firmsource of power and energy withir. the country to meet the growth ofdemand expected from 1981 to 1985 and to assist in reducing the country'sheavy dependence on imported oil. The Olkaria Geothermal Power ExpansionProject (phase III of the OGDP) aimed to assure the availability ofdomestic power and energy resources to meet the growth in demandprojected to exceed the capacity of the existing facilities in 1984. TheOlkaria Geothermal and Expansion Projects were the least cost means ofadding to the existing generating plant to achieve these objectives. Afurther objective of phase II of the OGDP was to strengthen the powerindustry in Kenya through provision of funds for the training of staff atall levels. The 1987 Power Sector Master Plan further demonstrated thatgeothermal power would continue to play an important and growing role inmeeting Kenya s long-term power demand at least cost.

3.3 Phase I of the OGDP provided for drilling of additionalwells both north and south of the existing producers in order to try anddelineate the shape and size of the productive area of the Olkaria steamfield to a greater extent than was possible with the well spacing patternexisting at the time. A Bank loan of US$9.0 million (which includedabout US$5.0 million in monies saved from the Gitaru Hydroelectric PowerProject, LN-1147-KE) was used to finance the purchase of an additionaldrill rig, related accessories and ancillary equipment and suppliesnecessary to drill production wells and for consultants for the drilling.

3.4 Phase II of the OGDP consisted of the construction of anelectric generating station comprising two 15 MW units with associatedauxiliaries and other necessary civil works, together with deep wellsdriven into a geothermal reservoir, some 1300 to 2500 meters below

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ground, to provide the source of steam for the turbine generators in thepowerhouse. The project also provided for construction of housingfacilitiea for operating and maintenance staff, staff training and futurepower development planning.

3.5 Phase III of the geothermal program (the Olkaria GeothermalPower Expansion Project) added a 15-MW turbine and generator to theexisting powerhouse; expanded the system to bring steam from the wellsgenerated under Phase I; extended the cooling tower and other associatedworks; provided technical assistance for project design and constructionsupervision and provided for a detailed study of the geothermal potentialof the site, as well as a study of the least cost development investmentprogram and a feasibility study for the next recommended project.

3.6 A Bank loan in the amount of US$40.0 million (for twentyyears with a grace period of 5 years) together with a CommonwealthDevelopment Corporation, (UK) loan of US$17 million (for 15 yearsincluding a grace period of three years) was provided under phase II ofthe project to the East Africa Power and Lighting Company (EAP&L) theimplementing agency, and was guaranteed by t1 Republic of Kenya. PhaseIII of the project was financed with a Bank loan in the amount of US$12.0million equivalent (for 17 years including four years of grace).

4. Project Preparation, Appraisal and Negotiations

A. Preparation

4.1 The Gitaru Hydroelectric Power Project (LN-1147-KE)completed in 1978, included studies showing the potential of electricitygeneration from the use of geothermal energy. These studies financed bythe Bank and UNDP provided the basis for project preparation. TlhiOlkaria Geothermal Power project was proposed to the Bank in January 1978after the studies undertaken by the Bank/UNDP demonstrated that theOlkaria geothermal field had significant potential for development.

4.2 The Bank helped finance the preparatory drilling under theOlkaria Geothermal Engineering Loan (LN-S-12-KE). The need for theengineering loan arose because wells capable of producing the steamrequired for the generating capacity needed to have been drilled beforethe Bank could proceed with the appraisal of the project. Given theuncertainties in geothermal well reservoir engineering, drilling andtesting of the wells was considered the only reliable way to gauge theextent and productivity of the Olkaria steam field.

4.3 Drilling geothermal wells posed a certain number of risksand problems in applied engineering. Geothermal reserve estimation as arelatively new field was characterized by a level of unreliabilityincluding risks related to the sustained volume of steam output,temperature and pressure variations and the success rate in the drillingof production wells. While application of existing oilfield techniquesand equipment was routine, special attention had to be paid to thed:stinctive characteristics of geothermal fields or drilling costs andthe number of lost and abandoned holes could arise alarmingly, andprejudice the economics of the project.

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4.4 Under the engineering loan, drilling at Olkaria to developsteam production capability commenced in March 1978 with the assistanceof consultants from New Zealand (GENZL). The contract with GENZLstipulated that the company would provide specialized technicalassistance in a supervisory capacity. This stipulation was consistentwith EAP&L's strongly held view that it purchase its own rigs and developin house drilling expertise using its own staff. Self-sufficiency indrilling was considered a logical and necessary step in the process oftechnical development.

4.5 Drilling operations under the engineering loan encounteredsome problems, but as of July 1979, produced enough steam from completedwells to justify purchase of the first 15 MW unit.

B. Appraisal

4.6 At the appraisal stage (September 1978), the major issue waswhether to include the second power unit for which financing would berequired in mid-1980. There was some concern about the prudence ofcommitting financing for the second power unit so far ahead of tspossible utilization given the uncertainties associated with geothermaldrilling.

4.7 There was agreement that if the 'bulk' of the steam requiredfor the second power unit was verified before the project was presentedto the Board (around September 1979), then the project would include bothpower units. There was considerable debate, however, over what *bulk'meant -- that is, what petcentage of the project's steam requirementswould actually have to be proven before the generating equipment could bepurchased.

4.8 The Loan Committee queried a project disbursement conditionwhich required 802 of the steam for the two generating units to be provenbefore the second 15 MW unit could be purchased. In essence this meantgoing ahead with the financing of the second unit when effectively lOOZof the first unit's steam requirements were proven but only 6O0 of thesteam required for the second unit. It was agreed (after consultationswith the Energy Department) that commitment of funds for the second unitwould be conditional upon proof that it met 70Z of the steamrequirements. Since almost 2-1/2 years would elapse between the time ofplacing the order and commissioning of the unit, it was consideredreasonable to expect that continued drilling of production wells wouldprovide for the additional 6 MW of steam needed for the second unit.

4.9 Not all Bank energy specialists, however, agreed with the'70? go ahead' with at least one calling for proof of at least 1252 ofthe steam requirement at full load, in order to allow for well repairsand workovers, production declines etc.

4.10 The Olkaria Geothermal Expansion Project was appraised inFebruary 1982. Progress on phase II (Loan 1799 KE) of the OGDP hadproceeded satisfactorily and with cast savings. EAP&L had requested Bankassistance for the supply and installation of a third 15 MW steam drivengeneration unit at the Olkaria site. Since further drilling was requiredfor such an expansion to prove steam availability for the third unit andprovide a reserve capacity, EAP&L requested utilization of the cost

savings (about US$4.0 million) under Loan 1799 KE to continue itsdrilling program uninterrupted. The Bank viewed continuation of thedrilling of production wells as a longer-term objective of the Olkariageothermal development program. The continued drilling also allowed forthe most cost effective use of the existing equipment.

C. Negotiations

4.11 Negotiations were held in Washington from September 4-10,1979 for the Olkaria Geothermal Power Project, but were suspended onSeptember 10 when agreement could not be reached on the financialcovenant related to the rate of return for the combined operations of thethree power companies in Kenva and the Kenyan delegation withdrew fromnegotiations. (The three companies, KPC, the East A'rican Power andLighting Company, (!'kP&L) and the Tana River Development Company, (TRDC)were bound together by common management and majority ownership).

4.12 The Bank's proposal in the documents presented to the LoanCommittee was that a minimum annual rate of return of 6.52 on averagerevalued net fixed assets in operation should be earned by the companieson a combined basis. During negotiations, the Kenyan delegation proposedinstead a phased and reduced rate of return covenant.

4.13 During internal negotiations, the Kenyan delegationindicated that the Government was in the process of undertaking a studyof the impact of the fuel price increases on the Kenyan economy andanalyzing the methods by which the effects of such increases could beabsorbed. They felt that Government should complete this study beforepassing on the recent fuel price increases to the consumer. In addition,the Chairman of EAP&L explained that the most recent tariff increasesimplemented in January 1, 1979, on the recommendation of the Bank,changed the entire tariff structure and the tariff increases rangedbetween 5-852. The largest increases of up to 852, were imposed onhousehold users of electricity in the medium and upper income levels.The delegation explained that they would face serious problems in gettinga newly elected Government (October 1979) to pass on an additional fuelsurcharge so soon after assuming power.

4.14 After the departure of the Kenyan delegation, furtherdetailed analyses were undertaken by the Bank to determine theimplications of the Kenyans' proposal. On the basis of these analyses,and after further negotiations in Nairobi, it was agreed that thecompanies should achieve a 62 rate of return for the 1980 financial year.Further, the Kenyan delegation's proposal for a rate of return of 72 in1981 and 1982 and 82 thereafter was accepted. It was noted that on thebasis of the delegation's revised projections of fuel requirements, theachievement of the 6? rate of return did not require the imposition ofany tariffs or fuel surcharge in 1980.

4.15 On January 22, 1980, the Executive Directors of the Bankapproved a loan of US$40.0 million for the Olkaria Geothermal PowerProject.

4.16 The tariff issue, although ultimately agreed, strainedrelations on both sides. The Bank's insistence on the desirability ofapplying the fuel cost surcharge was perceived by the Kenyans as a lack

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of trust on the Bank's part on the Government's determination to maintainsound financial policy for the power sector. The policy statements madeby high ranking Kenyan officials were intended to reassure the Bank oftheir it .xtions. The Bank, for its part, was concerned that the KenyaGovernm. was not committed to the principle that increases in the costof fuel hould be passed on to the consumers by the power companies.This skepticism was based, at least in part, on the fact that in 1979,despite the high increase in fuel costs, the Kenyan Government failed totake timely action to pass these increases on to the consumers.

4.17 The Olkaria Geothermal Expansion Loan was negotiated withoutmajor issues in September 1982.

5. Project Implementation

5.1 At the end of phase II, the Olkaria Geothermal Power Projectwas in compliance with all project loan covenants though there wasintermittent non-compliance during the course of project implementation(see below). By 1982, the physical components of the project (the two15-MW units) were in normal operation generating almost 32MWcontinuously.

5.2 With the completion of the 2nd 15 MW geothermal unit in 1982and the continued drilling program at Olkaria, sufficient steam wasavailable to install a third 15 MW unit at Olkaria. The justification foran additional generation plant arose from the need to provide securityagainst power and energy shortfalls towards the end of 1985 given delaysin completing the Kiambere Hydroelectric Power Project (LN 2359-KE)before 1986. Although the Olkaria Geothermal Power Expansion Project wassigned September 1983, it did not become effective until April 1984. Thedelay was due to certain tax exemption requirements of the EuropeanInvestment Bank and the need for approval of the Guarantee Agreement byGovernment. Erection of the third unit under the expansion project wassuccessfully completed on May 17, 1985 fairly close to the SAR estimateof March 1985.

A. Financial Performance

5.3 The tariff issue quickly resurfaced under the OlkariaGeothermal Power Project and it appeared in early July 1980 that therewould be non-compliance with the rate of return covenant. In the periodJanuary - April 1980, Kenya underwent a severe drought which resulted inreduced output from the hydroelectric generating plants. During thisperiod, EAP&L's operating cost increased not only because of greater fuelconsumption, but because of the higher fuel cost, since oil prices hadalso increased. EAP&L considered a general tariff increase necessary,both to maintain the financial viability of the power companies and tomeet the rate of return covenant agreed with the Bank. On June 18, 1980,however, the Cabinet reviewed and rejected the proposal for a surcharge.

5.4 On July 7, the Bank was advised that the GOK had approvedfor EAP&L to apply the oil cost adjustment formula with immediate effect,to achieve the desired minimum 6? rate of return for 1980. However, byAugust 18, (one day before the cutoff date of effectiveness) the Bankstill had not received from Kenya satisfactory evidence to establish that

EAP&L had adjusted its tariff to a level sufficient to ensure that thethree power companies could reasonably be expected to earn a rate ofreturn of 6Z in 1980 on their consolidated average revalued net fixedassets in operations as required by the project. Accordingly, theterminal date of effectiveness was postponed to November 19, 1980.

5.5 On September 16, 1980 KPC advised the Bank that theGovernment would exempt KPC from income taxes. With this reduction inoperating expense, together with a fuel oil surcharge of KSh. 0.139 perKWh applied to billings after August 1, 1980, KPC forecasted achieving arate of return of 62 on the combined assets of the three power companies.A review of the financial forecast by the Bank, however, showed that inarriving at net operating income, the annual depreciation charged was ona historical cost basis rather than on a revalued basis as required bythe Olkaria Geothermal Power project agreement. When the appropriateadjustment was made, the rate of return for 1980 was about 5.3Z. TheBank accepted this ROR, but stipulated that the method of computation ofthe ROR prescribed by the project agreement be applied in future years.

5.6 EAP&L earned rates or return of 112 and 7.8% on revaluedassets in 1981 and 1982 respectively which were above the 7x requiredunder the Loan Agreement. This satisfactory position was achieved bytimely adjus.ments of tariffs which averaged 0.578 and 0.626 shillingsper kWh in 1981 and 1982 - well above the appraisal estimates of 0.536and 0.583.

5.7 EAP&L's billing and collections were efficient with averageoutstanding accounts receivable equal to 66 days of sales at the end of1982 and 82 days at the end of 1983. The higher figure for 1983 waspartly due to the timing of the June 1, 1983 tariff increase which causedthe year-end accounts receivable to increase proportionately at a higherrate than the total sales revenue for the year.

5.8 The proj3ct was in non-compliance with the rite of returncovenant in 1983 and 1984. The GOK rejected an average tariff increase of8 Kenya cents per kWh which would have resulted in ROR on the averageconsolidated net plant in operations of the three power companies of atleast 8Z.

5.9 In 1985, the GOK implemented a 12 Kenyan cent tariffincrease (with no objection from the Bank). This tariff revisiongenerated sufficient funds to cover operational, capital expenditure anddebt service requirements for the years 1985 and 1986. However, therevisions resulted in lower than covenanted rates of return on fixedassets (about 6Z vs. covenanted 8% for 1985, and about 5% vs. covenanted10% for 1986). The lower ratee were mainly due to higher depreciationcharges and asset base compared to the appraisal estimate since noallowance for exchange fluctuation wes provided for in the revaluationindex applied at the time of appraisal. EAP&L's billing and collectionof sales continued to be satisfactory.

5.10 A study of the power industry's future financialrequirements and tariff levels, was being undertaken as part of the KenyaPower Sector Master Plan. This financial study together with the MasterPlan was expected to establish the economic cost of supplying electricity

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in Kenya and would provide a basis for determining future tariff levels.A decision was taken by the Bank not to push for further tariff increasesuntil the Master Plan was completed.

B. Procurement

5.11 One of the issues which arose under the Olkaria geothermalprojects was the prudence of requiring KPC to do worldwide advertising inaccordance with World Bank guidelines for well-head equipment, steampipes, final separators etc.. Geothermal equipment is at the cuttingedge of technology and the number of reliable equipment suppliers withproven track records is very limited (probably no more than three or fourcompanies worldwide). KPC maintained that adjudicating bids from anumber of unproven companies was time consuming and unproductive. It wasfelt that whatever cost savings might be obtained by using equipment froma lesser known company (one not on the American Petroleum Instituteschedule, for example) would be more than offset if the equipment failedin the well hole and had to be drilled out at a drilling cost of aboutUS$10,001 per day. Accordingly, under the follow up Bank financedgeothermal development project, the Geothermal Development and EnergyPreinvestment Preject (CR KE-1973), provision was made for scientificequipment, workshop tools and equipment and drill equipment to beprocured under contracts awarded through limited international biddingprocedures.

5.12 As in other projects in Kenya, the three Olkaria geothermaldevelopment projects suffered from lengthy and complicated procurementprocedures. Delays of 9-12 months to obtain import permits and licensesfor materials were not unknown. Slow clearance of spare parts andsupplies through customs and subsequent delays in delivery of the same tothe drilling site resulted in drilling equipment and crew leftunnecessarily idle.

C. Project Costs

5.13 Actual project costs for the Olkaria Geothermal EngineeringLoan totaled US$21.3 million equivalent compared with the appraisalestimate of US$15.5 million. The foreign exchange cost of the project atUS$8.4 million was below the appraisal estimate of US$S'.0 million.

5.14 Actual project costs for the Olkaria Geothermal PowerProject totaled US$76.5 million equivalent compared with the appraisalestimate of US$89.0 million equivalent. Expressed in Kenyan currency,these costs are above the appraisal estimate, but expressed in US$ theyare about 14Z lower. This was because the mid-1983 rate of exchange (atKsh 13 = US$1) was about 73% higher than the rate at appraisal (Ks 7.5 =US$1). The foreign exchange cost of the project at US$44.4 million wasbelow the appraisal estimate of US$48.6 million.

5.15 Actual project costs for the Olkaria Geothermal PowerExpansion Project tallied with the appraisal estimate of US$12.0 million.

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D. Consultants and Contractors

5.16 Very early in the Olkaria Geothermal Project (September1980) KPC had become less satisfied with the performance of the mainconsultant on the project. A number of oversights and omissions hadoccurred, and while, not major, design errors had caused extra work forall parties. For example, the houses in the operator's colony werevirtually complete, and although a road had been built, it was discoveredthat the water supply, sewerage, walkways, and general landscaping aroundthe community were not included in the contract. Also, several of thetender analyses submitted were incomplete such that further informationhad to be requested in order to obtain an accurate assessment.

5.17 There were also problems of a more technical nature. Thecooling water-loop had been designed to run between pH 3 and 4, (closerto 4), but since start up, the pH had oscillated between 2.5 and 3 withmost of the values around 2.7, causing corrosion which no one thought ofestimating much less controlling. The pH problem festered for 2 yearswith Olkaria reporting it to KPC Nairobi which in turn reported it to theconsultant who responded after some delay.

5.18 The most serious engineering problem encountered during thecourse of the three projects was leakage from the seal pit of Unit I. InSeptember of 1981 after only two months of operation, Unit I was takenout of service to investigate this leak. Between September 1981 andDecember 1982, the loss of generation because of the seal pit problem wasconsiderable, reducing the load factor over the period from 82 to 522.Although the cause of the leak was eventually determined (displacement ofthe water-bar during the pouring of the concrete) and repaired, KPCattributed the origin of the problem to lack of construction supervisionby the contractor. While there may well be disagreement over thisassessment, it is important to note that the contractor did make therepairs substantially at its own costs.

E. Training

5.19 After getting off to a slow start, the projects' trainingcomponent picked up momentum and met its objectives in terms of numberstrained. In 1980, apart from training of 480 technicians at localpolytechnic and training schools, 19 KPC staff received short-term (2weeks to 6 months) training abroad by attending courses in geothermal,hydro, power system, electronics and computers. During 1981, 1982 and1983, 490, 553 and 460 staff respectively were trained, the majority intechnical and craft apprenticeships, but over 90 were enrolled inuniversity programs and 70 participated in local management courses.

F. Moi South Lake Road

5.20 Funding of improvements for the Moi South Lake Road wasdiscussed for several years between KPC and the Bank. The road is aprivate KPC owned spur from the public road system to the Olkariageothermal field running along the south side of Lake Naivasha andserving [PC as well as a hotel and some agricultural properties. [PC, inthe course of developing Olkaria, improved the road so that heavyvehicles could pass, but the road was never brought up to modern

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standards with a continuous tarmac. KPC through mid-1987 repeatedlyasked the Bank to reallocate funds under the geothermal projects for roadimprovements. Twice the request was formally rejected by Bank managementon the grounds that Kenya had at its disposal undisbursed and uncommittedfunds under existing highway projects, i.e. that the Moi South Lake Roadshould be funded out of highway loan funds. KPC viewed the Bank'sposition as inflexible bordering on dogmatic, arguing that while the roadwas of utmost importance to KPC and geothermal development, it would beafforded a much lower priority by Kenya's roads department who would takea countrywide view. From the Bank's point of view the issue was settledin late 1987 when the Bank agreed to fund the road under the GeothermalDevelopment and Energy Preinvestment Project (Cr. 1973 KE) then underpreparation and now under implementation. In Kenya, it has taken thebetter part of two years to settle the various engineering, supervisionand maintenance responsibilities between KPC and the Ministry of PublicWorks. Currently the roads contract is in the bidding stage, withimplementation expected to begin later in 1990.

G. Technology Transfer

5.21 One question which emerged under the projects (and remainsto some extent unanswered) is what is the best way to transfer technologyin the highly technical area of geothermal development. The Olkariageothermal development projects succeeded in focusing attention anddebate on this question without yielding a conclusive answer.

5.22 Although there are many approaches to geothermaldevelopment, the debate centered on essentially three models. Under thefirst model, the power company buys its own drilling rigs (as KPC didunder phase II of OGDP) and uses contractors to supervise drillingactivity until such time that local personnel have developed thetechnical expertise to undertake it themselves. Under the second model,the power company would contract out for drilling in which case thecontracting firm would use its own rigs and technicians. In the thirdmodel, the development of the steam fields would be left altogether toprivate investors who, owning the steam, would sell it to the powercompany. In the United States, for example, site of the world's largestgeothermal development program, steam field development, maintenance ofwells etc. is generally left to investors (usually oil companies). Thepower companies focus on electricity generation and let investors assumethe risks associated with drilling wells. Under the OGDP, the questionof which of these development models (or their variations) to use was thesubject of considerable debate between the Bank and KPC.

5.23 KPC has always been very keen to purchase its own rigs anddevelop in house drilling expertise as part of a technology transferassociated with geothermal development. By contrast, geothermal (andpetroleum related) drilling is routinely subcontracted to specializeddrilling companies. Over the years and up to mid-1987 numerous,sometimes controversial and even antagonistic discussions have takenplace between KPC and the Bank. The Bank, citing poor drillingperformance by KPC through mid-1987 and industry practice elsewhere, --strongly recommended contract drilling. KPC, citing legitimateobjectives of technology transfer and the build-up of local expertise,insisted on force account drilling. As a result of this discussion, KPCin 1987/88 completely reorganized its line management for drilling

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operations. A drilling manager, three drill rig supervisors andspecialized materials handling, engineering, and mechanical experts weresubcontracted with a foreign petroleum firm. Within a few months KPC'sdrilling performance improved dramatically and has since compared veryfavorably with international performance standards. In its latestgeothermal operation in Kenya, the Bank has acknowledged the now provenviability of KPC's geothermal drilling operation, funding both a seconddrill rig as well as drilling materials for KPC. This is appropriategiven the size of Kenya's geothermal program i.e. about 10 wells per yearfor the next 20 reservoirs. However, significant levels of contractdrilling will continue to supplement KPC's capacity, particularly withrespect to exploration drilling in new areas, where cutting edgeexpertise and equipment are necessary for risk containment.

H. Environmental Impacts, Occupational Safety and Health

5.24 Due to the nature of emissions and the actual small size ofthe geothermal field, the condition of the environment was generallyconsidered acceptable. Care was taken to design the facilities tominimize the danger from the hydrogen sulphide gas which escaped from thewells. There were no pits or basements in the powerhouse which couldallow the heavier-than-air H2S to collect and create a hazardoussituation. These gases were vented from a stack 50 feet high, at anelevation sufficient to provide adequate dilution of noxious gases atground level.

5.25 Erosion was not a problem under the project given theundulating terrain and there was no trace of erosion visible around thewells and around the plant.

5.26 Drilling with mud and drilling with air were both practicedat Olkaria. Final disposal of drilling wastes produced no problems andhad not contaminated the aquifer.

5.27 Information and/or statistics were not available on theseverity and frequency of accidents in the project area.

5.28 Living conditions for workers left much to desired. Theworkers compound was just upgraded huts with only one source of waterfor the whole village and no sewer collection whatsoever. Although thiswas not part of the project, a reasonable argument could be made forhaving included Bank financing to improve the quality of life for atleast part of the workforce.

5.29 Allegations have been made by some local horticulturefarmers that geothermal development was responsible for their lower cropyields, but this has been denied by KPC. An environmental impact studyof all aspects of countrywide geothermal development is currently beingundertaken under the Geothermal Development and Energy PreinvestmentProject, CR KE-1973.

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I. Extension of the Closing Date

5.30 At the close of the Olkaria Geothermal Power Project, US$7.5million remained undisbursed. Of this balance, EAP&L (or the Kenya Powerand Lighting Company as it was renamed) had committed about US$3.0million. KPC requested and was granted approval by the Bank to extendthe project closing date for one year to December 1984 in order to usethe uncommitted loan funds (US$4.5 million) to import additional drillingsupplies, services and equipment.

5.31 A second extension of t};e project closing date to December1985 was approved by the Bank so that KPC could complete commitmentsassociated with $3.5 million in unused funds. The remaining funds wereused for additional works connected with drilling, purchase of spareparts, training equipment and mobile labs.

5.32 A third extension was approved by the Bank because a numberof final payments had not been made. These were payments for connectingwell 26, the retention money for road construction and final payments forspare parts on order that had yet to cleared by customs. The loan wasclosed in January of 1987; the undisbursed amount of US$1,295,039.48 wascancelled as of the same date.

5.33 The Olkaria Geothermal Power Expansion Project was extendedby one year to March 1986 to utilize residual funds of about US$3 millionfor the construction of a road extension for the project.

6. Project Results

6.1 Under the projects, drilling for steam production wellsproduced satisfactory results and the construction works proceededsubstantially according to schedule and within cost estimates.

6.2 In March 1981, the Bank accepted reservoir development dataensuring steam supply for at least 80Z of the plant capacity (consistentwith an earlier stipulation) and gave the go ahead for proceeding withprocurement of the second 15 MW unit which was a loan condition. Thesecond 15 MW unit was commissioned on November 30, 1982 about 3 monthsahead of appraisal schedule and with savings in cost. Overall inspectionof units 1 and 2 in 1984 found the main equipment in generally goodcondition. The turbine rotors were found in almost new condition aftertwo years of intensive operation. Output data on steam production wellsshowed adequate steam production for the two units in operation and alsoenough steam for the third unit under the subsequent expansion projectcompleted in March 1985.

6.3 By December 1985, all three units at Olkaria were performingwell. The availability and reliability of the plant was very high. Theplant load factor was 94.25Z and availability 93.71Z. The plant was ingood condition and the maintenance program had been properly planned andexecuted. The remaining works in the expansion project, (connection ofwell OG-26 to the main steam system and road connection from camp tosite) were completed in September 1986.

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7. Bank Performance

7.1 The Olkaria Geothermal Power Project and its follow upExpansion Project comprised the first geothermal program operating on acommercial basis in Africa. As has been noted, geothermal reservoircapacity estimation was a relatively new field characterized by a numberof risks requiring careful management. The Bank took precautionary stepsto minimize these risks. For example, the engineering loan was financedin order to identify wells capable of producing the steam required forthe plant's generating capacity before proceeding with project appraisal.Only when the drilling operations proved satisfactory was advancecontracting permitted and then encouraged to avoid delays in theconstruction of the power station and to allow sufficient time for themanufacture, shipping and installation of the projects' highlyspecialized equipment. The Bank in its dialogue with KPC played aconstructive yet firm role in encouraging sound tariff policy andfinancial performance. It also periodically monitored the environmentalimpact of the Olkaria geothermal projects and assisted KPC in definingthe scope of various engineering and economic feasibility studies andmonitored their progress. Overall, the Bank played a positive role inthe implementation of the two geothermal projects particularlyconsidering the highly technical nature of the projects and the fact thatthe Olkaria intervention represented the Bank's first venture intogeothermal exploration, drilling and development in Africa.

8. Lessons Learned

8.1 Given the uncertainties and risks associated with geothermalreserve estimation, it was particularly important under the Olkariageothermal development program to find an appropriate way of sequencingthe Bank's investment. The Bank's three step approach (beginning withthe preparatory drilling under the Olkaria Geothermal Engineering Loanand followed by the construction of two power units under the OlkariaGeothermal Power Project and a third power unit under the follow upexpansion project) implemented on time and without cost overruns supportsthe wisdom of this approach. (paras. 3.3 - 3.6)

8.2 To be sure, financial covenants serve a useful purpose asthey provide the only leverage for introducing financial discipline. TheBank has long been committed to the principle that increases in the costof fuel should be passed on to the consumers. While maintaining thisposition under the Olkaria geothermal projects, the Bank also had tolearn balance - that is to be firm in its insistence on sound financialpolicy while at the same time being sensitive to the hard politicalrealities that confronted KPC particularly around the tariff issue.(paras. 5.3 - 5.10)

8.3 The Bank learned (and is still learning) to balance theborrower's strong desire to acquire new technology as rapidly as possibleagainst the implicit financial risks of doing so. (paras. 5.21 - 5.23)

8.4 The National Power Development Plan, prepared under thejoint BanklUNDP ESMAP program has shown that geothermal generation is theleast cost form of energy available in Kenya by a significant margin.Based on operating and investment data from the existing geothermal unitsat Olkaria as well as the geothermal industry elsewhere, the unit cost in

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Kenya for energy generated by geothermal steam is estimated at aboutUS$0.036/kWh. This is 20-40 percent lower than electrical energy fromother sourcesl. The Olkaria geothermal development projects havedemonstrated that geothermal power can have a role in least cost powerdevelopment under certain conditions (as is the case in Kenya) wher.electrical energy from other sources is expensive, the wells yieldreasonable and sustained levels of power, and the field is reasonablyclose to the national grid and center of demand.

1 Unit costs are estimated at US$0.043/kWh for the lowest cost hydroproject and at US$0.06/kWh for coal-fired steam projects, the lowest costconventional thermal energy.

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PROJECT COMPLETION REPORT

REPUBLIC OF KENYA

THE OLKARIA GEOTHERMAL ENGINEERING PROJECT,THE OLKARIA GEOTHERMAL POWER PROJECT

AND THE OLKARIA GEOTHERMAL POWER EXPANSION PROJECT(Loans S-12-KE, 1799-KE, and 2237 XE)

PART II. BORROWER'S SUMMARY

1. Introduction

1.1 Topics in this summary are grouped under the headingsgeneral, contractual and engineering although some necessarily overlap.The thought behind this summary is that it is most important that theexperiences encountered during the engineering of Olkaria East should beused to the advantage of other geothermal projects at Olkaria orelsewhere in Kenya.

1.2 Before detailing what may be contentious topics when considered inisolation it is perhaps worth mentioning that the challenge ofconstructing and commissioning the first geothermal power plant in Africawas met by all participants with enthusiasm and excellent cooperation wasmaintained between the client, contractors and consultants throughout theproject period albeit there were many "healthy* arguments and differencesof opinion.

2. General

2.1 Drilling. It is perhaps invidious to mention well-drillingperformance in this report as the authors. Merz and McLellan inassociation with Virkir Consulting Group took no direct part in drilling(although they advised on geoscientific matters and administered thedrill supplies contracts). The poor rate of drilling and consequentslowness in proving steam production was the predominant reason for thedelays in placing the main engineering contracts for the successivephases of the development of Olkaria East.

2.2 Site Access. It is impossible to quantify the effect on theproject of the appalling state of the access road to the site but it musthave been considerable. The South Lake road east of the Safariland Lodge

1 Part II is a condensed version of the summary chapter of KPC'sProject Completion Report submitted to the Bank. It highlights from KPC'sperspective many of the technical issues that arose under the Olkariageothermal development projects.

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turn off was (and still is) basically a murram road with sections ofbroken tarmac and outcrops of rock; depending on the season the road isdusty, pot-holed, muddy or flooded.

2.3 Several lorries lost their loads; turbine components andswitchgear panels were damaged ai.d a consignment of cooling towermaterial fell into a ravine. Vehicle breakdowns attributable to theconditions of the road were frequent and caused high maintenance costsfor contractors. Severe discomfit and loss of time was experienced bymany personnel on many journeys.

2.4 Contractors were aware of conditions when they tendered forwork and they coped as best they could, to the extent of effecting roadrepairs themselves and even plating the road for heavy loads such as the75 ton generator transformer; on the other hand they always thought thatthe provision of a better road must be imminent.

2.5 The benefit to be gained by ensuring good access as a firstproject priority can not be overemphasized.

3. Engineering

3.1 Problems encountered with the seal pit were the only reallysignificant failure on the project, from a construction engineering pointof view.

3.2 In September 1981 after only two months running it wasnecessary to take No. 1 Unit out of service to investigate a leak fromthe seal pit which was causing movement of the seal pit; there wasconcern that continued leakage could undermine the foundation.

3.3 The cause of the leakage was eventually found to be due tothe displacement of water-bar during pouring of the concrete.

3.4 The loss of generation because of the seal pit wasconsiderable, reducing the Load Factor over the period September 1981 toDecember 1982 to 52?.

3.5 Summarizing, the problems with No. 1 Seal Pit were due topoor construction implying inadequate supervision by the contractor whowas contractually responsible (and who effected the under-pinning andrepairs substantially at his own costs). The supervision problem alsoreflects on the consultants' starf and it is important to ensure that theconsultants' supervision is sufficiently extensive to meet therequirements of sensitive operations such as placing water-bars; toensure such supervision could increase substantially the cost ofsupervisory services.

3.6 Before the specifications for No. 3 unit were issued a greatdeal of attention was given to the cooling arrangements to be adoptedand, particularly, whether or not the principle of the barometric legshould be abandoned in favor of the more straightforward condenserextraction pump. It was finally generally accepted that the barometricleg principle was, in fact, the best arrangement and, further, that thedesign of No. 1 seal pit was perfectly satisfactory but perhaps demandedtoo much skill or care from the workmen placing concrete.

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3.7 For No. 3 unit, therefore, a concrete pit was designed thathad more straightforward construction requirements and a facility toobserve leaks quickly and easily and rectify them and to prevent any suchleaks from having detrimental effects on the load bearing capacity of thefoundations.

3.8 These construction modifications were achieved and the No. 3seal pit has been proved to be totally satisfactory.

3.9 Cooling Water Acidity. An unusual, though not unique.feature of the geothermal steam from the Olkaria field is that ammoniagas is almost absent. The circulating cooling water, which is condensedgeothermal steam, is therefore acidic (due to sulfuric acid resultingfrom the oxidation of hydrogen sulfuric gas) with the pH settling at 2.9.The water is of course, highly corrosive especially to mild steel andconcrete.

3.10 Therefore to withstand the water acidity stainless steel hasbeen used for the cooling water pipework and pumps and for lining thecondenser. The concrete cooling tower basis and seal pits are protectedby epoxy paint. The present condition of the plant appears to vindicatethis decision.

3.11 There was some concern regarding discoloration and apparentpitting on the outside of the stainless steel cooling water pipes; theseapparent defects became noticeable a few months after erection of thepipes. After investigating several possible causes it was concluded thatthe faults were due to scuffing by or embedding of iron other thanstainless steel; in several cases the marks of wire slings could beidentified. The pits were ground out and buffed and carefully monitoreduntil it was concluded that the faults were non-malignant.

3.12 Environment. The three possible nuisances of noise,hydrogen sulphide gas and waste water are all adequately dealt with atOlkaria East.

3.13 The wellhead and main silencers are very effective; hydrogensulphide ground level concentration are well within the internationallyrecommended maximum level; and natural filtration waste water into theground is easily achieved.

3.14 Prior to engineering the third unit consideration was givento erecting a large single chimney to accommodate the gaseous dischargesfrom the ejectors of all three units but measurements showed that thiswas completely unnecessary though recent comments have been made byoperating staff about the occasional smell of H2S.

3.15 Wellhead Equipment. During the design stages of Unit 1there was some acrimonious discussion regarding the wellhead equipmentdesign and more recently comparisons have been made with plant atWa!rakie on the grounds that the New Zealand equipment is cheaper.

3.16 The Wairakei plant was also engineered by Merz and McLellan,but that was in the nineteen fifties and many lessons have been learntsince.

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3.17 The primary object of the wellhead equipment and pipelinesis to discard water and to convey steam from the wellhead to arrive atthe turbine stop valve with a minimum content of solids and moisture; theperformance of the machines at Olkaria for long periods without foulingof the turbines compares very favorably with other geothermal fieldmachines and is evidence that the primary object was achieved.

3.18 Cooling Tower Grid Failures. After about a year ofoperation of No. 2 unit several sections of the fill of the cooling towerbecame adrift and fell into the cooling tower basin; the incident did notmaterially affect the operation of the unit but was disconcertirg. Thecause was attributed to the blockage of water distribution nozzles in thetop "basin" of the tower; water then streamed over the side of the basinsubjecting the fill to much higher impingement forces than they couldstand.

3.19 KPC fitted replacement grids and instituted a more frequentnozzle cleaning routine.

3.20 The end sheets and draught guide baffles of No. 1 tower arealso showing some signs of "wear" and corrosion type attach and it isapparent that improvements could be made to tower designs for futureprojects.

3.21 Corrosion of Outdoor Equipment. Corrosion of some isolatorcontacts occurred shortly after commission unit 1 and it was establishedthat the contacts in question had been plated with wrong material. Thecontractor replaced them and no further incidents have occurred.

3.22 Also on the outdoor switchgear, stranded earthing cableswere attacked; these were satisfactorily replaced by links.

3.23 For Unit 1 the wellhead fencing was galvanized which provedto be unsatisfactory. For Units 2 and 3 the specification was changed toplastic coating.

3.24 Silencer Erosion. Most silencers have suffered some damagefrom erosion of internal surfaces of concrete. This does not impair theefficiency of the silencer but produces unsightly leakage marks on theoutside and requires periodic repair work.

3.25 It is clear that future designs should incorporate fairlyextensive additional stainless steel sheet shielding.

3.26 Pipe Tracks and Slope Protection. During the last six yearsseveral short sharp storms have caused wash-outs, particularly aroundpipe supports, in spite of the precautions taken to provide what wasthought to be adequate water run-off drainage.

3.27 It would be uneconomic to provide complete protectionagainst very rare occurrences, such as the rainfall of 76 mm in 45minutes on 17 January 1987, when it is necessary to rely on being able torepair quickly any damage caused. On the other hand, it is clear thatthe optimum degree of protection was not provided at Olkaria East and thesubject warrants more attention on future developments.

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3.28 Similarly, further attention is required to protect fieldinstruments from the effects of lightening strikes which have occurredwith a frequency that was not envisaged.

3.29 Circulating Water Pump 'B'. Of the eight cooling waterpumps positioned on the seal pit roofs only one has given any trouble butthe alarm it created was considerable, it being suggested that the pitroof resonant frequency was that of the pump running speed.

3.30 In fact the pump had been damaged by taking in a lump ofwood; a first attempt to repair the damage did not succeed but this wasnot generally accepted until the pump had been tried in a differentposition and a replacement pump ran smoothly iin the position formerlyoccupied by the faulty pump.

4. Contractual

4.1 Scope of Main Plant Contracts. The principle thought behindthe decision for the main plant for Phases One and Two to be provided intwo packages was that a package should be large enough to attract stronginternational competition. An alternative would have been to have hadseveral small supply contracts with a separate erection ccntract.

4.2 The alternative was not adopted mainly because it wasrecognized that the predominant part of the plant required specializedknowledge not only for its design and manufacture but also for itserection and commissioning; any attempt to divide responsibility for theultimate success of the plant would be liable to lead to difficulties.

4.3 On the other hand, the principle behind not adopting thealternative did not appear to be fully accepted. If it had been fullyaccepted the authorities concerned, particularly IBRD, would haveacknowledged that what the plant required could have been supplied byonly a very limited number of contractors throughout the world.

4.4 Particularly for Contract OG-01 (for well-head equipment,steam pipes and final separator) worldwide advertising in accordance withIBRD Guidelines was an unnecessary expense and the adjudication oftenders, also in accordance with the Guidelines, was almost certainly notthe best way to obtain the most favorable terms for KPC.

4.5 It might be better to invite tenders from the few capablecontractors and, having selected a contractor, then negotiate furtherwith him to refine his design nearer to optimum conditions.

4.6 This is a topic that might be considered to deserve athorough airing before embarkation on a further similar project.

4.7 Finally, the drilling supplies contract invitations have notreceived an enthusiastic response and this subject also deserves a re-appraisal. For the future, we recommend that KPC goods be delivered tothe site in order to avoid the problems of customs clearance and inlandtransportation. Further, it should be noted that contractors too areunwilling to accept anything other than CIF because they also wish toavoid the problems.

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PART III

STATISTICAL ANNEXES

KENYA PONER III OLKARIA GEOTHERMALLasn 17?9-4E

Actual as IAppraisal Appraial

Basie Date Shoet Estimate Actuel Estimate

Total project cost (USS million) 89.0 76.5 86.0X

Loan amount (USI ml lion) 40.0 J8.6 96.X1

Projoct Datest Eti mato Actual

Id.ntlfication Jan. 17, 1978 Jan. 17, 1978

Appraisal Jun. 1978 Nov. 1978

N.gotlations Jul. 2, 1979 Sep. 10, 1979

Board Approval Sep. 6, 1979 Jan. 22, 1980

Loan/Guarantee Agr_ment Sep. 23, 1980

Effoctiven es Apr. 1980 Nov. 18, 1980

Loan Closing Date Doc. 31, 1983 Jan. 31, 1987

Cumulativo Disbursemnts 190 1961 1982 1m8 1984 1986

Appraisal estimates (USS million) 7.0 24.0 81.0 38.0 40.0 40.0

Actual (USS million) 2.5 23.6 29.9 82.5 37.7 3886

Actual as X of appraisal 8SX 98X 97n 86 94X 97X

Date of final disbursemnt Jan. 17, 1986

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KENYA POWER IV OLKARIA EXPANSIONLoan 2237-KE

-------------- _----------------------__-__-----------___-_------__---___-----__----

Actual as XAppralsal Appraio1l

Basic Data Sheot Estimate Actual Estimate-------------------------------------.----------------------- __--------------__----

Total project cost (US$ million) 41.6 0.03

Loan amount (US3 million) 12.0 7.6 62.6X

______________________..____________________________________________________________

Project Dotes: Actual--------------------------------------------------------------- __------------__----

First mentioned In file Apr. 16, 1982

Identification Nov. 1982

Appraisal Jan. 198a

Negotiations Sep. 20-23, 1982

Board Approval Feb. 22, 1983

Loan Agreement date Sep. 22, 1983

Effecti-eness Apr. 27, 1984

Closing Date Mar. 31, 1986

Cumulative DIsbursements 1983 1984 1985 1986 1987------------------------------------------------------------------- __--------__----

Appraisal estimatos (USS million) 0.5 7.0 10.5 12.0 12.0

Actual (USS million) - 4.6 6.0 7.6 0.0

Actual as X of appraisal OX e6s 48X 62x OX

Date of final disbursement Oct. 4, 1987

Amount Cancelled USS 4.6 million

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KENYA POWER III OLKARIA GEOTHERMAL (Loan 1799-KE)KENYA POWER IV OLKARIA EXPANSION (Loan 2237-KE)

Financial Indicators:------------------------------------------------------- __--------------------

1984 1984Estimate Actual

_____________________________________________________________________________

Debt Service Coverage 2.3 1.8

Debt/Equity Ratio 42/58 41/69

Accounts Receivables (days) se 69

Financial Rate of Return 1/ 7.9X 4.61

-------------------------------------- __-------------------------------------

Performance Indicators: 1/_____________________________________________________________________________

1984 1984Estimate Actual

------------------------------------------------------------- __--------------

Productlon (GWh)Hydro - Masinga 166 168Hydro - Other Hydro 1394 1306Uganda Imports 252 216

Sub-total 1612 l666

eothermal 200 233Other Thermal 162 176

2194 2094Units used on works 28

Total Production 2194 2068

System Losses (GWh) 329 291

i of Produetion 15.0X 14.1X

Sale (GWh) 1866 1776

Annual Growth Rate of Sales (X) 6.0% 6.9X

System Maximum Demand (MW) 368 360

System Load Factor 66 68

No. of consumers (000) 196

No. of staff 5668

No. of consumers per staff 33

Average Tariff (KSh/KWh) 0.703 0.700

1/ Kenya Power III Project (Loan 1799-KE)

Project Results:_______________

The project has been successful since output data on steam production wells showedadequate steam production of the two unite In operstion and also enough steam forthe third unit under the subsequent *xpenslon project completed in March 1985. Theavailability and reliability of the plant was very high with a load factor of94.26X and availability of 93.711.

Note: The above Information is not available for the Engineering Loan.

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KENYA POWER III OLKARIA GEOTHERMAL (Loan 1799-KE)KENYA POWER IV OLKARIA EXPANSON (Loan 2237-E

Use of Bank Resource.Staff Inputs (Staffw-eks)

Stage of Project Cycle 1976 1977 1978 1979 1980 1981 1982 1983 1984 1986 1986 1987 Total

Through Appraisal 0.7 2.3 13.9 16.9

Appraisal through BoardApproval 61.2 49.1 7.6 2/ 117.9

Board Aporoval ThroughEffectiveness 4.3 4.3

Supervision 1/ 8.1 3.s 1.7 4.3 3.0 2.7 0.3 23.6

Total Staffweeks 0.7 2.3 13.9 61.2 53.4 8.1 11.1 1.7 4.3 3.0 2.7 0.3 162.7

1/ Project supervised in conjunction with other parallel projects.2/ Power IV Olkaris Expansion (Ln 2237-KE)

Note: No time recording information Is available for the Engineering Project (Loan S-12-KE).

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MISSIONS

Days PerformanceMonth/ No. of in Rating Types of

Stage of Project Cycle Year Persons Field Spec4ilization Represented Status Problems

Power III Olkeria Geothermal (Loan 1799-KE)…-------------------------------------------------- - ---------- __ ------------- __ ---------------------------

- Preappraisal Aug 78* 2 Power Engineer

- Preappraisal Oct 78* 1 6 Drilling Operations

- Appraisal Nov 78 3 22 Power Engr/Fin. Analyst

Appraisal through BoardApproval Feb 79 1 2 Power Engineer

Board Approval ThroughEffectiveness Apr 80 1 6 Power Engineer

Jul 80 1 5 Power Engineer 1

Supervision Mar 81 1 9 Financial Analyst 1

Sep 81 1 S Power Engineer 1

Feb 82 2 6 Power Engr/Fin. Analyst 1

* Also supervising Engineering Loan (S-12-KE).____________ ___________ ___________ ___________ --- - ------------ - ----------___ ___ _ ___ ___ __

Power IV Olkeria Expansion (Loan 2237-KE)-------------------------------------------------------------- ___-------------__---------------------------

- Preappraisal Nov 82 2 10 Fin Anal/Drilling Engr } In conjunction with} supervision of Loan 1799-KE.

- Appraisal Jan 83 3 6 Fin Anal/Geologits }

-- - - - - - - - - - - - - - - - - - -____ ___ ___ ___ ___ ___ ___ ___ ____ ___ ___ ___ ___ ___ ___ ___ ____ ___ ___ ___ ___ ___ ___ ___ ___

Power III Olkaria Geothermal (Loan 1799-KE)/Power IV Olkaria Expansion (Loan 2237-KE)

Supervision Jun 83 2 6 Power Engr/Fin. Analyst 1

Feb 84 2 6 Power Engr/Fin. Analyst 1

Nov 84 3 5 Power Engr/Fin. Analyst/Econ. 1

Jun 85 2 6 Power Engr/Fin. Analyst 1

Nov 85 2 6 Power Engr/Fin. Analyst 1

Feb 86 2 6 Power Engr/Fin. Analyst 1

Jun 86 2 4 Power Engr/Fin. Analyst 1 Tariff increaseimplemented inin Feb 88 wasrevoked forlegal reasonsin July 88

Dec 86 2 4 Power Engr/Economist 1

.__________________-_--___-_---------- --- ____-------------- ------------- _ -- -- ______---------------

- 26 -

KENYA POWER III OLKARIA EXPANSIONLoan 2237-KE

--------------------------------------------------------------- __

Estimate_________________________________________________________________

Project Costs (USS millions) Local Foreign Total--------------------------------------------------------------- __

UMchanical A Elect. Equipment 8.1 11.8 19.9

Substation 0.3 0.7 1.0

Civil Works 1.4 1.6 3.0

Road 0.9 0.9 1.8

Water Supply 0.3 0.3 0.6

Housing 0.4 0.4 0.8

Engineering 0.8 1.8 2.8

Studies 0.7 1.9 2.6

Contingencies 2.3 3.1 5.4-----------------------------------------------------------------

Total Project Cost 16.2 22.6 37.7-----------------------------------------------------------------

Interest during Construction - 3.8 3,6-----------------------------------------------------------------

Front End Fees on Bank & CDC Loans - 0.3 0.3-----------------------------------------------------------------

Total F;napncing Required 15.2 26.4 41.6---------.-------------------------------------------------------

----------- __----------------------------------------------------

Estimate-----------------------------------------------------------------

Financing Plan Local Foreign Total--------------------------------------------------------------- __

Kenya Power Co. Ltd. 9.0 2.8 11.8

Commonwealth Dev. Corp. 2.8 6.2 9.0

European Investment Bank 3.4 6.4 8.8

IaRD - 12.0 12.0

Total Financing 15.2 26.4 41.6_________________________________________________________________

- 27 -

KENYA POWER III OLKARIA GEOTHERMALLoan 1799-KE

----------------------------------- __---_____----------_____--

Estimate---------------------------------------------------------------

Project Costs (USS millions) Local Foreign Total---------------------------------------------------------------

Preparatory Works(including Loan S-12-KE) 6.S 9.0 15.6

Unit 1 15.7 17.2 32.9

Unit 2 16.9 16.7 33.8

Training 0.3 0.4 0.8

Studies 0.8 1.1 1.7

------------------------------------ _----____------------------

Total Project Costs 40.0 44.3 84.3

Interest during Construction 0.4 4.3 4.7------------------------------------------------------.--------

Total Financing Required 40.4 48.8 89.0---------------------------------------------------------------

------------- __---------------------__---____------------------

Estimate---------------------------------------------------------------

Financing Plan Local Foreign Total---------------------------------------------------------------

Government of Kenya 8.0 8.0

Kenya Power Co. Ltd. 21.0 - 21.0

Commonwealth D-v. Corp. 11.4 8.8 20.0

IBRD 1/ - 40.0 40.0

Total Financing 40.4 48.8 89.0----------------------------------------- _-_--_----------------

1/ Includes the amount required to refinance disbursementsunder the USS 9.0 million Olkarla Geothermal Engineering ProjectLoan (5-12-KE).

- 28 -

KENYA OLKARIA GEOTHERMAL ENGINEERING PROJECTLoan S-12-KE

Estimate Actual Actual as…______________ -__---------------------------------_________--___---- ------------------- Percent

Project Costs (US3 millions) Local Foreign Total Local Foreign Total of Apr.

Drill Rigg A Compressor - 1.0 1.0 1.1 2.8 3.9 390X

Rig Accessories 0.6 1.0 1.6 0.4 0.6 1.0 67X

Equipment & Supplies 2.8 6.0 7.6 6.4 2.6 9.0 118X

Civil Works 0.4 - 0.4 3.3 0.6 3.9 976X

Local Transportation 0.6 - 0.5 - - - ox

Consultants A Drill Operators 0.6 0.8 1.8 0.7 1.8 2.6 200%

KPC Staff 0.6 - 0.6 1.0 - 1.0 200X

Sub-total 5.0 7.8 12.8 12.9 8.4 21.3 167W

Price & Physical Contingencies 1.5 1.3 2.8 - - - 0%

Total Financing Required 8.6 9.0 165. 12.9 8.4 21.3 137S

Estimte Actual Actual as…--------------------------------------------- ---- …------------ …---------------------------… Percent

Financing Plan Local Foreign Total Local Foreign Total of Apr.

Government of Kenya 68. - 6.' 12.9 - 12.9 198X

IBRD 1/ - 9.0 9.0 - 8.4 8.4 93S

Total Financing 6.5 9.0 15.5 12.9 8.4 21.3 137X

1/ This loan amount was used primarily for drilling activities.

- 29 -

KENYA POWER III OLKARIA GEOTHERMALLoan 1799-KE

Estimate Actual Actual as--------------------------------------------------------------- --------------------------- PercentI8RD Financing Local Foreign Total Local Foreign Total of Apr.

Preparatory Works - 9.0 9.0 - 11.2 11.2 124%

Unit 1 - 14.2 14.2 - 11.8 11.8 83%

Unit 2 - 14.4 14.4 - 14.4 14.4 100X

Training - 1.4 1.4 - 1.2 1.2 86%

Unallocated - 1.0 1.0 - 0.0 0%

- 40.0 40.0 - 38.6 38.6 97%

KENYA POWER III OLKARIA EXPANSIONLoan 2237-KE

Estimate Actual Actual as…………P_____________c________ __ ____------------- Percent

IBRD Financing Local Foreign Total Local Foreign Total of Apr.

Mechanical A Elect. Equipment - 8.8 8.8 - 6.0 8.0 88%

Road - 1.1 1.1 - 1.0 1.0 9S%

Studios - 1.9 1.9 - 0.2 0.2 11%

Front End Fee - 0.2 0.2 - 0.2 0.2 88X

Total I8RD Financing - 12.0 12.0 - 7.5 7.5 62%--------------------------------------------------------------- -------------------------------------

- 30 -

STATUS OF COVENANTS_______________.___

KENYA POWER III OLKARIA COETHERMAL (Loan 1799-KE)KENYA POWER IV OLKARIA EXPANSION (Loan 2237-KE)

Reference Description Compliance Comments

Loan Agreement - 1799-KE - KPC Requirement:

3.01 (c) Use development surcharge for 1979-82 Yesto finance the local currency costs

3.02 (a) Continue to employ engineerlng Yesconsultants

3.02 (b) Continue to employ engineering experts Yes

3.04 (c) Prepar- a completion report within six Yesmonths after the closing date

5.01 (c) Prepare financial statements for each Yes Statements up to datefiscal year and a proforma consolidatedstatement for KPC and TROC

6.01 (d) Have accounts and statements audited and Yes Superseded by Section 6.01 (c)provide to Bank within 5 months after Loan Agreement 2237-KEclose of fiscal year

5.02 Not incur debt unless consolidated net Yes Identical to 5.02 Loanrevenues are less than 1.6 times debt Agreement 2237-KEservice

5.04 Not place orders, award contracts or Yesincur debt relative to the second 16 MWgenerators until evidence has beenfurnished to the Bank that steamrequired for generation of 24 MW ofpower is available.

Guarantee Agreement - 1799-KE Government Requirements-----------------------------------------------------

2.01 (a) Pay by July 1, 1980 remaining Yesinstallments of KSh 20 million tocomplete KSh 60 million share capital

3.03 Take action for issuance of station Yeslicense by December 31, 19e0

Project Agreement - 1799-KE - KPLC Requirement----------------------------------------------

2.02 Employ engineering, management and other Yesexperts to train staff

2.03 (b) Provide Bank with report on geothermal Yesdevelopment

2.03 (c) Prepare a completion report within six Yesmonths after the closing date

2.04 Exchange views with the Bank on training Yesand geothermai development

4.01 Earn a consolidated net operating income Yes Earned 7.2X in FY82.yielding a rate of return of not less Superseded by Section 5.01than 6% in FY80, 7% in FY81 and FY82 and Project Agreement 227 ' E8% thereafter

4.02 (a) Pay a development surcharge of Kc2 per KWh Ye

4.02 (b) Provide additional funds If needed. YesObligation to provide additional fundscontinues as long as consolidated KPC andTRDC earns less than 8-1/2X rate of return

- 31 -

STATUS OF COVENANTS

KENYA POWER III OLKARIA COETHERMAL (Loan 1799-KE)KENYA POWER IV OLKARIA EXPANSION (Loan 2237-KE)

Referenco Description Compliance Comments

4.03 (c) Prepare proforma statements for Yesconsolidated operation

4.03 (d) Have accounts and financial statements Yes Identical to Section 4.03 (d)audited and provide to Bank no later than Project Agreement 2237-KEsix months after end of fiscal yoer

4.04 Not incur debt unless consolidated Yes Identical to Section 4.04revenues are loss than 1.6 tims debt Project Agreement 2237-KEservice

KENYA ENGINEERING LOAN (S-12-KE)

The major covenant of this loan is the requirement for Beneficiary to ensure that no otherexternal debt shall have priority over the loans in the allocation, realization ordistribution of foreign exchange held under their control or for their benefit. This wascomplied with.

I BR D 16389ET -- 1 36° 400 JULY 1982

S U D A N K E N YA-- t OLKARIA GEOTHERMAL POWER/ - -_ EXPANSION PROJECT

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A Diesel Power Slalions \* SteOm Power Stalions Tsavo

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e 220 kV Transmission line(UnderConstruction1 rh.,4W 1- t

o.------- e 132 kV Transmission line(Under Construction) '

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c @ 33 kV Distribution lines

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