African nations have a challenging course to chart over coming decades. Rapid growth and rising populations are ratcheting up energy demand. However, the continent is also facing a future of floods, droughts, and other extremes driven by climate change. Economic success will require not only clean and consistent power supplies, but energy infrastructure that is resilient to climate-induced shocks.
Take Kenya and Ethiopia, two of the largest economies in East Africa. In both nations, many people continue to live without electricity—12.5 million in Kenya and 42 million in Ethiopia. Energy access is set to become even more pressing, with Kenya’s power needs growing 20% faster than GDP and rapid growth in Ethiopia implying a similar rise in electricity demand. Connecting people to the grid is a priority, both for productivity and the welfare of communities.
However, the energy needs of Kenya and Ethiopia are only half the story. Both face significant risks to existing capacity as climate change becomes more acute. Current power sources in Kenya are either carbon-emitting or vulnerable to increased droughts, with 35% coming from thermal sources such as coal, gas, or wood, and another 35% generated by hydroelectric dams. The climate risk in Ethiopia is even higher, with 89% of power hydro-generated.
Already, East Africa is warming at almost twice the rate of the rest of the world, with climate change expected to increase the frequency and severity of droughts. Given these risks, Kenya and Ethiopia need to reduce fossil fuel reliance where possible and diversify energy supplies to hedge against extreme weather.
Amidst increasing demand and climate-related uncertainty, geothermal energy presents an untapped opportunity. Given geothermal energy comes from heat in the Earth’s crust, powerplants can generate electricity consistently throughout the day and without regard to changes in weather or overall climate. Moreover, the consistency of geothermal energy delivers a stable baseload to the grid, ensuring a reliable level of power supply while enabling integration of other, less consistent, renewable energy sources.
East Africa has incredible geothermal potential—15,000 MW or two and a half times the capacity of the Grand Renaissance Dam. However, this potential remains unrealised. In Kenya, only 500 MW is operational, while Ethiopia runs at just 7 MW. This is not because geothermal is unprofitable or overwhelmingly risky. It comes down to the fact that drilling geothermal wells incurs a high upfront cost, meaning project developers and potential investors cannot afford even the low probability that the well will prove unviable.
Finance is key to unlocking East Africa’s geothermal potential. This begins with the region’s insurance sector, for whom the high cost, low probability profile of geothermal projects is precisely suited. By underwriting risks associated with initial set up, insurers can provide reassurance to potential investors, freeing private capital to flow into geothermal ventures.
The rewards from mobilising the insurance sector are considerable. An underwriting facility set for launch by Parhelion, a specialist in energy and climate risk finance, and backed by the UK government’s flagship financial sector programme in Africa, FSD Africa, is alone projected to increase geothermal capacity in Kenya by 20% and in Ethiopia by 500%. These increases in generation would prevent 515,000 tonnes of CO2 from entering the atmosphere per year while bringing electricity to 5.25 million people. The facility also demonstrates the economic potential of geothermal, with 2,600 jobs forecast for both East Africa’s insurance and energy sectors.
Underwriting geothermal projects would also help reposition East Africa’s insurance sector to capture a greater share of value. Currently, complex projects look to the international market for insurance, where these is both available capital and the right expertise. These global insurers then contact local counterparts as intermediaries, enabling them to meet the regulatory and practical requirements of operating in the region but channelling the premiums out of Africa. By engaging with projects directly, African insurers can go from middleman to main player. Moreover, by pooling exposure into an underwriting facility, these businesses can reduce their shared risks while still accessing the attractive returns from a profitable, reliable, and high potential geothermal sector.
Geothermal is not a golden bullet for East Africa’s energy challenges. However, it can provide a stable and reliable platform to underpin economic growth and the broader transition to clean power. Moreover, by building its capacity to underwrite geothermal projects, domestic insurers can expand their capabilities to de-risk other part of Africa’s fast-growing renewables sector. An energy revolution is coming to the region—it just needs the backing to light the spark.
Thomas Wiechers is Assistant Director, Risk at FSD Africa and Julian Richardson is Founder of Parhelion