Innovative risk finance solutions: Insights for geothermal power development in Kenya and Ethiopia

Geothermal development is on the rise in many regions of the world. However, the high costs of field development, coupled with the high risks associated with resource exploration and drilling, still pose a significant barrier to private sector financing.

Insurance can mitigate the risks to investors and increase flows of private finance to the industry.

A project by Parhelion, a private sector insurance and risk company focused on climate finance, funded by CDKN, aimed to improve the technical capacity of Kenya’s and Ethiopia’s local insurance industries for using geothermal risk mitigation instruments.

A consultative process with relevant stakeholders in these countries yielded insights and recommendations for international, multilateral and bilateral institutions that are looking to support geothermal resource development. The analysis was enriched by E3G’s expertise in analysing climate finance flows.

The study found that international, multilateral and bilateral institutions should:

• Support technical assistance and capacity building, which takes into account the needs of all relevant stakeholders involved within specific country and market contexts.

• Provide targeted concessional finance by taking into account all possible risk mitigation instruments during project development, and by envisioning the leverage of private finance as early as possible.

• Use insurance instruments to target specific, well defined risks: this can offer very high leverage ratios on the use of public funds, and crowd in private sector insurance capital