NAIROBI (Reuters) - Kenya Electricity Generating Company (KenGen) said on Tuesday it will sign a contract next week with a consortium to build its 280 megawatt (MW) Olkaria IV geothermal plant meant to be operational in 2014, as it pushes to diversify its power sources.

At the same time, KenGen Managing director Eddy Njoroge said an extra 202 MW would be injected into the national grid next year from a mix of thermal power, renewable energy and rehabilitation of an existing hydropower dam.

The total cost of Olkaria IV -- an extension of Olkaria I and II plants that already produce a total 115 MW -- is $1 billion, he added.

"The contract is for 27 months which means it comes on board around January 2014," Njoroge told Reuters on a sidelines of carbon credit workshop.

The consortium comprising Japan's Toyota Tsusho Corp and South Korea's Hyundai Engineering & Construction, is expected to begin construction of the geothermal plant by the end of the year.

The plant is funded jointly by the Kenyan government, World Bank, Germany's Development Bank KfW, European Investment Bank, Japan International Corporation Agency and French Development Agency, AFD and KenGen.

Kenya is the first African country to drill geothermal power, tapping the vast steam energy is the country's Rift Valley region.

The country has potential to produce 7,000 MW and is targeting production of at least 5,000 MW of geothermal power by 2030.

Development of cheaper geothermal power means the country has to rely on less thermal power that is prone to the vagaries of high international prices, and rain fed hydroelectric dams.

High electricity and fuel costs are among factors that have pushed Kenya's annual inflation rate to 18.91 percent in October, the 12th consecutive month rise.

Njoroge said that at present, the country's grid had quite a narrow margin between demand and supply of electricity.

"The peak(power) demand right now is about 1,200 MW. Our total installed capacity is about 1,400 MW. But when you really do the effective capacity because of hydro, it comes down to about 1,100 MW," he said.

"That is part of our problem. That we are too hydro-dependent in terms of our generation and every time there is a drought, and even now in spite of the rains that we are having, our dams are still not full so we then tend to increase our thermal generation."

KenGen has projects registered to receive carbon emissions credits under the United Nations' Clean Development Mechanism, and says it has already received revenues under the programme for its Olkaria II plant.

With the 2012 expiration of Kyoto Protocol, a legally binding pact on carbon emission offset, analysts fear funds for carbon credits for emissions-cutting projects in developing nations may dry up.

But Njoroge was optimistic that clean energy projects in Africa funded by individual developed nations would not be affected.

"Kyoto protocol was in 1997, we are now talking about 2012 There is a lot more awareness about climate change and need for mitigation for climate change," he said.

"So even if Kyoto Protocol as designed does not proceed there are a lot of other agencies and countries like Japan, Germany, that are willing to proceed, and put up funds to be able to help in terms of CDM projects."

(Editing by George Obulutsa and Keiron Henderson)