The country’s utilities sector is in the midst of a rapid transformation, with a host of ambitious new projects expected to alter Kenya’s energy mix for the better, reducing import dependency and slowly ending decades of capacity constraints that have aggravated residential consumers and impeded industrialisation. Renewable energy development will make the most significant impact, as the government moves to capitalise on its considerable geothermal, wind and solar resources, while a series of mid- and long-term policies aimed at achieving universal electrification will see millions in new infrastructure investment, even as the Kenya Power and Lighting Company (Kenya Power) reduces fees and tariffs.
By 2017 the country has an ambitious target of adding 5000 MW to the national grid. The government plans to add 1600 MW from geothermal sources, 1920 MW from coal-powered plants, 420 MW from hydro and 650 MW from wind. Platts reported in February 2015 that a previously planned 700-MW liquefied natural gas plant (LNG) at Dongo Kundu in Mombasa had been delayed by the discovery of gas at Wajir, with a deal to import gas from Qatar also on hold. The government is now considering moving the plant to Wajir and sourcing gas from its own fields.
The government has outlined a significant role for the private sector in these projects, and recent legislative reforms should see the number of independent power plants in the country continue to increase. Investors are expected to move to capitalise on the huge potential for future expansion despite the high initial input costs and an infrastructure deficit that could delay projects.
Decade Of Reforms
Until 1995 Kenya’s electricity sector was operated as an integrated monopoly under the supervision of Kenya Power, which continues to own and operate the majority of the country’s transmission and distribution system, although the market has become increasingly open and liberalised over the past two decades. The country’s historical reliance on hydroelectric generation eventually led to serious capacity constraints, and by 1995 the country had launched a comprehensive restructuring of its energy sector, issuing its first tender for independent power producers (IPPs) in the same year. The first IPPs to launch facilities in the country were IberAfrica Power in Nairobi, which opened a 45-MW heavy fuel oil and diesel plant in 1997, and Westmont, which commissioned a 48-MW barge-mounted gas turbine at the Port of Mombasa in 1997.
The power sector was fully unbundled in 1997 and underwent nearly a decade of structural reform, culminating in the announcement of the Energy Act in 2006. Under the act, the Ministry of Energy and Petroleum (MoEP) is charged with drawing up and creating energy policy, while the Rural Electricity Authority (REA) implements rural electrification schemes on behalf of the MoEP.
Market Structure
In order to strengthen governance and oversight, as well as to attract new investment, a number of major structural changes were introduced in the wake of the Energy Act. The Energy Regulatory Commission (ERC) was created in 2007 to replace the Electricity Regulatory Board and acts as an autonomous, independent sector regulator responsible for licensing and policy recommendations. In addition, it is responsible for approving power purchase and network service contracts and investigating complaints.
More recently, the Kenya Nuclear Electricity Board (KNEB) was established in 2010 to begin the development of a nuclear energy programme. The board’s first move was to establish an industry roadmap that follows guidelines set out by the International Atomic Energy Agency.
New Players
In addition to the ERC, the Energy Act created a number of new state-owned players that are active in the utilities sector. The Kenya Electricity Generation Company (KenGen) was formed as the primary state-owned generating company, taking over Kenya Power assets and today supplying roughly 68% of the country’s electricity. The Geothermal Development Company (GDC) is responsible for geothermal exploration and any related drilling activities.
Kenya Power has retained responsibility for transmission, distribution and retail electricity sales, as well as maintenance and repair duties for the country’s national network, which totals 41,486 km. The Kenya Electricity Transmission Company is tasked with planning, designing, building, operating and maintaining new electricity transmission lines and substations, as well as delivering an estimated 24,000 km of new high-voltage lines of 132 KV and above (see analyses).
Both Kenya Power and KenGen are publicly listed but majority state-owned, while GDC is a 100% state-owned special purpose company currently in the midst of a $2.6bn exploration plan that has already added 280 MW of power, developed by KenGen, to the national grid over the past year (see analysis). GDC is also responsible for drilling production wells and tendering out IPPs in line with the Least Cost Power Development Plan, most notably within the Olkaria and Menengai regions.
New Energy Bill
The sector’s regulatory framework is due for another overhaul in light of capacity constraints and a push for sustainability, and the government released a new working draft of its proposed Energy Bill 2015 in May, after two years of deliberation. Under the new bill, the government will prioritise renewable energy development by creating a number of corresponding regulatory agencies, including the Nuclear Electricity Institute, the Nuclear Electricity Tribunal, the Energy Efficiency and Conservation Authority, the Energy Regulatory Authority, and the Rural Electrification and Renewable Energy Corporation.
Although stakeholders have welcomed the move as a step in the right direction in terms of addressing the role of renewables in energy development, critics point to the fact that a highly fragmented and compartmentalised regulatory framework fails to streamline energy regulation and reduce red tape. Furthermore, any potential energy investor will need to negotiate with both county governments and local communities, in addition to following local content laws (see Energy chapter). Dealing with regulatory reform is an important priority as the country continues to implement devolution, but in the interim period, the possible misunderstandings surrounding the details of some reforms might be a hindrance.
The new energy bill will also end Kenya Power’s monopoly on distribution and retail sales, although some initial changes have already been made in this direction. In the same month as the working draft was published, May 2015, solar micro-grid company PowerHive East Africa became the first firm in Kenya permitted to generate, distribute and sell power to the public. Although PowerHive’s pilot projects currently only connect a total of around 1500 people in Kisii, the company – which relies on battery storage, pre-paid metering and mobile money payments – has been so successful that it is now planning to expand its operations to serve more than 200,000 households.
Supply & Demand
Generation and consumption are both rising steadily in Kenya, with the Kenya National Bureau of Statistics reporting that domestic demand for electricity increased by 3.8% to reach a total of 7768.6 GWh in 2014, while total installed capacity rose by 4.7% to 9138.7 GWh. Although total generation currently surpasses peak demand, dilapidated infrastructure and fragmented connections mean that power outages are a common inconvenience, for both residential and industrial customers, and serve as a major impediment to future economic growth and industrialisation. “Within industries that rely heavily on electricity, for example the cement industry, electricity shortages have directly impacted the cost of finished goods, which makes the country less competitive,” Emmanuel Alenga, a researcher at the Kenya Association of Manufacturers, told OBG. “It is one of the biggest challenges facing our domestic manufacturers,” Alenga added.
Current Mix
While hydroelectric power remains an important power source, accounting for 35.73% of Kenya’s total effective capacity, geothermal energy production was greater in the year ending June 30, 2015, producing 750 GWh more. The decline in hydropower generation over the past decade is in large part due to a lack of available rainfall, while geothermal production has benefitted from being largely unaffected by drought.
The rise of geothermal energy has been rapid, with total production doubling from 2008 GWh to 4060 MWh between 2014 and 2015. Meanwhile, fossil thermal energy accounted for 19.2% of Kenya’s total production. Wind power accounts for just 0.4% of generation in the country, according to Bloomberg, while solar generation still remains limited to small-scale, off-grid projects.
Electrification
Estimates of the total rate of electrification within the country vary widely but in all surveys they fall below 50%. According to figures from the African Development Bank (AfDB), just 32% of the Kenyan population had access to electricity as of 2014, while in mid-2015 Kenya Power indicated that national electrification stood at 47%. The AfDB reported that rural electrification also remains low, at around 19%.
As highlighted by the over-arching Vision 2030 national development plan, which seeks to bolster economic development by improving both electricity access as well as reliability, universal electrification remains a key target of the Kenyan government. Meeting this goal has drawn international as well as domestic support.
So while the biggest impact will be from the Last Mile Connectivity Project (LMCP) initiative, other programmes such as the US Agency for International Development’s (USAID) Power Africa are working closely with local players to support the development of the energy sector by catalysing private sector investments in boosting electricity generation capacity.
Last Mile Project
To this end, the MoEP and Kenya Power have launched a number of critical mid-term initiatives in recent years; for example, the LMCP is intended to connect over 70% of residents to the national grid by 2017 and 100% by 2020. To accurately match supply and demand going forward, the government undertook a survey of the energy needs of the public, manufacturers and new investors. Deputy Prime Minister William Ruto told the media that Kenya Power will implement a nationwide programme to upgrade and construct lines, base stations and transformers (see analysis). According to Ruto, more than 1.1m Kenyans have been connected to the grid since 2013, compared to 2.5m new connections in total between 1922 and 2013.
An additional 300,000 households, or 1.5m Kenyans, are expected to benefit from the LMCP. In order to reach its ambitious target and encourage uptake, the government has also moved to reduce connection fees (see analysis) for low-income consumers using less than 5500 KWh per year, from KSh35,000 ($385) to KSh15,000 ($165).
The government has also targeted adding an additional 5000 MW of power to the national grid by 2017 and 23,000 MW by 2030, largely through the expansion of new private-sector-driven renewable energy projects, although there remains some question as to the feasibility of these goals.
Modernisation
One important element of the LMCP is its second phase, known as the Kenya Electricity Modernisation Project (KEMP), a $262m World Bank-sponsored initiative launched in July 2015. Under KEMP’s initial phase, 50,000 smart meters will be installed in a bid to improve efficiency and reduce theft, while large and medium-sized businesses will benefit from a live line maintenance programme aimed at minimising power interruption for industrial consumers and manufacturers. The World Bank will provide $257.5m for the programme, while Kenya Power will pay $3.5m and the REA will contribute an additional $1m. These programmes have already demonstrated considerable success; in August 2014 Kenya Power announced that it hoped to add a total of 1m new customers to its existing base of 2.8m customers between January and December 2015.
In August 2015, Peter Mungai, general manager of business strategy at Kenya Power, told OBG, “We’ve added 800,000 new customers since January, so if you look at where we are at the moment and the number of months remaining in the year, we’ll do more than our 1m target by December,” Mungai told OBG. “We plan to add an additional 2m customers between now and June 2017, which will allow us to meet our goal of connecting 70% of the population to the grid,” he added.
Renewables
Much of the success of the power sector can be attributed to renewable energy development, most notably geothermal development. Geothermal power has become increasingly attractive to private and foreign investors in recent years, resulting in significant capacity upgrades and a reduction in retail tariffs, although the associated infrastructure costs of new renewable projects continue to pose a problem.
John Odhiambo Majiwa, CEO of Bluesea Energy, told OBG, “Kenya actually has a very competitive tariff regime for renewable energy that encourages investment and offers a significant return on investment. This is why we have seen so many renewable projects taking off in the country.”
IPPs are expected to be the standard model for future renewable energy development, and the government has increasingly targeted foreign investments in drafting its renewable energy policies. Kenya was the first country in Africa to introduce a feed-in-tariff (FIT) system in 2008 with the publication of the MoEP’s FIT policy on wind, biomass, small hydro, geothermal, biogas and solar resource-generated energy. Under the FIT policy, Kenyan off-takers are required to guarantee priority purchase, transmission and distribution of all electricity supplied by small-scale renewable energy projects, with tariffs ranging from $0.088 per KWh for geothermal projects to $0.12 per KWh for grid-connected solar projects.
The FIT policy applies to all wind projects generating between 10 MW and 50 MW, all geothermal projects between 30 MW and 70 MW, and any solar project offering between 10 MW and 40 MW. These tariffs are only offered for the first 500 MW of wind projects, 500 MW of geothermal projects and 100 MW of grid-connected solar projects, while larger renewable projects exceeding aggregate capacity limits can be negotiated on a case-by-case basis under a power purchasing agreement.
More recently, the Kenya Renewable Energy Portal was launched in 2013 to provide easy access to potential investors. The portal is designed to help inform them about the administrative entry requirements and procedures necessary to operate renewable IPPs, in addition to the legal and regulatory framework for such investments.
“By favouring the development of renewable energies, Kenya has been able to bring down the cost of power significantly – by as much as 40% from 2013 levels for some users,” Ben Chunmo, managing director and CEO of Kenya Power, told OBG. “The savings have come largely as a result of the displacement of diesel by wind and geothermal generation, which are less expensive to run.”
Geothermal
Geothermal energy in particular has had a major impact on the utilities sector, with KenGen adding an additional 280 MW of capacity in the past two years. The government plans to increase geothermal generation by 5530 MW by 2030, largely through new independent power projects in the Olkaria and Menengai regions in the Great Rift Valley (see analysis). Recent geothermal additions have already pushed retail tariffs down by nearly 30% since 2013.
“Tariffs have dropped from KSh23 ($0.25) per KWh to about 17KSh ($0.19). For commercial consumers, they have dropped from KSh18 ($0.20) to KSh13.5 ($0.15) on average,” Robert Pavel Oimeke, ERC’s director of renewable energy, told OBG. “We expect tariffs to flatten out around those levels for the next several years,” he added. Infrastructure gaps remain a challenge, however, and high initial capital expenditure requirements will likely prevent further tariff decreases over the medium term. For example, KenGen reports that geothermal exploration wells cost between $10m and $12m to drill, in addition to an estimated $5m in related infrastructure expenses.
“The first phase of exploration is quite expensive because you are drilling high-risk wells, and there are associated new field and heavy infrastructure costs, meaning new roads, fresh water for drilling the wells, staff counts and, in some cases, field laboratory capacity,” Simon Ngure, manager for regulatory affairs at KenGen, told OBG. “There is also a higher risk of wells not being productive in a field that is not well-known, although GDC uses government funds to reduce that risk so that private investors are only drilling in fields where the resources are proven. If the well is dry, the government takes the hit,” he added.
Wind Power
Wind represents another high potential renewables segment, and of the 5000 MW of new capacity targeted for addition to the grid by 2017, the government hopes to see 630 MW generated via wind power. Kenya’s arid north-eastern regions boast some of the best winds in the world for electricity generation, with the government reporting that a wind resource assessment conducted by WindForce in 2013 found that over 73% of the country experiences annual mean wind speeds of more than 6 metres per second.
Although wind power comprises a small portion of the total energy mix, the situation could soon change when a massive new project in the northern Rift Valley region of Turkana takes off in the coming years. In March 2014 the Kenyan government signed a finance agreement for the largest private investment ever recorded in Kenya at the time: the $1bn, 40,000-acre Lake Turkana Wind Project, which is expected to add 300 MW to the national grid. The project is one of the most significant public-private partnerships (PPPs) ever undertaken in the country and, after successfully reaching a financial agreement in December 2014, counts the AfDB, European Investment Bank, Standard Bank, the private UK-based company Aldwych International and a number of European aid agencies as its main investors.
Despite high hopes for the project, The Wall Street Journal reported in May 2015 that it is facing logistical difficulties, not least of which includes having to use smaller turbines for the mills, as the Port of Mombasa cannot handle the 80-metre turbines originally envisioned.
Solar Power
As an equatorial country benefitting from over 3500 hours of sunlight annually in some regions, Kenya’s solar potential is also high. However, apart from China’s June 2015 announcement that it plans to build a 50-MW solar plant in Garissa, the sector’s development to date has been limited mainly to smaller-scale projects in both rural and unconnected urban areas.
In off-grid locations with a high concentration of homes, micro-grid solar models are a more cost-effective solution; for example, the government of Kenya estimates that the cost of connecting a household to the national grid is between $800 and $1000. Personal photovoltaic (PV) solar systems, which provide enough power for an off-grid household (see analysis), cost an average of between $150 and $300. “This is what is allowing us to collect upwards of 90% of dues from our customers. Service control is instant and it’s automatic, and that is really a significant advantage for our business,” Chad Larson, the finance director of off-grid solar provider M-Kopa, told OBG.
Coal
Despite promising strides made in renewables development, the government is also launching a number of new coal-fired power plants in a bid to boost capacity. In May 2015 the government announced it had awarded two new coal blocks in the eastern region to China’s HCIG Energy Investment Company and Liketh Investments Kenya. The deal also includes construction of a coal-fired power plant, although further details have not yet been unveiled. In 2011 the MoEP selected China’s Fenxi Mining Group to develop blocks in the Mui basin, estimated to hold more than 400m tonnes of coal. Fenxi formed a joint venture with local firm Great Lakes Coal Corporation in 2014, with coal mined from the project to be used in the cement and steel industries, and energy generation.
Most significantly in the coal-fired energy segment, a consortium led by Kenyan companies Centum Investment and Gulf Energy won a government tender to build a 1000-MW coal-fired plant in Lamu in September 2014. The consortium has partnered with China’s Huadian Corporation Power Operation Company, Sichuan Electric Power Design and Consulting Company, and Sichuan No. 3 Power Construction Company to launch the plant.
Outlook
Although high capital expenditure requirements remain a challenge to future expansion, an intensifying government focus on increasing capacity, coupled with a host of business-friendly policies, should see utilities remain an extremely attractive sector for investment in the coming years. As electrification rates increase and supply reliability improves, Kenya will also become increasingly attractive to industrial investors, which will in turn provide the demand needed to roll out the country’s long-term energy targets, helping to put it back on track.
Some companies have launched innovative payment platforms in a bid to recoup the costs of their PV units while also maintaining affordability for low-income earners, as is the case with PowerHive and other companies such as M-Kopa. The latter firm, an off-grid solar provider, offers customers the option to pay back the $200 cost of its solar units through mobile payments of KSh40 ($0.44) daily, less than what they would pay for kerosene.
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