A stable and expanding energy supply is central to Kenya’s ambition to establish itself as an industrialised middle-income country, as set out in its Vision 2030 development strategy. The nation is fortunate in its energy mix: hydro, geothermal, solar and wind energy already play a significant role in power generation, and – particularly in the case of geothermal – there is room for further expansion. Recent oil finds, meanwhile, may soon feed into the segment and establish Kenya as a hydrocarbons exporter for the first time. For the private sector, the promulgation of the new Energy Bill and Mining Act promise to open up these closely related sectors to increased domestic and foreign investment.
Kenya is not yet a hydrocarbons-producing country, but the 2012 discovery of commercial oil reserves in Lokichar – a settlement in the heart of the arid Turkana Basin – is set to change that. The UK-based Tullow Oil is leading the exploration effort in the Lokichar fields, in partnership with Delonex Energy, Maersk Oil and Canada’s Africa Oil. More than 750m barrels of recoverable reserves have been discovered in the South Lokichar Basin, and exploration activities have increased in scope to include a number of new areas, such as the Kerio Basin and the North Turkana Basin.
In late 2015 Tullow submitted a draft field plan to Kenya’s government to develop nine fields in the Lokichar Basin, with an anticipated production of 60,000-100,000 barrels per day (bpd). Given the abundance of hydro and geothermal energy sources, the nation’s recently discovered hydrocarbons resources represent a significant export opportunity for the country. However, realising this potential is an expensive and time-consuming undertaking. The distance between Lokichar and Lamu – where Kenya is building East Africa’s largest port at a cost of KSh2.5trn ($24.5bn) – is approximately 780 km. In 2016 Total chose a Uganda-Tanzania pipeline route, rather than Kenya, to transfer production from its East African fields. Total re-committed to the Lokichar-Lamu pipeline in 2018 by acquiring Maersk’s stake in the basin’s oil blocks. Tullow, which had previously expressed strong support for the Kenyan pipeline project, now expects to obtain a final investment decision from the government in 2019, with first oil production scheduled for 2021.
The slow development of the necessary infrastructure and legal framework has delayed commercial exploitation of Kenya’s oil resources. The amount of royalties levied on hydrocarbons was finalised by the three major tiers of government in 2018. The draft bill that was passed by Parliament in 2016 was not signed by President Uhuru Kenyatta, prompting the introduction of a bill in February 2018 with regional governments receiving 15% of total royalties, local communities just 5% and the remainder allocated to the national government. However, in June 2018 the Energy Bill was approved by members of Parliament, with 20% of royalties given to regional governments, 5% to local communities and 75% to the national government.
For the Turkana region the stakes are high. Although the arrival of Tullow in the region has already produced tangible benefits, including classrooms and dormitories, village water points, graded roads and a 40-bed referral hospital, the area faces significant challenges, such as a literacy rate of just 20%, against a national average of 70%, and elevated levels of child mortality. For the government the oil reserves represent a valuable revenue stream to tackle a stubborn fiscal deficit.
With oil exploration comes the possibility of natural gas finds, both associated and non-associated. Kenya’s interest in gas derives from its need to find a cheaper alternative to diesel, which is used to run its power plants during droughts, or closures for maintenance, of the hydro and geothermal facilities that generate the bulk of its energy. Natural gas is a relatively cost-efficient input, similar in price to geothermal power, and a domestic find would reduce the nation’s gas import bill, which is expected to increase upon the completion of a 700-MW gas-fired plant in Mombasa. The July 2015 discovery of a major onshore gas resource in neighbouring Tanzania has raised hopes of similar finds in Kenya, and in 2017 excitement mounted regarding a potential discovery in the county of Kajiado.
However, in February 2018 tests conducted on samples sent to the US showed that the gas discovered during a water drilling operation was biogenic, and not petroleum or gas. Nevertheless, the possibility of commercial gas extraction in Kenya remains. Preliminary studies in Hadado in Wajir county, for example, have shown a high likelihood of natural gas reserves, while the UAE’s Zarara Oil & Gas began drilling exploration wells in April 2018 on Lamu’s Pate Island and plans to construct a 50-MW power plant.
Kenya used to operate a refinery at the Port of Mombasa, operated by Kenya Petroleum Refineries Limited (KPRL), which processed Murban light sour crude from Abu Dhabi, as well as a number of other heavy Middle Eastern crude grades. The 35,000-bpd facility was shut down in 2013 and is currently being used as a storage facility, but the prospect of exports from the Turkana oilfields has revived the government’s interest in the midstream sector. In 2016 it indicated that the Mombasa refinery would be fed by Turkana.
However, the government has since ruled out using the refinery, saying instead that it would establish a new facility at Lamu. Such a development would be integrated with the Lamu Port Southern Sudan-Ethiopia Transport (LAPSSET) project, a transportation corridor set to integrate a number of East African economies. As part of the ambitious LAPSSET scheme, a crude pipeline will be established between Lamu and Isiolo – a town in central Kenya – and from Isiolo to South Sudan’s capital of Juba. A second product oil pipeline is to connect Lamu with Ethiopia’s capital Addis Ababa, via Isiolo and the border town of Moyale. The crude and product pipelines are expected to cost $3bn and $885m, respectively, and both are to be developed using a public-private partnership (PPP) model.
A number of institutions play key roles in the further development of the sector. The Ministry of Energy (MoE), previously the Ministry of Energy and Petroleum, is responsible for overall strategy, producing and developing energy policy, overseeing oil and gas exploration, regulating minerals sector development and promoting renewable energy. For the foreign firms entering the sector, however, the principal point of contact will likely be the National Fossil Fuels Advisory Committee, which forms part of the MoE and is responsible for negotiating with investors regarding licences for exploration and production activity.
The National Oil Corporation of Kenya is involved in overseeing the entire supply chain, covering upstream oil and gas exploration, midstream petroleum infrastructure development and the downstream marketing of petroleum products. Looking to the midstream and downstream, KPRL was set up by Shell and BP in 1959 to serve the East African region with a supply of oil products refined at Mombasa, while Kenya Pipeline Company is a government-owned body whose primary purpose is to deliver petroleum products from Mombasa to the interior. In terms of policy, the Petroleum Institute of East Africa is the professional body of the industry, playing an important role in the drafting of regulation and standards. Lastly, the Energy Regulatory Commission (ERC) is a significant downstream actor due to its role in the regulation of retail prices of petroleum products, although its principal responsibilities relate to energy regulation and oversight.
In order to avoid bottlenecks in investment and development, the regulatory framework which governs the energy sector is undergoing a major overhaul. The new national Energy Bill completed its consultation phase in February 2018 and was passed by the National Assembly and referred to the Senate. The bill’s passage would introduce changes to almost every segment of the market. Downstream, Kenya Power would lose its virtual monopoly over electricity distribution and retail, as the government seeks to improve service quality through liberalisation. Other proposals in the bill include granting Kenya’s 47 counties the power to establish energy conservation building codes to suit local conditions, along with the creation of an energy fund to smooth volatility in petrol and electricity prices.
A significant alteration to the country’s taxation legislation will also affect the energy sector in late 2018. Although heavily taxed, petroleum has been exempted from Kenya’s value-added tax (VAT) schedule since its introduction in 1990. However, as part of its deal to secure a precautionary loan from the IMF, the government has agreed to remove the exemption and apply a 16% VAT on petroleum – a move which is expected to increase the price of a litre of petrol in Nairobi from KSh107.92 ($1.06) to KSh125 ($1.22), and diesel from KSh96 ($0.94) to KSh111 ($1.09). In mid-September 2018 a litre of super petrol cost KSh122.76 ($1.20) in Mombasa and KSh125.59 ($1.23) in Nairobi. Prices for diesel in the two cities were KSh112.65 ($1.10) and KSh115.47 ($1.13) per litre, respectively.
“The fact that petrol prices are controlled by the ERC on a monthly basis makes the fuel supply market stable,” Joseph Muganda, managing director for Shell’s African distributor and marketer Vivo Energy, told OBG. According to some estimates, the change in the tax law, which will also see aviation fuel brought under the VAT umbrella, could earn the National Treasury an additional KSh71bn ($695.6m) per year.
The Kenya Electricity Generating Company (KenGen) is the largest power-producing company in Kenya, accounting for about 75% of electricity capacity. Currently, the firm is 70% owned by the state. The company’s 15 hydropower plants, with an installed capacity of nearly 820 MW, provide 51% of KenGen’s total generation capacity. Five geothermal plants, with a combined capacity of nearly 534 MW, make up around 32%, followed by another five thermal plants, which provide 253.5 MW, and a wind power plant at Ngong which adds a further 25.5 MW to the system.
While the new Energy Bill may bring about liberalisation, for now the transmission and distribution of the country’s generated power is a state-run affair. The government-owned Kenya Electricity Transmission Company is the single body investing in electricity transmission, while Kenya Power – in which the government has a substantial shareholding – enjoys a near monopoly on distribution. Kenya has an installed generation capacity of 2370 MW and peak demand of about 1770 MW. According to the government’s generation and transmission plan, demand for electricity is expected to grow at around 8% per year until 2020, rising to 9% in 2021 before settling to 7% afterwards.
In the longer term Kenya may add yet another energy source to its already diverse portfolio: in late 2017 the Kenya Nuclear Electricity Board announced that it expects to begin construction of the nation’s first nuclear power plant by 2024. A site analysis is currently under way for the KSh500bn ($4.9bn) mega-project, and the board anticipates that the 1000-MW station will add nuclear energy to the grid by 2027.
As well as expanding capacity, the government’s strategy aims to increase the number of citizens with access to the national grid. Electricity penetration has increased significantly over recent years, from 27% in 2012 to 63% in 2016. This improvement is the result of the Last Mile Connectivity Project, the first phase of which aimed to bring electricity to an additional 1.5m Kenyans by 2017. The KSh13.5bn ($132.3m) initiative, financed by the government and the African Development Bank, targets houses within 600 metres of a transformer and offers them a subsidised connection. The long-term goal of the scheme is to provide universal access by 2020, to which end the government launched the second phase in April 2018.
The private sector is also playing a role in the extension of electricity access. The US-based companies Powerhive and Vulcan have begun to make modest inroads into the retail and distribution market, selling small-scale solar power directly to consumers through mini-grids. Furthermore, in early 2018 the ERC announced that a domestic firm, PowerGen, raised $4.5m, and applied for a licence to generate and supply electricity via solar power and mini-grids. PowerGen currently operates at the Unilever tea estate in Kericho and a number of other off-grid areas, with plans to provide electricity to 50,000 people in Kenya and Tanzania over the next two years. Additionally, in July 2017 the World Bank approved $150m for the Off-grid Solar Access Project for Underserved Counties, which aims to benefit 1.3m people in 14 counties. Solar powered mini-grids are widely viewed as the quickest route to supplying off-grid towns with power.
However, for many consumers solar home systems providers offer a more versatile alternative to mini-grid technology. Companies such as M-Kopa, Sun King, Mobisol and Azuri offer consumers a battery package capable of running three or four lights, a TV or sound system, and a laptop. Payment models vary, with most clients paying monthly by a mobile platform for three years, before taking full ownership of the equipment. Many of these operations are regional. Azuri, for example, has a presence in Kenya, Tanzania, Nigeria, Uganda and Zambia, while Mobisol raised $25m in 2017 to upgrade off-grid solar projects in East Africa. Lastly, M-Kopa secured an $80m off-grid solar project in 2017, the largest in Africa that year.
Solar energy is playing a central role in boosting electricity penetration in Kenya. Nevertheless, solar is only part of a much wider renewables industry, which accounted for 87% of the energy mix at the beginning of 2017. In FY 2016/17 geothermal resources accounted for 44% of energy purchased by Kenya Power, while hydropower contributed 33%. Of the two, geothermal power from the Rift Valley holds the most potential. By most estimates the bulk of Kenya’s hydropower resources have been exploited. In FY 2016/17, when the country’s two main water reservoirs, Turkwel Gorge and Masinga, were depleted, Kenya Power reported that its growing geothermal component allowed it to meet demand without resorting to load shedding or the expensive diesel generators reserved for emergency power.
The nation was the first in Africa to tap geothermal power, beginning generation in the 1970s. Nevertheless, it has yet to emulate the success of countries such as Iceland in fully exploiting the technology. Despite its slow start, the growth of the Kenyan industry has accelerated since the late 1990s, when political stability allowed for increased investment. KenGen is currently building a new 140-MW plant, financed by a $400m loan from the Japan International Cooperation Agency and scheduled for completion in 2018.
The country’s Vision 2030 strategy calls for an dramatic expansion of renewable generation capacity, from the current 2341 MW to 23,000 MW, representing growth of 882%. Geothermal resources are likely to play a major role in this sustainability drive. The Geothermal Resources Council ranks Kenya eighth in the world in terms of installed geothermal capacity, and some estimates put the potential of geothermal at 10,000 MW – more than four times the current power generation capacity of the country. However, localised hydropower generation opportunities continue to be developed by some industrial segments.
Tea operations, in particular, have sought to minimise their costs by leaving the Kenya Power national grid and turning to small hydropower stations (SHPs) capable of generating power in the region of 1-2 MW. Tea factories use an average of 0.5 MW to run their operations, spending between KSh30m ($294,000) and KSh65m ($637,000) per year on electricity.
In early 2018 the Kenya Tea Development Agency, a service provider to more than 565,000 small tea farmers, connected seven factories to its SHPs, and stated that it would connect a further 12 by the end of the year. Lastly, wind energy appears set to play a greater role in the energy mix with the completion of the Lake Turkana Wind Power Project in late 2018. The facility is the largest of its type in Africa, with a capacity of 310 MW – sufficient to power a million homes.
Kenya’s mining industry may also provide a useful contribution to energy generation over the medium term. In September 2014 the government opened bids to build, own and operate a coal-fired power station at Lamu, with a consortium including domestic and Chinese interests winning the tender. Concerns regarding pollution and revenue sharing delayed the development of the 1050-MW facility, and some observers have questioned Kenya’s need to generate coal power for the first time when it has such large wind and geothermal sources. However, in June 2018 the ERC confirmed the project would proceed with a capacity around half that of the original design. The government also revealed plans to use a PPP arrangement to build a 960-MW power plant at Kitui, where coal deposits were recently discovered.
The mining sector’s potential input to the energy industry forms only part of its appeal to planners. The government has identified Kenya’s largely untapped mineral resources as an important route to generating revenue. Numerous mineral finds have been recorded and mapped in the country, including soda ash, fluorspar, titanium, niobium and rare earth elements, gold, coal, iron ore, limestone, manganese, diatomite, gemstones, gypsum and mineable CO .
According to the KNBS’s Kenya Economic Survey 2018, between 2014 and 2017 mineral production fell from 1.77m tonnes to 1.54m tonnes; however, total value increased from KSh21.1bn ($206.5m) to KSh23.8bn ($232.7m). In 2016 Dan Kazungu, then-minister of mining, formulated a new 20-year strategy that aims to see mining account for 10% of GDP by 2030, and includes plans for up to 20 new mines. The centrepiece of this strategy was a new Mining Act, which applies to all minerals, with the exception of petroleum and hydrocarbon gases (see analysis).
The new law has been widely welcomed, as it enables increased transparency and accountability. However, the legislation left the difficult question of revenue sharing with local communities to accompanying regulation. As a result, in 2018 the application of royalties and fees requires further changes to the current legislative and regulatory framework.
Complex issues surrounding the distribution of royalties and revenue sharing are likely to persist; pending the implementation of both the new Energy Bill and Mining Act and accompanying regulatory reform. Nevertheless, if fully implemented, the legislation can be expected to provide the necessary framework to support investment and the expansion of both sectors. This would, in turn, generate both new opportunities for the private sector and useful revenue streams for the central and regional governments. Infrastructure growth appears set to receive a major boost from KenGen’s efforts to further unlock the country’s considerable geothermal resources .
Meanwhile, transmission infrastructure appears set to expand, with Kenya Power’s efforts to improve network coverage across the country. Furthermore, having gained a foothold in the generation segment – through the provision of mini-grid systems and SHPs – the private sector is likely set to play a larger role in the areas of transmission and distribution, particularly if the Kenyan government pushes forward with liberalisation in the energy sector.