Kenya to phase out costly power deals under new investment model

Wednesday June 19 2019
Thermal plant

A thermal power plant. The shift to an auction system is an indication that Kenya wants to focus on developing renewable energy. PHOTO | FILE | NATION MEDIA GROUP


Businesses seeking to invest in energy generation in Kenya may soon be able to do so through an auction system rather than the costly power-purchase agreements that are currently in place.

Benson Mwakina, director for renewable energy in the Energy Ministry said that the mechanisms for establishing the auction system as provided for in the Energy Act 2019 are in the final stages of formulation.

“The system involves establishing a demand-supply equilibrium and identifying projects on a need basis before inviting potential investors to bid for their development in an open auction," Mr Mwakina told an energy forum in Nairobi on Tuesday.

Currently, investors come up with power projects, sign power purchasing agreements with the national utility firm Kenya Power and then implement the project.

The proposed policy shift is an indication that Kenya wants to focus on developing renewable energy, where auctioning of projects has become popular, based on its potential to achieve deployment in a cost-efficient and regulated manner.

Under the new law, which came into force in March, entities including the former Rural Electrification Authority, which is responsible for renewable energy has been renamed Rural Electrification and Renewable Energy Agency, while the Energy Regulatory Commission is now the Energy & Petroleum Regulatory Authority.


The chief economist in the Energy Ministry Timothy Gakuo, said the new law has unbundled the energy sector.

“There is a clear cut provision for the integration of county energy plans into the national plan, providing for synergies and complementarity," added Mr Gakuo.

This, he said, is expected to lead to clean, accessible, affordable and available energy for domestic and commercial use, as it will address the real cost of energy through the chain —  generation, transmission, distribution and retailing.

According to George Aluru, the vice chair for the energy board of the Kenya Private Sector Association, the provision of clean renewable energy in the law opens up new opportunities, “especially for private-sector players."

A case in point of just how expensive the current system is, is the planned $2 billion Lamu coal power plant on Kenya’s Coast, which the government approved in 2015 based on lobbying from investors, and which a US-based think tank has termed a “costly error.”

“Building the proposed Lamu coal plant in Kenya, a three-unit, 981 MW facility, would be a costly error for the country, locking it into a 25-year PPA that would force electricity consumers to pay more than $9 billion, even if Lamu doesn’t generate any power, as long as it is available for dispatch,” said the Institute for Energy Economics and Financial Analysis.

IEFA added that the existing PPA would force Kenya to pay at least $360 million in annual capacity charges, even if no power is generated at the plant.

If it comes on stream in 2024, the coal plant will significantly increase the excess power capacity in Kenya to more than 1,300MW, which consumers must pay for without using.

The policy shift by Kenya could encourage other East African nations to follow suit owing to the fact that the region is grappling with excess capacity of 878MW, a quandary that has seen electricity consumers forced to pay for idle capacity, making power costs in the region among the highest on the continent.

Currently, the electricity demand stands at about 3,300MW across Kenya, Uganda and Tanzania, which is way below the installed capacity of about 5,500MW.

According to the International Renewable Energy Agency (IREA), energy auctions have become a popular policy tool in recent years, with the number of countries that have adopted them increasing from six in 2005 to more than 67 by early 2017.

“The increasing popularity of the auction scheme can be attributed to its potential to achieve deployment in a cost-efficient way, and its ability to bring out the real price of the product being auctioned by means of a structured, transparent and most importantly, competitive process,” said IREA.

In Africa South Africa and Morocco are among countries that have adopted the auction system.

Kenya is currently developing a long-term cheap power masterplan — the Draft Least Cost Power Development Plan 2017-2037 —  which proposes the suspension of nuclear energy plans from the power matrix by close to two decades. It also recommends the deferment of the coal power plant in the immediate future because the country will only need coal-generated electricity in 2030. It further calls for the reduction of the contribution of geothermal and hydro in the energy generation mix.

The controversial Lamu coal-powered plant, the 1,000MW nuclear plant and other geothermal, wind, solar and hydro projects are billed to push Kenya’s installed capacity to about 7,500MW by 2030. With demand increasing at a moderate rate of 8.5 per cent per annum, this will result in a huge mismatch of supply and demand, with demand estimated at 4,000MW.

Mr Mwakina said that the government has been forced to freeze the signing of contracts with prospective wind and solar energy investors as the number of applications for power generation projects continues to rise.

Last year, the government received applications for projects to generate over 4,000MW, up from about 1,700MW in 2017.

“What is the use of approving many generation projects whose costs will be passed on to the consumers,” Mr Mwakina asked.

According to the IEFA report, given the significant uncertainty in future electricity demands, Kenya should opt for smaller and more flexible capacity additions.

Such an approach, the report notes, would ensure that Kenya Power and its customers are not burdened with substantial amounts of expensive excess capacity if projected load growth does not develop and also enable the addition of new capacity in smaller increments if needed.

Additional reporting by Xinhua.