Changing generation sources to bring down electricity costs

The idea is simple: increase capacity, use cheaper generation sources for new power plants and this will reduce prices for the end user. The only problem is that prices are actually rising. Questions remain surrounding issues, such as whether the 5000 MW of planned additional capacity can actually be realised in the short 40-month timeframe, whether there will be enough demand to absorb new supply and justify the capacity expansion, and whether the knock-on effect of cheaper generation sources will actually be felt by end users.

Missing The Mark

Geothermal, liquefied natural gas (LNG), coal and wind are the cheaper sources that Kenya is using for its capacity additions by 2017. At the time of publication, the government reported that the 5000-MW target was on track. Davis Chirchir, Cabinet secretary for energy and petroleum, was quoted in local media as saying that the accelerated pace of investment in renewable energy and anticipated power-purchase agreements with independent power producers (IPPs) would help. The Ministry of Energy cites the strong interest in the April 2014 request for proposals for the construction of a 700-MW LNG facility in Dongo Kundu near Mombasa as a cause for optimism; 36 firms submitted expressions of interest.

Most sector stakeholders think that the target is too ambitious given the timeframe but that it is good to aim high. A new wind farm in the north-west Marsabit County being constructed by Lake Turkana Wind Power will add 300 MW by 2016. Company chairman Carlo van Wageningen told OBG, “In Africa, you have to shoot for the stars if you want hit the moon. The 5000 MW in 40 months is a very ambitious target, and it may not be met by the deadline, but there will certainly be significant progress made along the way.” Amyn Mussa, senior partner at law firm Anjarwalla & Khanna, agreed and said 3000 MW is more realistic in the timeframe, and would be a noteworthy achievement.

Although supportive of the capacity expansion, Benson Muriithi, Kenya Power’s chief manager for energy transmission, cited delays as the most likely obstacle to reaching the 5000-MW target. “The proposed LNG project is still being procured and other projects such as the geothermal plant at Lake Naivasha are progressing slower than expected due to right-of-way challenges for evacuating transmission lines,” Muriithi said.

Supply & Demand

Ensuring ample demand will also be a crucial part of maintaining a stable generation and distribution framework. In the previous five fiscal years, power demand grew at a compound annual growth rate of 5.3%, and demand is expected to accelerate to 17,000 MW by 2030. Many industrialists, including Betty Maina, CEO of the Kenya Association of Manufacturers, have been cited by local media as saying that the demand projections are too high and that the government should focus more on grid stability. However, Mussa thinks that demand is set to grow quickly if Vision 2030 mega-projects are brought to completion. “The standard-gauge railway from Mombasa and projects such as Lamu’s new port and Konza Techno City will need a couple thousand megawatts,” he estimated.

What everyone agrees on is that current capacity levels are too low. Mussa told OBG, “Kenya is a country of 40m with less than 2000 MW of electricity, whereas an average European city may have 20,000 MW.” In addition, Kenya’s power imports have been rising. In April 2014 the country brought in 12.1m KWh from Uganda, quadrupling January 2014 imports and representing the highest level of imports since 2011, according to the Kenya National Bureau of Statistics.

Cost Issues 

Power costs in Kenya have reached $0.18 per KWh, compared to South Africa’s $0.04. The Kenyan government is targeting a price reduction to $0. 07-0.09 per KWh by 2017. IPPs – relying mainly on expensive heavy fuel oil-based power plants – have sustained prices, a consequence of their significant contributions to the grid when the country’s hydroelectric stations suffer from seasonality. Limited rainfall in the long rainy season from March to June 2014 led to a generation shortfall at the country’s hydroelectric stations. Masinga, the largest reservoir feeding the Seven Forks hydroelectricity facility, was only one-third full in mid-2014, for instance. In addition, there have been delays in the completion of projects that would have brought cheaper power onto the grid. A total of 280 MW of additional geothermal capacity came on-line in October 2014, including a 140-MW geothermal plant in Naivasha. Reduced supply has thus prompted Kenya to increase dependence on more expensive heavy fuel oil sources to meet demand. Despite efforts to recalibrate towards cheaper generation sources to achieve the ambitious 5000-MW capacity addition in the next couple of years, Kenya is still having to rely on more expensive thermal plants to meet the target and has turned to Nigeria for oil to fuel at least one planned power plant. Kenya’s sole 50-year-old refinery was not operational at the time of print. Cheaper power production from coal is also in the works, but the two planned 960-MW, coal-fired plants in Kitui and Lamu will take several years to be completed. While one of the Energy Regulatory Commission’s (ERC) main mandates is to deal with issues of affordability, production costs necessitated the introduction of a new billing structure that saw household electricity bills increase by 10% on average from July 2014. The higher prices are affecting other parts of the economy. Several water firms doubled water tariffs.

Inflation is also set to increase as the power bill goes up. Electricity, gas, water, other fuels and housing have a weighting of 18.3% in the consumer basket of goods used to calculate inflation. Year-on-year inflation rose for five consecutive months in 2014, reaching 7.3% in May. Local media reports that analysts expect a new interest rate tightening cycle to check rising inflation.

Regulating Costs

In order to encourage smaller projects (less than 50 MW) in the renewables space, ERC has set out a feed-in tariff policy. This in effect allows IPPs to produce and sell renewables to Kenya Power, the distributor, at a guaranteed price over a specified timeframe. Mussa believes that the feed-in tariff is an excellent way to encourage investment in renewable energy. Current feed-in tariffs are $0.088 per KWh for geothermal, $0.10 per KWh for biomass and biogas, $0.11 per KWh for wind and $0.105 per KWh for hydro. Despite falling solar panel prices, solar power is not yet cost competitive for the feed-in tariff structure.

One challenge with the feed-in structure is that risk is shifted from IPPs to Kenya Power. Under the “take or pay” system, Kenya Power must make payments even if it does not take the power when demand is low. Although Kenya Power is 50.1% government-owned, its other shareholders are forced to assume risk as a result of this system. Splitting up distribution could spread the risk, and may even serve to lower prices by increasing competition. Kenya Power’s Muriithi said that the idea was put on the table, but given that 6000 customers generate 60% of the company’s profits, and most are concentrated in Nairobi, discussions on how to split up the distribution base fell apart. One way in which the government has tried to keep end-user prices down is by bearing costs such as building new transmission infrastructure and developing geothermal wells through the Kenya Electricity Transmission Company and Geothermal Development Company, respectively. These entities in effect offer an indirect subsidy.

Savings & Packages

Despite delays in achieving capacity additions, once construction is completed and cheaper power sources start to replace plants running on oil and diesel, prices are expected to drop. For example, once Lake Turkana’s wind farm starts production in 2016, the government expects to save KSh13.7bn ($156.2m) annually on the fuel import bill. There are some in the industry who believe that potential changes in market dynamics may result in a different form of pricing down the road. Sam Slaughter, the managing director of PowerGen, a Nairobi-based provider of offgrid solar solutions, observes that US companies like cable and telecoms company Comcast are bundling power provision into their traditional cable products.

“Electricity is moving from a commodity product to a service product,” Slaughter told OBG. Some anticipate this evolution is coming to Kenya – in the past four years Kenya Power has installed 1800 km of fibre-optic cables along its high-voltage power lines. However, for the shorter term, Kenyans can anticipate higher bills.