Experts warn of Sh50bn burden in State energy plan
Workers at a geothermal well at Menengai Crater in Nakuru where the Geothermal Development Company hopes to produce 400MW of electricity by 2016. FILE
What you need to know:
Power experts say there is no capacity to absorb the 5,000 megawatts planned to come onstream by 2017.
The experts argue that with nearly 1,300 MW of clean and cheaper energy set to come into the grid in the next couple of years, the inclusion of thermal power in the planned generation mix lacks a justification.
Kenya’s plan to produce additional 5,000 megawatts of electricity in the next 40 months will leave the country with a disproportionately huge surplus and saddle consumers with a Sh50 billion idle capacity charges burden every year, a new study shows.
The unpublished report by a team of power sector experts says the Jubilee government’s decision to go heavy on thermal sources such as coal and natural gas will result in expensive electricity that could increase the unit cost of power by a third or ¢7 (Sh6.03) per kilowatt hour – making Kenya one of the most expensive places to do business.
The report reckons that Kenya lacks the capacity to absorb such massive amounts of electricity given the sluggish rate of economic growth, delays in rolling out Vision 2030 projects and a poorly performing manufacturing sector.
“The power plants will remain totally redundant for several years, attracting almost $600 million (Sh50 billion) per annum in idle capacity charges,” reads the report titled Review of Kenya’s Power Sector (1998-2013) and Its Future (2013-2023).
The Sh50 billion idle capacity burden would arise from the fact that up to 3,000MW of the planned electricity generation will come from expensive thermal sources developed by private investors.
Power experts argue that with nearly 1,300 MW of clean and cheaper energy set to come into the grid in the next couple of years, the inclusion of thermal power in the planned generation mix lacks a justification.
The list of renewable power projects in the pipeline includes 400MW from the Ethiopian interconnector that is already signed up, 300MW from Turkana Wind Power, 280MW from KenGen’s geothermal plant and 105MW of geothermal power from Geothermal Development Company’s (GDC) Menengai plants and another 100MW from Orpower 14.
All this power will go to the base load, pushing out all thermal sources in the reserve margin.
Kenya’s energy sector regulations require electricity distributor Kenya Power to sign 20-year Power Purchase Agreements (PPA) with power producers and to denominate the tariffs in dollars, whetting the appetite of independent power producers (IPPs).
The off-take agreements are based on the take-or-pay model that will force Kenyan consumers to pay for the 5000+ megawatts of electricity whether consumed or not — effectively beating President Uhuru Kenyatta’s vision of reducing the cost of power in the economy.
The PPAs further classify fuel costs as well as foreign exchange fluctuations as pass-through charges that are recovered from consumers through Kenya Power.
“Such charges must either be absorbed by the State or borne by electricity consumers, resulting in increased tariffs burden,” the report says.
The findings cast a dark cloud over the Kenyatta government’s plan to have 5,538MW on the national grid by end of 2016.
The power surplus forecast is hinged on key parameters that determine the rate at which a country’s consumption of electricity grows, including industrial and economic growth.
Taking an optimistic economic growth trend averaging 10 per cent in the next 10 years, the report reckons that demand growth could average 8.3 per cent in the next decade.
That would leave the economy with the capacity to absorb 1,982MW in 2018 against the Kenyatta government’s forecast of 7,900MW based on planned power projects.
Such a surplus would see electricity charges rise by 35 per cent to US¢26.78 (Sh23.08) per kilowatt hour from the current ¢19.78 (Sh17.04) per unit for domestic households.
No risk
But Energy secretary Davis Chirchir says there is no risk of consumers carrying the burden of idle capacity because nearly all the new power generation plans are tied to demand side projects in the pipeline.
The list of planned projects includes the Lamu Port Southern Sudan-Ethiopia Transport (LAPSSET) corridor, Mombasa-Malaba standard gauge railway, Konza Techno City and the setting up of iron and steel smelting plants.
“Should we see that any of these projects is lagging behind, we will amend our supply plans accordingly,” said Mr Chirchir.
“This is not some sort of an academic exercise but a realistic plan with timelines that are adjustable as the situation demands.”
The minister argues that the alternative is to sit back without a plan and get hit by a serious energy crisis similar to what Kenya experienced at the turn of the millennium that pulled down the rate of economic growth to below two per cent in 2002.
Kenya’s installed power capacity stands at 1,712MW, with the State-owned KenGen accounting for 72 per cent of total electricity produced and consumed.
The expectation that consumers will bear a huge idle capacity burden if the thermal power sources come on board by 2016 is hinged on the fact that most infrastructure and manufacturing projects envisioned under the Vision 2030 economic blueprint are running behind schedule.
Kenya’s peak power demand— the maximum power consumed— almost doubled in the past decade to 1,354MW in 2013 compared to 786MW in 2003.
The rate of growth is, however, not in tandem with the rising customer numbers, which grew fourfold to 2.3 million from 643,274 users in 2003. The slow demand growth is attributed to lack of a vibrant industrial sector – the heavy consumers of power and catalysts for economic growth.
Only one in every four Kenyan households is connected to the national electricity grid and the government plans to hook about third or 35 per cent of Kenyans to electricity grid by 2018.
Frederick Nyang’, the acting ERC director-general, acknowledged that there was concern over the absorption capacity of Kenyan industries and households but says the government has committed to underwriting the power projects and will shoulder the cost burden should there be excess power in the grid.
“These are legitimate concerns. But we are optimistic that the power will be taken up. There is also opportunity to export excess power to neighbouring Tanzania and Uganda under the Eastern Africa Power Pool,” Dr Nyang’ said in an interview.
Mega deals
The findings come barely two weeks after the Energy ministry unveiled a shortlist dominated by Asian and European firms that have qualified to bid for the 900MW coal and 700MW natural gas-fired power plants in Lamu and Dongo Kundu respectively.
Among the global giants gunning for the mega deal are Sino-hydro, Tata Power, Toyota Tsusho, Samsung, Aldwych International and Wärtsilä who will be required to develop the electricity plants under a build, own, operate (BOO) model.
KenGen is in the final stages of developing four power plants at Olkaria I and Olkaria IV unit to add 280 megawatts of steam power to the grid by September this year.
The listed power producer aims to add at least 3,000MW of generating capacity to its fleet by 2018, mostly geothermal and wind.
“Affordable power is a key component to competitiveness of Kenyan industries both locally and globally,” said Albert Mugo, the new KenGen managing director, when he took office last month.
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