Reassess economics of Lamu coal plant

For infrastructure projects with momentous environmental consequences, the economics of its purpose first has to be right then mitigation cost can be factored in when conducting a due diligence.

Unfortunately for the Lamu coal plant, the economics behind it is brazenly atrocious and in fact poses a high risk to the sustainability of Kenya’s power sector.

Energy economics demands precision in planning because huge demand not met by supply will collapse the power system, forcing massive load-shedding which is four times expensive.

While excess supply not met by demand attracts idle capacity charges, an inefficiency cost passed to the consumer, raising the price of electricity and making it expensive to increase customer base and also an additional cost to industries.

The latter is the problem that Kenya is about to face with the entry of the coal plant.

The genesis of it is that the government, since 2010, has been issuing unrealistic electricity demand numbers and ambitious power generation projects have been lined up out of that misleading forecast.

In September 2013, government launched the Least Cost Power Development Plan with the goal of bringing 5,000+megawatt (MW) capacity — similar to adding installed generation capacity of Uganda, Rwanda and Ethiopia — within 40 months. The expected cost of the whole plan would be Sh850 billion of which private sector would contribute Sh800 billion.

It’s at this point that coal as a source of energy became a considered option and one year later a consortium of Gulf energy and Centum were awarded a contract of 900-1,000MW plant estimated at Sh200 billion.

Now, let us look at Kenya’s installed generation capacity profile and see where coal fits in.

Ethiopia hydropower leads in the least cost per unit supplying 400MW and another 400MW of new high voltage direct current (HVDC) line starting in July this year.

This is followed by geothermal contributing about 1219.3MW as of the end of 2017 and a further 800MW expected to be added to the grid by 2022.

Next is local hydro power at 264MW, Kenya has already exhausted its large potential, making it the intermittent power generator at peak demand since it cannot be giving a continuous 40 per cent energy.

Wind power currently generates 350MW of installed capacity with a further 900MW being developed. Under a 20-year feed-in tariff, wind, therefore, is set to displace hydropower as a reliable contributor.

READ: Lamu coal plant gets boost as court case flops

This brings Kenya’s total installed generation capacity in the medium term to more than 4,200MW against projected demand of 2,500MW by 2022.

So where do we place the 1,000MW expected from Amu power in 2020?

According to Government’s 5000+MW plan, peak demand is expected at 5,000MW by 2022, meaning our peak demand will have almost tripled in the next five years.

Second, according to energy guru and former ERC chairman Hindpal Singh Jabbal, coal will rank fifth in Kenya’s Least Cost Power Development prospectus because of its high fixed cost of $362 million (about Sh36.2bn) per year due to its capital-intensive nature.

This translates to Sh600 additional cost to every consumers’ bill going to the Amu power investors every month.

This is the most expensive fixed cost among the power generators but worse is its idle capacity we will be paying for.

Sh600 is equivalent to 35-40 units on average and it gets murkier after one realises that 70 per cent of household consumers are actually lifeline consumers who use less than 50 units a month.

That means Kenya Power cannot bill majority of 70 per cent households the Sh600 a month of Amu power’s fixed cost, therefore, the 30 per cent will have to bear the burden.

Was this project designed to grease palms of some bureaucrats colluding with some private sector entities under the guise of commercial necessity?