In Germany investments in renewable energy, particularly wind and solar, is incredibly substantial. Everywhere you go you can see PV solars and lots of wind turbines both onshore and offshore. Any power they produce in excess of their own demand will be purchased at a feedin tariff.
Due to this incentive, investing in renewable energy is offering far better returns than operating savings account.
With huge potential in renewable energy whose costs are dramatically falling around the world, why is Kenya not on that kind of trajectory? That is the question that came up in a workshop last week.
More specifically, why is Kenya investing in a $2 billion coal-fired power plant in Lamu when there is no demand for the 1,050MW (nearly half of the current installed power capacity) that it’s expected to generate?
The other interrelated question was on why are electricity prices were not coming down when we have an oversupply of power generation?
The answer to the two questions simply boils down to the set up of our energy system and electricity infrastructure.
For example, as Germany energy companies are investing in renewable energies, across its borders in Netherlands, the new power plants are coal-fired. This is because the successful shale gas programmes in the US have made the US self-sufficient in its gas demand, forcing out coal as a source of energy.
American coal is, therefore, cheaper than ever and is finding its way into other countries, including the Netherlands.
The combination of cheap coal from the US and cheap power imported from Germany has virtually eliminated incentive for the Netherlands to invest in renewable energy.
For Kenya, the market structure allows for neither the Germany scenario where renewable power generators are given first priority to the grid nor the Netherlands one where the market is looking for cheap power generators.
Kenya has a centrally planned market where the government monitors electricity use and identifies when more electricity is needed, and then either builds a power station or gets a private investor to build one.
The government then agrees to buy all the electricity from that generator at a particular price. In this non-competitive pricing structure, there are steady prices (which mostly are high) because the government acts as the financial clearer and power generators will be compensated even if the State doesn’t need all the electricity they can make.
This is why Kenyan electricity consumers are expected to be charged Sh37 billion yearly as annual fixed capacity payments regardless of whether they generate electricity or not.
We also saw Kenyan taxpayers penalised Sh5.7 billion for failing to connect Lake Turkana Wind Power to the national grid in breach of contractual terms.
This kind of market structure is very stable and electricity generation is a safe investment but its works against the consumer because there is no competition which comes with favourable prices.
There are two options of restructuring it to induce competitive market pricing.
First is establishing a net pool market operated in the United Kingdom where wholesale prices and the amount of electricity generated are agreed directly between the electricity generators and the electricity retailers.
The interesting feature of this type of market is that the government can influence the use of non-renewable energy through price discrimination — a levy on non-renewable.
Second is the gross pool market operated in Norway that acts as an auction where an independent system operator buys all electricity from each generator based on the prices they offer then sell it to retailers.
This market structure allows intermittent renewables like wind to often bid in as low as it’s allowed because they can’t control how much electricity to make, so they make sure all of their electricity is bought.