How Kenya can step up its power drive for growth

Over the past decade, we have witnessed a phenomenal global transition towards cleaner energy sources. In Kenya, this is evidenced by increased investments from both public and private sector players in renewable energy.

Renewable energy contribution to the total generation capacity has grown from 59 percent in 2012 to 69 percent in 2019. By 2030, we expect renewable energy to account for more than 75 percent of total installed capacity largely due to the Government’s commitment to diversify the country’s generation mix.

One important policy that contributed to increased investments in renewable energy was the Feed-in-Tariff (FiT). The FiT policy allows power producers to sell electricity to Kenya Power at a pre-determined tariff. The lowest tariff provided under the FiT policy is USc 6/kWh for wind projects.

These low generation tariffs have enabled Kenya Power to set retail tariffs at approximately US¢ 15/kWh, which is relatively low compared to other developed countries such as Sweden and Germany who charge US¢ 26/kWh and US¢ 30/kWh respectively.

Nonetheless, the Government of Kenya needs to consider implementing energy auction systems that could help reduce generation tariffs and in turn lower retail tariffs further.

In countries such as Senegal, South Africa and Zambia, where auction systems have been successfully implemented, generation tariffs have significantly reduced to as low as US¢ 4/kWh for new renewable energy projects.

Beyond focusing on reducing generation tariffs, the Government should continue to focus on developing and improving transmission and distribution infrastructure needed to ensure electricity is delivered to consumers with minimal losses.

The Government, through the 2019 Budget Statement, indicated its plan to develop 1,432km of transmission lines over the next three years and hopes that the private sector will play a crucial role through Public Private Partnerships (PPPs).

In addition, the newly enacted Energy Act (2019) provides for the participation of private investors in the distribution of power to consumers in the country.

We expect that in the long-term this will lead to improved service delivery and favourable retail tariffs, perhaps with Kenya Power Company transitioning to an asset owner role concessioning its network out to the private sector.

Even as Kenya focuses on growing generation capacity, we need to be cognizant that demand still lags, as evidenced by the continuous mismatch between peak demand and generation capacity. As at December 31, 2018, peak demand stood at 1,882MW, while installed capacity was 2,712MW.

Under a take-or-pay regime, this scenario results in the cost of significant unused capacity being borne by the consumer. However, it may be argued that with a large component of generation sourced from intermittent sources, the large gap may not be of too great a concern. Nonetheless, there is still a need to enhance industrialisation in the country to grow electricity demand.

TAX REBATES

Currently, commercial and industrial consumers account for more than 50 percent of electricity consumption in Kenya.

Even though the Government has developed a framework to grant tax rebates on power costs to manufacturers, more needs to be done to encourage investors to establish manufacturing companies in Kenya.

One initiative that the Government can focus on is in promoting the development of more industrial parks with incentives that will attract private sector investments.

There has been a discussion in the recent past on whether the Government should stop encouraging investments in renewable energy projects until demand catches up with supply.

However, this might prove to be detrimental as witnessed in South Africa in the late 80s and early 90s when Eskom delayed construction of new plants, mothballed others and decommissioned old power plants at a time South Africa was experiencing oversupply of electricity.

However, in the years that followed, power demand exceeded supply and the country experienced blackouts, which eventually became a national crisis.

Eskom was forced to resort to countrywide rotational load shedding to protect power systems from total shutdown.

Operationalisation of the Eastern Africa Power Pool that would facilitate export of power to neighbouring countries could assist in managing the excess supply as we ensure integrated and efficient development of generation capacity in the regions.

Even though more needs to be done to ensure everyone has access to cheaper electricity, Kenya has made a lot of progress in recent years with the establishment of a generation mix that is one of the most impressive in Africa.

Tariffs need to be cost reflective to ensure that generation development is sustainable.

Efficient and improved transmission and distribution, as well as greater absorption of power by industries will facilitate a step change for Kenya’s power sector.

Reported by Isaac Otolo, Germano Mutahi, Hawa Bonaya. - Otolois associate director in PwC Kenya’s Transactions Advisory business;MutahiandHawaare senior associates.