Kenya will start offering land at lower cost to investors to set up renewable energy projects as it moves to introduce competitive bidding in the sector with the aim of cutting power prices.
Energy Principal Secretary Joseph Njoroge said the measure is meant to cushion investors from losses since the proposed auctions will only favour contractors offering low electricity prices.
The State has already identified such land in northern Kenya and near Tana River’s Seven Forks dams, according to the PS.
“This will reduce the risks for investors as we pursue lower consumer power prices,” said Mr Njoroge, adding that the State would also chip in to fund construction of site substations for tendered projects.
The tendering system was supposed to start early last year but ran into headwinds. Mr Njoroge said the plan has now been revived and should “see the light of day later this year.”
The State is betting on removal of land cost burden on investors to sharpen the country’s competitive edge.
Kenya’s renewable energy market has recently attracted dozens of local and multinational investors, who are constructing solar farms, wind parks and geothermal wells.
The auctions will replace the current feed-in-tariff (FiT) system, where investors identify potentially viable power projects and then acquire licences to operate them at pre-determined rates without any requirement for tendering.
Energy ministry officials said the new system is intended to introduce competition among investors and give consumers the benefit of paying the lowest possible electricity tariffs.
Critics of the plan, however, argue that the auctions could also present potential conflict of interest where bureaucrats only clear the way for projects in which they have vested interests.
The competitive bidding system will see the government pick power projects and award them to bidders who offer to charge consumers the lowest tariffs.
Currently, investors identify viable power projects and then acquire licences from the Energy Regulatory Commission (ERC) to operate them at pre-determined rates without any requirement for tendering. The competitive bidding window is billed as a tool to slash electricity bills.
The feed-in-tariff for solar projects (between 10 and 40 megawatts) stands at Sh12.36 per unit ($0.12), and Sh11.33 per unit ($0.11) for wind projects of between 10 and 50 megawatts.
The rate for geothermal power plants (35–70 megawatts) is Sh9 per unit ($0.088). The rates are expected to drop by as much as half, easing consumers’ billing burden.
Kenya adopted the feed-in-tariff in 2008 to attract investors in renewable energy as an alternative to expensive diesel-generated electricity.
Electricity distributor Kenya Power #ticker:KPLC is obligated to buy electricity generated under feed-in-tariff — which covers smaller renewable power plants.
Mr Njoroge reckons that tendering would help Kenya plan well and match power demand with supply. “We want to reduce cases of having stranded power which forces consumers to pay for idle plants through capacity charges,” he said.
If adopted, this will see Kenya join more than 60 countries that have embraced the auctions, including South Africa, Morocco, Brazil, Zambia and the United Arab Emirates (UAE).
Under the auction system, renewable energy developers will bid for contracts and those with the lowest bids will win government support.
Sector players said that the auctions work well for large-scale projects while feed-in-tariffs are best suited for smaller plants with a capacity of below 20 megawatts where competitive auction is unnecessary.
They, however, warned against a rushed switchover without doing proper documentation.
Under the auction system, the ERC will strip investors of their independence in choosing project sites and deciding project capacity and turnaround time.
The current feed-in-tariff offers investors pre-determined rates for wind power, geothermal, solar, hydropower and biomass energy sources, which take into account the cost of the investment and the profit margin.