Thursday, 18 April 2013

Kenya’s electricity generation: A hot investment spot

A Geothermal Power station: A favourite
 source of electric power in Kenya
KENYA'S ELECTRICITY  generation sector is an investment hot spot.  The country plans to increase its power generating capacity by 17000 MW by the year 2030 when it will transit to an emerging economy status. The capacity currently is less than 1500 MW hence the mad rush to hit targets in just 17 years.  The bulk of this power will come from clean and renewable sources such wind, geothermal and solar sources.

 According to experts in the energy sector, on average, it costs US$2.5 million to produce a MW of electricity. This means that to produce 17,000 MW will cost a massive US$42.5 billion for an average investment of US$2.5 billion a year.

 In terms of the amount of investment needed, electricity generation is way bigger than the Lapsset Corridor. Lapsset is an acronym for Lamu Port, South Sudan Ethiopia transport corridor. It will comprise of 2000 Kilometres of crude Oil Pipeline, 1700 KM of standard gauge Railways line, 1800 of standard single carriage road, a 32 berth sea port at Lamu and 120,000 bpd refinery. It will cost an estimated $25 billion.

To raise the $42.5 billion  the country so far employs a mix of financial models ranging from good old PPA-power Purchase Agreements; to PPP; to joint ventures, and imports, borrowing from DFIs  and mobilising FDI to borrowing from t the local Capital market.

The Major power generators in Kenya are the KENGEN and GDC. Both are State Owned Enterprises (SOEs). However, Kengen is partially privatised and is therefore listed at the Nairobi Securities Exchange. KenGen generates power from all sources including Hydro, Thermal, Geothermal, Wind power and Coal. Being the oldest power generation firm, it is expected to generate 10000 MW of the 17,000 MW needed in 2030.

 The other Public owned generator is Geothermal Development Corporation, GDC. A recent creation DGC specialises in generating geothermal power. It is currently developing 400 MW-almost 26 per cent of the current capacity- of geothermal power from its Menengai fields that will come on grid in 2016. The firm hopes to generate a further 3000 MW of by 2020 from the same fields rising to 5500 MW in 2031.
GDC drills the steam and caps the wells, then contracts Independent Power Producers to build the generation capacity and sell to the electricity distribution company, Kenya Power Company. The IPPs must thus sign a 20-25 years Power Purchase Agreement, PPA, with KPLC.

GDC’s business model is to assume the drilling risk leaving the generation risk to the private sector. This model has a number of benefits; It ensures that geothermal power is the cheapest source of electricity. Two, it releases GDC to concentrate on its core business –drilling of steam wells and capping them. Since the IPPs pay a fee for the steam, the model ensures that GDC can meet some of the drilling costs from internal resources.


Kenya Electricity Generating Company Limited, KenGen, is the leading electric power generation company in Kenya, producing about 80 percent of electricity consumed in the country.  As the oldest company, much is expected from it. By 2030, it must produce some 10000 MW to meet domestic demand. That is an estimated 59 per cent of domestic demand.
A Wind farm: Popular with the Private sector
The company utilises various sources to generate electricity ranging from hydro, geothermal, thermal and wind. Hydro is the leading source, with an installed capacity of 766.88 MW, which is 64.9 per cent of the company’s installed capacity.  But Hydro is slipping down the scale of importance as a source power. Instead, geothermal is slowly edging forward as the leading source. Kengen is therefore ratcheting up its geothermal capacity. By 2016 Kengen’s 3000 MW generating capacity will be dominated by geothermal at 882 MW; Hydro at 820 MW; coal 600 MW; wind 62 MW. KenGen is the leader in geothermal power generation in Africa currently generating some 150 MW from the Olkaria geothermal power fields.

In the second phase of her development plan set to close in 2018, Kengen needs US$5 billion to ratchet up her capacity in geothermal generation to 5000 MW by 2020 from her Ol karia fields.

Being a listed company at the Securities Exchange, Kengen is also the most creative in crafting debt instruments. It has borrowed from the local Capital market using Infrastructure bonds to borrow US$320 million.
KenGen has also borrowed a leaf from GDC where it drills wells and concessions them to IPPs to generate and sale power to KPLC. This is a model it has applied to develop the 560MW of geothermal power at its Olkaria fields under a public–private partnership deal. The shortlisted companies include Mitsubishi, Toshiba, Korea Electric Power Corporation (Kepco), Daewoo. The entire project will cost US$2 billion and is expected on stream in 2016.

 In addition the firm has crafted a and is now planning to issue an asset backed bond to raise some US$350 million to help finance further drilling.

An asset backed bond is a form of borrowing in which the borrower offers an existing asset with reliable cash-flow as security. Ken Gen has already the drilled the steam wells and capped them.  All she need do is to transfer that steam to a Special Purpose Vehicle (SPV) which will in turn issue the asset backed bond, raise money and give it to KenGen to continue drilling more wells. The SPV will then concession power to IPPs to produce power and pay off the debt.

Although GDC, being a wholly owned government enterprise cannot borrow from the local Capital market .The government issues infrastructure bonds part of whose proceeds goes to GDC. To this extend, GDC also borrows from the local capital market.

 The private sector is also pitching tent in Power generation targeting wind power and solar power generation. These two sources are the least risky and therefore popular with the private sector.  So far, an estimated US$1.7 billion has been committed to the segment of generating power.

Among the Players in this sector is Lake Turkana wind project in northern Kenya. LTWP plans to sink an estimated Euro 586 million to produce some 300 MW. The project has been on the drawing board to nearly 17 years owing to funding issues. The government of Kenya is said to be considering issuing sovereign guarantees to allow the project to raise capital build the plant. The project is the largest FDI in Kenya’s history.

In addition there are other companies owned by Kenyans that also plan to generate wind power.  One of them, Gitson Kenya limited has US $830million war chest to generate some 350 MW of electricity from both wind and solar sources. Blueseas, another outfit seeking to raise funding from the US plans to invest $100 million to generate 107 MW of wind power.

 Any shortfall will in the meantime be met by imports. Kenya has already signed a deal he deal with Ethiopia for the supply Kenya with 2,000 MW of electricity at US$0.0065 per KWh. This will earn Ethiopia some US$400 million a year from 2018 on wards.  The Ethiopian Electricity generator EEPP has signed a 25-year PPA with Kenya power and lighting.

It may look like Kenya will at some point by over -supplied with electricity thus suffer excess capacity. Kenya, is a member of the East African Power Pool (EAPP) incorporating Tanzania, Rwanda, Burundi and DRC.  This means that any excess power will be sold to her neighbours making Kenya an electricity power trade hub in the region.

3 comments:

  1. Musyoka, well written articles. However, i hear LTWP has run into some issues. You can also see more on East African energy at http://eafricaenergy.blogspot.com/

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  2. The current story is about AfDB financing the project.The financial close appears to be near

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  3. Congrats. It is nice piece. Much like mine. How did we reach at the same design? Will visiting

    ReplyDelete