Kenya: Innovating in Power

Kenya has turned around its power sector in just three years. With the right mix of energy sources, investment promotion and clear legislation, the country is now on track for universal access to electricity. AOP looks at how the government is successfully meeting its ambitious power targets.

Just four years ago, access to power in Kenya was a dismal picture, with only 25 percent of the population hooked up to power.

This electrification rate is typical for Sub-Saharan Africa, and is still the average for East and Central Africa today. Access to electricity was at 23 percent for East Africa and 25 percent for Central Africa in 2015, according to a report by the International Renewable Energy Agency.

But since 2013, Kenya has accomplished something radical: 1.3 million households have been connected to the national grid, more than doubling the national electrification rate by June 2016 and bringing electricity access 55 percent. The same achievement took the United States about eight years, according to Todd Moss from the Center for Global Development, compared to Kenya’s three.

Kenya is far from finished, with an ambitious goal of reaching 95 percent access by 2020. So far, according to regular performance reports by Kenya Power (the publicly listed transmission and distribution company), the plan is largely on schedule and investment into Kenya’s energy sector is steadily increasing.

Unique energy mix

Kenya’s power mix is skewed to renewable sources, with 60 percent of all power generation coming from sustainable sources. Already it is home to the world’s largest geothermal power plant, Olkaria, which generates 280 MW of power.

Kenya is steadily adding to its geothermal power mix, with a deal for an additional 140 MW of geothermal power signed in 2016. Japan agreed to lend $408 million to build Olkaria V, which will be built by Kenya Electricity Generation Company (KenGen). The plant is expected to be commissioned early this year.

Africa’s biggest wind farm is also expected to come online in early 2017. The Lake Turkana Wind Power Project, a $674 million project, will provide 310 MW by June 2017.

Innovative funding

A key element of Kenya’s success has been the government’s aggressive pursuit of international investment.

In fact, a report by the World Bank stated the government of Kenya approached the development bank seeking “to optimize its use of security instruments to attract investors, including commercial banks that had not provided support to earlier rounds of IPPs [independent power projects].” The government specifically wanted to explore alternative financing options to attract and leverage private investment.

The International Development Association used an allocation of $41.5 million to “back-stop liquidity support for certain ongoing power purchase agreement (PPA) payment obligations from Kenya’s national power utility to private project developers.” The involvement of the IDA also enabled Kenya Power to provide favorable terms for IPPs without using sovereign guarantees.

The program was successful. In the years since, Kenya’s power program has attracted funding from a range of lenders and investors, from traditional development sources like the World Bank, to less utilized development agencies like the French Development Agency, as well as funding from governments, like Japan, and large investments and participation in the power sector by private firms.

For example, phase one of the government’s “Last Mile” project aims to connect “under grid” households within 600 meters of existing Kenya Power transformers. Already the program has secured over $600 million in funding from several sources, including $118 million from the French Development Agency, $68 million from the European Investment Bank and $433 million from the African Development Bank and the World Bank.

Though it was delayed for several years, the Lake Turkana Wind Power Project finally took off when a diverse consortium of private companies and development funding was formed to back the project, including KP&P Africa, Aldwych International, Industrial Fund for Developing Countries, Vestas, Finnish Fund for Industrial Cooperation, Norwegian Investment Fund for Developing Countries and Sandpiper Ltd.

Policy is key

There is little doubt that sound government policies are the bedrock of investment in any sector, but especially one as financially-intensive and risk-prone as power. President Uhuru Kenyatta’s administration, in line with previous governments, has pursued regulatory reforms and transparency schemes aimed at attracting IPPs and continued investment.

Key to securing the investment for the Lake Turkana wind Power Project was feed-in tariff legislation enacted in 2010, which offered pre-determined rates for hydropower, wind, geothermal, solar and biomass power projects, taking into account the cost of investment and offering headroom for profit. The tariffs are for a 20-year period.

“Favourable feed in tariff policies were among factors that made Kenya attract €625 million investment in clean energy through the Lake Turkana Wind Power Project. This marked the single largest private investment in Kenya’s history. Wholesale commitment by Africa’s governments to ideals of the Africa Renewable Energy Initiative (AREI) enabled mobilisation of $7 billion in less than one year,” Dr. Richard Munang, the UN Environment Climate Change Coordinator for Africa, told The New York Times. The World Bank’s Ease of Doing Business Report noted the efforts to streamline business and ease regulations when it upgraded Kenya from 113 in 2016 to 92 for 2017.

Transparency, especially, has been a priority for Kenya’s power program. Observers and investors can track the country’s power targets and actual progress by region through Kenya Power’s Connectivity Performance reports. If Kenya’s ambitious target of adding one million people annually to the power grid is successful, the country will reach universal access by 2020, a first for East Africa.