Beating Africa’s Power Problem: The Surprising Success in Kenya’s Power Sector
The issues surrounding lighting Africa can seem daunting and, if not for key success stories, even insurmountable. But Kenya’s recent success — going from a mere 25 percent electricity access rate to 73 percent in just six years — has been so out of line with normal trends that the World Bank’s reports on Sub Saharan Africa show electrification rates outpacing population growth for the first time. The metric, the Bank says, is being disproportionally driven by Kenya. The Kenya story clearly shows that these problems can and should be tackled.
A New Roadmap
One of the first steps Kenya took in retooling its energy sector was the creation of a new independent regulator, the Energy Regulatory Commission, in 2006. KenGas snags the top spot on the continent in the African Development Bank’s report on energy regulators for its independence from government institutions (especially conflicts of interest from the Ministry of Energy), its focus on transparency and its implementation of formal mechanisms for holding the regulator accountable to the public. The regulator is tasked with regulation of the sector, especially setting and reviewing tariffs, licensing of new power plants and Independent Power Producers, enforcement of regulations, dispute settlement and approval of power purchases from Independent Power Producers. Separating these tasks from the role of the Ministry of Energy, which is often tasked with courting investors, is key to removing conflicts of interest and potential for corruption.
In 2008, the government of Kenya launched its Vision 2030 — a multifaceted long-term plan for Kenya’s development that spanned the economic and social fibers of society, and, according to the plan, aims to “transform Kenya into a newly-industrialization, middle income country providing a high quality of life to all its citizens in a clean and secure environment.” The government correctly identified the development of the power sector as essential to these goals. Without widespread, affordable electricity, Kenya would be unable to compete in globalized economy or spur an industrial revolution. Development of the power sector was deemed a “foundation” of the plan, and the foundation of power had to be dealt with such that the three pillars of the plan — economic, social and political — could progress. The government set a highly ambitious (and considered by some unachievable) goal to achieve universal power access by 202.
Kenya began aggressively pursuing international investment in the power sector. Its first stop was the World Bank — but not to ask for money. Instead, Kenya wanted “to optimize its use of security instruments to attract investors, including commercial banks that had not provided support to earlier rounds of Independent Power Producers,” the World Bank states in a report.
Like many African countries, the government of Kenya was not capable at the time of offering government guarantees on power projects and was looking for another solution to attract the private sector. In a revolutionary deal, the World Bank provided Partial Risk Guarantees to backstop the project and secured $166 million in private sector funding, which went to funding 270 MW of new power generation. The deal allowed Kenya Power, the country’s electricity distributer, to secure favorable terms in power purchase agreements from IPPs by de-risking the project for the private sector. The favorable Power Purchase Agreements meant that the cost of power was not too high for the average consumer, and the need for subsidies for the general public was minimal.
Since then private investment has flowed into Kenya’s renewed power sector, with Kenya now boasting such projects as Africa’s largest windfarm and the world’s largest geothermal power plant. Kenya has aggressively pursued private investment in its power sector, with thirteen Independent Power Producers operating in a liberalized power environment. Creating an attractive environment for private investment and building capacity through a liberalized power sector has proven key to Kenya’s success.
As Makhtar Diop, Vice President for the World Bank’s Africa region said in the report Linking Up, which specifically calls for private sector investment in Africa’s power sector, “If we do not address the underlying reasons preventing Africans from achieving wider access to reliable and affordable electricity, economic growth on the continent will remain slow, keeping millions trapped in poverty.”
In addition to its partnership with the World Bank, Kenya has worked closely with the United States Agency for International Development’s Power Africa program, which aims to use public funding as seed money to spur private investment and connect promising projects with private sector investments. Power Africa credits Kenya as “a true success story in sub-Saharan Africa” for its focus on attracting the private sector, building an enabling regulatory environment and innovatively approaching off-grid solutions.
Kenya has also approached development institutions for funding, but these projects tend to focus on funding the “last mile connectors” — plans to reach the most rural and impoverished areas of society. These connections are the most expensive and least likely to make a profit. The use of development funding has otherwise been relatively limited and stands in stark contrast to countries like neighboring Tanzania, which depends heavily on lending from the development sector to run basic operations. High debt ratios make new investment in the power generation and transmission difficult, though large debt ratios are not uncommon in Sub Saharan Africa. In 2005, members of the G-8 voted to absolve $40 billion of debt from Africa’s most indebted countries, including Benin, Burkina Faso, Ethiopia, Ghana, Madagascar, Mali, Mauritania, Mozambique, Niger, Rwanda, Senegal, Tanzania, Uganda and Zambia. But the write-off due to inability to repay debts has done little to wind down lending or borrowing in Sub Saharan Africa, with debt increasing from about 37 percent of GDP in 2012 to 60 percent in 2017 for the continent.
Not only is Kenya re-shaping its regulatory environment and aggressively pursuing new investment, the country is also taking innovative approaches to using capacity that has already been installed to generate jobs and economic development. For example, manufacturing and industrialization require reliable, affordable electricity capacity in order to attract investment, leaving many African countries out of the running for new deals. To tackle both the issue of cost and lack of capacity, starting last year Kenya began offering tariff discounts to manufacturers who move their base of operations to Kenya and operate at night, an off-peak time for energy consumption, according to Business Daily.
These creative approaches to attracting new investment are vital — allowing Kenya to give the economy a boost and provide additional jobs without immediately increasing power capacity, which is an expensive and time-consuming process. And, as the economy improves and the manufacturing base in the country increases, demand for energy will increase, private sector interest in building more electricity capacity will increase simultaneously, and the government will also develop more borrowing capacity.
And Kenya is certainly not the only country to achieve success in the power sector in Sub-Saharan Africa, with countries like South Africa and Ghana boasting strong power sectors as well. South Africa, for example, has an access rate of 86 percent with new investment in the renewable sector on the way, while Ghana in West Africa has an access rate of 83 percent with new gas-to-power plants already in the works.
The striking similarities between these countries include the implementation of an independent regulator, building an enabling regulatory environment and intense involvement by the private sector in the development of power generation, both in terms of capacity and transmission
Certainly, there are other factors that influence investment in the power sector, including macro-economic factors like foreign exchange risks and environmental security, but these countries have established a roadmap for success, and issues like regulator reforms and the creation of independent regulators to attract the private sector are critical first steps.