Affordable and reliable energy pivotal to Kenya’s economic outlook

Kenya is a significant sub-Saharan economy and a pillar of the East African region. It boasts a favourable economic outlook and is promoting its “Big Four” agenda, which prioritises food security, manufacturing, universal healthcare and affordable housing.

To deliver on this agenda, Kenya needs affordable and reliable energy. The recently promulgated Energy Act 2019 supports the continuous evolution of its energy sector, which was unbundled in the mid-1990s. Existing baseload capacity is primarily provided by hydro energy (30%) and supplemented by the development of geothermal and renewable energy.

The government has recognised the importance of reducing carbon emissions and committed to increase the contribution of renewables to the country’s total generation capacity. In pursuit of all this, the recent regulatory changes have been influenced by considerations that include:

• tariff reviews aimed at achieving cost-reflective tariffs;  
• rationalising power purchase agreements;
• a bias towards renewable energy;
• off-grid solutions to balance grid connection costs relative to rural electrification; and
• independent power producer investment in generation projects.  

In light of these developments, stakeholders have mixed views on the requirements for additional generation capacity in the short to medium term, given Kenya’s current perceived overcapacity of about 900MW. This is based on current installed capacity of about 2.7GW relative to peak demand of about 1.9GW.

Historic economic growth projections anticipated 5GW being introduced to the grid in 2017, and the current installed generation capacity reflects the slower pace at which new generation capacity has been developed and commissioned.

The delay may have unintentionally benefited the economy from an electricity cost perspective.

About 1.4GW of additional capacity that is expected to come onto the grid over the next five years will be influenced by Kenya’s economic growth path and electrification rate.

By most economic and performance standards, Kenya Power and Lighting Company (KPLC) stands out as one of the more successful and better-run state-owned utilities on the continent. The extent of further investment into the sector to support generation capacity will be key to achieving the levelised cost of energy. KPLC, which serves 7m customers out of a total population of 48m, will determine the country’s transmission and distribution ambitions. Of these 7m customers, about 60% are commercial and industrial clients, while 67% of electricity sales are from Nairobi and the coast.

KPLC cannot grow its customer base without major investment in the country’s transmission and distribution network, which requires significant and patient long-term funding. Across the entire electricity value chain, private sector funding suits generation far more than distribution and transmission, which are generally funded through government budgets and development and concessionary finance sources. The Kenyan government will need to carefully determine how best to finance this grid expansion.

For generation, lawmakers and regulators will also need to consider the interplay between several factors if they are to deliver cost-effective electricity. These include:

• water as a fuel source for hydro power plants competing with agricultural and communal use, while taking into consideration the unpredictability of rainfall;
• the cost of transmission to extend power to densely populated areas;
• the role and location of renewable energy power plants to supplement base-load energy;
• the role and location of thermal peaking plants to balance the grid;
• the potential impact of emerging technologies such as large-scale battery storage to provide ancillary services to the grid; and
• the role of off-grid power generation to serve remote and sparsely populated areas.

In support of the Big Four agenda, the supply side of Kenya’s gross domestic product (GDP) is driven by the energy-intensive service and industrial sectors, with the assumption that most of the agricultural sector, which is also a significant contributor to GDP, is not fully automated for production efficiencies. The energy sector can enhance Kenya’s economic growth by enforcing the discipline of regulated and cost-reflective tariffs to develop a sustainable electricity sector, as is essential in any country.

For more information, visit the Rand Merchant Bank website.

This article was paid for by Rand Merchant Bank.