The recent announcement by the Kenya electricity generating company (Kengen) inviting bids for joint development of geothermal resources along the Kenyan Rift Valley marks a shift in funding for energy in the country.
It used to be that such projects were funded through development loans and grants from donor countries, often tying the funding with other issues such as good governance. This in many cases slowed down the expansion of the power sector because the government had to first pass muster on governance issues and donors could pull out of projects without notice.
The confidence that is being shown by investors now is perhaps an indication of growing economic interest in the region – and a much wider shift in funding. With its bid invitation, Kengen is breaking with the past by directly looking for commercial partners, even though the government still owns the majority of the geothermal effort.
Another project that is significant because of its scale is the Lake Turkana wind project in the Marsabit area of Kenya. The project was wholly conceived by private investors and will be developed by private investors. The majority of the funding for this project will be provided by African Development Bank. Ten years ago such a thing would not have been possible.
So what is influencing the shift in funding for such projects in Kenya? The most attributable factor has been the liberalization of part of the energy sector. Even though this has taken some time, the benefits couldn’t have come at a better time.
GREEN POLICY CHANGES
With economic growth in sub-Saharan Africa at one of the world’s highest rates during a near-global economic downturn, many investors are looking at the region for ways to diversify their investments. Kenya is attracting funding for its renewable energy sector because of green policy changes in recent years.
Ten years ago there was no feed-in tariff policy for renewable energy. Now Kenya stands out among others in the region with a fairly progressive policy that ensures investors get returns. This has freed the government from the burden of seeking bilateral and developmental loans and grants for such investments.
Recent expansion and modernization of some of Kengen’s existing hydro power stations was funded by money borrowed from the capital markets – not donor funding. There is talk of issuing more bonds to fund the company’s geothermal investments. This bold move was as a result of oversubscription in the previous bond issue at the Nairobi stock exchange.
A look at part of the application process for renewable energy generation licenses makes it clear that one has to demonstrate they can attract funding for the project or investment they wish to undertake in the country. By encouraging the private sector to invest, the government has – unintentionally – taken a step back from the responsibilities of seeking funding for such investments.
The biggest beneficiary has been the geothermal sector which continues to expand faster than other renewable energy sectors, perhaps because of its already documented potential.
While it seems that the shift in financing of such projects is a combination of prevailing global economic factors and a change in policy, the time it has taken for the wind power project in northern Kenya to take off shows there are still some bureaucratic inefficiencies that need to be addressed.
The biggest challenge is that Kenya has only one electricity distributor, which still part-owned by the government. This means a crucial part of the process, such as signing a power purchase agreement between an electricity generator and the distributor, can take a long time, as was the case with the wind project. Further liberalisation in electric distribution would help speed up uptake of energy of renewable energy.
There may be a change on the horizon, with a motion already filed in parliament to allow competition in power distribution. This hopefully will speed up power purchase agreements, which are important because they give project owners a guaranteed income from their investment.
Kenya, meanwhile, also seems to be gearing up to support micro grids. The government recently published an ad for consultancy services on training staff at the Ministry of Energy and the energy regulatory commission on how to deal with off grid networks. Again, this is a first in the sub Saharan Africa region.
This could in the long run pave the way for smart grids. One can only hope that with a new government and a new energy secretary, some of these steps will be expedited and Kenya will find its place among the top countries with progressive energy policies.
Ray Obiero is a physics graduate of Kenya’s Egerton University. He has previously worked for Green Earth Energy Solutions in Kenya and is a writer at Kenya’s Management Magazine on technology and new knowledge issues.