[2008-07-01]  High tariffs to finance KenGen power projects
The country faces serious power shortages in two years time, unless the Government steps up power generation capacity.

That is the verdict of Kenya’s largest power producer, Kenya Electricity Generating Company (KenGen).

According to KenGen Managing Director, Mr Eddy Njoroge, the current generation capacity of1263 Megawatts (MW), including 146 MW of emergency plants, must be tripled in the next 10 years, if the country is to successfully implement its ambitious Vision 2030 economic blue print.

The higher tariffs announced last week by the Electricity Regulatory Commission will enable KenGen to raise the much needed funds to finance investment in new capacity.

Njoroge and his team at KenGen are worried that the country might suffer massive power shortages, if generation is not stepped up.

The power producer had no choice but hike tariffs to bolster its financial capacity to finance power projects to match the expanding power demand in the economy.

According to Njoroge, this is a massive $4 billion (Sh260 billion), an amount that is almost half the entire Budget that Finance Minister, Mr Amos Kimunya, presented in Parliament last month.

"Do we have a choice? That will be the requirement of power in 10 years. If you look at GDP growth of eight per cent to 10 per cent, the requirement for this country will not be less than 3,000 Megawatts," Njoroge told FS in an interview.

"So we do not have a choice. If we are going to achieve the objective of Vision 2030, we have no choice."

However, what is disturbing Njoroge is where to get the money in such a short period of time, considering that they cannot rely any longer on donors, who keep on shifting goal posts, depending on political circumstances prevailing at any particular moment.

Although he was non-committal on future tariff hikes, Njoroge said much of the funds would be generated internally, though debt financing and the much-talked-about infrastructure bonds.

The company is expected to revise its bulk power purchasing agreement with the Kenya Power and Lighting Company (KPLC), now that the ERC has raised electricity tariffs.

KenGen, however, remains tight-lipped on whether it will increase what it charges KPLC for bulk sales to the power distributor. But it last week, it emerged that KPLC must now pay the extra 60 cents per kilowatt that the Government has been subsidising for the last two years.

"In 2003, the IPPA was varied reducing KenGen’s bulk tariff by 60 cents from 2.36 Sh/kWh to 1.76 Sh/kWh for a period of three years from July 1, 2003 to June 30, 2006," said the ERC, when it approved the new tariff last week.

"From July 1, 2006 to date, the Government has been subsidising KPLC, by paying 60 cents per unit of electricity supplied by KenGen. However, this subsidy will end on June 30, 2008."

In the next decade, KenGen wants to install 1,260 MW of geothermal power, 200MW of hydro and the rest will be sourced from alternatives like wind and solar.

Currently, several projects that are expected to inject some 600 MW to the national grid are on going and most are expected to be complete in the next four years.

Among them is the 35 MW geothermal plant by OrPower — an independent power producer —to be commissioned in October this year, 25 MW from Mumias Sugar, and 50 MW medium speed diesel plant from Iberafrica — another independent producer — to be commissioned in April next year.

A 90 MW medium speed diesel plant in Mombasa by Rabai Power is expected to be commissioned by September next year.

"Based on the planned investment projects, KenGen and KPLC have submitted to the Commission, initiated power purchase Agreements seeking to a review of KenGen bulk tariffs with effect from July 2008," said Engineer Kaburu Mwirichia, ERC director general last week.

According to Njoroge, the country must step up generation and move from short-term planning to long-term in order to keep up with increasing demand.

Currently, the country is operating with a thin six per cent reserve margin against an international benchmark of 15 per cent for systems of similar size. This means that if one of the major generating stations shut down, the country can easily find itself with a huge electricity deficit.

Besides, the country must grapple with a highly inefficient transmission and distribution system that was neglected for over a decade.

Energy lost during transmission had risen to 21 per cent and the ERC had demanded that KPLC stem the losses to 15 per cent, a gigantic task to the new management team at Stima Plaza.

Last year, the then Electricity Regulatory Board (now ERC) threatened to ‘sit’ on the tariff review until KPLC reduced the loses significantly.

There are some who feel that the tariff increase by the ERC, which is likely to hurt already overburdened consumers more, could have been avoided had KPLC managed to reduce the losses that cost them an estimated Sh4 billion annually.

"By reducing [the losses] to one per cent a year, KPLC could save billions of shillings, and and spare consumers higher tariffs. The new contracted managers have failed the test and they should account for it," said a source who requested not to be named.

However, ERC has defended the managers, saying that although they capped the losses at 15 per cent, the continuous expansion of the distribution system under the rural electrification project undermined their achievement. The delayed implementation of KPLC’s system enforcement programme that should have been completed this financial year, had also contributed to the problem. The project will be completed in the next financial year

"The commission has decided to adopt an agreed target for reducing system losses subject to a yearly reduction rate of 0.5 per cent for the three year tariff control period," said Mwirichia.

"The allowed system losses are expected to decline from 16.9 per cent in 2007/08 to 15.4 per cent in 2010/11."

Besides the losses, KPLC must grapple with vandalism of its transmission wires and transformers, which is now rampant in Nairobi and the Mt Kenya region.

KPLC managing director, Engineer Joseph Njoroge, said the Company had lost Sh3.4 billion over a four-year period between January 2004 and December last year.

"KPLC’s direct losses for this year are projected to reach Sh478 million," Njoroge told participants of a pan-African power producers meeting held in Nairobi last week.

"Vandalism of power is prevalent with transformer oil, copper and aluminium being the main targets of the vandals."

Wastage of electricity is also common ranging between 10 and 30 per cent of primary energy input. Experts in the sector say there is little uptake of energy saving measures.


Source: THE STANDARD