Edwin Nateminya - Green Growth Diagnostics for Africa

Green Growth Diagnostics Study

Constraints to Investment in Renewable Energy for Electricity

Generation in Kenya

Energy Political Economy Brief

January 2017

Context and scope

• This political economy analysis seeks to identifyhow constraints to development of renewableenergy projects come to be and who is driving oropposing policies to address them.

Key methodologies

• A detailed review of the energy policy andpolitical environments

• Stakeholder interviews

1. Introduction

• The study examines constraints that are holdingback investment in renewable technologies inKenya where the economics would supportthis investment.

• Through literature review and interviews withvarious energy stakeholders, the study identifiedthe political economy of binding constraintsand investigated the political feasibility ofpolicies to remove these constraints.

1. Introduction Cont..d

• There are many different actors involved in

Kenya’s energy sector: local, national and global.

• They have different priorities; among them:

climate change mitigation, universal access to

energy, energy security, competitiveness; job

creation; profit, etc.


• In general the stakeholders can be categorised

into the following groups and priorities:


• These actors may support or oppose an

energy policy depending on the policy’s potential

impact on the achievement of their objectives

and fulfilment of their priorities.

• This support or opposition is not always

explicitly expressed; there is significant

unspoken positioning and lobbying.


• The Government is the largest and most

influential actor among all.

• This influence emanates from:

Constitutional mandate -> Authority

Legal dispensation –> Structure and organs

Financial and political control -> Clout

2. Background

• Kenya has a vast renewable energy resourceswhich can be exploited economically and(potentially) in a financially viable manner.

• Key among them are: Hydropower | Geothermal| Wind | Solar PV technologies

• BUT the penetration of electricity hashistorically been low, with most gains havingbeen achieved in recent times.

2. Background Cont..d

Table 1: Potential and exploited renewable energy resources in Kenya

Renewable Energy resources

Geothermal Hydro Wind Solar Biogas Biomass- Municipal

Waste- Bagasse

Large Small

Potential in MW 10,000 3,000 3,000 4,000 4-6

kWh/m²/day

30 230

Exploited in MW by 2016

590 812 25 25 3.21 2.2 62 (incldg Mumias – 38, Kwale – 18,

Mathenge – 6)

Total exploited: 1,519.41 MW

Source : The Draft National Energy and Petroleum Policy 2015

• Since the year 2000 to 2015, the Ministry of

Energy approved has 178 power generation

projects out of which 46 (14 fossil and 32

renewable) plants (26%) are connected to the

grid.



Source: Approved Proposals Under The Renewable Energy Feed-In-TariffsEnergy Regulatory Commission

•Hence the question on dominant constraints –

to what extent are they caused, propagated or

sustained by the political economy?


• Kenya’s constraints to investment in RE are varied,

but the most critical ones can be divided into two

distinct categories, with causative sub-categories.

• The two are:

a) Unattractive investments and

b) Access to finance.

3. Introduction to constraints

a) Unattractive investments

• The key contributing factors are low returns and high risks.

• There are three core drivers of low returns viz;

(i) Low rural demand; (ii) High system installations and

maintenance costs; and (iii) Planning/procurement induced

dis-incentives.

• There are two leading risk factors making up for high risks and

negatively affecting the appetite of RE investors;

(i) Poor access to land and (ii) High levels of social opposition.

3. Constraints Cont...d

a) Unattractive investments


b) Poor Access to finance

• The single most influential factor negatively affecting financial

closure of RE projects is the lack of appropriately structured

financing mechanisms.

• This draws a wedge between demand and supply of RE finance

types. These are summed up as “poor intermediation.”


b) Poor Access to finance


Constraint 1-1: Unattractive investments from low returns

attributable to low rural demand

Typical scenario

4. Constraint Analysis

1. Time lag between the investment

and the commencement of

connections

2. Revenue growth adjustment as

the rate of new connections

levelizes

3. Deficit

4. Low monthly revenue

Constraint 1-1: Unattractive investments

from low returns attributable to low rural

demand

Underlying causes

• low disposal income in rural areas. (affordability)

• For those who cannot afford the upfront cost electrical

power connectivity, the power consumption is on average

5 kWhr per month (The power is consumed mainly for

lighting and running electronic media).



attributable to low rural demand

Elaboration > For on-grid projects


• Effectively, connecting new customers leads to higher costs for the

entire system.

• Servicing costs are high relative to the benefits and revenue

generated.

• Important: most cases higher consumption customers are ordinarily

already connected, and therefore new efforts are directed to the

unconnected but low demand customers.


attributable to system costs/curtailment

Origins of the constraint


• Power transmission is highly regulated by Government and is

related mainly to Govt-planned projects, not private sector plans.

• Transmission carries heavy capital investments, and the Govt. has

constraints raising requisite funding due to competition for

development resources across and within key sectors funded by

Treasury.



Elaboration


• Renewables are intermittent, hence demand grid enhancement and

a smart grid system that can sense fluctuations of energy in the

system brought about by the intermittent renewable energy sources

and give a corrective signals.

• This also demands more expertise and more of the manpower that

can attend to challenges. This is against an industry that lacks

specialised human resources in the areas of smart grids.



Elaboration


• Deliberate curtailment of RE projects: Since wind and solar PV are

intermittent, there is a limit to which they can be incorporated in

the electricity power mix. Hence curtailment of these kind of

projects to avoid destabilising the grid network.

Constraint 1-3: - Unattractive investments from low returns

attributable to regulation (planning and procurement)


Underlying causes

• Generation and transmission masterplan not linked to rural

electrification planning – Does not include off-grid options;

• Overestimation of demand and lack of transmission capacity

have led to overcapacity – future constraints to financial viability

of KPLC;




Underlying causes

• At the same time large shares of population are not connected;

• Unclear minigrid planning and regulations: What are the

obligations of KPLC when the grid reaches a village with a private

minigrid? When will the national grid reach a village?





• There is lack of local capacity to develop the specialised elements of

projects and power infrastructure. At the same time, foreign

experts are relatively expensive and do not provide the long term

capacity solution that is required. Nevertheless, this has led to most

energy project resource persons being procured from Europe, China

and India.



Example cases:


• Despite reduction in electricity connection fee from KES 35,000 to

KES 15,000 less wiring cost, many households still find it

unaffordable. Thus there are many households who are not

connected though they have access to the national grid. These

factors seem not to have been considered before the grid was

extended in those areas. Therefore ideas and programmes for

connection are being designed long after power lines were installed.

Constraint 1-4: Unattractive investments from high risks

attributable to poor access to land


Underlying causes

• The first sign that land is relatively inaccessible for RE projects in

Kenya is price. Overpricing of land follows almost immediately the

land owner realises that the procurement of the land is meant for

such a project.

• In order to reap maximum benefit from the investors, impostors

and speculators invade proposed sites before or even after a land

transaction – whether sale or lease – is completed. No policy exists

to handle land speculation.




Underlying causes

• Another indicator to inaccessibility of land is road networks.

Physical access to land in frontier regions is made impossible by

lack of roads and supporting infrastructure such as proper drainage.

All-weather roads are limited to highways and major feeder roads,

with the bulk of the network being unpaved and susceptible

damage by rain water run-off.




Underlying causes

• Lack of clarity about land acquisition process and rights of

population currently using land for their livelihood

• One of the strategies employed by locals to protest a project is

encroachment and settlements on lands where beacons have been

installed for purposes of energy projects. The locals and their

leaders thereafter demand compensation for “displacement”. This is

specifically common in areas that are not demarcated for private

use.




Underlying causes

• Lack of clear consultation guidelines; County administration, even

though not directly involved in the approval process for energy

projects, has influence on the acceptability of a project by locals.

There have not been any guidelines on the consultation processes

for public participation. However, in 2016 these have been

developed.

Constraint 1-4: Unattractive investments from high

risks attributable to poor access to land



• There is a perceived “danger” of foreigners “invading” and buying

all agricultural land hence leaving the natives with no land for

farming.

• Uncontrolled escalation in cost of land in high energy demand

regions.





• There is heavy interference by the local authorities and politicians.

Engagement with the senators, governors and local communities

does not easily bear fruit.

• Lack of clarity about land acquisition process and rights of

population currently using land for their livelihood.





• Before the new constitution and devolution, it was easier to

implement energy projects. Under the new constitution compulsory

land acquisition is not allowed. Only the National Land Commission

can acquire land in this manner – and even then it may also be

challenged in court. Counties now hold public land in trust on behalf

of the residents.



Example cases:


• The cost of acquisition of way leaves increases significantly as the

power lines approach high density and high energy demand

regions.

• This is accompanied by increasing expectations of both the land

owners and consumers of power, pushing the costs even higher.

Constraint 2: Constrained access to finance

attributable to poor intermediation


Underlying causes

• Finance for small-scale renewables is too expensive

• Uncompetitive financial terms

• Lack of local equity partner

• Foreign exchange fluctuations

• An unpredictable fiscal regime

Constraint 2: Constrained access to finance

attributable to poor intermediation



• Given these circumstances, many projects fail to reach financial

closure due to unwillingness on the side of the government to

provide even a letter of comfort.

• Most financiers request for guarantees from the government before

agreeing to fund RE projects, in order to secure government

compensation if the projects fails as a result of the Country-specific

risks.

5. Political economy factors behind the constraints:

• The key issue to note when it comes to energy sector focus is that

the Principal Secretary at the Ministry of Energy and Petroleum is

the common administrative denominator across all state energy

agencies.

• Planning and implementation is therefore highly influenced by the

PS.

• The previous regime had an economist for an energy PS, while

currently the PS is an engineer. The mindset of the PS plays a

major role in the direction of the Country’s energy investments.

6. Proposed solutions/policies

• Several options can be advanced to resolve low rural

demand.

• The most desirable solution – yet the hardest of them all – is to

create development programs that will enhance productive uses of

electric power.

• Economic development would result in higher incomes and

consequently demand for electricity would increase a the local

population acquire more energy intensive appliances.

6. Proposed solutions/policies Cont...d

• Huge lifestyle lifts and significant advances in productive uses of

electricity would have to come through integrated development

programmes linking energy interventions with rural development

interventions: first create demand, then electrify.

• Another possible solution is the provision of subsidies for

connections.

• Lastly, promotion of new technologies and business models that are

adapted to low ability to pay: pay-as-you-go, standalone systems.


• However, off-grid solutions face a major marketing hurdle >

politicians and opinion leaders. In general, Kenyan politicians do not

yet fully subscribe to the narrative that solar power is “total

electricity.” Grid connected power is.

• The Kenyan renewable energy auction: Government intends to

publish regulations for the tendering. They will replace the current

feed-in-tariff (FiT) as investors seeking licenses for generation of

electricity will have to use tariffs approved by the Energy

Regulatory Commission (ERC).


• Kenya is reviewing the national grid code to enhance the country’s

capacity to absorb additional renewable electricity. The grid code

stipulates rules and regulations that various players in the

electricity production chain are expected to abide by for efficient

operation of the system.

• The need for review has come with the rise in the number of

investments in renewable energy, especially in wind and solar

projects, whose specific needs are not largely covered under the

current code.


On land matters:

• Develop a policy to handle land speculation

• Clear definition of population with rights over the land

• Clear consultation guidelines

• Clear compensation requirements for land and way leaves

• Capacity building to local population

• Clear land property rights

• Policies to avoid speculation with land targeted for power

generation or transmission

7. Efforts that have been made to tackle the constraints

• The government is determined to create demand for electricity

consumption, including the new industries coming into the power

demand structure like the Konza City, electrification of the SGR, the

special economic zones in all the counties, and growing middle class

with people having more equipment as envisaged under the Kenya

Vision 2030.

• Last mile connectivity

8. Forces that block or support these efforts• National government: the enactment of the new energy policy

which will operationalize the proposed institutions i.e. RERAC,

RERC.

• County government: the adoption of the new policy will result to

establishment of the county energy centres and will foster county

energy planning which is a legal requirement for every county to

prepare and submit the plan for consolidation into National

Integrated Energy Plan.

• Lack of transparency especially within the agencies charged with

the mandate of implementing the projects.

• Corruption that is manifested in land speculation, overpricing of

land and demands for a stake from investors.

• Land cartels who make land very expensive, making it difficult to

access way leaves and hindering development of potential sites.

8. Forces for/against Cont...d


• Local politicians who incite the local communities against

government projects.

• Judiciary systems which places court injunctions and prolonged

rulings in court cases.

• It is generally believed among stakeholders, that Kenya Power is

opposed to licensing of power producers to sell directly to

customers. It is also opposed to policies like power wheeling, net-

metering and usage of the distribution network by companies

willing to generate and sale power directly to the consumers.


• Kenya Power is also seen as causing unnecessary delays in signing

of power purchase agreements and lacking the will to promote the

FiT policy.

• Ministry of Energy and Petroleum is believed to be unwilling to give

a cost reflective tariff. The argument is that the FiT policy tariff is

higher than the Government target.

• Energy laws and regulations do not oblige the Government or its

energy agencies to buy power from the independent power

producers.


• Independent power producers who are proposing tariffs and

demands more incentives from the government for them in invest in

the country. They also what to have quick returns on their

investment.

• Government formulates policies and influences land access for

energy infrastructure, as well as compensation for the local

communities in case of displacement.


• With respect to planning, most of the efforts have not been

successful because of lack of coordination between various

government agencies in the energy sector. The agencies continue to

work independently sometimes leading to conflicting laws, and poor

implementation of energy projects.

• There is lack of will power on the side of the government to enforce

the policies and regulations.

• Also there is delay in the disbursement of funds from the National

Treasury which leads to poor implementation of government plans.


• With respect to land, the Ministry of Land and Physical Planning has

failed to plan and allocate land for energy projects, give direction on

compensation and enforce forceful acquisition of land.

• County governments cite lack of consultation on development on

energy projects within their counties by the Ministry of Energy and

Petroleum.


• Local Politicians incite the local against development of energy

projects within their locality.

• Land Cartels collude with government officers to make the price of

land unaffordable for investors in the energy sector.


• With respect to energy financing, the interest rates historically

offered by local banks have been high. Banks also prefer a short

period for their returns on the investment.

• This makes borrowing loans for development of renewable energy

projects unaffordable.

• The National Treasury has failed to establish infrastructure bank or

national energy fund which can lend money to investors in

renewable energy projects at a lower interest rate.

9. Ongoing or proposed policies to tackle the constraints

• Ministry of Energy and Petroleum has been responsible for

development of guidelines and regulations in favour of accelerating

energy demand. Some of the programs include;

• Rural Electrification Programme;

• Zero-rated VAT and reduced duty on PV Panels;

• Exemption from VAT on the first 200Kwh consumed has

ensured that low-income households benefit; and

• Photovoltaic Market Transformation Initiatives of the GEF

Programme;

9. Ongoing or proposed policies to tackle the constraints

• Creation of a Rural Electrification Authority to accelerate the pace of

rural electrification in the country, a function currently undertaken

by the Ministry of Energy;

• Promoting privately or community owned vertically integrated

entities either operating renewable energy power plants or hybrid

systems, to co-exist with licensed electricity distributors;

9. Ongoing or proposed policies to tackle the constraints Cont...d

• The implementation of the Sustainable Energy for All (SE4All)

Action Agenda with key focus on the productive use of energy as a

priority area for both the National and County government.

• Green Energy Facility to pool donor contributions to help finance

Government equity participation and loan contributions to help

firms and other institutions to develop clean energy projects.

• Designed incentive packages to promote private sector investments

by zero rating import Duties and Taxes on energy equipment and

accessories.

9. Ongoing or proposed policies to tackle the constraints Cont...d

• Liberalisation of the power retail chain: The retail function is

currently exclusively undertaken by Kenya Power & Lighting

Company.

• Based on this, KPLC has continued to be the single buyer of

electricity signing Power Purchase Agreements with generators of

electrical energy. In the draft energy policy 2015, the government

will regularly review the electricity market to allow for competition

in retail of electricity.

10. Level of success...

• Implementation is on course although the targets are seen

by many as too ambitious and politically aligned.

• Funding limitations of Vision 2030 flagship projects has

slowed down the rate at which these projects are being

implemented meaning that power demand is still limited.

END

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Edwin Nateminya - Green Growth Diagnostics for Africa