By James Anyanzwa

A wave of uncertainty has hit KenGen’s Sh15 billion bond even as the power producer struggles to raise funds to diversify power generation sources.

Over reliance on unpredictable hydro power has plunged the country into power adages following the closure of Masinga power station and the subsequent fall in water levels at Kamburu dam, which has reduced its operational frequency to only three hours a day.

The KenGen bond, initially scheduled to be issued in June, is yet to receive approval from the Capital Markets Authority (CMA) over what a cross section of transaction advisors have termed as just ‘minor issues’.

The Olkaria geothermal power project. KenGen is seeking funds to tap the huge geothermal power capacity.

The apparent delay in the bond’s issuance has prompted new reservations over its timing despite assurances from the company that the issue will proceed despite the subdued debt market.

"There are just very few issues remaining before the bond is approved. There are other disclosures, which we are putting in. We want it to be issued sooner than later," Mr James Wangunyu, the executive chairman of Standard Investment Bank, the issue’s lead sponsoring broker told Financial Journal .

Wangunyu, however, remained non-committal over new timelines for the issue saying it could take place "anytime".

Fund managers have observed that the recent oversubscription by 45 per cent of the Government’s Sh18.5 billion Infrastructure bond signalled an increasing appetite for fixed income securities as investors scampered for safety away from the plummeting equities market.

But Government plans to double borrowing from the domestic market this financial year, sets the stage for intense competition with private companies seeking to raise capital from the same source.

Treasury plans to increase its borrowing from the local money market to Sh109 billion up from Sh54 billion in the last financial year.

Economists have warned that a big government presence in the domestic debt markets could crowd out the private sector and make borrowing for those that plan to raise capital from the same market costly.

"When the equity market is not doing well, the best option is the bond market, even though the returns may not be very high," says Mr Joe Nyandiko, a senior research analyst at Kenindia Asset Management Company Ltd.

KenGen is looking for money to tap the huge geothermal potential in the country as part of its policy aimed at reducing over reliance on hydro power generation owing to erratic rainfall patterns.

Over 3,000 MW of geothermal potential exist in Kenya, but only 163 megawatts (MW) of the potential has been developed by KenGen (115MW) and Orpower 4 (48MW).

The Government has identified access to electricity as one of its priority in the framework of Vision 2030, with ambitious plans to connect in five years the same number of people that have been connected in more than 50 years.

To this end it has identified three options, which it expects to use to triple its generation capacity within 10 years.

These include importation of hydroelectricity from Ethiopia, thermal plants working on imported fuel or coal at the Coast and the development of geothermal power.

The proceeds of KenGen’s bond issue are expected to help the utility firm fund initiatives that will enable the country increase its energy reserves from the current 6 to 15 per cent.

A thermal plant in Mombasa to generate 120 MW, upgrading of Tana, Masinga and a third unit of Kindaruma dams are the four projects set to benefit from the proceeds of the bond.

The upgrading of closed Masinga dam is expected to increase its capacity by 25 per cent to enable it generate about 90 gigawatt hours of power.

KenGen wants to increase its geothermal power production capacity through an upgrade of the Olkaria Power Project.

"Without emergency (capacity) we would not be meeting demand. That is why we are hoping to put up a thermal plant so that we can be able to terminate use of emergency power by early 2010," Mr Eddy Njoroge, the company’s managing director was quoted saying in April.

The Japanese Government has expressed willingness to fund part of an approximated $500 million for the construction of KenGen’s new Olkaria 4 Geothermal power station.

The French Development Agency (AFD) committed 20 million euros towards the development of the third unit of Olkaria II project.

The unit is expected to add 35 MW to Olkaria 11’s 70 MW capacity pushing the total generation to 105 MW. Olkaria 4 plant would generate an extra 140MW to the national grid once completed.

The KenGen bond comes on the back of the recent Sh18.5 billion inaugural Government infrastructure bond offer, which recorded a 45 per cent over-subscription after attracting bids worth Sh26.9 billion.

The Sh15 billion bond is part of KenGen’s capacity expansion strategy which is expected to cost a massive Sh70 billion as the power generator seeks to increase its installed generating capacity by 500 MW in the next five years (2009-2013) and 1,600 MW between July 1, 2013 and June 30, 2019.

This is expected to expand the company’s electricity generation by about 2000 MW within 12 years thus enhancing the reliability of power available in the country and mitigating against the fuel costs that have negatively impacted on the retail tariffs.

Under this programme KenGen plans to make substantial investment in geothermal, wind, solar and hydro energy generation to be able to meet the gap in supply.

The country’s peak power demand stands at 1,050 MW against an installed capacity of 1,100 MW including the emergency reserves of 150 MW.