Energy remains ‘dark horse’

By John Njiraini

As the Government embarks on the implementation of the Vision 2030, which is already two years behind schedule, the situation in the energy sector is raising concerns.

Projections by the Vision 2030 secretariat show that 2010 is expected to be the year when the economy should recover before making a take-off in the coming years.

Analysts are optimistic economic growth could hit 4.5 per cent in 2010, up from 2.7 last year, a clear sign the worst period could be over.

"The economy will improve as the impact of the Government stimulus package supports economic activity and employment creation," said Peter Wachira, AIG’s senior Investment Manager.

However, there are concerns that trends in the energy sector could slow the anticipated progress. For instance, the crude oil prices at the international market have in recent weeks been on an upward rally, raising fears of a return to high fuel prices and continued high electricity cost.

Besides, the fact that most of the investments being undertaken both in oil and energy sub-sectors to ensure the country becomes energy sufficient will only be ready starting 2012.

"The expanding economy is putting pressure on energy supply but we hope to meet the demand when ongoing investments come on stream," said Joseph Njoroge, the Managing Director of Kenya Power and Lighting Company (KPLC).

Recommended margin

Currently, the country has an installed capacity of 1,135 MW against a demand of 1,107 MW, leaving a reserve margin of a mere four per cent against a recommended world margin of 20 per cent, something that resulted to perennial outages and rationing.

The country has been forced to rely on thermal generation to prevent the economy from grinding to a halt. A total of 290 MW is being generated through burning of diesel, something that has made the cost of electricity to soar exponentially due to rising cost of crude oil.

In a span of six months, the price of crude has risen from $50 per barrel to $75 last week. Analysts contend the rally could continue due to a demand occasioned by the recovering global economy and rising instability in oil producing countries like Nigeria, Venezuela and Iran.

Though the increase has translated to a huge burden for retail consumers due to an upsurge in the fuel surcharge in their electricity bills, its worse for manufacturers.

Energy costs

The Kenya Association of Manufacturers contend that rising energy costs are making the going extremely tough.

Over the past two years increase in electricity costs constituted about 600 per cent of the production costs.

This has resulted to declining growth in the sector, massive job losses and some companies relocating to other countries.

This year, the World Bank projects the sector will continue on a decline as growth is anticipated to be three per cent. "Manufacturing will only expand by three per cent, which is below 2008 level of 3.8 per cent," states a report dubbed Still standing: Kenya’s slow recovery from quadruple shock released recently.

While this paints a bleak picture, analysts are optimistic that investments in the energy sector are a good omen not only for manufacturers but also for the economy in general.

Moreover, incentives being offered by the Government to private investors like expanding the scope of the special electricity feed-in-tariff are seen as a step in the right direction.

Increasing demand

"Investments in energy will open the doors for cheaper, affordable and sustainable sources of energy to meet increasing demand," said Henk Hutting, the Managing Director of Lake Turkana Wind Power Limited (LTWP).

By 2012, the country expects to have an additional 1,200 MW from the ongoing investments in rehabilitation and expansion of existing hydro plants, wind and geothermal.

The investments include the 300 MW wind plant by LTWP that is expected to be the largest in Africa, 140 MW from OlKaria IV and 120 MW from Kipevu III plant by Kenya Electricity and Generating Company (KenGen).

"Our strategy is to do thermal plants in the short term and go green using geothermal in the medium term," said KenGen managing director Eddie Njoroge.

The diversification in generation facilities is expected to ease the pressure on hydro sources that are prone to unpredictable weather patterns and also help in balancing the generation mix.

Studies indicate the over-reliance on hydro has proved to be costly for the economy due to drought induced power crisis. Since 2006, the crisis is estimated to have cost the economy a staggering $442 million, equivalent to 1.4 per cent of the GDP.