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Growing dominance of foreign investors to blame for huge power bills

FINANCIAL STANDARD
By Otiato Guguyu and Macharia Kamau | December 12th 2017
A Geothermal development Company steam well in Menengai ,Nakuru county.

NAIROBI, KENYA; The growing dominance of foreign firms and governments in Kenya’s energy sector is partly to blame for the soaring power bills for consumers, it has emerged.

The country has received $3 billion (Sh300 billion) in foreign direct investment (FDI) over the past eight years, which has gone into clean energy projects that include building of geothermal, solar, wind, and hydropower plants.

Some of these projects have started generating electricity and are with time expected to substantially reduce the amount of power produced using the more expensive thermal generators.

While FDI is good for the country, the foreign currency-denominated loans play a factor in pushing up power bills, especially when the shilling depreciates against the world’s major currencies such as the dollar.

This means the players in the power sector have to use more shillings in repaying their debts. This is usually passed on to the consumers and captured in the monthly power bills as forex adjustment.

The shilling has over the past five years or so weakened against the dollar and is currently trading at Sh103 compared to Sh85 in 2012.

Success story

A new report has ranked Kenya the eighth most attractive country in which to invest in green energy, falling only behind South Africa, which ranked sixth, in the continent.

According to the Bloomberg New Energy Finance’s Climatescope report, foreign nations, including the small West African country of Togo, have put in over Sh330 billion over the past decade to tap into Kenya’s booming green energy sector.

From geothermal to biofuels, wind and solar, the country is building a thriving energy mix fuelled by dollars from multilateral deals clinched between 2008 and 2016.

The country’s huge investments in the geothermal industry is a success story, with the underground resource now accounting for about 50 per cent of installed power capacity. Several new projects on this front are underway. Japan is the biggest bilateral lender to Kenya’s new energy mix, having advanced $655.5 million (Sh67.5 billion) in loans followed by Germany with $354.3 million (Sh36.4 billion). South Africa, Luxembourg, France, and the United Kingdom follow closely with over $200 million each (Sh20.6 billion) in debt and equity deals across the country. China and the US have, on the other hand, each put in over $100 million (Sh10.3 billion) to power Kenyan homes and businesses.

Solar power is quickly gaining currency across the continent, with Burkina Faso last week launching its French-backed 55-hectare solar plant at Zagtouli on the outskirts of the capital Ouagadougou.

The plant will churn out 33 megawatts – enough to power tens of thousands of homes.

According to the Bloomberg Climatescope report, which assesses 71 countries in emerging markets on their progress towards the clean energy transition and reports on clean energy investment made in those countries, solar energy has driven global capacity by 54 per cent year on year to 34 gigawatts and has more than tripled in three years.

Currency volatility

Kenya also has a thriving off-grid industry, with some of the most advanced pay-as-you-go solar companies and innovative business models for micro-grid development.

As one way of cushioning consumers against rising power bills because of currency volatility, the Energy Regulatory Commission (ERC) recently said it is evaluating the possibility of having shilling-denominated loans as well as power purchase agreements. The industry regulator commissioned a study to evaluate the extent to which this will be possible. Currently, consumers are paying about a shilling per kilowatt hour of electricity consumed.

Considering that the forex component will continue playing a critical role in determining the cost of power, the high investments, both debt and equity, might also mean idle capacity.

This is because local demand for electricity is still low. Peak electricity demand reached 1,720 megawatts (MW) in November this year, against an installed capacity of 2,300MW, although some of this is made up of thermal generators that the Government and other sector players are looking to replace.

According to analysts, additional capacity without growth in demand might leave the country with a disproportionately huge surplus and saddle consumers with a Sh50 billion idle capacity charges burden every year.

This was a key determinant in doing away with the grand plan of having in place installed electricity generating capacity of 5,000MW in 2013. The recent presidential directive to the power sector to offer discounts to manufacturers during the off-peak hours of between 10pm and 6am could be one of the measures aimed at creating increased demand for the electricity without burdening consumers with having to pay for idle installed generating plants.

The 50 per cent discount is also expected to additionally awaken the manufacturing sector, a critical sector in creating jobs and wealth and reorient Kenya into being a major exporter.

Stanbic regional economist Jibran Qureishi told The Standard that President Kenyatta must go beyond increasing power capacity in his second term and improve reliability and transmission to boost manufacturing.

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