Project work - Country

KENYAS ELECTRIC POWER SECTOR

Fredrick Oluleka Amariati

8/31/2018

Table of ContentsPart A: Background........................................................................................................................................2

Overview of the country............................................................................................................................2

Case example of provision of modern energy access................................................................................2

Evolution and present situation of the power system................................................................................2

Electricity generation.................................................................................................................................2

Networks....................................................................................................................................................2

Electricity demand.....................................................................................................................................2

Large energy projects.................................................................................................................................2

Electrification planning..............................................................................................................................2

Part B: Regulation of the power sector..........................................................................................................2

Power sector regulation..............................................................................................................................2

Regulation and governance for energy access...........................................................................................2

Governance of electrification activities.....................................................................................................2

Financing electrification............................................................................................................................2

Electrification business models: Grid extension........................................................................................2

Electrification business models: Microgrids..............................................................................................2

Electrification business models: Stand-alone system................................................................................2

Clean cooking............................................................................................................................................2

Part C: Roadmap to achieve 100% electrification by 2030...........................................................................2

Part A: Background

Overview of the country The Republic of Kenya lies on the equator in in the northern part of East Africa and borders on five countries and two bodies of water. In the north, it shares borders with South Sudan and Ethiopia; it shares a border with Somalia to the East and it has access to the Indian Ocean. The latter provides the major entry point for trade and transport (including import of energy sources), not only for Kenya but for many countries in East Africa. In the south, it shares a border with Tanzania and finally to the west, it has access to the Lake Victoria and shares a border with Uganda. With some 0.6 million square kilometres, Kenya is the 23rd largest country in Africa and the 49th largest country in the world. Its shape is relatively even with nearly equidistant west to east and north to south extension as well as an equidistant location on the equator. However, due to distinguished geographic regions together with historic reasons, the populated and development areas are not equally distributed but lie mainly in the southern half of the country. They concentrate around Nairobi, Mombasa and Lake Victoria. This distribution has furthermore determined the development of the existing infrastructure2. It also poses a challenge for the connection and supply of the periphery, for instance with regard to transport and power supply.

The main geographic regions are the (eastern) highlands in the centre south with Nairobi as the main settlement and development area of the country determined by high altitude and precipitation; the coastal region along the 400 km coast line to the Indian Ocean (densely populated around Mombasa in the south) and the coastal hinterland with several rivers (e.g. Tana) flowing from the highlands into the ocean; the western plateau along Lake Victoria with the second largest settlement area in terms of total population; the rift valley between highlands and western plateau with geologic fault lines as the resource area for geothermal energy; and the northern plain lands region covering the whole northern part of Kenya with arid and semi-arid plains and low population density but also including the Lake Turkana as the largest water body within Kenya.

Administratively, and under the new constitution promulgated in 2010, Kenya has 47 countries. It is envisioned that power will be devolved to each of the forty seven counties. This is expected to result in more equitable sharing of resources across the country, with increased levels of investment particularly in the more remote counties that have historically been neglected. There exists wide ranging levels of household electrification across the country, from around 75 % of households in Nairobi County to less than 2 % of households in Tana River County. Electrification levels are increasing across the country and following devolution, it is expected that the rate of increase will be highest in those counties that are currently poorly served with electricity infrastructure. The Least Cost Power Development Plan (LCPDP) is the key power generation and transmission system planning document in Kenya. The key message within the LCPDP is that, “there is a need to plan for sufficient electricity capacity additions to meet the growth aspirations of the Vision 2030”. Vision 2030 identifies energy and electricity as a key element of Kenya’s sustained economic growth and transformation.

The population size and growth as well as migration strongly determine the future demand for utility services. It is interrelated with other demographic parameters such as urbanisation and the geographical distribution as well as national and local economic growth. The most recent census of 2009 set the population of Kenya at 38.6 million people while recent publications from Kenya National Bureau of Statistics (KNBS) and United Nations (UN) forecasts at 41.8 million for 2013 and 46.7 million respectively. This ranks Kenya at 30th and 7th among all countries in the world and Africa, respectively. The annual population growth in Kenya is 3.14% and is forecasted to grow between 2.5% and 2.9%,

which makes Kenya one of the fastest growing countries in the world in terms of population. The needs for household-level services such as connections to the water and electricity networks is likely to be substantially underestimated if governments do not take into account the impact of the demographic transition towards smaller household sizes apart from the impact of population growth”

The geographical distribution of the population has a strong effect on the supply of electricity on the national (transmission network) as well as local level (distribution network) and related costs. It may also give indications on possible social impacts of new infrastructure projects. Kenya has a population density of 63 people per km2 in 2009 ranking it as average among the countries in the world and Africa. However, the distribution of the population is very uneven. Population distribution for Kenya follows to a large extent the natural landscape, with the large arid areas in the north and east and along the border to Tanzania showing a low population density. The humid areas of the highlands and the coastal regions along Lake Victoria and the ocean are home to the majority of the population. The density on county level reaches in many areas to several hundred people per square kilometre and beyond. Nairobi and Mombasa had more than 4,000 inhabitants per km2 in 2009. For the power system areas, Nairobi is leading with a density of 189 in-habitants per km2, ahead of Western area (100), the Coast area (40) and Mount Kenya (31). Urbanisation has a strong effect on the present and future electricity supply, for instance, with regard to costs and possible targets for electrification measures. Due to the high population density, urban areas are in most cases easier and less costly to electrify compared to rural areas. This effect is reduced by the household size which tends to be larger in rural areas . In 2009, about one third of the Kenyan population lived in the urban areas of some 200 settlements of more than 2,000 inhabitants. Compared to other African countries the level of urbanisation in Kenya is low.

Kenya is a market economy and it consists of a liberalised external trade framework and rather market friendly policies. Compared to other developing countries, there is strong private sector participation, with both local and international companies. The Kenyan economy plays an important role for the regional economy (e.g. within the East African Community (EAC)) due to its size and, among other reasons, its private sector and its human capital. Despite the market-friendly policies there are various obstacles for the private sector. Kenya is ranked 136 (out of 189 countries) in the World Bank Doing Business 2015 report. This is only slightly above Sub-Saharan Africa average (142) and has barely changed in the past years. Particularly challenging areas are “Starting Business” (143), “Trading across Borders” (153), and “Getting Electricity” (151). It is categorized as a lower middle income country,

Kenya’s Vision 2030; the development programme of the Government of Kenya for the period 2008 to 2030 has since 2006 influenced the economic, social and political frameworks of the country. The economy in Kenya has experienced a long period of growth during the past decades with Gross Domestic Product (GDP) growth rates averaging at 5% between 2006 and 2014. Vision 2030 set a 10% GDP growth rate as a policy objective, which is highly unlikely to be attained. The IMF projection for the GDP growth rate in Kenya is 6.9%. The country’s GDP is driven and dominated by the service sector (public and private) which has contributed 56% to the GDP in 2014, constantly growing over time from 52% in 2006. The share of services predominantly delivered by the government (administration, education, health, electricity and water) has been around 19% throughout the years. The remaining rather private services (e.g. transport, telecommunication, wholesale/retail, finance, real estate) contributed 36% to the GDP in 2014; growing from 34% in 2006. The agricultural sector contributed 25% in 2014, down from 29% in 2006. The contribution of manufacturing, and mining kept stable at 18-19%. While contribution of construction and mining increased above average (from 0.6% to 1% and 3.8% to 5.4% respectively) the contribution of manufacturing decreased by nearly two percentage points (from 14.1% in 2006 to 12.4% in 2014).

Regarding the socio-economic situation, around 45% of the population in Kenya lives below the poverty line. The absolute numbers of the poor have probably even increased during the past decades (e.g.

three million between 1997 and 2006). In the Human Development Index (HDI), a factor taking into account Kenya’s Gross Domestic Product, life expectancy and education, the country is ranked at 147 out of 187. This is ahead of most (34) of all African countries and all countries in East Africa. However, a strong inequality among the population persists (Gini coefficient of 0.445). The inequality also exists with regards to access to electricity, i.e. the low electrification ratio (or connectivity level) of the population. Kenya is classified among the 20 fastest moving countries over the 2010-2016 tracking period. Only 56% of the population has access to electricity, with only 13% having access to clean cooking energy. Of all these, 73% of the population with access to electricity is in the urban areas giving an electrification rate of 77.89%; while approximately 43.89% is in the rural areas giving an electrification rate of 48.23%.

Case example of provision of modern energy accessPay-As-You-Go (PAYG) Models for Cooking Fuels – Innovation for the Poorest Consumers in Kenya

Regional leader in use of technology: Within the East Africa and Sub-Saharan region, Kenya has been recognized for its leadership in adopting technology in doing business, with the invention of mobile money services forming the best innovation to ever happen. In the last 2-3 years, a handful of thermal energy services companies in the developing world, specifically in Sub-Saharan African countries, have begun to take advantage of pay-as-you-go (PAYG) consumer financing models in their energy businesses. These models have significant advantages in comparison to direct purchase, hire-purchase or micro-credit models when dealing with the poorest consumers in societies, for example those living in informal settlements in urban or rural areas. Some companies are taking advantage of these models for selling clean cooking products, such as stoves themselves, whereas others are using this payment structure for cooking fuels.

One company in Kenya taking advantage of these innovations is KOKO Networks. This firm o offers an integrated neighborhood-level clean cooking solution with smart technology, via their KOKO points, cloud-connected commerce hubs where consumers and vendors come to refill the products on sale or make purchases. Currently, the company is offering the SmartCook product at these sales points, which is a two-burner clean cook stove with an integrated fuel canister. The fuel used is marketed as Mafuta smart, which is an ethanol fuel derived from molasses manufacture.

What is particularly innovative about this system is that the sales hubs for the company have an automated purchasing stations for the fuel for the cook stove system. These dispensers refill the provided fuel canister (known as a kibuyu smart canister) with the cook stove system, and customers can refill their canister from as little as KHS30 (US$0.29) at a time, offering significant flexibility for the consumer without the “poor people’s premium” (higher per-unit prices charged for small amounts of consumable products) seen in other commodities. The company operates on a concession business model, with interested parties either setting up their own fuel supply arrangements for the fuel to service their settlement, or purchasing equipment and fuels from KOKO themselves. Other companies in Kenya are taking advantage of PAYG models to enable greater access to their products and services as well.

In Nairobi, PayGo Energy is a distribution service for Liquefiable Petroleum Gas (LPG) fuels that is using pay-as-you-go services to bring LPG fuel access to a greater number of consumers. The service begins with the installation of an LPG stove, cylinder and smart fuel meter in the home. This smart meter is at the core of the service the company offers, as it automatically communicates to the company when

the fuel level is running low, whereupon the company arranges delivery of a replacement, full cylinder to the household. In addition, the system support mobile payments and ordering of fuel replacements, allowing customers to purchase as little as a day’s worth of LPG (around US$0.50) at a time. This logistics system has been adapted to informal settlements, allowing uninterrupted supply to households in informal settlements via motorcycle. Through this combination of factors, these companies are breaking the traditional barriers to household thermal energy service delivery, allowing consumers who previously would not have had the financial capacity to afford modern cooking fuels the ability to access these technologies.

Evolution and present situation of the power systemA sector dominated by reforms driven by emerging challenges. The evolution of Kenya’s power sector can well be analysed through the policy reforms undertaken in the sector over the years . The sector, like many other developing countries, has also seen quite the transformation in the last couple of years. Over time, it has faced a number of challenges, which have seen it evolve and adopt new strategies in order to alleviate them. The challenges include the need to improve competitiveness, reliability and quality of energy supply in particular power generation and network are barely able to meet the growing demand leading to in-creasing supressed demand and economic losses. Lack of major investments in the sector by the private sector versus high initial capital needs for new investments in the sector and long lead and implementation time for new infrastructure projects continue to affect the sector. Lack of competitiveness of the country and negative impact on available household income and domestic wealth due to high energy costs and dependency on energy imports, insufficient access to and quality of electricity supply due to low connectivity rates and a weak transmission and distribution network (leading to high losses and costs including theft of equipment and electricity) have a huge negative impact o the sectors ability to deliver its mandate.

Policy reforms adopted to address these issues over the years by the government through the Ministry of Energy to improve the performance of the sector. The country undertook fundamental liberalisation reforms in the energy sector after the mid-1990s following the enactment of the Electric Power Act of 1997. This was followed almost a decade later by the Energy Act of 2006. This act built the foundations for the unbundling of generation from transmission and distribution in the electricity sub-sectors as well as the liberalization of procurement, distribution and pricing of petroleum products in the country. The Energy Act consolidated all laws relating to the energy sector and provided for the establishment of the Energy Regulatory Commission (ERC) as a single sector regulator. The current notable policy documents governing the sector include:

The Kenya Vision 2030 which is the new long-term development blueprint for the country which regarding energy, it acknowledges the currently high energy costs in Kenya compared to competitors in the region, especially in the face of growing energy demand. It prioritizes the growth of energy generation and increased efficiency in energy consumption through continued institutional reforms in the energy sector, including a strong regulatory frame-work, encouraging private generators of power, and separating generation from distribution, as well as securing new sources of energy through exploitation of geothermal power, coal, renewable energy sources, and connecting Kenya to energy-surplus countries in the region.

Sessional Paper No. 4 of 2004 and the Energy Act No. 12 of 2006 which stipulates the liberalisation reforms implemented in the energy sector in the mid-1990s and it lays down the policy framework upon which cost effective, affordable and adequate quality energy services will be made available to the domestic economy on a sustainable basis over the period 2004-2023.

Energy Act No. 12 of 2006 which succeeded the Electric Power Act No. 11 of 1997 and the Petroleum Act, Cap 116 of 1994 to facilitate a single platform for regulation and enhancement of all energy resources in the country. It further provided for the establishment of ERC, REA, KETRACO, and GDC, and outlines the functions and powers of the two bodies. In addition, the Act established the Energy Tribunal whose purpose is to hear appeals from decisions of the ERC. The institutional setup situates the two bodies, namely the ERC and the Tribunal as overall regulatory bodies independent of state influence. Both institutions coordinate and advise the Ministry of Energy on policy and strategy.

The Least Cost Power Development Plans (LCPDP) has been the Ministry of Energy and Petroleum (MOEP’s) power implementation plan for delivering the power sector targets outlined in Vision 2030, prepared by the Planning Team. The main contents are demand forecast scenarios for electricity demand, assessment of energy resources and generation and transmission expansion plans for the respective study periods.

Figure 2: Institutional structure in Kenya power sector

Rural Electrification Master Plan as the master plan adopted for the electrification of rural areas through the rural electrification pro-gram. It is updated on an annual basis in order to respond to the most urgent needs of rural population regarding electricity connectivity. The main agency responsible for this is the Rural Electrification Authority (REA) which was established by the Energy Act of 2006, and operationalised in 2007 with the sole mandate of accelerating rural electrification in Kenya. The government of Kenya provides the main funding sources for REA projects (80%) and is supported by various development partners (20%). The projects completed by REA are handed to KPLC for operation and maintenance based on a Service Level Agreement (SLA). However, the projects continue to remain

the property of REA and it does not pay KPLC operation and maintenance costs of the projects as this is recovered through the electricity retail tariff.

Feed in Tariffs introduced in 2008 to provide investment security to renewable electricity generators, reduce administrative and transaction costs and encourage private investors in establishment of Independent Power Production (IPPs). The FiT were reviewed in 2010 and 2012. The tariffs apply to grid-connected plants and are valid for a 20-year period from the beginning of the Power Purchasing Agreement (PPA), with approval of the PPAs granted by the ERC.

Draft National Energy and Petroleum Policy and Energy Bill 2015 aimed at consolidating of laws with regard to energy. It consists of various regulations for instance for renewable energy promotion and energy exploration. It further defines powers and functions of existing and various new entities for regulation and advisory of the energy sector. It also clarifies the respective functions for national and county governments.

High Energy Costs in Kenya are seen as an impediment to the realization of the country Vision 2030. The energy costs in Kenya is US$0.150 per KWh. This compares poorly with Mexico (US$0.075), Taiwan and China (US$0.070), Colombia (US$0.064) and South Africa (US$0.040). Due to over-reliance on hydroelectricity, the frequency of power outages is high (33 per cent compared with the average for Mexico, China and South Africa, which stands at 1 per cent). Production lost due to these outages is estimated at 9.3% (compared with the average for Mexico, China and South Africa, which stands at 1.8 per cent). Also, it takes approximately 66 days to obtain electricity connection in Kenya (compared with an average of 18 days in Mexico, China and South Africa); Telecommunications costs in Kenya are US$15,000 per month for a 2Mbps international leased line. This situation compares unfavorably with key Business Process Outsourcing (BPO) destinations e.g. India (US$4,800), the Philippines (US$4,400), Poland (US$ 2,000) and Morocco (US$7,000); Total water availability in Kenya is currently about ~937 m3/capita, which is far below the average for Africa (~4,500 m3/capita); System losses: Unaccounted-for-water losses average 60 per cent while electricity transmission losses average 18.5 per cent

According to the Kenya Power and Lighting Company data base, customers are classified into Customer / tariff groups and they include Domestic consumers; Small commercial consumers; large commercial and industrial consumers; and Street lighting. All categories include customers of the normal (commercial) KPLC scheme (which have accounted for more than 80% of all customers) and the subsidized Rural Electrification Programme (REP). The data situation in Kenya does not allow for the definition of other customer groups which could be of benefit due to their common consumption patterns (e.g. institutional, public and private customers in education and health; large agricultural consumers). Besides the interconnected national electricity grid, there are 16 isolated grids in Kenya. They serve areas and population far away from the grid. Compared to the interconnected grid, they only generate and supply less than 0.5% of the electricity. The Tariff structure as shown below is set by the Kenya Power and Lighting Company and they do not change frequently.Table 1: Kenya Tariff structure

Special off peak tariffs rates were introduced by the Government of Kenya targeting commercial customers with effect from December 2017. For all the commercial customers operating at 100% production capacity during on peak and off peak hours, they receive a 5% discount on the applicable Energy Rate for the off peak consumption upon satisfactory confirmation by KPLC that their production is at 100%. Off-peak rates are applicable as follows:

Table 2: Kenya special off peak tariff structure

A growing customer base made possible through technology adoption: According to KPLC data base, 5.9 million customers have been connected to the grid to date through ongoing government-led national electrification programmes. Of these customers, 3.5 million customers are on prepaid meters, as the Company shifts to advanced technology that makes it easy for customers to purchase electricity. The number of households currently connected to the national grid stands at 63 per cent of the national coverage. The target is to connect 70 per cent by 2020.

Kenya’s energy mix consist of imported fossil fuels and renewable sources which include biomass, hydro, geothermal, solar and wind (about 0.01%). Total installed electricity capacity (2010) is 1,429 MW (Hydro-electric 52.1%, Geothermal 13.2%, Conventional Thermal 32.5%, Wind, Others 2.2%). Nationally 69% of all households use firewood for cooking. The availability of Improved Cook Stoves is much higher than in the rest of East Africa, with production on a commercial basis and a larger market existing in urban and peri-urban areas. The current renewable energy power generation has been on the

Tariff/ Customer Group

Fixed Charge

Energy Charge (per kwh) Demand charge (per Kva)

DC (Domestic, 240 V) 150 First 50kWh:2.5050 to 1 500kWh:12.75Thereafter:20.57

N/A

SC (Small Commercial, 240 V) 150

13.50 NA

CI1 (Commercial, 415 V)

2500 Peak: 9.20Off-peak: 4.60

800

CI2 (Commercial, 11 kV)

4500 Peak: 8.00Off-peak: 4.00

520

CI3 (Commercial, 33 kV)

5500 Peak: 7.50Off-peak: 3.75

270

CI4 (Commercial, 66 kV)

6500 Peak: 7.30Off-peak: 3.65

220

CI5 (Commercial, 132 kV)

17000 Peak: 7.10Off-peak: 3.55

220

IT (Domestic water heating)

150 13.50 NA

Day Off-peak hoursWeek days 2200hrs to 0000hours and 0000hours to 0600hours

Saturdays and Public holidays 1400hours to 0000hours and 0000hours to 0800hours

Sundays All day(0000hours to 0000hours)

rise and has only been 5% of the total potential. Significant potential exist for power generation from wind, solar, geothermal and hydro resources.

Electricity generationKenya Electricity Generating Company Limited, KenGen is the leading electric power generation company in Kenya, producing about 75 percent of electricity capacity installed in the country. The company utilizes various sources to generate electricity ranging from hydro, geothermal, thermal and wind. Hydro is the leading source, with an installed capacity of 819.9MW, which is 51 per cent of the company-installed capacity. Geothermal is currently at 533.8MW (of which 81.1MW is from the innovative wellheads technology raising geothermal capacity to about 32% of the total installed capacity. Our total thermal capacity is 253.5MW while wind comprises 25.5MW. As of 2015, Kenya’s total installed capacity stood at 2295 MW of installed on-grid capacity across 42 plants plus an additional 11.5MW in 19 off-grid stations in remote parts of the country. Of this total, KenGen’s installed capacity amounted to 72 percent; IPPs made up the majority of the balance. The installed capacity consists of 70% renewable sources, with enormous potential to expand that base. According to the MOEP, Kenya has the potential to produce 10000MW of geothermal power from the Rift valley basin. Wind capacity is estimated at 3000MW.

The recent shift to a mix of publicly financed energy supply has increased reliance on geothermal energy and encouraged the emergence of wind energy. Geothermal energy increased from 12 percent of KenGen’s total installed capacity in 2006 to 32 percent as of April 2015. The share of installed wind capacity, though relatively small (at 1.6 percent), has increased substantially from its base and is expected to increase further after additions at Meru. The share of traditional thermal gas and diesel has become less significant (at 15 percent) as it is displaced by geothermal.

Table 3: Kenya electricity sources

Installed MW Effective MW % effectiveHydro 820.7 797.6 37.2%

Geothermal 588.0 579.9 27.0%

Thermal (MSD) 633.0 614.5 28.6%

Temporary Thermal (HSD) 30.0 30.0 1.4%

Thermal (GT) 60.0 54.0 2.5%

Wind 25.5 25.5 1.2%

Cogeneration 26.0 21.5 1.0%Interconnected System 2183 2123 98.9%Off-grid thermal 26.8 23.1 1.1%

Off-grid wind 0.66 0.610 0.028%

Off-grid solar 0.550 0.212 0.010%

Imports 0.00 0.00Total Capacity 2211 2147 100%

Independent Power Producers (IPPs) together account for approximately 30% of the installed capacity in Kenya (or 565 MW). Most capacity is supplied by diesel generators (78 percent), followed by a geothermal installation at 18% and a cogeneration installation at 5%. The percentage of IPP capacity has grown considerably since 2005, when IPPs accounted for only 12 percent of installed capacity. Total installed generation capacity also includes Emergency Power Projects (EPPs), which today account for only 30 MW (2015) or less than 1 percent of the total. Dependence on EPPs has fluctuated considerably over the past decade; their peak was in 2008 and 2009, when EPP installed capacity amounted to 11 percent of the total.

In the period July 2013–June 2014, the latest for which complete data are available, KenGen produced 5,931 gigawatt-hours (GWh) of electricity, or 67 percent of the total (of which approximately 67 percent was KenGen hydropower installations, and the balance was largely geothermal, accounting for 19 percent). This was followed by IPPs at 30 percent, EPPs at 1 percent, and a total of 1 percent contributed by imports and the government’s Rural Electrification Programme (REP).

Figure 3: Existing and proposed Generation Stations

The governments’ generation plan was formulated as a 40-month target to expand the power generation capacity by 5,000+ MW. The additional capacity was deemed necessary to enhance diversification of the generation mix, reduce power tariffs through addition of least cost generation projects, avoid overreliance on hydropower and avail adequate capacity and reserve margin. Under this plan, envisaged in the Medium Term Power Development Plan to be completed by 2020/21, the total system generation capacity is targeted to reach 6,670 MW. Kenya Power, as the generation off-taker will be engaged in procuring power from 34 new power stations as well as supporting the government’s effort to stimulate power market peak demand growth to absorb the new capacity. As a result of the 5,000+MW plan the average generation tariff is targeted to fall from USD12.5 cts/kWh to USD7.40 cts /kWh.

Figure4: Kenya current and Projected Generation Capacity

Transmission and Distribution NetworksDistribution Network Configuration: Kenya Power and Lighting Company’s distribution network includes the main interconnected grid in addition to a number of small off-grid networks. The grid is operated in four distinct regions; Nairobi, Coast, Western and Mt. Kenya. The extent of the grid covers the main population centres in the four geographical regions. Within the Nairobi Region, the network configuration differs from that of the other KPLC regions. The region is supplied from the transmission network via several 220/66 kV and 132/66 kV transmission substations or Bulk Supply Points (BSPs). A number of 66 kV feeders emanate from each BSP and each 66 kV feeder supplies one or more primary (66/11 kV) substations. Each primary substation supplies a number of 11 kV feeders, which in turn supply 11/0.433 kV distribution substations. Larger customers may be supplied at 11 kV or 66 kV. The Nairobi network is interconnected both at 66 kV and 11 kV, with normally open points to allow transfer of load across BSPs or primary substations respectively. The 66 kV feeders are mostly overhead using single and double circuit wood-pole construction. The 11 kV feeders are also mostly overhead using single circuit wood or concrete pole construction. In Nairobi city centre, where there are space constraints or issues with clearances, underground cables are used for 11 kV and a few for 66 kV. There are a few 66/33 kV substations on the outskirts of Nairobi, which supply neighbouring areas via long 33 kV feeders.

Table 4: KPLC regional network

Region Nairobi Mt. Kenya Coast Western

Sub-region/ Sub-divisions

Nairobi South Nairobi North Nairobi West

Mt. Kenya North Mt. Kenya South

Coast North Rift Central RiftWest Kenya

Other Regions: The distribution network in the regions outside Nairobi is less interconnected, with many radial 33 kV feeders and generally with long distances between BSPs. Standard BSP design typically consists of 2 x 132/33 kV two winding transformers, however some BSPs are equipped with only a single transformer. A number of 33 kV feeders emanate from each BSP and each 33 kV feeder generally supplies one or more primary (33/11 kV) substations and many distribution (33/0.433 kV) substations. The 11 kV feeders emanating from the primary substations in turn supply distribution substations. In general, the primary substations are supplied from a single BSP, although some 33/11 kV substations have an alternative supply at 33 kV from a different 132 kV substation. There are normally open points to avoid parallel supply from different BSPs. The 33 kV and 11 kV feeders are generally overhead using single circuit wood-pole or concrete-pole construction. Underground cables are used as necessary due to space constraints in urban centres, although their present level of use outside Nairobi is minimal. In the urban centres, the 11 kV networks are interconnected where possible to provide alternative supply, however in the rural areas the 11 kV feeders are radial.

Kenya Power (KP) through Kenya Electricity Transmission Company (KETRACO) is currently the sole distribution company in Kenya. It operates Kenya’s interconnected grid, as well as several off-grid stations in the northern regions of the country. As the single off-taker in the country, KP negotiates Power Purchase Agreements (PPAs) with generation providers and dispatched energy to 3.6 million customers as of August 2015. Kenya Power has nearly doubled access in Kenya over the last 4 years, from 26% of households in 2011 to 46% in 2015, meeting best-in-class benchmarks globally with collaboration from Rural Electrification Authority (REA) whose mandate has been to accelerate the pace of rural electrification across all 47 counties. REA has helped move rural electrification from 4% to 32% of rural households, largely through its efforts to connect 60,000 public facilities (mostly primary schools) around the country and all household consumers within 600 meters of those facilities.

The Kenyan electricity supply industry structure is of the single buyer model with all generators selling power in bulk to KPLC for dispatch and onward transmission and distribution to consumers. The existing transmission network consists of 220 and 132 kV high-voltage transmission lines, and the distribution network consists of 66 kV feeder lines around Nairobi and 33 and 11 kV medium-voltage lines. Existing Transmission and Distribution Network Lengths include 1,331km of 220kV, 2,211km of 132kV, 655km of 66kV, 13,812km of 33kV, and 25,485km of 11kV lines

The distribution and transmission network is made of 49,828km of electric lines and additional 3,574km should be implemented by 2020. Distribution and transmission losses remain an important issue as the rate of loss verged on 17% in 2012. The main hindrances to the improvement of the quality of the network are the huge incurred investments, which require the participation of donors or of private investors. Expanding the medium voltage network to shorten low voltage lines would also be relevant. Kenya’s transmission network comprises of a 220 kV national grid61 branching into 132 kV and 66 kV levels and is as shown in the figure below:

Figure 5: Transmission network in Kenya

The existing network was designed for an operating voltage level up to 220 kV, though a higher voltage level of 400 kV is under implementation. The nominal fundamental system frequency is 50 Hz. The distribution network comprises the voltage levels of 33 kV and 11 kV and the low voltage system. Electricity is supplied to end consumers on different voltage levels up to 132kV. The transmission system is divided into four main areas. They are presented in the table below with further sub divisions for the larger areas in the network. The interconnected system has been operated by KPLC which owns most of the network built in the past. Kenya’s main transmission company, KETRACO established in 2008/2009 owns part of the high voltage lines and is developing the majority of new transmission lines (more than 4,000 km under construction or planned) and substations. Power generating plants are distributed in the country, some in far distance from the load centers; others support local load. The total installed capacity has increased to some 2,300 MW by the end of 2015 and 2016 with an effective capacity of some 2,200 MW to serve a peak load demand of around 1,600 MW.

Extension to the network: Kenya has experienced increased demand in electricity consumption in the last 5 years. This rise in consumption requires a corresponding increase in generation capacity and transmission network. Consequently, the Least Cost Power Development Plan (LCPDP) has put up the requisite plan to implement various plans on both generation and transmission.

Regionally, Kenya is part of the East Africa Power Pool and the key notable regional interconnections include Kenya (Lessos)-Uganda (Tororo), 127Km 220kV Double Circuit Transmission Line; Kenya (Isinya)-Tanzania(Singinda), 100Km 400kV Single Circuit Transmission Line and Kenya-Ethiopia (East Africa Interconnector), 686Km 500kV HVDC Transmission Line

Electricity demandPeak demand had reached 1,586MW by June 2016 and is expected to rise to 2,864MW in 2021 under normal growth scenario, including 30MW export to Rwanda. Peak demand in 2021 would be equivalent to 42.6% of the projected installed capacity. Total system generation capacity is targeted to reach 6,670 MW in 2021 if there are no slippages in completion of dates of committed projects. However, under the deferred growth scenario that takes account of the likely project delays, total installed capacity would be expected to reach 5,024MW.

Table 5: Projected electricity demand

Year GWh Peak LoadMW

2015/16 9,817 1,5852016/17 10,341 1,7502017/18 10,895 1,9592018/19 11,478 2,205

2019/20 12,093 2,494

2020/21 12,740 2,834

Sources: Source: Power Sector Medium Term Plan 2016-2021

The Installed capacity and peak demand is expected to grow as a result of normal demand growth linked to growth in the national economy and to major new industrial and commercial investments and Vision 2030 flagship projects: namely the ICT Park, light rail, standard gauge railway, Port of Lamu, new pipeline pumping stations, resort cities and iron smelting industry. The effective installed capacity is 2,341 MW where hydro accounts for about 35 percent of the total generation. The network has undergone tremendous expansion and improvement. In its quest for the socio-economic transformation of the country, the Government has set the goal of electrifying 70 percent of households in 2017 and universal access to electricity by 2020.

Figure 6: Installed Capacity and Peak Demand MW

Sources: Kenya Grid Development Plan

Domestic electricity demand is expected to grow since population is expected to grow from 38.6 Million according to the 2009 Kenya Population and Housing Census Volume 1C (2009 Census) to 60.5 million by 2030 according to the LCPDP. Similarly, growth in urbanization levels of consumers is a key demographic input and driver of demand and sales. This is expected to rise from 32 % in 2009, to 63 % in 2031 as stated in the LCPDP. The number of persons per household differs between urban and rural domestic settings. The number of persons per urban household is expected to decrease from a present average of 5, to 4.3 by 2031. The number of persons per rural household is expected to decrease from a present average of 6.5, to 5.9 by 2031. Industrial and Commercial electricity Demand based on the GDP growth is also expected to rise.

Based on other wider assumptions in the LCPDP, the number of lamps used for street lighting is expected to grow at 80% of the growth rate of the number of domestic consumers. Forecasted demand for domestic urban, domestic rural, industrial and commercial, street lighting and the flagship projects is expected to rise through to 2031, which will see a similar rise in electricity generation for the same period.

Electricity demand based on Counties: Based on the urban electrification levels per county, which is the connected urban households as a percentage of the total urban households, there is a wide variation across the counties and the level for the whole country is 50 %. The LCPDP forecasts urban electrification levels increasing to 95-100 % by 2031. Similarly, based on the rural electrification levels per county which is the connected rural households as a percentage of the total rural households. There is a wide variation across the counties and the level for the whole country is 5 %. The LCPDP forecasts rural electrification levels increasing to 50 -100 % by 2031.

The LCPDP electricity demand forecast is based on a number of inputs including; GDP growth rate projections, population growth rates, levels of urbanisation, levels of electrification and specific consumption. According to the LCPDP, the demand for electricity is expected to grow. Under different scenarios, the forecasts indicate a rising electricity demand as shown in the figure below. The forecast shown in the figure below includes the Vision 2030 Flagship Projects. Some of these are particularly energy intensive.

Table 6: LCPDP Forecast – including Flagship Projects

6,000

5,000

4,000

3,000

Projected

As at June 2016 Installed Capacity is 2341 MW and Peak Demand was 1585MW

Years

Capacity / Demand MW 2,000

1,000

2,8342,494

2,205

1,959

1,750

1,5851,5681,468

1,354

1,2281,107

987760708

520

290127

9470

5,024

4,468

3,901

2,6322,490

2,341

2,246

1,8851,7651,6891,5931,473

1,1971,1951,048

736498203

161

20212020201920182017201620152014201320122011201020072002200019901980197019660

Source: LCPDP, March 2011.

Large energy projectsThe governments Least Cost Development Plan and Grid Development Strategic Plan as the main blue prints guiding large projects development in Kenya. The government has adopted a grid network development and maintenance plan, as part of the Kenya Power 5-Year Corporate Plan by operationalizing the strategic initiatives and providing details of the specific projects or programs to be implemented yearly to ensure adequate power supply. The plan provides a detailed power supply value chain with activities that centre on the committed, planned, and future electricity generation, transmission, and distribution projects. The projects are centred on generation, transmission network development, distribution infrastructure development and network management. Different large projects have been initiated under this plan and some have been discussed here.

Large generation projects under the government’s 40-month target to expand the power generation capacity by 5,000+ MW have been initiated. The additional capacity was deemed necessary to enhance diversification of the generation mix, reduce power tariffs through addition of least cost generation projects, avoid overreliance on hydropower and avail adequate capacity and reserve margin. Under this plan, envisaged in the Medium Term Power Development Plan to be completed by 2020/21, the total system generation capacity is targeted to reach 6,670 MW. Kenya Power, as the generation off-taker will be engaged in procuring power from 34 new power stations as well as supporting the government’s effort to stimulate power market peak demand growth to absorb the new capacity. As a result of the 5,000+MW plan the average generation tariff is targeted to fall from USD12.5 cts/kWh to USD7.40 cts /kWh. Some of the on-going projects under this plan are as shown in the table below.

The transmission plan provides a summary of both the committed and future transmission projects including the regional grid interconnection requirements. The projects are mainly developed by KETRACO as identified and planned under the least cost power development plan. The transmission expansion plan aims to provide an additional 3,178MVA of transmission substation capacity and 3,325kms of new transmission power lines over the next five years that will serve the increasing demand and customer growth. The new lines will provide the vital link for the evacuation of power from the additional generation sources under the 5000+MW plan and improve the power quality and stability across the network. KPLC and KETRACO are working closely in implementation of transmission projects for evacuating power from ongoing generation projects and others for transmission capacity enhancement. Some of the recently completed transmission lines include 30km 132kV Thika-Gatundu, 77 km 132kV Kilimambogo – Thika –Githambo and 328km 220kV Rabai-Malindi –Garsen –Lamu. Kenya Power will lease and maintain the new transmission lines developed by Ketraco. Other large transmission Network Development projects under this plan that are on-going are shown in the table below.

Kenya is a member of the East Arican Regional Power Pool. Some of the regional power trade Projects include the implementation of the PPA signed between the Ethiopian Electric Power Company and Kenya Power for export of 400 MW to Kenya through a 500kV HVDC line spanning over 1,100 km. The line is currently being developed by KETRACO on the Kenyan side and it is expected to be commissioned by 2018. Kenya Power has signed a Power Purchase Agreement (PPA) with the Rwanda power utility Rwanda Energy Group Limited (REG) for export of 30-50MW through the Ugandan transmission line although at the initial stage, only 10-15MW will be exported due to transmission constraints along the Uganda line. The sale take effect through the three entities’ already interconnected transmission grid, following the signing of a wheeling agreement between Kenya Power, Uganda Electricity Transmission Company Ltd (UETCL) and REG. A new line being built between Kenya and Uganda will increase capacity transfer capability, while additional capacity enhancements are required in the power transmission system of Uganda for delivery of the power to Rwanda.

Table 7: On-going Large Transmission projects in Kenya

  Transmission Line Length (KM) Projected Commissioning Date1 Loiyangalani – Suswa 400kV line 428 May 20182 Nairobi Ring substations - August 20183 Kisii  – Awendo 132kV line 44 December 20184 Nanyuki – Isiolo – Meru (cable pending) 96 December 20185 Turkwel – Ortum – Kitale 90 April 20186 Isinya – Namanga 96 October 20187 Wote – Sultan Hamud 44 November 20178 Mwingi – Kitui 46 December 20179 Kitui – Wote 66 June 201810 Nanyuki – Rumuruti 79 June 201811 Lessos – Kabarnet 65 June 201810 Olkaria – Narok 68 June 201811 Olkaria – Lessos – Tororo 300 December 201812 Lessos – Tororo 132 December 201913 System Reinforcement (Isinya & NN s/stn) - December 2018

14 Eastern Electricity Highway Project 612 October 201915 Sondu – Homa Bay (Ndhiwa) – Awendo 96 December 201816 Mariakani substation - December 201917 Kenya – Tanzania line 97 February 2019  Total Length (KM) 2,359  

Source: KETRACO, 2018

Distribution Infrastructure Plan indicates the need to extension the transmission lines to connect current Off Grid Stations There exists an economic case for extension of the grid to Lodwar, Marsabit, Wajir, Habaswein and Hola. These sites will be interconnected to the grid through extension of the transmission network. Transmission projects that will bring currently off-grid stations into the interconnected network are shown in the able below. The distribution plan entails construction of 116 new distribution substations totalling 2,809 MVA with 1,244 kms of associated 66 and 33KV lines, 20 new bulk supply substations and installation of a total of 336.5MVAR reactive power compensation equipment in 15 transmission substations. The plan further recommends upgrade on several parts of the network as enumerated below:

Table 3.6 Transmission Projects connecting Off Grid Power Stations indicates the need for the company to invest in the distribution and transmission infrastructures (66kV Network) for the short-term period of 2016-2021. The plan proposes the required system reinforcement, upgrades and network expansion programme that ensures that the network is robust and reliable to transmit and carry the load demands as and when it grows and more so with the injection of the new 5,000MW generation.

Table 8: Transmission Projects connecting Off Grid Power StationsTransmission project Voltage

(kV)Status Expected

completionAffected off-grid power plant

Rabai-Malindi-Garsen-Lamu

220 RabaiMalindi commissioned Malindi Garsen Lamu commissioned

2015 Lamu

Kindaruma-Mwingi-Garissa

132 Under construction 2016 Garissa

Garsen-Hola-Garissa 220 Feasibility stage 2019 HolaGarissa-Wajir 132 Feasibility stage 2019 Wajir Habaswein

Source: KETRACO, 2018

Development of a major power hub at Suswa is seen as one of the East Africa Regions game changing projects. The projected growth in energy demand in the East African region due to the energy intensive projects envisioned in the various pool member countries has led to the adoption of a plan to build a major power hub to serve this purpose. Located in Suswa, the upcoming Substation is designed and located strategically to be a major hub within the grid networks of the Eastern African region and beyond. The substation is meant to play a critical role in enhancing power reliability, quality and security for a conducive business environment. There will be high inflows of power from diverse generation centres including Gibe in Ethiopia and Olkaria geothermal and Loiyangalani wind from Kenya among others. Outflows of power from Suswa is expected to feed Nairobi City County, onward export to

Tanzania and beyond through a southern corridor. There will also be interconnectivity with East African countries towards the western flank. Already the implementation of a high capacity HVDC line from Ethiopia to Suswa is ongoing and will deliver power from huge generation capacity in Ethiopia to Kenya and beyond, through this important hub. Also the implementation of the Olkaria –Lessos – Tororo line is ongoing, providing supply corridor towards the western flank of East Africa. The Suswa - Isinya - Arusha line will link Kenya’s national Grid to the Southern Africa.

Strategic location near Kenyas biggest load centres: Suswa Substation is not only strategically located near Kenya’s biggest load centres around Nairobi City County, but also a key pillar in the greater Nairobi high voltage ring circuit. The HV ring circuit around Nairobi will provide flexibility in supply sources, enhanced system redundancies for stability and security of power supply to industry, businesses, important facilities and residences. The interconnectivity of the region through Suswa will enhance supply stability and security for a more competitive Eastern Africa region. The substation will therefore serve as an entry and exchange point for geothermal, wind and hydro-generated power into the Kenya’s National Grid and Regional GRID networks.

Electrification planningElectrification planning undertaken based on the Kenya Vision 2030. Vision 2030 plan forms the basis for most other master plans adopted by the various government agencies. The aim of Kenya Vision 2030 is to create “a globally competitive and prosperous country with a high quality of life by 2030” by transforming Kenya into “a newly-industrializing, middle-income country providing a high quality of life to all its citizens in a clean and secure environment”. On energy, the Vision 2030 notes that currently the energy costs in Kenya are higher than those of her competitors in the face of growing energy demand. It therefore prioritizes the growth of energy generation and increased efficiency in energy consumption. This will be achieved through continued institutional reforms in the energy sector, including a strong regulatory framework, encouraging private generators of power, and separating generation from distribution, as well as securing new sources of energy through exploitation of geothermal power, coal, renewable energy sources, and connecting Kenya to energy-surplus countries in the region.

The grid network development and maintenance plan forms part of the Kenya Power 5-Year Corporate Plan by operationalizing the strategic initiatives and providing details of the specific projects or programs to be implemented yearly to ensure adequate power supply. It provides a detailed power supply value chain with activities that center on the committed, planned, and future electricity generation, transmission, and distribution projects. Besides that, the Kenya government, in bid to attain SDG7 of universal energy access, has adopted a number of blue prints that are aimed at enhancing planning in the electricity sector. The existing master plans include Vision 2030, the governments development blue print that highlights the importance of energy, the Rural electrification Master Plan implemented by the Rural Electrification authority to fast track the goal of attaining universally accepted energy access for all, the KPLC distribution master plan and to some extent the Power Generation and Distribution Masterplan.

Despite significant gains in infrastructure development realized over the last 5 years, Vision 2030 notes that Kenya’s global competitiveness is still weak. Energy costs in Kenya is USD0.150 per kwh, which compares poorly with Mexico at half the price, Taiwan at USD 0.070 per kwh and South Africa at USD0.0040 per kwh. Due to over-reliance on hydroelectricity, the frequency of power outages is high at 33% compared with the averages for Mexico, China and South Africa. Production lost due to these outages is approximately 9.3% (compared with the average for Mexico, China and South Africa, which

stands at 1.8 per cent). Also, it takes approximately 66 days to obtain electricity connection in Kenya (compared with an average of 18 days in Mexico, China and South Africa). System losses

transmission loses average 18.5 per cent.

The Vision 2030 further identifies flagship projects to be undertaken for delivery within specific timelines, the following is a brief overview of energy specific projects to be undertaken by 2016. At its inception, a number of projects were envisioned under different master plans including rural electrification programs in partnership with development partners with the French Government providing funding to the tunes of KES. 2.7 billion to cover various parts of the country. Upon completion, the project will facilitate connection of power to 460 trading centers and 110 secondary schools, among other public facilities. Regarding Power to Public Institutions, the government through an ambitious plan planned to provide solar electricity generators to 74 public institutions including boarding primary and secondary schools, health centers and dispensaries in marginalized areas in Kenya. Energy access scale-up programme was also mooted under the vision 2030 and through this project, one million households would be connected with electricity over a period of five years at an estimated cost of KES.84 billion. The programme targeted connecting all major trading centers, secondary and primary schools, community water supply works and health centers in the country. Under vision 2030 and in bid to continue supplying clean energy, the government also envisioned construction of 6,000 tons common user Liquid Petroleum Gas (LPG) import handling facility in Mombasa through public private partnership. This is expected to increase parcel sizes imported thus reducing freight costs and making LPG cheaper to Kenyans. This was to be followed by construction of 2,000 tons common user LPG handling facility in Nairobi where it was expected that with increased storage space, supply sources will increase thus competitively priced LPG can be obtained.Addition of generation capacity is a key goal under vision 2030. The government envisioned additional capacity by drilling of 6 wells in Kenya’s Rift Valley region and was expected to produce 70 MW of electricity. The project is expected to prove that commercially exploitable steam is available in the field. Additional power would also be explored through the process of producing sugar. It is envisaged that the potential of about 120 MW will be exploited using sugar factories as a base. This will be done through public-private partnership. Wind Power Generation and other renewable energy sources were envisioned as other potential sources of energy that would be explored. For instance, it was envisaged that wind power will provide total power installed of about 150MW, this potential is still undergoing appraisal and more potential exists.The Energy Sector Recovery Project (ESRP), funded by the World Bank and some bilateral donors, has a major component on “Distribution Reinforcement and Upgrade” to be implemented over a period of four years. This is intended to improve quality and reliability of supply, reduce system losses and increase access to electricity service especially in the urban and peri-urban areas. This is of special interest to the industrial sector where power outages in the past led to losses.

The Rural Electrification Master plan was prepared by Rural Electrification Authority (REA) which was established by the Energy Act of 2006, and operationalized in 2007, with the mandate of accelerating rural electrification. REA developed the Rural Electrification Master plan for the

electrification of rural areas through the rural electrification program. The plan is updated annually and its development and review involves stakeholder participation in annual review exercises. The master plan is implemented in phases as outlined below. Access means households within 1.2km of M.V/L.V line while connectivity is the actual connection to electricity)

Phase Period TargetsI 2008-2012 Connect all public facilities;

Increase connectivity from 12% to 22%

II 20103-2022 Increase connectivity from 22% to 65%

III 2022-2030 Increase connectivity from 65% to 100%

Source: REA, 2016

Funding for Rural Electrification is facilitated by both internal, the exchequer contributing (80% and external (development partners) sources (20%). Recent Development Partners include the World Bank and Africa Development Bank among a host of others.

Mode of rural electrification in Kenya: REA implements RE projects through both Grid Extension and Off-grid supply which involves isolated diesel stations, installation of solar PV, Wind and Biogas systems in public institutions. Strategies of implementation include adoption of a Masterplan, Stakeholders involvement, Bulk Purchase of Materials, Use of Labour and Transport Contractors, turn key contracts and Competitive tendering with an average cost per km for MV line at US $ 10,000)

Standards / engineering spec used in rural electrification projects are prepared by a joint technical project committee of REA and KPLC members decides on the KPLC members decides on the standards and Specs for use in electricity subsector. The committee reviews regularly and the standards/ Specs of the various materials/designs. These standards are used both by KPLC and REA to ensure uniformity in the subsector to ensure uniformity in the subsector. REA hands over completed projects to KPLC for operation and maintenance based on the Service Level Agreement (SLA). The project handed over to KPLC remains property of REA. REA does not pay KPLC for O&M of the projects since this is covered through the electricity retail tariff.

Renewable energy sources at the heart of the authority plan. Program to encourage renewable energy includes adoption of Feed in Tariffs for Geothermal, wind, biomass, solar, small Hydro and biogas. Energy Regulatory Commission has gazette solar water heating regulations for use in towns residential buildings. Formulating a framework to promote use of solar PV, wind and Biogas systems. Net metering policy to encourage solar energy generation in buildings, commercialization of generation of solar energy.

Table 9: Renewable Energy Sources under REA plan

Renewable Energy Potential AreasGeothermal 7000MW Rift valleySolar 4-6kwh/m2/day Over 80% of

the land

Wind 346w/m2 Parts of Nairobi, Eastern, Coast

Small Hydro 3000MW Five drainage basins

Biomass-Cogeneration 300MW Sugar growing belt

Others-biogas, power alcohol, bio-diesel 300MW Medium and high potential areas

Source: Rural Electrification Masterplan

Challenges abound in the implementation of the plans: While there has been open confession by the government that success has been achieved in the electrification of the country, there is still not clear cut success story of the same. Absence of adequate data to corroborate the same has seen the Rural Electrification Authority unable to clearly consolidate its success. However, even in the absence of clear data to indicate success, challenges abound that affect the realization of the master plans. Historically, Kenya has relied on concessional financing from development partners and development finance institutions to provide the capital required for investments in the power sector. However, given the ambitious nature of its current targets and the tight timelines, Kenya may no longer be able to afford continue relying entirely on concessional capital. Instead, Kenya must catalyze commercial investments in the power sector to meet its financing needs. While Kenya’s power sector has made significant progress over the past few years and is attractive relative to peers in the region, Kenya still faces a range of challenges to financing the power sector and attracting commercial capital. These challenges include:

A challenging financing ecosystem for commercial capital. Commercial banks are currently often crowded out by Multilateral Development Banks(MDBs)/DFIs on both loan tenure and interest rates. Moreover, the tariff structure places a disproportionate burden on concessional financing across the value chain, especially for solar and wind. In addition, risk models are not tailored to the local Kenyan context, making commercial financing more challengingHigh GOK financial exposure to the energy sector. If the government delivers on transmission and distribution targets, the energy sector may exceed 20% of the total government debt burden. PPAs may also sit as contingent liabilities on the sovereign balance sheetOpaque or inconsistent processes which make securing financing difficult. Unclear approach to project selection at EOI stage, inconsistent application of PPA negotiation process, challenges in securing land, and lack of a standard approach to GOK Letter of Support make securing financing challenging and also lead to cost overruns due to delays, particularly for IPPs Insufficient financing models for state-owned enterprises. KenGen’s balance sheet indicates that it cannot take on significantly more debt to fund expansion; current initiatives to improve balance sheet and operational performance may not be sufficient to bridge the financing gap. Kenyas Geothermal Development Cooperation’s revenue model is not sufficient to cover true GDC costs due to implicit GoK subsidy. KETRACO’s inadequate revenue model results in a reliance on GoK financing rather than its own balance sheet. KP’s target to reach near-universal access by 2020 may be high-cost, given that we estimate a significant increase in cost per connection past a 70-80% connection rate based on trends seen in other countries

Lack of affordable financing for private off-grid developers. Due to smaller-scale financing needs and more innovative technologies, private sector players have difficulty securing affordable financing tailored to their needs

Part B: Regulation of the power sector

Power sector regulationKenya power sector regulation guidelines are effected through the Energy Act, 2006 (the Energy Act). The Act provides the basis for separation of generation from transmission and distribution of power in electricity sub-sector, liberalisation of procurement, distribution and pricing of oil products. Key highlights of the Act include:

Provision for the development of the Energy Policy which provides for the regulation of the entire energy sector including electric energy, petroleum and renewable energy.

Provision for the establishment of key institutions namely, the Energy Regulatory Commission (ERG), Geothermal Development Company, Rural Electrification Authority, Energy Tribunal and Kenya Electricity Transmission Company (KETRACO).

The formation of the institutions saw clear separation of roles between institutions for efficiency. KETRACO, for instance, took charge of electricity transmission while Kenya Power remained with distribution role. ERC became the single regulatory agency for the energy sector.

The Energy (Electricity Licensing) Regulations, 2012 which set out the requirements to be fulfilled by any person desiring a licence or permit authorising him or her to take part in the generation, transmission, distribution or supply of electrical energy in Kenya.

The Electric Power (Electrical Installation Work) Rules, 2006 which provide the requirements for the licensing of electricians and electrical contractors.

The Energy (Complaints and Dispute Resolution) Regulations, 2012 which provide the mechanisms through which the ERC resolves complaints and disputes between a licensee and its customers.

With respect to the regulation of electricity, the energy policy contains a detailed raft of measures which include:

the development of a competitive market structure for the generation, supply and distribution of electricity,

the establishment a rural electrification authority to spearhead off grid developments; and The promotion of entry of private entities into the sector and the creation of a new energy

regulator.

Kenya energy policy has been reviewed with the government issuing a Draft National Energy and Petroleum Policy dated June 2015. The policy framework proposed under the Draft National Energy and Petroleum Policy is reflected in the Energy Bill, 2017, which has been published and is under legal review.

The ERC is mandated under the Energy Act come up with national energy plans. In line with this, the ERC prepares and updates the Least Cost Power Development Plan (LCPDP), which is a 20-year development plan updated annually. The LCPDP is instrumental in identifying the possible investments in the generation and transmission of power in the energy sector in Kenya; it also places a focus on coming up with techniques on how the demand for power can be met cost effectively.

The Ministry for Energy and Petroleum issued a Feed-in Tariff Policy in March 2008 (the FiT Policy) (which was later revised in December 2012) relating to the generation of power through wind, biomass, small-hydro, geothermal and solar. The FiT Policy seeks to promote the generation of electricity from renewable energy sources and allows a power producer to sell renewable-energy-generated electricity to an off taker at a predetermined tariff for a given period of time. This policy is under review and the ERC is reviewing adopting competitive auction for renewable energy projects. Currently, the FiT Policy allows the award of projects without a requirement for tendering.

Regulation and governance for energy accessKenya power sector regulation guidelines are effected through the Energy Act, 2006 (the Energy Act). The Act provides the basis for separation of generation from transmission and distribution of power in electricity sub-sector, liberalisation of procurement, distribution and pricing of oil products. Key highlights of the Act include:

Provision for the development of the Energy Policy which provides for the regulation of the entire energy sector including electric energy, petroleum and renewable energy.

Provision for the establishment of key institutions namely, the Energy Regulatory Commission (ERG), Geothermal Development Company, Rural Electrification Authority, Energy Tribunal and Kenya Electricity Transmission Company (Ketraco).

The formation of the institutions saw clear separation of roles between institutions for efficiency. Ketraco, for instance, took charge of electricity transmission while Kenya Power remained with distribution role. ERC became the single regulatory agency for the energy sector.

The Energy (Electricity Licensing) Regulations, 2012 which set out the requirements to be fulfilled by any person desiring a licence or permit authorising him or her to take part in the generation, transmission, distribution or supply of electrical energy in Kenya.

The Electric Power (Electrical Installation Work) Rules, 2006 which provide the requirements for the licensing of electricians and electrical contractors.

The Energy (Complaints and Dispute Resolution) Regulations, 2012 which provide the mechanisms through which the ERC resolves complaints and disputes between a licensee and its customers.

With respect to the regulation of electricity, the energy policy contains a detailed raft of measures which include:

the development of a competitive market structure for the generation, supply and distribution of electricity,

the establishment a rural electrification authority to spearhead off grid developments; and The promotion of entry of private entities into the sector and the creation of a new energy

regulator.

Kenya energy policy has been reviewed with the government issuing a Draft National Energy and Petroleum Policy dated June 2015. The policy framework proposed under the Draft National Energy and Petroleum Policy is reflected in the Energy Bill, 2017, which has been published and is under legal review.

The ERC is mandated under the Energy Act come up with national energy plans. In line with this, the ERC prepares and updates the Least Cost Power Development Plan (LCPDP), which is a 20-year development plan updated annually. The LCPDP is instrumental in identifying the possible investments in the generation and transmission of power in the energy sector in Kenya; it also places a focus on coming up with techniques on how the demand for power can be met cost effectively.

The Ministry for Energy and Petroleum issued a Feed-in Tariff Policy in March 2008 (the FiT Policy) (which was later revised in December 2012) relating to the generation of power through wind, biomass, small-hydro, geothermal and solar. The FiT Policy seeks to promote the generation of electricity from

renewable energy sources and allows a power producer to sell renewable-energy-generated electricity to an offtaker at a predetermined tariff for a given period of time. This policy is under review and the ERC is reviewing adopting competitive auction for renewable energy projects. Currently, the FiT Policy allows the award of projects without a requirement for tendering.

Wholesale electricity generation

The Energy Act 2006 provides for the provisions to generate, import or export, transmit or distribute electrical energy. Provisions include obtaining a license or permit from the ERC.

The Energy (Electricity Licensing) Regulations, 2012 (Licensing Regulations) which set out the application process for various permits and licences.

For projects under the FiT Tariff Policy regime, The FiT Tariff Policy - Application and Implementation Guidelines provide that an applicant will have to submit an expression of interest to the Ministry of Energy and Petroleum together with a FiT Project Application Form. If the application is approved, the applicant can begin negotiations on the power purchase agreement with KPLC

The FiT Policy requires power producers to sell renewable-energy-generated electricity to KPLC, which is the single offtaker currently operating in the Kenyan market and provides qualifying tariffs for a set period of time.

Persons who wish to operate, manage or control facilities consisting of high-voltage electric supply lines for the movement of electrical energy in bulk between generating stations and transmission substations for the purposes of enabling supply to consumers are required to obtain a transmission licence or permit issued by the ERC.

Transmission Kenya has in place the National Transmission Grid Code (the Transmission Code) which was enacted in May 2017. The grid code is the primary technical document stipulating rules and regulations that various players in the electricity production chain are expected to abide by for efficient operation of the transmission system.

It is also the government’s current policy for all new transmission infrastructure to be constructed, owned and operated by KETRACO. This policy is in line with the unbundling of the energy sector in Kenya which provides for all existing transmission infrastructure to be held by KPLC, but for all new transmission infrastructure to be developed by KETRACO.

Persons who wish to operate, manage or control facilities consisting of high-voltage electric supply lines for the movement of electrical energy in bulk between generating stations and transmission substations for the purposes of enabling supply to consumers are required to obtain a transmission licence or permit issued by the ERC.

Distribution Persons who wish to distribute electrical energy require a

distribution licence issued by the ERC under the Energy Act. It is important to note, however, that KPLC is the sole distributor for electrical energy in Kenya.

Access to the distribution network is granted by KPLC subject to the terms and conditions of a power purchase agreement

Currently, KPLC is the sole main distributor and supplier for electrical energy in Kenya. However, this monopoly could end if the Energy Bill, 2017 is enacted in its current form. The Energy Bill, 2017 proposes the creation of a legal framework to support the licensing of private parties and county governments to distribute electricity.

KPLC is the main distributor of electrical energy in Kenya and it charges end consumers for power consumed. KPLC determines the electricity tariff which is then reviewed and approved by the ERC.

The ERC is required by the Energy Act to set the rates in a fair, transparent and predictable manner consistent with government policy and sensitive to stakeholder interest

Pursuant to the requirements of the Licensing Regulations and the Energy Act, the ERC grants licences to entities that wish to supply electricity to consumers

Public service obligations for electrical utilities in Kenya do not exists given that there is only one national utility, KPLC, which itself is a state corporation

Retail ERC is required by the Energy Act to set tariffs consistent with government policy and sensitive to stakeholder interests. KPLC proposes retail tariffs that are then reviewed and approved by the ERC. If approved, the ERC publishes the approved rates in the Kenya Gazette specifying the date on which the rates are to take effect.

KPLC proposes retail tariffs which are then reviewed and approved by the ERC. If approved, the ERC publishes in the Kenya Gazette the approved rates as the Schedule of Tariffs for the Supply of Electrical Energy, which provides the different rates at which electrical energy may be supplied to consumers, including wholesale consumers, by KPLC. The ERC is mandated to regulate the energy sector in a fair, transparent and predictable manner consistent with government policy and sensitive to stakeholder interests.

Governance of electrification activitiesElectrification planning in Kenya is undertaken based on the Kenya Vision 2030. The table below summarizes the institutions tasked with the various electrification plans and planning in Kenya.

Ministry of Energy(MOE) Development of policies to govern the various electrification plans developed by the various electrification institutions.

Vision 2030 Secretariat The Vision 2030 further identifies flagship projects to be undertaken for delivery within specific timelines, the following is a brief overview of energy specific projects to be undertaken by 2016.

Rural Electrification Authority (REA)

REA developed the Rural Electrification Master plan for the electrification of rural areas through the rural electrification program. The plan is updated annually and its development and review involves stakeholder participation in annual review exercises

Energy Regulation Commission (ERC)

Prepares and updates the Least Cost Power Development Plan (LCPDP), which is a 20-year development plan updated annually. The LCPDP is instrumental in identifying the possible investments in the generation and transmission of power in the energy sector in Kenya; it also places a focus on coming up with techniques on how the demand for power can be met cost effectively.

Kenya power In charge of preparing the grid development plans including but not limited to generation plan, transmission network plan, distribution infrastructure development plans and network management plans

The Kenya Electricity Generating Company (KenGen)

The main player in electricity generation with the shareholding being 70% by the Government of Kenya and 30% by private shareholders. The Company accounts for about 75% of the installed capacity from various power generation sources that include hydropower, thermal, geothermal and wind.

Kenya Electricity Transmission Company (KETRACO)

Implements the transmission network plans in collaboration with Kenya Power. Constructs new transmission infrastructure

National Land Commission Supports acquisition of land (public and trust land) as well as wayleave process for KETRACO

Business Models: Kenya energy sector is experiencing a flurry of business models to supplement its energy access efforts. The traditional centralized model has been complemented by the decentralized with the uptake of decentralized Renewable Energy technologies. The table below summarizes the categories of the business models in Kenya with few examples. The private sector led business models that include PAYG models is the most common in Kenya, largely due to the highest mobile coverage in Kenya and the M-pesa uptake option upon which the players ride on.

Multi-party led models Government departments and relevant agencies enter into agreements with international development agencies and private sector firms to develop the energy sector. The arrangement is guided by the government’s policy. The government of Kenya, in collaboration with the private sector, and international organizations have entered into partnerships to enhance energy access. Common in Kenya is the includes Power Africa, the United States’ clean energy plan for Africa led by USAID, and the Electrification Financing Initiative, led by the European Commission in partnership with Kenyan government and private sector investors.

Government led models The Kenya government is currently undertaking a K-OSAP project, aimed at enhancing universal energy access in marginalized Kenyan communities using decentralized renewable energy options specifically solar standalone systems.

Private sector led models This model has taken shape in Kenya and is preferred by firms in the private sector, as it holds high prospects for establishing a local market for the consumption of renewable electricity. It involves private sector firms financing and developing the renewable electricity-generating

asset, connecting households and managing the daily operations and the electricity-billing process. Customers may choose how much electricity they require and pay a flat rate when issued a bill reflecting their electricity consumption at regular intervals, or customers pay for electricity consumed using a flexible pay-as-you-go billing structure. This has been adopted in Kenya commonly as PAYG by M-kopa and Power hive.

PPA: An investor in energy in Kenya can sell energy only to Kenya Power in charge of transmission, distribution and retail of electricity. The contract with Kenya Power is the Power Purchasing Agreement, which stipulates the price, technical specifications, risk allocation, rights of obligations of the parties. Kenya has a well developed Standardized Power Purchase Agreement for Renewable Energy Generators of less than and including 10 MW and for generators greater than 10MW. This agreements are readily available from the Energy Regulatory Commission. The Key aspects of the PPA are in the table below:

Details Purpose: The Ministry of Energy and Petroleum wants to determine how the proposed power plant can be integrated into the national power development plan and estimate suitability of proposed power plant location for interconnection including interconnection facilities and costs.

Application and clearance Fee: None Maximum Processing Time: Within 90 days with 24 months validity to

complete feasibility study Validity: 24 months to complete feasibility study Legal Basis: No primary or secondary legislation in place. The Ministry

describes the procedure in the Feed-in Tariffs Policy 2012. Annual Renewal: 2 years subject to the investor updating the Feed in

Tarrif Policy Committee

Investor Inputs The investors input is contained in the Feed-in-Tariff Application and Implementation Guidelines. The summary of which is:

Particulars of the applicant Site and Land Ownership and Control Technology type Preliminary Project Feasibility Assessment Project Sponsors and Developers Technical Advisors, Experts and Contractors Project Financing Project Development and Implementation Plan

Elaborate application process

Submission of expression of Interest to the Ministry of energy Feed In Tariff Policy committee meets to review the EOI Expression of Interest 9EOI) approved by the committee with or without

further studies required Submission of progress reports to the FIT committee every 6 months Submission of detailed project proposal The committee reviews the project proposal The committee approves the project proposal and approves

commencement of PPA negotiations 6 months for project development including standard PPA

Additional 6 months for project construction to commence Project completion and commissioning within 24 months of signing the

PPA

Challenges with the PPA in Kenya:

Access to investment capital is a major challenge for renewable energy project developers because the cost of money in East Africa is very high.

The private sector investors in this renewable energy market experience financial loss and much frustration when pursuing PPAs, licensing to be an IPP, and the approval from local authorities, the off taker and energy regulatory agencies

Financial constraints, inadequate infrastructure and a lack of public buy-in have jeopardized Kenya’s ability to meet its 2016 target on new renewable energy generation capacity

Bureaucratic processes in getting approval for the renewable energy projects as a hindrance to IPPs willing to bet their money in the region’s market

Financing electrificationIn bid to promote electrification in Kenya, the government has adopted various financial and corporate arrangements made between firms to finance, execute, own and operate an infrastructure project. Various instruments have been employed in projects targeting generation, transmission and distribution.

Public debt National Governments assume development bank debt and sell bonds to outsiders as well as the public linked to projects, or for general budget support. Examples in Kenya include bonds issued by governments to outsiders in exchange for cash. A typical example for Kenya is the Green Bond in Kenya

, bonds issued by governments to outsiders in exchange for cashEquity financing

A corporation sells shares privately or publicly to raise cash for a variety of purposes generally disclosed in advance to shareholders.

shares in energy firms developing energy projects that are sold to the publicCorporate debts

Domestic or foreign corporations raise cash through bank loans for a specific purpose, and spend this money on project development, project realisation and to cover other related expenses

money that is borrowed by private actors, firms that are interested in developing energy projects

Donor based financing

Existing donor financing in the energy sector covers 36 projects / programs, with 20 donors / DFIs active and 210bn KES (around USD2.4bn) invested in the sector.

Donors are deploying a range of financing tools (grants, mixed grants and loans), with concessional lending representing 98% of current donor financing (8 development banks).

Projects range from large infrastructure projects, such as interconnectors and geothermal plants, to smaller rural electrification, technical assistance and capacity building.

Around 51% of donor financing is focused on generation, 20% on transmission, 13% on distribution and the remainder on other sector-wide needs (ERC, 2016)

In bid to ensure adequate financing for the energy sector projects, the following risks are prevalent and seen to be hindering this progress. Private financing has been seen to face more risks as indicated in the table below:

Risk and availability of risk mitigation

Political risk – the main requirement being to demonstrate that the regulatory and policy environment are sound and will remain stable over and beyond individuals change in circumstances.

Credit risk – will the project service the loan and pay the equity returns, which relates to the reliability of the revenue sources.

Inconsistence expectations from DFI and institutional investors.

The experience of the Lake Turkana project in Kenya shows that although the off-taker could be financially sound and bankable, the negotiation of the PPA and of the corresponding risk coverage could last longer, with significant associated additional project costs.

Land availability and permitting issues are important bottlenecks

Difficulties in securing stable long-term land allocation and difficulties in determining land ownership (community vs non-community) and use (agricultural land for example).

Equity constraints and donor competition

Lack of appropriate equity, including lack of early stage high-risk / high-return capital, ban on private placements, competition from grants and other forms of philanthropy (“crowding out private investments”).

The culture of maintaining full ownership in projects / companies, unrealistic expectations from project developers.

Insufficient know-how on how equity investments work and shape the revenue models.

Lending capacity for large-scale options and concessional finance crowd-out effects

Lack of capacity in local banks to assess the viability of clean energy projects and lack of long-term financing by local banks.

Lack of capacity of sponsors to demonstrate the bankability of projects, the inappropriate loan tenors (typically of 5 years, rarely 7 and maximum 10 years), these barriers make for limited successful commercial project finance to date.

Inappropriate forms of finance

Difficulty of small-scale decentralized solutions to access finance. The business opportunities are too big for some kinds of grants, but not big enough for commercial lending. As such, they sit within a grey area that makes them difficult to be considered for financing.

With respect to distributed models the availability of working capital is also a significant issue. With extended import time horizons and the need to retain high stocking rates – the need for substantial sums of working capital puts pressure on distributed generation equipment providers who can struggle to secure sufficient funds.

Electrification business models: Micro-gridsIn order to dismantle the challenges that come with the inefficiencies in Kenya Power utility, micro-grids have been adopted by the private sector, but with continued support from the government. The undocumented failures with the Last mile connectivity initiative coupled with the inefficiencies in the utility have enabled consumers view minigrids as viable options as long as the reliability debacle is

addressed. Micorgrids have been adopted as panaceas to liberalizing the sector to allow for independent players which would see healthy competition in the set-up and operation. Key facts about the micro grid opportunities in Kenya are as follows:

Consumers are willing to pay USD4/kwh The cost per watt for micro grid is estimated at USD5-10 20% of Kenyans have access to the grid 88% of Kenyans have a mobile phone There are over 65 micro grids in Kenya Kenya micro grid market over the next 5 years is estimated at USD1.5 billion In 2016 alone, there were over USD6b worth of transactions over M-pesa

It is estimated that the Kenyan micro grid market could reach 2,000 to 3,000 micro grids by 2021, up from the 65 microgrids between 5 and 100 kW currently operating. Sustainable Energy for All predicts that Africa will contain 35,000 microgrids – demonstrating the technology’s role as a key provider of electricity access. Majority of the very successful microgrids in Kenya are privately owned and have adopted business models such as PAYG. The variety of commercial microgrid business models in Kenya signals a healthy and dynamic business ecosystem.

Many microgrids are locally built and managed. For instance, on the Lake Victoria islands, there are crude, informal microgrids, where the owner of a diesel generator distributes power locally and charge people a flat rate, depending on what appliances they plan to run. These grids typically operate only for a few hours in the evening.

There are examples of locally built micro-hydro schemes individually built and owned, and uses old barbed wire to distribute power to a few local households, shops and a school. These users pay a flat rate for a service that covers all maintenance

There are cases, where the microgrid assets are owned by a community and decisions about investment of profits and new connections are made by an elected community council. Several such microgrids are run in fishing communities around Lake Victoria by the UK Comic Relief funded RESOLVE24 project.

Talek Power Company: A (Small) Microgrid Case-Study

Talek Power Company is a Special Purpose Vehicle (SPV), owned by the County Government of Narok. It was established by GIZ. The company boasts of a 40MWp solar/10MWp diesel backup MG, with 3km distribution network in a low voltage 3-phase system with 200 customers. Initially planned to connect 250 customers Tariff was KES70/kWh (US$0.67/kWh), not cost-reflective.

Talek is the 2nd minigrid1 (after KPLC and Powerhive) to receive a license/ permit (25 years). Not all customers are directly metered, but use sub-metering and connection sharing. When the project was implemented, the grid was 70km away, but now it comes as close as 30km. After 2 years in operation, GIZ did an impact assessment in April that found that since commissioning, 120 new local jobs have been created, new shops opened, and new productive users being generated. People used to travel to Narok, the next big city, but now stay in Talek, as more services are offered locally, such as welding and

1 Minigrid and Microgrid are used interchangeably in this report

woodwork Critics did not see GIZ as the right player to operate a mini grid for profit, therefore handed the project over to county government

Regulations for Micro grids: Kenya government see microgrids as a key piece of the country electrification strategies. The Ministry of Energy understand that their active development requires proactive risk reduction and the development of dedicated regulations and planning for a transparent, stable intersection between them and national grid expansion. In the Energy Bill 2016 under discussion, micro grids have been envisioned and are under preparation. Currently, there are many provisions that support mini-grids, but

no specific mini-grid policy and legal framework (no appropriate mini-grid license, regulatory procedures still too heavy-handed)

National Electrification Strategy is still under development No mini-grid coordination agency or guidelines for use of national funds to support mini-grids Existing institutional roles will be redefined or extended (e.g. REA mandate will be extended

through successor REREC)

A study was undertaken in 2016 on Mini grids in Kenya, and most of the output considered in the upcoming new energy bill. Under the new energy bill, micro grids are expected to be evaluated based on four categories based on the sizes (Category A: <50Kva; Category B: 40-500kVA; Category c: >500Kva. Regulations for mini-grids are based on expectation of connection to the grid if it arrives, technical standards, licensing, tariff and need for recurrent subsidies.

Two business models are currently possible, and they can be classified as either isolated or grid connected business models.

Isolated Business model RequirementUtility – KPLC owns and operates MG Release the restriction on KPLC for isolated MGPPA - separate generation from distribution

Allow also for much smaller generation under the RE framework

Management contract – Different parties own and operate MG

REREC should no longer develop sites

Private (concession) Already possiblePublic – public entity owns and operates MG

County government to develop and prioritize the site

Grid connected business models RequirementSmall Power Distributor (SPD) only Framework exists; bulk supply tariff to be developedGenerate only/ sell distribution assets to KPLC

Framework needed for transferring assets, incl compensation

Combined SPD/SPP See above, net-metering can be used for power sale/ purchase

Part C: Roadmap to achieve 100% electrification by 2030 In order to achieve 100% electrification for Kenya, Microgrids have been touted as viable options both in Kenya and around Sub-Saharan Africa. However, challenges have been noted in the existing regulatory frameworks governing the development, operation and maintenance of microgrids. This section focuses on the role of the regulatory frameworks necessary to ensure this happens. The position taken in this section acknowledges the role of an ensemble of approaches to realize electrification including different electrification models. However, there exists immense potential from micro grids that is hereby discussed. The economic viability of micro-grids is based on the following observations adopted from the Kenya Microgrid Report2

2 TFE_Report-Microgrids-Kenya.pdf

Highlights about the Microgrid potential in Kenya

Businesses create commercially viable returns: The microgrid industry is becoming less and less driven by development organizations and NGOs and increasingly by private companies. Microgrid developers have learned from the growing number of successful as well as failed projects. There are now a number of localized and proven microgrid business models. Many of them proactively catalyze the productive use of electricity for new, electricity-based enterprises that in turn bolster the revenues of microgrid operators. We also see specialization in the sector, from dedicated investment instruments to companies specializing in microgrid specific technical hardware.

Technology drives down cost: Whether it is locally designed smart meters, rapidly falling solar module costs, mobile payment solutions or the use of satellite imagery - technology plays a key role in bringing down the costs of microgrid systems as well as those of running the business. This reduces the cost of electricity for the end consumer, speeding up adoption rates and encouraging greater electricity consumption. As a result, micro grids offer higher returns to investors and become a more attractive option for governmental electrification strategies.

Technology drives down risk: The best potential sites and customers can be identified through data analytics and remote mapping. Power usage and payments are easily tracked using metering and control technologies. Tariffs can be adjusted in real time to optimize the use of installed assets and increase operator revenues. In general, technology makes “remoteness” less remote by bridging the informational, operational and psychological gap between the end customer, the microgrid developer and the investor.

Government drives down risk: Governments, including Kenya’s, increasingly see micro grids as a key piece of their electrification strategies. They understand that this requires proactive risk reduction and the development of dedicated regulations and planning for a transparent, stable intersection between the microgrid and national grid expansion. It also means giving microgrid operators a clear legal status and operational freedom. Should governments decide to subsidize microgrid power, there are technological and regulatory ways to achieve this that avoid excessive bureaucratic interference

The following trends and key highlights complement the business case for microgrid development in Kenya:

The way forward towards 100% electrification in Kenya can be viewed in form of adopting an appropriate framework of microgrids based on the 47 county governments for Kenya. In this case, we discuss private sector microgrids. The table below provides an overall guide of the details in developing a mini grid.

Focus Micro grids: The next frontier in the race towards universal Energy Access in Kenya by 2030

Decentralized in the 47 county governments

Ownership/Operating models: Available models to choose from include:

Public mini grids, Community-owned mini grids, and Privately owned mini grids

Micro-grid discussed Private Sector Micro grids

Kenya Enabling Environment

Kenya promulgated the new constitution in 2010 that saw the creation of 47 county governments. These governments provide a better platform in addressing the electrification needs. They enable addressing electrification needs at the county level, unlike national level, where we see improved granularity

The government is in the process of adopting a revised Energy Bill 2016, which provides an elaborate framework upon which micro grids can be developed. The Bill is expected to see electrification function devolved to the county governments

Kenyans are getting richer fast and demand for modern, electricity-based lifestyles grows and an estimated 80% of Kenyans lack access to reliable grid power

Mobile money platforms have driven a revolution in financial inclusion with the advent of M-pesa and Airtel Money or Orange Money. Customers use them to incrementally pay for a solar system or to pre-pay for energy services (buying kWh) from a microgrid operator being a game changer

The ability to pay for services remotely is the basis for Kenya‘s electrification business models

Mode of establishment

Establish under public-private partnership with private developers. Make use of contracts, including: PPAs for generation, which grant operational rights for seven to ten years until the private investment is recovered;

EPC contracts to build the distribution assets of the mini grid, paid by the REA; and O&M contracts to maintain the distribution assets.

At the end of the contracts periods, ownership of all generation and distribution assets is transferred to the Government, and customer relations are owned by KPLC3 from the beginning.

A competitive bidding process is to set the PPA price per unitTechnologies to be employed

Hybrid technologies consisting of wind, solar, hydro, battery storage, and diesel generators for backup

Deploy customized systems to monitor and control consumption, and to collect revenues.

Such systems to have sophisticated smart technologies with automatic monitoring, control, and payment functions.

Existing possible Business models

IPP4/SPP5 Model/Separate Genco6‐DISCO: Mini grids generate and sell power to a utility company, large power consumer off-taker, or a single buyer. The mini grid company operates as a small power producer (SPP), which supplies power and receives payment under a PPA. The PPA addresses the associated risks of main grid extension and tariff adjustment.

Distribution concession model/Combined Genco‐DISCO: The mini grid developer is responsible for both distribution and supply. It generates power or buys electricity from the national grid and sells it to the end customers. This model gives the operator exclusivity for a predefined period and an allocated area, so that the company can achieve a return on investment once the mini grid starts operating. The private company is responsible for grid operations, distribution, supply, and revenue collection.

Electricity supply cluster model: Systems usually have an installed capacity below 50kW, based on either diesel generators or solar PV systems. They are typically modular and mobile, and can be relocated if the main grid arrives. This model is used by the small, unregulated operators that have existed in Kenya for a long time. They typically supply power with a diesel generator and target small, clustered load centers.

Diversified Revenue stream: Some mini grid operators have diversified revenue streams, generating additional revenues from other business activities. Power supply to customers is still the core business, but operators also provide additional services, such as setting up a small shop, distributing solar lanterns, phone charging, and electricity to provide services such as internet, printing, photocopying, water pumping, or agricultural processing

Public model: REA is responsible for building generation and distribution assets. KPLC operates and maintains the assets. ERC

3 Kenya Power and Lighting Company, now referred to as Kenya Power4 Independent Power Producer5 Special Power Producer6 Generation company

approves uniform tariffs for mini grid customers, which apply to all retail KPLC customers. The electricity tariff is around $0.20/kWh, but changes every month depending on pass‐through costs such as monthly fuel and forex fluctuations, and semi‐annual changes due to inflation

Available Payment Methods

Leverage on both traditional payment methods, as well as pre-payment methods enabled with mobile technology.

The PAYG model provides the best platform. It meets the challenges of extending end-user finance and collecting payments from remote customers, who often have unpredictable and limited cash flow

Pre-payment meters for grid connections have been used in Kenya since 2009, because cellular networks are widespread and mobile money platforms are popular.

Public mini grids use post-paid or prepaid meter-billing systems for payment. Customers using prepaid systems pay through platforms such as M-PESA and tokens bought from vendors

Tariffs Adopt cost reflective tariffs, uniform tariffs have been noted to failTechnical and service standards

Build according to the guidelines of the National Grid Code to guidelines to allow subsequent integration into the national grid

Barriers to be dealt with towards adopting micro grids in can be classified as explained in the table below:

Barrier Explanation Possible solutionDemand Load curves and customer demand that

can often not be predicted Adopt a

comprehensive energy consumption/ management approach over time

Regulations/ policy framework

Vague regulations that prioritizes grid connection over off-grid solutions

Deficiencies in policy and regulatory framework for MG market development: arrival of main grid, lack of clarity around tariff setting (cost-reflective vs. national tariff)

Timeline for grid expansion unclear / intransparent

Market analyses, policy gap assessment, impact assessments for regulations

Tariffs Uniform tariff and single utility model that discourage private sector

Cost reflective tariffs have proven to be progressive

Access to finance A banking sector that is not prepared for small-scale high risk projects

Few investors with sufficient risk appetite – small project size with high anticipated risk

Grant dependency to demonstrate bankable business model due to lack of incentives

Several grant/ incentive programs

Work on risk mitigation facility for local developers

Technical capacity Lack of technical skills along the mini- Training and CB7

grid value chain planning, design, construction, O&M, management

Challenges and high costs to operate in remote, inaccessible areas

for public and private sector

Collaborate more with capacity building focused organizations like AfD/ DfID, GIZ

Business models High electricity costs due to high upfront / investment costs, yet low ability to pay especially in remote areas

Business models remain untested: 1) Mini-Grid concession model; 2) IPP model

Application of various business models as discussed above.

The table below indicates microgrid development/operation specific barriers in Kenya currently and the proposed mitigation ways. Overall, the Kenya government is in the process of reviewing the energy policies through the current Energy Bill under review. This bill, once adopted promises a brighter future for the industry and the microgrids development in the country:

Barrier Explanation MitigationAuthorizing Mini grids in Kenya Mini grids are currently

subject to no specific regulations. ERC grants permits and licenses for mini grids based on the Energy Regulation of 2012, which applies to all power sector participants and provides a permitting and licensing framework separated into generation, distribution, and retail sale of power

The 2012 regulations did not address exclusivity

The adoption of the Energy Bill 2015 promises to change this.

Need to digitize the process of licensing mini grids in Kenya, and minimize the tedious process

Technical and serviceStandards

No clear regulations regarding this.

Minigrid developers advised to build according to the guidelines of the National Grid Code.

These guidelines allow subsequent integration into the national grid

Tariffs, financing, andSubsidies

Tariffs system not clear whether cost reflective or uniform

Need to clarify this in some form of clear regulation

Relationship regarding arrival Kenya has no clear set of Need to clarify this

7 Capacity Building

of the grid regulations dealing with grid arrival.

in some of well-articulated regulation

Wholesale tariff setting Current regulations in Kenya do not allow wholesale tariff setting for mini grids for purchase or sale of power.

The Energy Bill of 2015, under review, is expected to introduce a Wholesale Spot Market.

The market will determine the price of electricity if there is no bilateral contract between the seller and purchaser of electricity.

Obligation of utility to purchase output

Current regulations in Kenya contain no obligation to purchase electricity from a mini grid.

Need to clarify this in some form of regulation, though the Energy Bill 2015 under review promises a platform for this to happen

It is therefore imperative that for microgrids to succeed in Kenya:1. The Kenya government fast track the Energy Bill 2015 currently under review to set a platform

for further developments in the sector2. Digital technologies can make the business case much stronger and make leapfrogging from no

power to a smart microgrid possible3. Local adaptation of technologies avoids over-engineering and keeps costs low4. Rural microgrids need access to better energy storage technology

In enabling a market environment for microgrids

5. Governments and donors are too focused on large energy infrastructure to the detriment of often smarter distributed solutions

6. There is a skills gap in governments when it comes to enabling markets7. Bureaucratic hurdles should be kept to a minimum in the emerging microgrid market

Towards supporting entrepreneurship

1. Microfinance and capacity building for business development can accelerate the demand side of electrification

2. Women entrepreneurs, already successful in selling solar products, can boost microgrid businesses

3. The rapid uptake of mobile technology is an encouraging example of market-led rapid transformation in Africa

4. More actual cost and usage data of successful microgrids will help make the investment case5. The government can strengthen the investment case by creating a level playing field with utilities