On April 16, 2014, Kenya School of Government hosted a 3-hour symposium regarding financial, economic, and regulatory considerations of public private partnership in the energy sector. The discussion took place on the 3rd week of a 4-week training program CRI was offering on the same topic.
Prof Jorry M. Mwenechanya
Head of the Zambian Rural Electrification Authority, and the former head of the electricity regulatory authority of Zambia.
Former Principal Financial Analyst at Florida Light and Power, and the Finance Head of NextEra Energy’s Portfolio Management Group. NEE was named No. 1 among electric and gas utilities on Fortune magazine’s 2013 list of the “World’s Most Admired Companies.”
Bahman Kashi (Moderator)
A Senior Associate and Economist at Cambridge Resources International, USA, and the Program Manager at John Deutsch International, Queen’s University, Canada.
Managers and representatives from:
- KenGen – Kenya Electricity Generating Company
- KPLC – Kenya Power and Lighting Company
- KETRACO – Kenya Electricity Transmission Company Ltd.
- ERC – Kenya Electricity Regulatory Commission
- Privatization Commission – Kenya
- Ministry of Devolution and Planning – Kenya
- Ministry of Energy
- The Treasury – Kenya
- Kenya School of Government
- Juan Belt: Senior Economic Advisor, Economic Policy (USAID)
- Conrado Garcia: Mission Economist (USAID Kenya)
Current status of the Kenyan electricity sector in East Africa and the world
Regulatory performance and challenges
The lead speaker on this topic, Jorry M. Mwenechanya, raised a number of general challenges faced by the regulators in the continent, with specific focus on the scope of authority and the role of the regulator in determining the tariffs. In addition, competence of regulators in this region often falls short of the private sector in both engineering and financial aspects of the projects, making it difficult to create sustainable partnerships.
Other issues included discussing challenges specific to the Kenyan context, such as communication, transparency, and presence. In this regard, Jorry reminded the audience that the cost of regulation must be reflected in the picture, and ultimately, the cost must be less the benefits of its operation.
The electricity market in Kenya, in line with other countries in the region, has recently undergone various market reforms, moving from a state-owned monopoly to a vertically unbundled structure. There are on-going efforts towards further disaggregation of the sector through horizontal unbundling of distribution.
These changes coincide with the recent devolution efforts, and establishment of county governments. As discussed by Prof Jorry and the participants, the main challenge to this process would be the departure from a uniform tariff mechanism. Some solutions were discussed including a price cap. A valuable contribution by Juan Belt was the case of Chile, where a distribution margin cap is calculated for each area covered by distribution companies.
John Wehner and Jorry led the discussion on regional integration. Important issues included:
- The value of energy security provided by regional power pools and interconnections
- The extent to which a country would rely on external generation
To maintain energy independence
To protect local generation sources
- he varying role and authority of regulatory associations for regional power pools
- Evaluating the feasibility of investment in interconnections, by measuring the economic costs and benefits, with particular attention to movements of demand and supply over time in the region.
Participants emphasized the value of interconnections for Kenya, providing access to cheaper sources of electricity, and the potential for local generation companies to sell their excess generation in the future.
Kenya would naturally have access to the East African Power pool. Its geographical location would also provide it with potential access to other sources of consumption or generation including the Southern African Power Pool and Democratic Republic of Congo. Overall, opportunities and considerations for regional interconnection is considered a key topic to develop and discuss in future events.
Sector performance indicators
As discussed by John, while Kenya is a regional leader in development and performance of its electricity sector, there is still room for improvement when compared with international benchmarks. Generation performance, financial efficiency, availability factor of hydro plants, and geothermal development, place Kenya in a good position in the world, however, losses in the distribution and transmission, access rate, and electricity tariffs can still be improved by a considerable margin.
Electricity sector as a collection of projects and the role of investment appraisal
Balancing the objectives
The regulator pursues a number of objectives in the electricity market including tariff affordability, increased access, reliability, and financial and environmental efficiency. These objectives are often conflicting and not all can be pursued at the same time. Therefore, regulators often focus on one objective at a given time and then switch to another once one is relatively satisfied, or immediate attention is required to another objective.
The discussion on this part was led by Bahman Kashi, and emphasized the importance of project evaluation for efficient use of funds and rapid progress towards the general objectives. Interventions in supply of electricity are always defined as projects. These projects may be in form of expansion in generation, transmission, and distribution, or in form of improvements in the existing infrastructure.
Looking at each project independently by isolating its costs and benefits, can help measure its incremental contribution towards the current objectives. Through integrated investment appraisal, analysts can identify the impact on each stakeholder in both a deterministic and a probabilistic framework. This approach is important, for it:
- helps restructuring projects to ensure they are economically sustainable for all stakeholders,
- assists in designing sustainable power purchase agreements (PPAs), and
- provides a comprehensive framework for evaluating private participation mechanisms.
Despite these benefits, analysts must be very careful in factoring for the impact of the projects on the system. Every project in the electricity sector leaves an impact on the existing infrastructure and operations. The impact must be included in the project’s costs and benefits.
Participants emphasized the importance of creating institutional capacities for training, conducting, and utilizing such analysis within all parts of the electricity sector, to ensure the most efficient use of scarce funds.
Integration of Renewables
The general message delivered by the panel in this regard was to stay away from being pro or against renewables. Different sources of renewable energy are only options for moving toward the objectives of the regulators, and none of them are the objective themselves. Rigorous feasibility studies can reveal the true costs and benefits of alternative projects, which assist the decision makers to find the most viable means for required outcome at any given time.
Kenya is currently concerned about economic efficiency; to achieve this objective, the regulator is focused on reducing the cost of generation. Geothermal sources of energy are among the viable options.
Rural electrification is often challenged by low demand and high provision costs. Panel members brought examples from other countries and sectors who succeeded in rural provision of public services through stimulation of demand rather than subsidizing supply. Lessons can be learned from the telecom sector, where demand for communication has been stimulated through the diffusion of information and services such as mobile banking and mobile payment on cellular networks.
The final topic of discussion was led by John, looking at the need for a regional association for collection and reporting of regulatory benchmarks. The current efforts in benchmarking are currently scattered in two dimensions. They are either infrequent and fail to reflect progress, or are conducted with different methodologies, making it impossible to correctly compare the performance from one market to another.
The discussion panel was closed by Juan Belt, who discussed the effectiveness of professional training in this field, and the general objectives of this program in line with the Power Africa initiative.