“My government will be able to cut the cost of power by 30%”
President Uhuru Kenyatta
The statement above captions the overarching sentiment at the launch of the 140 MW Olkaria IV Geothermal Power Plant in Kenya’s Rift Valley. The event was dubbed as the first tangible step towards the Jubilee government’s ambitious endeavour to increase Kenya’s electricity generation mix by another 5,000 MW in less than 5 years.
The event was also a demonstration of this government’s shift from the old guard (or from analogue to digital, as they would say). The tradition has been dull launch ceremonies at which a red ribbon is cut over a stone bearing the name of the President at the time (this still happened). However, this government also treated Kenyans to the pomp and flair of large screens, on-stage conversations and banter between the deputy and the President, as well plenty of Facebook photos of him doing presidential things, as new age democracy demands.
The addition of 140 MW of renewable energy is a feat worth commendation. Kenya has the potential to generate 7 to 10 gigawatts ¹ (GW – that is, 1000 MW) from geothermal energy alone. The demonstration of the government’s continued support of the energy sector and electricity sub sector is an important indicator for both local and foreign private investor companies (called Independent Power Producers or IPPs).
Cabinet Secretary Davis Chirchir was not quite accurate in describing the Olkaria IV power plant as the largest power plant in the world – that title is held by the Hellisheiði Power Station, with a nominal capacity of 303 MW of electricity ². Kenya’s continued efforts in geothermal energy development will however position the country as a world leader in the adoption and commercialization of this energy source. For that, we have the efforts of both the Kibaki and Uhuru administrations to thank (though the Olkaria IV project is largely attributable to the efforts of Kengen under the Kibaki administration owing to the fact that the feasibility study for the project was completed in August 2009 ³).
The issue at hand is that the government has given a very specific target (i.e. a 30% price reduction) but has not highlighted how it will be achieved. We will look at some key questions that I feel should have been addressed by the Energy Regulatory Commission (ERC), Kenya Power and the Ministry of Energy.
The Nature of Our Power Industry
Figure 1: Kenya Power Generation Mix in MW produced by different technologies in the energy sector 4
The chart above highlights Kenya’s electricity generation mix. The chart does not include non operational power plants, and only factors in the effective rather than the nominal capacity of the respective power plants (meaning the actual MW power contribution that the power plants can produce rather than their production potential when they were designed). The values used are those reported by Kenya Power as at June 2013, and they do not include any off-grid power stations or emergency power generation units, which are largely thermal based (thermal power stations are those power plants which generate electricity by burning fuels such as diesel and heavy fuel oil to produce electricity). Kenya’s official generation capacity is approximately 1941 MW (whose distribution still stands in close proximity to the representation to the chart in Figure 1).
140 MW is 7.213% of the total electricity generation mix. This may seem small, but in the electricity sub sector it is significant. Rather, it would be, but there’s a catch. Kenya has signed contractual agreements (called Power Purchase Agreements (PPAs) to purchase power from thermal power stations in Thika (80 MW) and two in Athi River (at 80 and 83 MW respectively)).
“This is a reality”
Deputy President William Ruto
The Burden of Existing Commitments
The addition of another 243 MW from heavily priced thermal stations almost negates the comparative benefit of 140 MW recently added, as well as that of the 140 MW expected to be added by December 2014.
Electricity is a commodity which is traded similarly to wheat or maize. Kenya Power buys electricity from Kengen (which partly state owned) and other IPPs at a tariff which is set for the lifetime of the project on a take or pay basis (typically for a 20 year period 5). This in effect means that Kenya Power has an obligation to pay all power producers for electricity generated whether or not the company needs the power produced, or more likely, if the grid cannot absorb the power generated.
What does this mean?
Let’s examine what Kenya Power’s bill will look like at the end of 2015 for its obligations to the Olkaria Plant vis-à-vis the combined thermal plants:
Step 1: Calculate the total energy produced:
Multiply the capacity of the plant by the number of hours it will produce electricity for in a year by its capacity factor (which is basically the ratio of a power plant’s actual production capacity compared to its nominal production capacity).
Thermal Power Plants:
243 MW (nominal capacity) × (24 × 365) (hours in 2015) × 65% 6 (plant capacity factor)= 1,383, 642 kwh
Geothermal Power Plants:
280 MW (nominal capacity) × (24 × 365) (hours in 2015) × 96% 7 (plant capacity factor) = 2,354,688 kwh
Step 2: Calculate the Bill:
Multiply the kwh generated by the set tariff (which averages at 22 US Cents for thermal power plants, and 7 cents for geothermal power plants).
1,383, 642 × 0.22 = 304,401 USD
2,354,688 × 0.07 = 164,828.16 USD
In this scenario, Kenya is generating 70% more electricity from the two Olkaria plants than it does from the three thermal stations, and at 54% less of the cost. (This analysis will be revisited later, in the discussion on Kenya Power.) This is why geothermal energy is brilliant for our grid: we have a lot of it, and in the long run it is quite cheap.
How fast can Kenya Power reduce your bill by 30%? To answer that question, we need to look at the company.
The first analysis of Kenya Power is an examination of its actual bills from 2012 – 2013 (at which point Kenya only had 245.4 MW of geothermal energy tied to the grid). This demonstration will extrapolate the previous discussion on the comparative costs from thermal energy.
Figure 2: Kenya Powers payments for electricity purchased from IPPs as well as the pass through fuel costs which you pay directly in your electricity bill 8
31% of Kenya Power’s power purchase costs in 2013 were from thermal sources, including the 9.3% of thermal contribution to Kengen’s portfolio. Worse still, the consumer spent more on fuel costs (fuel costs are pass through costs, meaning that the consumer pays them directly, not Kenya Power) than he/she did for actual purchase of power. Fuel costs were approximately double the power purchase cost in both 2012 and 2013.
Whether or not we can add the planned 5,000 MW to the national grid is not up for debate – the question remains how fast we can do it. This is an important question because timing is everything in energy transactions, moreso when elections are on the horizon as they will be in 2016/2017 when this government plans to switch on the last MW in the cumulative tranche of 5,000.
Timing is important for another reason – Kenya Power has committed to pay the thermal based power stations for at least 20 years, with you, the consumer, paying the fuel costs (which are almost double what Kenya Power pays these IPPs).
For Kenya Power to have a sustained reduction in the cost of power, it must not only increase cheap energy sources like geothermal, but also taper its exposure to thermal power in the short term. Therefore, it stands to reason that with 243 MW of thermal power yet to be added to the grid within the next year, any power cost reduction gains made from the additional geothermal would be lost if there were to be any variation in the international cost of crude oil.
Oil prices are pretty volatile – almost in the manner of the four seasons. Oil enjoys tranquillity (low cost) in its summer and spring months only to return to furious and vengefully brutal cold in the fall and winter months when the price shoots up. Unlike the meteorology departments that can “accurately” predict weather, we cannot forecast the price of crude oil. What we do know is that this trend is cyclical, and the price will eventually go up.
Truth is singular – it affords no person the privilege of making derivatives of it, nor are any diversions from it permissible.
The truth is this, Mr. President – you have enough resources within Kenya’s renewables to power this country, but to see a dramatic reduction in power costs you must put a date on which the last thermal power plant will be connected and thereafter rapidly seek the liberalization of the distribution of electricity. Cut off the chains from the unnecessary monstrosity that is thermally generated electricity and you can finally deliver freedom to an industry and a people that are desperately ready for such a revolutionary stand. To do this would finally grant the Kenyan people their long deserved (energy) independence and their freedom.
1 Hussein. M. Fatumah. Kenya’s Experience In Renewable Energy- UNFCCC. ADP 2.4 SESSION (March, 2014).
2 Hellisheiði Power Station official website. http://www.or.is/en/projects/hellisheidi-geothermal-plant
3 Olkaria IV Geothermal Project. Project Design Document Version 03. 7/11/2012. http://cdm.unfccc.int/filestorage/g/s/CNUDEWM3VTYP91GBOZQ7XJA8HIS240.pdf/Olkaria%20IV%20Geothermal%20Power%20Project_PDD%20ver03.pdf?t=aFh8bmR1OW9ifDCytxgZUwOnjo3EpQy1TdEj
4 Statistics derived from the Kenya Power Annual Report 2013 and the ERC list of Electric Power Generation Licences Issued by ERC to date
5 Njagi K. Laurencia Public Private Partnerships In The Power Sector In Kenya. Law, Justice and Development Week 2012
6 Capacity factors are project specific. The value of 65% has been selected as a conservative estimate from Gulf Power’s 83 MW project in Athi River. https://ifcndd.ifc.org/ifcext/spiwebsite1.nsf/DocsByUNIDForPrint/449695DFAAF3B48B852578A100762CD6?opendocument
8 Statistics derived from the Kenya Power Annual Report 2013