The case for private sector power transmission in Kenya

By Isaac Otolo, Hawa Bonaya, Germano Mutahi and Roland Ogore

Introduction

Access to cheap and affordable electricity has been identified as one of the key drivers for Kenya to attain its Vision 2030 goals as well as the Big 4 agenda. In a bid to achieve these objectives, the government of Kenya aims to deliver universal access to electricity by 2022 and as such, it has implemented various measures to incentivise private sector investment in the generation of electricity in the country. These incentives include providing letters of support for new investors as well as various tax measures aimed at improving returns for investors. Through the Last Mile Connectivity Project, the government has enhanced access to electricity in rural areas. All of these measures have helped to expand access to electricity from 32% of the population in 2014 to 75% in 2018, making Kenya one of the highest-ranked countries in Africa for access to electricity. The drive for cheaper power has led to the exploration and development of renewable energy sources, largely in remote areas of the country. This poses a challenge for efficient and effective evacuation of power from these sources and as such, there is a need to increase investment in transmission infrastructure. Currently, Kenya’s transmission network is approximately 6,295 kilometres, with Kenya Power and Lighting Company Limited (KPLC) owning 3,930 kilometres and Kenya Electricity Transmission Company Limited (KETRACO) owning 2,365 kilometres. The transmission network comprises 400kV, 220kV and 132kV lines. According to the Kenya National Electrification Strategy (2018 - 2022), KETRACO (as the main body mandated to develop transmission lines) plans to develop a total of 5,821 kilometres of power transmission lines and 65 high voltage substations by 2022 at a cost of US 4.1 billion. However, the utility has limited funding, with less than 25% of the investment cost currently secured from the government and development finance institutions. With increased pressure on exchequer funding, KETRACO may need to consider other options if it will deliver its transmission line development programme on target. The recently-enacted Energy Act, 2019 provides for the liberalisation of both the distribution and transmission subsector in Kenya. This presents an opportunity for KETRACO to consider Public Private Partnerships (PPPs) and Engineering, Procurement, Construction (EPC) + Financing frameworks to complement its present funding sources. It has also identified pilot lines it intends to develop under a PPP model and has developed a PPP framework. Globally, there are several models that have been used to attract private sector investment in the development of transmission lines. Privatisation, Independent Power Transmission (IPT), Whole-of-Grid Concessions and Merchant Investments are some of the models currently in practice. According to the World Bank, the most appropriate model for private sector participation in the development of transmission lines in Africa is the IPT model. The IPT model incorporates provisioning of rights and obligations associated with a single transmission line or more to a private sector developer. However, the World Bank has also found that no country in Africa has yet managed to successfully implement pure IPT networks. Emerging nations such as India, Brazil, Peru, Colombia, Mexico and Chile have successfully tapped into private sector investment in transmission lines through the IPT model. There are also variants under the IPT framework, which include Build Own Operate (BOO), Build Own Operate Transfer (BOOT), Build Transfer Operate (BTO) and EPC+F models. A few countries in Africa such as Cameroon, Mali, Senegal and Côte d’Ivoire are using the Whole-of-Grid Concessions model to develop transmission lines.

"The drive for cheaper power has led to the exploration and development of renewable energy sources, largely in remote areas of the country. This poses a challenge for efficient and effective evacuation of power from these sources and as such, there is a need to increase investment in transmission infrastructure."

In addition to comprehensive regulations, appropriate concessionaire payment options and provision of guarantees are necessary to attract private sector interest, particularly for first mover projects. Globally, there are three main concessionaire payment options when it comes to project remuneration. These include:

Fixed and available payment, whereby the operator is paid a fixed contracted amount and payments are based upon availability metrics. This payment model has been used in Chile and Brazil;
Fixed return model, whereby payments are stipulated by the energy regulator based on an agreed return, e.g., return on equity or return on assets. This has been implemented in the USA and the UK and
Wheeling tariffs, whereby the payment is based on the amount of energy transmitted through the line multiplied by an agreed-upon fee. This payment model has been implemented in the USA and Canada.

Since IPTs are implemented on a project finance basis, funders require a favourable level of confidence that payments by the Offtaker will be made. This is where guarantees extended and supported by either governments or multilateral financing institutions are important, particularly when the implementation model is not tried and tested in the country. In Kenya, the fixed payment model is perhaps the most suitable compensation model for developing private transmission infrastructure. In this case, the developer would be required to ensure that the line is available for use in exchange for payment. This could be more attractive to investors who may otherwise hesitate to take on revenue risk based on the amount of power wheeled through the line, particularly with the lack of an independent systems operator and no clear indication of the intensity of infrastructure usage over time. PPPs in the transmission sector in Kenya would set the scene for similar investment in Africa, following on the country’s successes in the development of the Independent Power Producer (IPP) market. The government, via the National Treasury, should support first-mover investors in this subsector through the provision of sovereign guarantees. This will not only improve the bankability of transmission projects but also support the case for lower cost debt financing from lenders including DFIs, multilateral lenders and local and international commercial banks.

It is expected that a successful pilot project would unlock the transmission subsector for the private sector, setting the stage for follow-on projects on a PPP basis as investors gain confidence in the market. As with IPPs, the need for sovereign guarantees could very well taper over time, provided that the government/KETRACO build a track record of timely payments to investors as well as investor protections and incentives.

Kenya’s Power Sector – Is it Time for Increased Private Participation?

PwC's Isaac Otolo, Edna Gitachu, Germano Mutahi, Hawa Bonaya and Roland Ogore believe it's time to rethink the power distribution model in Kenya. Electricity is the glue that keeps the economy together. Therefore, policies should be implemented that encourage rather than discourage investment in Kenya’s power generation and distribution, and at the same time make it easier for consumers nationwide to utilise more of it.

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