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Impact of the Unbundling on Renewable Electricity:
Evidence from Kenya
1. Introduction
2. Literature Review and
Conceptual Framework
3. Case of Kenya
4. Analysis
5. Discussion
6. Conclusion
Le Dong
[email protected]
June 21, 2017
Kyoto University
Doctoral Program in Environmental Economics
Graduate School of Global Environmental Studies
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1. Introduction
Electricity sector reform policy:
Renewable energy support policy:
1)Corporatization;
2)Commercialization;
3)Passage of the requisite energy
legislation;
4)An independent regulator;
5)Independent Power Producers
(IPPs);
6)Restructuring: unbundling;
7)Divestiture of generation assets;
8)Divestiture of distribution assets;
9)Competition.
(Gratick & Eberhard 2008)
1)Renewable energy targets;
2)Regulatory policies (Feed-in tariff,
RPS, net metering, transport
obligation, heat obligation, tradable
REC, tending);
3)Fiscal incentives and public
financing (capital subsidy, grant or
rebate, investment or production tax
credits, reductions in sales, energy,
VAT or other taxes, energy production
payment, public investment, loans, or
grants.
(REN21 2016)
Different backgrounds, goals and approaches with varying country contexts.
Causal relations are hard to prove, and association might be possible.
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1. Introduction
Key figures of Africa
Electrification rate (in
2013): 29%, the lowest in
the world, with East
Africa 23%, the lowest in
Sub-Saharan Africa (SSA).
Electricity source: 66% of
all new electricity
generated from 19982008 was from
renewables. However, still
mainly hydro and
non-renewables.
Source: IRENA 2013, IRENA
2015, UNEP FI 2012.
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1. Introduction
Electricity sector structure in SSA in 2014
Source: Eberhard et al., 2016
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2. Literature Review and Conceptual Framework
Source
Viewpoint
Pollitt
(2012)
Assessing the impacts of electricity sector reform is difficult and complex, given that
the sector reform is a set of policies involving not only unbundling.
UNIDO
(2005)
Streamlining both sets of policies of unbundling and renewable electricity is a multidimensional challenge. Despite of this, the unbundling in Africa inevitably interferes
with renewable energy policies.
Gugler et al.
(2013)
No unambiguous evidence of positive effects of unbundling on consumers’ welfare or
prices exists, nor on investment incentives in energy markets. While unbundling of
generation prohibits discrimination among firms and ameliorates allocative efficiency,
it reduces the aggregate investment rate in the sector by about 10%.
Meyer
(2012)
Generation unbundling is the most costly option, since it increases both coordination
costs and market risks, with synergy losses between 10 and 29% of total costs for
medium sized companies.
Nagayama
(2012)
Oppose the argument that there is no positive effect given the only fact that Germany
who employed the unbundling much later than the United Kingdom yet has much
more amount of newly-installed renewable electricity, by reasoning that renewable
promotion requires a mix of policies which do not co-relate with unbundling.
Kim et al.
(2016)
Through the United States case study found the power sector deregulation, though not
particularly focusing on unbundling, is neither an impediment nor an impetus to
renewable policy.
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2. Literature review and Conceptual Framework
Source
Viewpoint
Kapika & Eberhard (2013a),
and Eberhard et al. (2016)
General research on power sector reform, especially the IPPs, in
Africa with empirical studies.
Pineau (2007), Nhete (2007),
Several case study tried to present the reform trend and reflect the
Habtetsion & Tsighe (2007),
problems in one, or some, African country on Cameroon,
Mebratu & Wamukonya (2007) Mozambique, Eritrea, and so on.
Turkson (2000)
For SSA countries the lessons from other countries is helpful but
should not be all-determining, especially the unbundling
generation models.
Malgas & Eberhard (2011)
Planning and procurement challenges faced by the hybrid
electricity generation markets emerged in Africa since unbundling.
UNIDO (2005)
The impact of vertical unbundling on renewable electricity in
Africa is largely positive, with one of the best examples in Kenya,
and believed that vertical unbundling opens up opportunities for
sourcing electricity from renewables.
Owino & Morton (2010)
Since the reforms Kenya relied increasingly on diesel generation, it
mainly focused on CDM, not the renewable electricity.
No empirical study on the recent electricity sector reform in Kenya, especially the
impact of unbundling on renewable electricity.
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2. Literature review and Conceptual Framework
In terms of renewable energy financing, the development of renewable
electricity needs sufficient finance from various sources, yet with high risks and
huge primary investment.
Donovan (2015) declared that, although renewable energy, as an asset class
category, has aspects in common with conventional energy, investors are still in
the process of recognizing the unique facts about renewables, especially
regarding the predictability of risk and return for renewable investment.
Hypothesis: A country increases renewable electricity as long as it is the
cheapest energy source and it can afford the primary investment cost.
Research question: After the unbundling in Kenya, whether renewables are
the cheapest energy sources and whether the utilities can afford primary costs?
Methodology: Kenya as case study. Six interviews in Nairobi and Washington
as the primary data, and the statistical data and archival records as the
secondary data. Processed by ATLAS.ti 2017.
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3. Case of Kenya
3.1 Electricity sector reform
Vertically unbundling the generation sector and allowing the entry of IPPs seem to be
the most influential process in Kenya.
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3. Case of Kenya
3.2 Renewable energy policies
Well endowed with geothermal and wind energy:
1) the highest geothermal potential in Africa, and
the first African country to adopt geothermal. The
Naivasha region has the single largest geothermal
project in the world – the Olkaria I&IV with 280
MW, and the first private sector geothermal project
in Africa – the Akiira with 210 MW.
2) The Lake Turkana region holds the largest
single wind power project in Africa, with 310 MW.
Kenya per se offers no special incentives for
renewable, other than the FiTs. However, as MoE
has identified one of the key challenges –
“insufficient data and analytical tools to inform the
level of tariffs” (KMEP 2016), renewable energy do
not enjoy favored status (Eberhard et al. 2016).
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Therefore, it is justified to study
the association of unbundling
and renewable electricity in the
context of Kenya.
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4. Analysis
4.1 Changes in the structure of power generation
In terms of
electricity
production,
renewables,
mostly
geothermal,
are steadily
increasing
from 14 to
48%, and
have become
the main
electricity
sources.
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4. Analysis
4.1 Changes in the structure of power generation
In terms of the
installed
capacity,
renewable has
increased from
11 to 28%, yet
still lower than
hydro, and
conventional
energies.
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4. Analysis
4.1 Changes in the structure of power generation
In terms of
capacity by
ownership,
KenGen has
gradually
shifted away
from fossil
fuels to
geothermal.
While most of
new entrants
focus on fossil
fuels, having
four times
larger
capacity than
geothermal.
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4. Analysis
4.1 Changes in the structure of power generation
The local resources (wind, hydro and geothermal) are the cheapest, compared with
imported resources (nuclear, coal, oil and gas). However, uncapping these local
resources require a great deal of initial capital cost.
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4. Analysis
4.1 Changes in the structure of power generation
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4. Analysis
4.2 From the practical facts
Theme 1 Since the unbundling, the development of IPPs utilizing geothermal for
generation.
Emergent view 1.a: Unbundling provided entry opportunities for the IPPs, however,
KenGen remains dominant in the electricity generation (from interview with KenGen staff).
Emergent view 1.b: Two IPPs utilizing geothermal for electricity generation have
divergent situations (from interview with Akiira staff).
With an installed
capacity of 1,630 MW,
KenGen commands a
market share of 69%
and generated 80% of
national energy
consumption by June of
2016 (KenGen 2016).
OrPower4 geothermal project (the first operating renewable
IPP, as well as the first renewable PPP, in Kenya):
1) KenGen’s donation of 8 MW of wells; 2) PPA; 3)
International public finance, and Political Risk Insurance
from MIGA.
VS
Akiira geothermal project (the on-going first private sector
geothermal project in Kenya and Africa):
1) Failed test drilling by KenGen; 2) PPA; 3) Pending
application to use Kenyan Pension Funds; 4) Munich RE
insurance.
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4. Analysis
4.2 From the practical facts
Theme 2 After the unbundling, the channel for IPPs to join the electricity generation.
Emergent view 2.a: International Competitive Bidding (ICB) is not effective, with the facts
that: the only two renewable IPPs on geothermal did not join ICB or the bidding
competition is rather limited. The Lake Turkana Wind Project was initiated as an
unsolicited bid (from interview with Akiira staff and Franklin et al. 2015).
Emergent view 2.b: After the unbundling, new measures are needed to promote
renewable IPPs, such as auction (from interview with energy specialist from IDA of WBG).
Akiira Geothermal Limited (AGL) is a special
purpose vehicle formed by one consortium,
owned by Centum Investment Company
Limited (CICL) of Kenya and three other
non-Kenyan companies. The previous
history of CICL as a Kenyan-state-owned
company contributed to the successful
application as an IPP in 2009.
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The new auction regulation to be
issued in 2017 is believed to
mostly favor the solar sector in
Kenya and it is not clear how it
would affect private geothermal
energy development, and in
particular on-going projects
(Richter 2016).
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4. Analysis
After unbundling, the generation utilities in Kenya chose the
energies with the lowest cost, which coincidently are
renewables, namely geothermal, wind, and hydro.
However, it reveals two main challenges might impeding the
future renewable electricity development:
1)the financing challenge for the IPPs, especially for new
entrants, in comparison with incumbent state-owned utility;
2)the joining mechanism challenge faced by the IPPs for whom
the ICB and FiT policy seemed to be ineffective.
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5. Discussion
1) the necessity of streamlining the current legal and regulatory
framework in the Kenyan energy and electricity sector with
the 2010 Constitution, which tackles the institutional
challenge;
2) the debate and gaming on the future unbundling reform,
especially on the transmission and distribution, among World
Bank Groups, Government of Kenya and the vested interest
groups in Kenya, which relates to the financing challenge;
3) the importance for both international development agencies
and private financiers to co-invest on renewable IPPs in
Kenya, which also helps solve the financing challenges.
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6. Conclusion
1) Examining the impacts of unbundling on renewable
electricity is critical to the renewable promotion, which
holds especially true for the Sub-Saharan African
countries.
2) The implication is that, if the institutional and financial
challenges are solved, the unbundling would further
accelerate renewable electricity penetration in Kenya.
3) It requires further research on how to advance the private
IPPs investment with the resistance from incumbent stateowned utilities, and on looking for appropriate unbundling
approaches in the hybrid energy markets in SSA.
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Annex 1:
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Doctoral Program in Environmental Economics
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