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Wednesday, 8 August 2012

Wind Power in Kenya why all the delays?


Lake Turkana Wind Power (LTWP) when completed is envisaged to be the largest wind farm in Africa with a capacity to produce 300 Megawatts (MW) of electricity in the Turkana region of Kenya. This is the same region where oil has recently been discovered in March 2012 by Anglo Irish company Tullow Oil.

The project is co-financed by the Spanish Government in collaboration with other international lenders and the Government of Kenya at a cost of US$ 1 billion. The African Development Bank (ADB) is the lead arranger of debt financing with Standard Bank of South Africa and NedBank Capital of South Africa as co-arrangers.

This project has been on the drawing board for over 6 years and has been hit by several major hurdles along the way in the form of lack of a clear renewable energy policy in the beginning, to a lack of investment guarantees. Then there is the issue of missing basic infrastructure in the Turkana region of north western Kenya, a region that lacks basic amenities such as tarmacked roads, electricity and piped water. The community that lives in this area is mainly nomadic who rare livestock and fish in the Lake Turkana.

This has led the LTWP Company into lengthy negotiations with both government and potential investors to get the project going. The LTWP consortium now comprises KP&P Africa B.V. and Aldwych International as co-developers, Norwegian Investment Fund for Developing Countries (Norfund), Industrial Development Corporation of South Africa (IDC), Industrial Fund for Developing Countries (IFU) and Wind Power A.S. (Vestas).

The government finally came up with a Renewable Energy feed in tariff (FiT) policy in early 2010. The tariffs were subsequently reviewed higher in 2011 as it was seen that that the low tariffs were leading to under investment in the renewable energy sector even as the resources (raw material) lay in abundance.

The current FiT rates are US$12 cents a kilowatt-hour of electricity for wind power and US$20 cents a kilowatt-hour of electricity for solar are now attractive while the tariff for thermal is a maximum of 14 cents per kilowatt-hour.
Even after the FiT policy made investing more enticing another barrier came up, these were investment guarantees. Foreign direct investors usually require assurances that their investment and return on investment will be protected from a wide array of risks ranging from expropriation, political risk, foreign exchange risk to commercial risk among others. They want to know that when they invest in an area especially in a region like Africa that is deemed as a high risk frontier market, that at the end of the day their investment is safe.
The situation has been made worse by the government of Kenya suspension of sovereign risk guarantees for energy projects as it fights to contain an escalation of foreign debt. I believe this was forced on the government after it began receiving budgetary support aid from the World Bank post the global financial crisis in 2009. In a recent advert to attract investment in the Geothermal sector this line was inscribed “Investors are notified that the Government of Kenya will not provide sovereign guarantees relating to this investment and therefore they should seek other alternatives such as MIGA (World Bank) and other forms of insurance”. The government is at the moment looking at the World Bank to structure guarantees for large projects. However, the situation has been made better by the recent discovery of oil within its borders. Oil revenues always raise a country’s credit attractiveness and give investors added confidence.
Despite all these challenges the company recently awarded a contract to Civicon, the largest construction company in the region a US$ 300 million tender to build transmission lines and access roads. Under the contract the company will rehabilitate 204 Kms of access roads and another 109 kms within the site. This will take 15 months to complete, paving the way for the delivery of 365 Vestas wind turbines and Siemens transformers to the site.
Also the Kenya Electricity Transmission Company Ltd (Ketraco) has started construction of a double circuit 400kv, 428km high voltage transmission line to deliver electricity from the site. This transmission line will connect the site to the Suswa substation in central Kenya and will be funded by the Spanish Government and undertaken by Spanish company Isolax.
Aldwych, an Africa focused power company, will oversee the construction and operations of the power plant on behalf of LTWP while Vestas will run the plant under contract with LTWP.
The electricity will be bought at a fixed rate by Kenya Power over period of 20 years as per a signed Power Purchase agreement.(PPA).
As we await this project to commence, KENGEN, Kenya’s national power producer already has 5.1MW wind farm in the Ngong Hills area just south west of Nairobi. In January 2012, GE Energy a subsidiary of the American multinational GE announced it was setting up a 100MW wind farm (Kipeto Energy) in the Ngong area at a cost of US$ 300m. This project’s unit costs are much less as it doesn’t have the same infrastructural challenges as LTWP.
Other major wind farms planned include Aeolus (Kinangop and Ngong Hills) and Isiolo Wind farm that is in the process of verifying its carbon credits under the UNFCCC’s Clean Development Mechanism(CDM) with Standard Bank of South Africa as consultants. In addition there are 3 other planned wind farms in the wind rich Marsabit area in North Eastern Kenya. Marsabit awaits the World Bank funded high voltage transmission line from Ethiopia to Kenya to pass through it for these projects to be considered viable. (Read my previous post: Construction of a 1,000Km power line between Ethiopia and Kenya to commence soon)
With clear policy guidelines and strategy in the renewable energy sector these projects would have been up and running several years ago, these would have also lowered the hurdles currently being encountered and instead pushed forward Kenya’s drive towards cleaner cheaper energy.