Rush for power: EAC in haste to reign in crippling energy

East African power utilities have woken up to the fact that they need to fix the region’s crippling energy crisis.

In the past two months, public utilities and private sector players have announced plans to build power plants that will add an extra 650MW of electricity — or about 20 per cent of the region’s installed capacity.

In fact, nearly every week, there has been an announcement of a new power plant, supporting infrastructure coming up or proposed in at least one of the five EAC countries — Kenya, Uganda, Tanzania, Rwanda and Burundi.

The new investments, which will see the cost of power increase in the short run as firms seek funds, aim to bring down the cost of connections in the next five to 10 years, enabling more households to access electricity.

Demand for new connections is driven by the region’s growing economies, resulting in a middle class that is spending more, and an expanding informal business sector.

For example, in the years 2005-2011, Kenya Power connected more people to the national grid than the country had been able to do in the first 45 years of Independence!

The East African Community estimates that between 2013 and 2018, the region will need to invest $14 billion to meet its electricity needs, with the total spending over the next 20 years expected to rise to $64 billion, or nearly half the region’s economy.

READ: $64bn power plan to end energy woes

KenGen alone plans to invest $4.5 billion in either putting up or expanding power plants in the next five years, while Kenya Power is also planning to spend millions of dollars in expanding its distribution network.

Over the past 10 years, the East African region has made more investments in the energy sector than it had in the previous 50 years.

In Tanzania, the government has announced plans to jointly develop a 400MW gas powered plant with Symbion, a US company.

READ: Mtwara gas project still on course

Regulators in the country have also received applications from two independent power producers seeking approvals to put up power plants that would collectively add 150MW of electricity. The Kitonga electric power company and Tangulf Express Ltd are in the process of putting up 150MW and 9.2 MW hydro plants respectively.

In Kenya, Kepeto, an independent power utility has made an application to put up a 90MW power plant.

In the same month, the country’s largest power producer, KenGen, announced that it had shortlisted four Asian power firms such as Mitsubishi, Toshiba, Korea Electric Power Corporation (Kepco), Daewoo to help fund the $2 billion plan that will see the company add an extra 560MW from geothermal into the national grid by 2016.

In all, the company plans to add an extra 3,000MW of electricity to the national grid by 2018 from different sources. Last week, Kenya Power said it was developing renewable power projects in northern region and Rift Valley (northwest) at a total cost of $6.6 million to complement diesel generation in areas not connected to the national grid.

Kenya Power estimates that in 2012/13 electricity demand growth rate will be four per cent based on trends recorded up to December 2012 and the economic growth forecast for the current financial year.

For both citizens and governments in a region that the United Nations’ Economic Commission of Africa (UNECA) estimates has the lowest access to electricity in the world, the renewed focus on the sector couldn’t have come at a better period.

“The region’s average access rate of 26 per cent is lower than the sub-Saharan average of 32 per cent. Much progress needs to be made to achieve the middle income countries’ average access rate of around 80 per cent,” Antonio Pedro, UNECA’s director general told an Intergovernmental Committee of Experts (ICE) conference in Kampala recently.

According to the World Bank, Kenya has the second highest number of households without electricity at 6.2 million after Tanzania’s 7.2 million. Uganda has 5.5 million, Rwanda 1.7 million and Burundi 1.4 million.

The surge in electricity development has been matched by a rise in new customers linked to national grids across the region.
But with the region’s demand growing at 7 per cent, utilities continue to face challenges as they seek to meet the growing need.

A 2011 report by Africa Infrastructure Country Diagnostics (AICD) entitled, “Powering up: Costing power infrastructure spending needs in sub Saharan Africa” shows that ambitious national targets for electricity access have been set in the region, pushing demand up even further — in Kenya, for example, 48 per cent urban and only 4 per cent rural households are currently connected to the grid, but the country hopes to step this up to 100 per cent urban connectivity and 32 per cent rural by 2015.

AICD estimates electricity must reach 20 million more households in the wider East African region by 2015 in order to meet national electrification targets.

Expanding the generation system over 10 years is expected to cost more than $29 billion, almost all of which will have to go to investing in new capacity. The costs of transmission, distribution and connection total $11 billion and the cost of connecting new customers will be $3 billion.

Rural areas are expected to account for 80 per cent of these new connections, as the region’s rural access to electricity currently averages a mere 3 per cent. Refurbishment of the existing grid requires $3.3 billion.

The experts therefore estimate that the wider East African region needs to spend at least $54 billion over the next 10 years to alleviate the power shortages, translating into spending of $5.3 billion every year for a decade: $4 billion for generation capacity and $1.3 billion for transmission, distribution and connection.

ALSO READ: Soon: New $500m Africa fund

The key challenge is how to finance this expansion. Given the scale of spending required, governments are largely banking on the private sector to drive the investments.

Over the past 10 years, governments have negotiated fixed power purchase agreements with private investors, where the state undertakes to buy power at a fixed price per unit for the next 20 years, a factor that has greatly encouraged investments in the sector.

In Uganda for example, the development of this law has attracted the private sector into the country’s power sector resulting in the development of the 250MW Bujagali hydro power plant. The country is also pursuing a public-private partnership to develop the 600MW Karuma hydro power plant.

READ: Oil-rich Albertine region to become Uganda’s energy hub

In Kenya, these agreements have spurred a host of independent power producers including the 300MW Turkana power plant, billed to be Africa’s largest wind farm.

The country provides feed in tariff not exceeding US cents 12 for wind firms whose effective generation capacity is above 500kw and doesn’t exceed 100MW.

The tariffs has seen the country receive over 20 applications from investors with a proposed capacity of about 1000MW and a further 300MW under negotiated terms. The applications include one by General Electric for a 100MW power plant.

The country offers investors generating electricity from solar a feed in tariff not exceeding $20 cents per kilowatt-hour, a tariff of $8 cents from power generated from biomass and $8.5 cents for geothermal. Normally, the prices are fixed for a time period of 15-20 years.

Critics say the move to guarantee investors with a fixed energy tariffs means that as the government continues investing in their own power plants, East African countries could end up struck with expensive energy for years.

But even as investors, both public and private, announce plans for new energy plants, there are fears that in the growth in transmission and distribution lines is not matching the expansion in power sources.

Power distribution companies are struggling to source funds. Kenya Power recently applied to raise energy tariffs arguing that it needed to increase its revenue so as to increase investment in the sector.

Less than a month ago, the Tanzanian government rejected a proposal from the power distributor Tanesco to increase electricity tariffs.

While Tanzania’s energy costs of 11US cents per kilowatt hour are the lowest in the region, they compare badly with other countries like Egypt where the costs are 3.5US cents. The costs in Uganda are 13US cents, while in Kenya and Rwanda the costs are 16 and 24US cents respectively.

Manufacturers and consumer lobby group argue that though the utilities need money, the companies need to look at increasing their efficiency before they pursue tariff increases.

The World Bank estimates that power utilities in Kenya, Uganda and Tanzania lose 16, 26 and 21 per cent of their power respectively.

Every one point decrease in power losses would save Kenya Power some Ksh800 million ($9.4 million) and would save Umeme Ush12 billion ($4.5 million).

In Tanzania, the energy distributor is struggling with its own debt that is currently estimated to be at $250 million or about 1 per cent of the country’s GDP as at the end of September 2012.

But it’s not just the costs driving the increased projects in the sector. The investments are also informed by the shrinking forests, which are the source of 87 per cent of the region’s energy source; some 11 per cent of the region’s energy is sourced from thermal and only about 2 per cent is electricity based.

But in a region where forest cover has dropped by nearly half and falling, the need to develop alternatives sources is crucial.

Since Independence Kenya’s forest cover has dropped 90 per cent, decreasing from 10 per cent of the country’s total land mass to about 1.7 per cent today.

Over the past five years, Tanzania’s forest cover has dropped from 46 per cent to 36 per cent. Uganda has lost 40 per cent of its forest cover.

Additional reporting by Christine Mungai, Joseph Mwamunyange and Gaaki Kigambo