Having spent some of my formative years on the African continent, I can attest to the fact that the frequency of power blackouts desensitized citizenry to the point that power outages were neither a cause of despair nor excitement but just another mundane facet of everyday life. Power outages remain common phenomena throughout most of sub-Saharan Africa owing to various reasons such as low capacity output, over-reliance on volatile sources of energy, outdated machinery, mismatched pricing, energy theft, low collection rates, among other reasons. Over 30 countries in the continent have suffered power shortages in recent years, with detrimental economic effects including lost revenues, typically ranging between 1 and 4 percent of GDP.
Undoubtedly, increasing access to energy in Africa is vital for further development especially given its population growth and escalating urbanization. By 2030, it is expected that nearly half of Africans will be living in urban areas, with the urban population exceeding rural population by 100 million by 2035. At current electrification rates, in 2030, 654 million Africans will have no access to power. [i]
The effects of power shortages are far-reaching in Kenya. Last month, it was reported in the media that trading at the Nairobi Stock Exchange was disrupted by a power outage that cut internet servers and switched off the electronic trading system, resulting in a significant drop in market turnover. Blackouts have even occurred at Jomo Kenyatta International Airport and last year the Mombasa airport suffered an outage lasting several days. Kenya’s national grid has an effective installed capacity—about 1,472 MW of which 60 MW is expensive short-term emergency power. Thermal generation and hydropower accounts for about 51 percent of the total installed capacity. Other sources of energy include diesel (22 percent), geothermal sources (10 percent), and thermal (5 percent); the rest being wind, gas and emergency power plants, and co-generation plants (12 percent). The hydropower capacity is concentrated on one river and is drought-prone. Last July, Kenya Power had to initiate a power rationing program following a drought-induced shortfall in electricity generation.
A World Bank study indicates that the disruption of public power supply costs Kenyan firms about 7 percent of their annual sales revenues. Also, unreliable electricity supply reduces Kenya’s annual GDP growth by about 1.5 percent[ii]. Kenya’s economy is quite diversified with around 55 percent of GDP derived from services, transport, finance, tourism, information and communications technology, and trade; thus consistent power supply is imperative to the growth of these industries. Thus, Kenya’s government is looking at options for significantly increasing private participation in Kenya’s power sector, and is using the World Bank Group to leverage investments.
As part of this effort, MIGA is planning to provide guarantees to the equity and debt investors in Thika Power Ltd, covering their respective investments totaling €81 million (or US$106.92 million) for up to 16 years against the risks of transfer restriction and breach of contract. Thika Power Ltd., the project enterprise, will build, own, and operate a 87 MW Heavy Fuel Oil (HFO) power plant generating electricity to be sold to the Kenyan electricity transmission and distribution company, KPLC, under a 20-year power purchase agreement (PPA). Concurrently, another guarantee was proposed for a US$136.8 million non-shareholder loan to Triumph Power Generating Company Ltd., similarly for up to 16 years also against the risks of breach of contract and transfer restriction. Triumph Power is also a build, own, and operate HFO power plant expected to generate 82 MW to be sold to KPLC, under a 20-year PPA.
Both the Thika and Triumph Projects are part of a series of IPPs being developed by the Kenyan government and supported by various units of the World Bank Group - (IDA – partial risk guarantee program, IFC, and MIGA). By working together, the various entities can achieve significant economies of scale in environmental and social and other due diligence. The projects have significant development impacts, including adding approximately 169 MW of new generation capacity to Kenya’s under-supplied national electricity. They will help reduce the country’s load shedding and electricity imports, improve the system’s reliability, reduce reliance on hydropower, and support ongoing power sector reforms.
MIGA’s guarantees are essential for private investors’ participation in these projects. In the past, the agency has supported Kenya’s Olkaria III geothermal project and it has assisted resolving project-related disputes as well securing private sector participation. Such innovative application of the guarantee instruments may be replicated for other projects in other countries facing infrastructure deficits.
[i] Road to Durban:
[ii] These findings are contained in the multi-donor Africa Infrastructure Country Diagnostic 2008; Underpowed http://www-wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2009/04/21/000333038_20090421013954/Rendered/PDF/482140ESW0P11110Power0Sector0Review.pdf