Le Dong Kennydongle@gmail June 21, 201 7

1. Le Dong Kennydongle@gmail.com June21,2017 Impact of the Unbundling on Renewable Electricity: Evidence from Kenya • Introduction • LiteratureReviewand Conceptual Framework • CaseofKenya 4.Analysis 5.Discussion 6.Conclusion

2. Introduction Electricitysectorreformpolicy: • Corporatization; • Commercialization; • Passageoftherequisiteenergylegislation; • Anindependentregulator; • IndependentPowerProducers(IPPs); • Restructuring:unbundling; • Divestitureofgenerationassets; • Divestitureofdistributionassets; • Competition. (Gratick&Eberhard2008) Renewableenergysupportpolicy: • Renewableenergytargets; • Regulatorypolicies(Feed-intariff,RPS,netmetering,transportobligation,heatobligation,tradableREC,tending); • Fiscalincentivesandpublicfinancing(capitalsubsidy,grantorrebate,investmentorproductiontaxcredits,reductionsinsales,energy,VATorothertaxes,energyproductionpayment,publicinvestment,loans,orgrants. (REN212016) Differentbackgrounds,goalsandapproacheswithvaryingcountrycontexts. Causalrelationsarehardtoprove,andassociationmightbepossible.

3. Introduction KeyfiguresofAfrica Electrificationrate(in2013):29%,thelowestintheworld,withEastAfrica23%,thelowestinSub-SaharanAfrica(SSA). Electricitysource: 66%of all new electricity generated from 1998-2008 was from renewables.However,stillmainlyhydroand non-renewables. Source:IRENA2013,IRENA2015,UNEPFI2012.

4. Introduction ElectricitysectorstructureinSSAin2014 Source:Eberhardetal.,2016

5. 2.LiteratureReviewand Conceptual Framework

6. 2.Literaturereviewand Conceptual Framework No empiricalstudy onthe recentelectricity sector reforminKenya, especially the impactofunbundlingon renewableelectricity.

7. 2.Literaturereviewand Conceptual Framework Intermsofrenewableenergyfinancing,the development of renewable electricity needs sufficient finance from various sources,yetwithhighrisksandhugeprimaryinvestment. 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:Acountry increases renewable electricity as long as it is the cheapest energy source and it can afford the primaryinvestment cost. Researchquestion:AftertheunbundlinginKenya,whetherrenewablesarethecheapestenergysourcesandwhethertheutilitiescanaffordprimarycosts? Methodology:Kenyaascasestudy.SixinterviewsinNairobiandWashington as the primary data, and the statisticaldata and archival records as the secondary data.ProcessedbyATLAS.ti 2017.

8. 3.CaseofKenya 3.1Electricitysectorreform Vertically unbundling the generation sector and allowing the entry of IPPs seem to be the most influential processinKenya.

9. 3.CaseofKenya 3.2Renewableenergypolicies Wellendowedwithgeothermalandwindenergy: 1)the highest geothermal potential in Africa, andthe first Africancountry 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 holdsthe 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). Therefore,it is justified to study the associationofunbundling and renewable electricity in the context of Kenya.

10. 4.Analysis 4.1Changes in the structure of power generation Intermsofelectricityproduction,renewables, mostly geothermal, are steadily increasing from 14 to 48%, and have become the main electricity sources.

11. 4.Analysis 4.1Changes in the structure of power generation Intermsofthe installed capacity,renewable has increased from 11 to 28%, yet still lower than hydro, and conventional energies.

12. 4.Analysis 4.1Changes in the structure of power generation Intermsofcapacity by ownership, KenGenhas gradually shifted away from fossil fuels to geothermal. While most of new entrantsfocus on fossil fuels, having four times larger capacity than geothermal.

13. 4.Analysis 4.1Changes 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.

14. 4.Analysis 4.1Changes in the structure of power generation

15. 4.Analysis 4.2From 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)FailedtestdrillingbyKenGen;2)PPA;3)PendingapplicationtouseKenyan Pension Funds;4)MunichREinsurance.

16. 4.Analysis 4.2From the practical facts Theme 2 After the unbundling, the channel for IPPs to jointheelectricity 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 IDAof 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. 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).

17. 4.Analysis After unbundling, the generation utilities inKenyachose the energies with the lowest cost, whichcoincidently are renewables, namely geothermal, wind, and hydro. However, it reveals two main challenges might impeding the future renewable electricity development: • the financing challenge for the IPPs, especially for new entrants, in comparison with incumbent state-owned utility; • the joining mechanism challenge faced by the IPPs for whom the ICB and FiT policy seemed to be ineffective.

18. 5.Discussion • 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; • 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; • 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.

19. 6.Conclusion • Examining the impacts ofunbundlingonrenewableelectricityis critical to therenewable promotion, which holds especially true for the Sub-Saharan African countries. • Theimplicationisthat,if the institutional and financial challenges are solved, the unbundling would further accelerate renewable electricity penetration in Kenya. • It requires further research on how to advance the private IPPs investment with the resistance from incumbent state-owned utilities, and on looking for appropriate unbundling approaches in the hybrid energy markets in SSA.

20. Annex1:

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