Investor interest in Kenya’s renewable energy sector rises

  • Underlining the appeal of Kenya’s renewable energy sector to foreign investors, several new projects and deals have been announced in 2023 to date, focused on geothermal and wind power. Adding to the positive outlook, the government, in February, lifted a near 18‑month suspension on the licensing of new independent power producers (IPPs) in a bid to boost generation capacity.
  • Kenya’s reliance on renewables for roughly 90% of its power needs—and the aim of lifting this to 100% by 2030—is helping to attract climate change mitigation financing from global sources. The main power-sector weaknesses are the parastatal firms responsible for distribution (Kenya Power) and transmission (Ketraco). Kenya Power is vulnerable to government interference, crime and corruption, leading to heavy system losses.
  • We expect that the current power supplies will be sufficient to meet rising demand, but shortages could emerge in the medium term without new capacity additions, imposing constraints on overall economic growth and development.

Kenya’s electricity generation grew at a brisk pace in 2013-22, by 4.9% a year on average—outpacing average real GDP growth of 4.5% a year—driven by major investment from both the public and the private sectors in geothermal and wind power, and more recently in solar power, which is now the fastest-growing segment. Off-grid solar is also booming, both in isolated locations and in grid-connected areas. Grid-generation capacity doubled in 2013‑22, from 1,800 MW to 3,600 MW, while electricity production, in GWh, climbed by 51%. A switch in the main source of baseload power from hydroelectricity to geothermal—tapping steam resources in the Rift Valley—means the system is now more stable and drought resistant, but not totally immune to low rainfall, as shown in 2022. Domestic power supply is augmented by low-level imports of hydropower from Uganda and Ethiopia: the latter could become more important as part of East African power-pool plans.

Kenya: power generation and consumption and system loss, 2017-22

The current state of play

The latest data from the Energy and Petroleum Regulatory Authority (EPRA, the sector regulator) show that electricity available for distribution rose by 4.5% to 12,700 GWh in 2022, including a near 10% rise in geothermal (to 5,520 GWh) and an 8% rise in wind (to 2,140 GWh), giving them respective shares of 45% and 17%. Solar power’s share is smaller, at 3% in 2022, but output more than doubled from a year earlier. Hydroelectricity, formerly Kenya’s main source of power, fell by 17% in 2022, cutting its share to 24%, a multi-year low, because of a lengthy drought. The hydropower plunge led to a steep, 26% jump in thermal (diesel) generation in 2022, raising its share to 13%, its highest level since 2018. The temporary uptick in thermal power—which is generated entirely by old-style IPPs on generous contracts linked to fuel prices—helps to explain the upward pressure on electricity tariffs in 2022. The impact was mitigated by temporary government subsidies, but power costs will rise faster in 2023, including in real, inflation-adjusted terms.

Full steam ahead

Several recent developments underline high levels of investor interest in Kenya’s renewable energy potential. The most recent deal, signed in mid-March between the government and Fortescue Future Industries (Australia)—a unit of the Fortescue Metals Group—envisages the construction of a 300‑MW geothermal plant in Naivasha, geared to power supply and “green” fertiliser production (with a low carbon footprint), which would also support food security. The proposed plant, potentially one of three, aims to harness power from the nearby Olkaria region, the main source of Kenya’s geothermal energy. The full details of the plan, including the cost, remain unclear. The state-owned power producer, KenGen, has been the leading investor in geothermal to date, but the private sector is also participating, as illustrated by a 150‑MW geothermal plant (Olkaria III), which is owned and operated by Ormat (US), as well as the planned deal with Fortescue.

Adding to the list, Globeleq (UK) contracted Toyota Tsusho Corporation in February to build a geothermal plant costing US$108m and generating 35 MW near Menengai, Nakuru, Kenya’s next geothermal hotspot. The deal, which is part of a broader UK‑Kenya green investment plan, secured funding in December 2022 from multilateral and bilateral sources. Construction will start in 2023 for completion in 2025. Two other geothermal IPPs are in development in Menengai, one by Ormat and the other by Sosian (a local firm), which is expected to come on stream in June. In all cases, the state-owned Geothermal Development Company (GDC) drills the wells, and investors build the plants to harness the steam.

Riding the wind

In a major acquisition bid in mid-March, BlackRock Alternatives (a part of the US investment fund BlackRock) and its partners hope to secure a 31.25% stake in Lake Turkana Wind Power (LTWP), a world-scale, 310‑MW wind farm in northern Kenya. Developed by a private consortium at a cost of US$700m—the largest private investment in Kenya to date—the LTWP was completed in 2017, but delays in laying transmission lines (after a government-appointment contractor went bust) mean that power generation failed to start until 2019. The delay obliged the government to pay compensation to LTWP for lost earnings, via a surcharge on consumer tariffs. BlackRock and development finance institutions in France, Germany and Japan—working together as the UK-based Climate Finance Partnership—will acquire the stakes currently held by development finance agencies in Finland and Denmark, and Vestas, a Danish wind turbine manufacturer, pending EPRA approval. The acquisition bid highlights the appeal of Kenya’s renewable energy assets, which offer the prospect of earning carbon credits and offsets. Wind generation gained an additional boost in 2021 following the start-up of the 100‑MW Kipeto wind farm, owned by Actis (UK) and BioTherm Energy (South Africa).

Kenya: breakdown of power generation by source, 2013-22. The share of renewables has been on an upward trend over the period, from less than 75% in 2013 to more than 85% in 2022, down from a peak of almost 95% in 2020

A changing landscape for IPPs

Kenya was an early adopter of the IPP model, with the first deals—offering 20‑year power purchase agreements (PPAs) to supply Kenya Power—dating to the late 1990s. The largely diesel-fired IPP plants supplemented hydropower, reducing Kenya’s vulnerability to drought, but the contract terms were generous to investors and costly to the government and consumers. The IPPs require payments (in foreign currency), even if their power is untapped, leading to the imposition of fuel-charge tariffs—and exchange-rate adjustment tariffs—on monthly power bills, which remain in place. Power tariffs consequently remain high and volatile, despite a downward trend in reliance on thermal power. By contrast, new-style IPPs in wind, geothermal and solar offer more competitive electricity prices and have fairer overall terms. The diminished contribution of thermal power, alongside growing criticism of the cost burden, led to rising government pressure on thermal IPPs in 2021‑22, including demands for cheaper power, but operators resisted. The government, unwilling to breach IPP contracts—which is positive for the business environment—is instead letting them lapse as they expire, as happened to Tsavo Power in September 2021.

As part of the dispute, the former president, Uhuru Kenyatta, suspended the award of new PPAs in October 2021, pending a review—marking a temporary setback for projects under development—but the new president, William Ruto (elected in August 2022), lifted the suspension in February, giving a timely reprieve. In another potential boost for investors, reforms to public-private-partnership (PPP) laws in 2021 allow for longer terms for new concessions, of up to 30 years, although it remains uncertain if the extension will apply in the electricity sector. Controversy about thermal IPPs will continue, illustrated by a new investigation in parliament, but their contribution will fall to zero by 2030, as Kenya moves towards total reliance on renewables.

The main weaknesses in Kenya’s electricity sector are the parastatal firms responsible for distribution (Kenya Power) and transmission (Ketraco). Kenya Power—which handled both functions until Ketraco was spun off in 2008 as a separate entity—is the most vulnerable, given frequent government interference, alongside corruption and crime (including illegal connections), leading to heavy system losses, weak financial performances and debt accumulation. In 2018‑22, losses in distribution and transmission amounted to 22% of power generation a year on average—compared with a global average of less than 10%—underlining the scale of the problem. On the transmission front, underinvestment by Ketraco means the network is vulnerable to periodic outages, as shown by a nationwide blackout lasting several hours on March 4th. To help relieve transmission problems, the EU and the German Agency for International Co-operation (GIZ) unveiled plans in March to invest US$20m in a Green Resilient Electricity System, intended to strengthen the fragile network, which is a major limiting factor in the expansion of power generation and consumption. In a positive and innovative development, Kenya advanced plans in February for private-sector investment in transmission lines, via a PPP model. A mooted U$300m deal would see a pan-African investment vehicle, Africa50, partner with India’s Power Grid Corporation to build two transmission lines with a total length of 237 km. Despite these positive steps, distribution and transmission will remain weak links in the power chain in the medium term.

What next?

Blessed with ample solar, wind and geothermal resources, Kenya will remain a regional pioneer in renewable energy, bolstered by growing private-sector investment in key projects and the availability of global financing to support climate change mitigation. Highlighting the opportunities, the European Investment Bank unveiled a plan in March to provide seed funding of US$1.9m for onward lending to investors in “green” hydrogen, a key future energy source with significant potential in Kenya, given the country’s wealth of renewable energy feedstock. Apart from exploiting frontier technologies, Kenya will also need high levels of investment in primary electricity supply, as demand will continue to climb in line with national growth and development. Provided Kenya maintains an accommodating stance towards private investment and PPPs—and continues to respect contract terms—foreign investment will play a significant role in expanding the electricity sector, to the benefit of all stakeholders.

The analysis and forecasts featured in this piece can be found in EIU’s Country Analysis service. This integrated solution provides unmatched global insights covering the political and economic outlook for nearly 200 countries, helping organisations identify prospective opportunities and potential risks.