Effectiveness of independent power producers as a strategic choice for financing electricity Generation in the Kenyan electricity market

Abstract

The power sector in Kenya has undergone major strategy and structural changes over the last fifteen years. The Government of Kenya commenced comprehensive reforms in the electricity sub-sector in the mid 1990s, to among others enhance operational efficiency, attract private sector investment in power generation to complement the government's investment, expand the transmission capacity, accelerate development of geothermal resources and increase electricity access in the country. Initial reforms were achieved through enactment of the Electric Power Act 1997, which saw the unbundling of the generation business from transmission and distribution businesses. This led to the emergence of Independent Power Producers to compete with the then wholly government owned Kenya Electricity Generating Company Limited (KenGen). The need for further reforms in the sector have seen the Electric Power Act, 1997 repealed and replaced with Energy Act, 2006 leading to the establishment of additional players in the sector.On the onset, it would appear that these reforms were driven by the long term plan by the government to improve efficiency and service delivery in the sector. This can only be partially true. On the contrary, the reforms were a strategic response to changes in both the internal and external environment. The internal forces included the need for long term strategies that would improve efficiency and result in the long term sustainability of the sector. In the period 1991-1995, multilateral agencies and other development partners froze development aid to the Government of Kenya because of their concerns on governance issues and poor macro-economic performance. During this period, most of the projects in the electricity sector were being funded by multilateral and bilateral agencies. The freezing of aid was also linked to the end of the cold war, following which multilateral donors who were greatly influenced by the American and European governments diverted funding to Eastern Europe, resulting in competition for the scarce resources. This study sought to investigate the effectiveness of Independent Power Producers as a strategic choice for financing electricity generation in the Kenyan electricity market. The study used a cross-sectional survey research design focussing on the four Independent Power Producers that are fully commissioned and are in operation in the country. The results indicate that the strategy has been effective on the basis of the operational, contractual, policy and regulatory indicators. This is in contrast to the experience in most developing countries where Independent Power Producers failed soon after their introduction. Despite this success, the study established that there are areas of concern including high costs, governance issues and negative publicity that need to be addressed by the stakeholders in the sector. This will see Independent Power Producers continue to playa major role in meeting the country's future energy needs.