This agreement is the most significant step towards realization of the LTWP consortium’s EUR465m wind farm in Loiyangalani, Laisamis Marsabit district, in a remote part of northern Kenya, and marks an important step in Kenya’s enhanced efforts to secure its long-term energy needs through renewable energy. With the total value of the LTWP investment hitting over EUR600m (the additional sum being the cost of building a 428 km power transmission line from the project site to Suswa (EUR140m), and an additional EUR27m for the sub stations), this is one of the single largest Foreign Direct Investment (FDI) by a private entity in Kenya in recent times.
This is a vote of confidence in the future of this country by the consortium of investors, both local and foreign, and reflects well on the government’s policy and institutional reform efforts over the last seven years in the energy sector. These efforts have aimed at attracting private-sector participation, enhancing access to energy and increasing efficiency.
This signing will definitely spur more interest in the energy sector, especially given Kenya’s huge latent potential for renewable energy (geothermal, solar, hydro and wind energy), as well as open up existent but unexploited market-based income streams like the Clean Development Mechanism (CDM) and carbon trading under the United Nations framework on Climates Change (UNFCCC) and the Kyoto Protocol. The LTWP intends to fully utilise these emerging opportunities and enabling policy framework to leverage its position in the market.
All the necessary documentation for the wind farm is in place. The wind farm, once fully operational in mid 2012, will put Kenya firmly on the world energy map, and will be the biggest in Africa, supplying 17% of Kenya’s electricity demand on completion. This development is timely, coming at a time when the country and region has been frantically searching for cheaper, affordable, sustainable sources of energy to meet the increasing demand that threatens to outstrip supply.
Kenya currently has a very thin reserve margin of 4% (the difference between effective supply and peak demand) of less than the globally recommended 15%, which has at times led to load shedding (rationing), outages and unreliable supply. With a significant portion of Kenya’s energy coming from wind in the next three years, this is a positive step in the quest for energy security as the country will now have an even more diversified supply base, a commendable move aimed at moving away from over-reliance on hydro-electricity.
Over-reliance on hydro has proven costly in the past through load shedding schemes, and it is estimated that the drought induced power crisis of 2006 cost this economy 1.45% of its GDP, an amount equivalent to USD442m (Kenya’s GDP is equivalent to USD29.5bn). It is no secret that the rationing in 2009 has caused Kenyan manufacturing firms huge losses and translated into loss of competitiveness of Kenyan goods and job losses. In this age of climate-change and the attendant erratic rainfall patterns, diversification is in order.
Indeed, the most significant impact of this development will be felt by domestic and commercial energy consumers, as the costs of generating electricity from wind are significantly lower than that of the expensive emergency thermal generation currently being utilised by the other Independent Power Producers (IPPs). This will translate into lower energy costs for consumers across the board. The current high energy costs are mainly driven by the passing on of the high foreign-currency denominated cost of buying heavy diesel for the emergency thermal generators to the consumers through the fuel cost adjustment item in electricity bills.
This is also pegged to the fluctuating prevailing exchange rates, and oil prices in the global market showing no sign of falling. Wind is a win-win choice for the government, private-sector and domestic consumers. With the current situation where IPPs are currently supplying over 50% of Kenya’s energy needs through thermal generation, the above factors have translated into higher manufacturing and transport costs, which remain key drivers of inflationary pressure over the last two years. Further, it is hoped that affordable energy costs will help restore the country’s competitiveness in this era of increasing regional integration. LTWP has managed to negotiate an extremely fair and competitive rate with KPLC, which will hopefully be passed on to the consumer.
Completion of the transmission line, wind farm and full operations is expected to be done by mid 2012, and the company has already signed a Joint Development Agreement (JDA) with its equity participants. It has also signed an exclusivity clause with Vestas, the world’s most renowned and leading Danish wind turbine manufacturer, to manufacture 365 wind turbines, each generating 850 Kilowatts. Technical bids for the construction of the 428 kilometer transmission line and substations are being evaluated by the independent Danish power consultancy firm KEMA, KPLC, and the newly formed Kenya Electricity Transmission company (KETRACO).
This process has been a journey, and LTWP is extremely grateful to the people and institutions that have and continue to invest enormous resources in this venture. The consortium would like to acknowledge the support by the key government departments, including the Ministry of Energy, the Energy Regulatory Commission, and the KPLC. It would also like to thank and acknowledge the embassies represented here, including the Royal Netherlands embassy, Spanish and Italian embassies and trade missions. Due recognition also goes to the development and multilateral finance institutions that have continued backing this project.