Kenya Dodges Bullet; Adequate Rainfall Prevents

UNCLAS NAIROBI 003258

SIPDIS

DEPT FOR AF/E, AF/RSA

SIPDIS

E.O. 12958: N/A
TAGS: ENRG ECON ETRD KE
SUBJECT: Kenya Dodges Bullet; Adequate Rainfall Prevents
Power Shortage

REF: NAIROBI 285


1. Summary: The April rains exceeded expectations, filling
Kenya's hydropower reservoirs close to capacity and
avoiding a recurrence of the power rationing in 2000 that
cost the economy $48 billion and cut GDP growth to 0.4% in

2000. The 140 MW generators temporarily installed in case
the drought persisted have raised power costs, but were not
needed. Kenya Electricity Generating Company (KenGen)
wants to retain the thermal capacity to diversify its
sources, and hopes to recover the contract costs through
power exports to Uganda. However, if export negotiations
founder, the Emergency Power Supply Committee may cancel
the contract with Aggreko and give up the thermal plants.
End Summary.

Drought Threatened Hydropower Generation in Early 2006
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2. About 60% of Kenya's installed capacity of 1,085
megawatts is hydropower, and the shortfall of rain in 2005
reduced water levels behind the hydroelectric dams
alarmingly by early 2006. The forecast of continued
drought in 2006 raised fears of a recurrence of the drought
of 2000, when a shortfall of over 400 Megawatts forced a
power rationing program that cost the economy $48 billion
and cut GDP growth to 0.4% in 2000. In 2000, the GOK's
contract with a foreign company to bring in emergency
thermal generating capacity was criticized as too little,
too late, and too expensive.

Kenya Prepared for Hydropower Shortage
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3. To avoid a repetition of power rationing, Kenya
established the Emergency Power Supply Committee consisting
of the Kenya Association of Manufacturers, KenGen,
parastatal Kenya Power and Lighting Company, the
Electricity Regulatory Board, and the Ministries of Finance
and Energy in early 2006 to get bids and negotiate a
contract with an independent power producer to provide
temporary thermal generating capacity. In March, the
Committee signed a contract with British firm Aggreko to
provide 220 MW of capacity on terms both less expensive and
more flexible than the 2000 contract. The first 40 MW
plant opened near Nairobi in May, and a 100 MW plant was
installed in June, but did not begin operations. In June
2006, KenGen began charging consumers an average Ksh4.3kwh
(6 US cents) surcharge to cover Aggreko's fuel costs.

Now Kenya's Dams Are Almost Full
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4. Fortunately, the weatherman was wrong, and KenGen
reports the April rains exceeded expectations. The water
level at the main reservoir, Masinga Dam, is near capacity,
just three meters below spillage. KenGen reports the dams
downstream from Masinga on the Tana River are also near
full capacity. Turkwell, the other main reservoir in the
west of the country, is also at one of its highest levels,
even before the main rains fall in that region. Kenya,
which normally has to import 30 MW of power from Uganda,
finds itself with a rare energy surplus. Unless the
October rains fail badly, Kenya's power supply seems
assured in 2006, and the emergency generators will not be
needed.

Terminating Aggreko Contract Would Save Millions of Dollars
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5. According to KenGen Managing Director Eddy Njoroge,
terminating the contract and letting Aggreko remove the
thermal plants would save consumers about Ksh1.8
billion/month ($25 million). Treasury would also save the
Ksh500 million/month ($6.9 million) retention fee owed to
Aggreko regardless of whether its generators were used.
Termination would also release some Ksh5 billion ($69.4
million) that KenGen had committed from its budget to
finance the hiring of emergency generators, capital that
could otherwise be used to expand and diversify Kenya's
power sources.

Kenya's sources of electricity
--------------


6. Electricity demand in Kenya is estimated at 1,070
Megawatts, and is expected to rise to 1,520 Megawatts by

2009. Currently, 26% of Kenya's electricity is generated

from thermal plants and 14% from geothermal and other
sources. The government has announced plans to diversify
sources using part of the Ksh7.4 billion ($103.7 million)
raised in the May flotation of 30 per cent of KenGen's
equity at the Nairobi Stock Exchange. The capital will be
used to establish a geothermal development fund and to fund
prospecting for natural gas and coal. In addition,
Woodside Oil is expected to begin offshore exploration
drilling for oil in late 2006.

Export the Surplus Thermal Capacity or Relinquish It?
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7. KenGen wants to retain the 140 MW thermal generators
Aggreko installed to diversify its power sources and
conserve hydropower reservoirs. KenGen hopes to export the
surplus power to Uganda, which is suffering one of its
worst energy shortfalls in recent years. EPC chairman
Pradeep Paunrana said the EPC wants the export price set to
allow KenGen to earn a small profit on the Aggreko
investment and to help KPLC recover part of the technical
costs of transmitting the power to Uganda. A KenGen source
told Embassy the Committee has already signed a non-binding
Memorandum of Understanding (MoU) with Uganda government to
export surplus electricity. Press reports claim Uganda is
demanding a lower price and moving the generators closer to
the border to reduce transmission losses. KenGen's Njoroge
said the Aggreko contract could be terminated after the
October rains if no deal has been reached with Uganda. In
any case, the expected growth in demand for electricity and
the lack of sites for additional significant hydropower
dams will require Kenya to develop thermal, geothermal,
solar, or wind capacity.

Comment
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8. Led by the private sector, Kenya did a creditable job of
preparing for the threat of protracted drought and
associated power shortages. Even though the drought ended,
the case of Uganda demonstrates the value of paying for
insurance. While the increase in already-high electricity
tariffs must have had some economic impact, Kenya is
temporarily in an enviable position: its power sources are
more diversified, it has a power surplus, and it is in a
position to recoup some of its costs by exporting power to
Uganda, which is facing a multi-year shortfall. While
negotiations continue with Uganda, KenGen is waiting to see
if the October rains fail to top off the hydropower
reservoirs before the Committee decides the fate of
Aggreko's thermal generating plants. However, this surplus
is temporary, and Kenya knows it must build new power
plants soon, or face shortfalls like Uganda. End comment.

Hoover