Impact of the Unbundling on Renewable Electricity: Evidence from Kenya

Transcription

1 Impact of the Unbundling on Renewable Electricity: Evidence from Kenya 1. Introduction 2. Literature Review and Conceptual Framework 3. Case of Kenya 4. Analysis 5. Discussion 6. Conclusion Le Dong June 21, 2017 Graduate School of Global Environmental Studies 1

2 1. Introduction Electricity sector reform policy: Renewable energy support policy: 1)Corporatization; 2)Commercialization; 3)Passage of the requisite energy legislation; 4)An independent regulator; 5)Independent Power Producers (IPPs); 6)Restructuring: unbundling; 7)Divestiture of generation assets; 8)Divestiture of distribution assets; 9)Competition. (Gratick & Eberhard 2008) 1)Renewable energy targets; 2)Regulatory policies (Feed-in tariff, RPS, net metering, transport obligation, heat obligation, tradable REC, tending); 3)Fiscal incentives and public financing (capital subsidy, grant or rebate, investment or production tax credits, reductions in sales, energy, VAT or other taxes, energy production payment, public investment, loans, or grants. (REN ) Different backgrounds, goals and approaches with varying country contexts. Causal relations are hard to prove, and association might be possible. Graduate School of Global Environmental Studies 2

3 1. Introduction Key figures of Africa Electrification rate (in 2013): 29%, the lowest in the world, with East Africa 23%, the lowest in Sub-Saharan Africa (SSA). Electricity source: 66% of all new electricity generated from was from renewables. However, still mainly hydro and non-renewables. Source: IRENA 2013, IRENA 2015, UNEP FI Graduate School of Global Environmental Studies 3

4 1. Introduction Electricity sector structure in SSA in 2014 Source: Eberhard et al., 2016 Graduate School of Global Environmental Studies 4

5 2. Literature Review and Conceptual Framework Source Pollitt (2012) UNIDO (2005) Gugler et al. (2013) Meyer (2012) Nagayama (2012) Kim et al. (2016) Viewpoint Assessing the impacts of electricity sector reform is difficult and complex, given that the sector reform is a set of policies involving not only unbundling. Streamlining both sets of policies of unbundling and renewable electricity is a multidimensional challenge. Despite of this, the unbundling in Africa inevitably interferes with renewable energy policies. No unambiguous evidence of positive effects of unbundling on consumers welfare or prices exists, nor on investment incentives in energy markets. While unbundling of generation prohibits discrimination among firms and ameliorates allocative efficiency, it reduces the aggregate investment rate in the sector by about 10%. Generation unbundling is the most costly option, since it increases both coordination costs and market risks, with synergy losses between 10 and 29% of total costs for medium sized companies. Oppose the argument that there is no positive effect given the only fact that Germany who employed the unbundling much later than the United Kingdom yet has much more amount of newly-installed renewable electricity, by reasoning that renewable promotion requires a mix of policies which do not co-relate with unbundling. Through the United States case study found the power sector deregulation, though not particularly focusing on unbundling, is neither an impediment nor an impetus to renewable policy. Graduate School of Global Environmental Studies 5

6 2. Literature review and Conceptual Framework Source Kapika & Eberhard (2013a), and Eberhard et al. (2016) Pineau (2007), Nhete (2007), Habtetsion & Tsighe (2007), Mebratu & Wamukonya (2007) Turkson (2000) Malgas & Eberhard (2011) UNIDO (2005) Owino & Morton (2010) Viewpoint General research on power sector reform, especially the IPPs, in Africa with empirical studies. Several case study tried to present the reform trend and reflect the problems in one, or some, African country on Cameroon, Mozambique, Eritrea, and so on. For SSA countries the lessons from other countries is helpful but should not be all-determining, especially the unbundling generation models. Planning and procurement challenges faced by the hybrid electricity generation markets emerged in Africa since unbundling. The impact of vertical unbundling on renewable electricity in Africa is largely positive, with one of the best examples in Kenya, and believed that vertical unbundling opens up opportunities for sourcing electricity from renewables. Since the reforms Kenya relied increasingly on diesel generation, it mainly focused on CDM, not the renewable electricity. No empirical study on the recent electricity sector reform in Kenya, especially the impact of unbundling on renewable electricity. Graduate School of Global Environmental Studies 6

7 2. Literature review and Conceptual Framework In terms of renewable energy financing, the development of renewable electricity needs sufficient finance from various sources, yet with high risks and huge primary investment. 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: A country increases renewable electricity as long as it is the cheapest energy source and it can afford the primary investment cost. Research question: After the unbundling in Kenya, whether renewables are the cheapest energy sources and whether the utilities can afford primary costs? Methodology: Kenya as case study. Six interviews in Nairobi and Washington as the primary data, and the statistical data and archival records as the secondary data. Processed by ATLAS.ti Graduate School of Global Environmental Studies 7

8 3. Case of Kenya 3.1 Electricity sector reform Vertically unbundling the generation sector and allowing the entry of IPPs seem to be the most influential process in Kenya. Graduate School of Global Environmental Studies 8

9 3. Case of Kenya 3.2 Renewable energy policies Well endowed with geothermal and wind energy: 1) the highest geothermal potential in Africa, and the first African country 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 holds the 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 association of unbundling and renewable electricity in the context of Kenya. Graduate School of Global Environmental Studies 9

10 4. Analysis 4.1 Changes in the structure of power generation In terms of electricity production, renewables, mostly geothermal, are steadily increasing from 14 to 48%, and have become the main electricity sources. Graduate School of Global Environmental Studies 10

11 4. Analysis 4.1 Changes in the structure of power generation In terms of the installed capacity, renewable has increased from 11 to 28%, yet still lower than hydro, and conventional energies. Graduate School of Global Environmental Studies 11

12 4. Analysis 4.1 Changes in the structure of power generation In terms of capacity by ownership, KenGen has gradually shifted away from fossil fuels to geothermal. While most of new entrants focus on fossil fuels, having four times larger capacity than geothermal. Graduate School of Global Environmental Studies 12

13 4. Analysis 4.1 Changes 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. Graduate School of Global Environmental Studies 13

14 4. Analysis 4.1 Changes in the structure of power generation Graduate School of Global Environmental Studies 14

15 4. Analysis 4.2 From 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) Failed test drilling by KenGen; 2) PPA; 3) Pending application to use Kenyan Pension Funds; 4) Munich RE insurance. Graduate School of Global Environmental Studies 15

16 4. Analysis 4.2 From the practical facts Theme 2 After the unbundling, the channel for IPPs to join the electricity 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 IDA of 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 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). Graduate School of Global Environmental Studies 16

17 4. Analysis After unbundling, the generation utilities in Kenya chose the energies with the lowest cost, which coincidently are renewables, namely geothermal, wind, and hydro. However, it reveals two main challenges might impeding the future renewable electricity development: 1)the financing challenge for the IPPs, especially for new entrants, in comparison with incumbent state-owned utility; 2)the joining mechanism challenge faced by the IPPs for whom the ICB and FiT policy seemed to be ineffective. Graduate School of Global Environmental Studies 17

18 5. Discussion 1) 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; 2) 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; 3) 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. Graduate School of Global Environmental Studies 18

19 6. Conclusion 1) Examining the impacts of unbundling on renewable electricity is critical to the renewable promotion, which holds especially true for the Sub-Saharan African countries. 2) The implication is that, if the institutional and financial challenges are solved, the unbundling would further accelerate renewable electricity penetration in Kenya. 3) It requires further research on how to advance the private IPPs investment with the resistance from incumbent stateowned utilities, and on looking for appropriate unbundling approaches in the hybrid energy markets in SSA. Graduate School of Global Environmental Studies 19

20 Annex 1: Graduate School of Global Environmental Studies 20

21 Graduate School of Global Environmental Studies 21

22 Graduate School of Global Environmental Studies 22

23 References Donovan, C.W., Renewable Energy Finance: Powering the Future 1st ed., London: Imperial College Press. Eberhard, A. et al., Independent Power Producers in Sub-Saharan Africa: Lessons from Five Key Countries, Available at: GoK, Least Cost Power Development Plan , Available at: Gratwick, K.N. & Eberhard, A., Demise of the standard model for power sector reform and the emergence of hybrid power markets. Energy Policy, 36, pp Gugler, K., Rammerstorfer, M. & Schmitt, S., Ownership unbundling and investment in electricity markets - A cross country study. Energy Economics, 40, pp Habtetsion, S. & Tsighe, Z., Energy sector reform in Eritrea: initiatives and implications. Journal of Cleaner Production, 15(2), pp IRENA, Africa s Renewable Future: The Path to Sustainable Growth. Available at: IRENA, Africa 2030: Roadmap for a Renewable Energy Future. Abu Dhabi: IRENA. Kapika, J. & Eberhard, A., Kenya: enabling private-sector participation in electricity generation. In Power Sector Reform and Regulation in Africa: Lessons from Kenya, Tanzania, Uganda, Zambia, Namibia and Ghana. Pretoria: Human Sciences Research Council, pp KenGen, KenGen Annual Report 2016, Nairobi. Available at: Annual Report 2016_0.pdf. Kim, S.E., Yang, J. & Urpelainen, J., Does Power Sector Deregulation Promote or Discourage Renewable Energy Policy? Evidence from the States, Review of Policy Research, 33(1), pp KMEP, Kenya National Energy Policy, Nairobi, Kenya Ministry of Energy and Petroleum. Available at: Energy Policy - Final Draft.pdf. Malgas, I. & Eberhard, A., Hybrid power markets in Africa: Generation planning, procurement and contracting challenges. Energy Policy, 39(6), pp Graduate School of Global Environmental Studies 23

24 References Mebratu, D. & Wamukonya, N., Electricity sector reform in Africa: key lessons and emerging trends. Journal of Cleaner Production, 15(2), pp Meyer, R., Vertical Economies and the Costs of Separating Electricity Supply--A Review of Theoretical and Empirical Literature. Energy Journal, 33(4), pp Available at: Nagayama, H., Political Economics of the Unbundling of Electricity Generation and Transmission, Tokyo: Toyokeizai. Nhete, T.D., Electricity sector reform in Mozambique: a projection into the poverty and social impacts. Journal of Cleaner Production, 15(2), pp Owino, T. & Morton, T., The Impact of Energy Sector Reforms on Clean Development Mechanism Renewable Energy Projects in Kenya. Carbon & Climate Law Review, 4(4), pp Pineau, P.O., How sustainable is policy incoherence? A rationalist policy analysis of the Cameroonian electricity reform. Journal of Cleaner Production, 15(2), pp Pollitt, M.G., The role of policy in energy transitions: Lessons from the energy liberalisation era. Energy Policy, 50, pp REN21, Renewables 2016 Global Status Report. Paris: REN21 Secretariat. Richter, A., Competitive auctions for renewables projects could replace feed-in-tariff system in Kenya. Available at: [Accessed March 24, 2017]. SREP, Scaling-up Renewable Energy Program (SREP) Investment Plan for Kenya, Available at: IP_0.pdf. Turkson, J.K., Power Sector Reform in Sub Saharan Africa, London: Palgrave Macmillan. UNEP FI, Financing renewable energy in developing countries, Geneva. Available at: UNIDO, Module 8: Impact of different power sector reform options on renewables, Available at: Graduate School of Global Environmental Studies 24