By Tina Nduta
Kenya was recently recognised as one of the most attractive renewable energy markets in the world.
The country was ranked as one of the fastest growing markets for
renewable energy by Ernst & Young’s Renewable Energy Countries
Attractiveness Index (Recai).
The report put Kenya’s renewable energy sector in the Rising
Star category, which comprises promising growth markets. This comes
against the backdrop of the COP21 Paris Agreement that set to create a
$13.5 trillion global low carbon investment market by 2030.
Ahead of the COP21 Convention, Kenya pledged to cut its carbon
emissions by 30 per cent by 2030. With geothermal energy sources, wind
speeds averaging 11m/s — one of the fastest in Africa — and receiving
sunshine all year round due to its location on the Equator, Kenya is a
potentially prime renewable energy producer.
But legal disputes, security and legislation and confused policies seem to pose significant hurdles to investors in the sector.
The collapse of the 60MW Kinangop Wind Park has, for example, cast a dark shadow over the sector.
The compensation dispute after the project’s licence was
withdrawn following protests by the local community over land
acquisition, has taken the firm and the Kenya government to the
International Court of Arbitration.
The firm is seeking compensation on an indemnity that the
Ministry of Energy had promised in the event that the project failed to
take off.
Last year, US-based Walam Energy sued the county government of
Turkana for the cancellation of the licence of independent geothermal
exploration company Olsuswa Energy following a land dispute.
Around the same period, a Russian firm OJSC sued KenGen for
allegedly favouring a rival company in a $140 million tender award.
These disputes are worrying.
The mining sector is also facing similar challenges. Last year,
Canadian gold explorer African Queen Mines withdrew from Kenya, citing
security concerns.
The other factor that may adversely affect the renewable energy
sector is the new Companies Act, which could make it mandatory for
foreign investors to cede a 30 per cent stake in their businesses to
local investors.
Energy projects usually involve large capital investments and
the requirement may make it hard for local investors to find foreign
partners.
Private capital
Private institutional investors in Kenya rarely want to go into energy development because of the capital risk.
One of the reasons why the African continent has the least
electricity penetration in the world despite having the largest energy
reserves — especially in renewable energy — is because its energy sector
has the lowest private capital participation.
The result is that over half a billion people on the continent do not have electricity.
According to the World Bank, Africa’s private investment in the
energy sector is about one per cent, compared with 34 per cent in South
Asia, 26 per cent in Latin America and 25 per cent in Eastern Europe and
Central Asia.
This is attributable to policy and investment risks that undermine efforts to attract capital.
In addition to the power deficit, power cuts in sub-Saharan
Africa also hamper growth. The World Bank estimates that blackouts alone
cost countries up to 2.1 per cent of GDP.
In Kenya, over half of the population does not have access to
electricity, even as the government rolls out ambitious energy projects
to generate and provide sustainable and affordable electricity.
But the Kenyan energy projects are left almost entirely to the government and foreign investors.
The International Monetary Fund has already warned Kenya against
overexposure to debt in power deals, saying that Nairobi has guarantees
on up to 12 power purchasing contracts worth over $3.43 billion, or 5.7
per cent of GDP, that have not been made public or accounted for.
Private-public partnerships are critically important for Kenya’s
energy and energy infrastructure development if the country is to meet
its targets.
Equally important is Kenya’s ability to provide security for foreign capital investments.
Tina Nduta is the founder of Eimara Africa Resources, a Nairobi-based mining and energy consultancy.
E-mail: tina.nduta@eimaraafrica.com
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