Kenya has announced a policy shift that will see competitive energy auctions replace the Feed-in Tariff (FiT) scheme. The Energy Regulatory Commission (ERC) is formulating regulatory instruments and guidelines for energy auctions which should be ready within 3 months. If the timeframe provided will stand, then energy auctions are set to commence in early 2017.
Under the proposed auction scheme, power projects will be offered to pre-qualified private developers (IPPs) or open to all IPPs in an international tender in which the government issues a call for tenders to install a certain capacity of renewable energy electricity from a given technology or from a group of eligible technologies.
Bidders will submit their bids after which they will be evaluated on the basis of the price and other criteria, with the bidder offering the lowest tariffs and demonstrating the highest efficiency being awarded the project. The successful bidder will sign a Power Purchase Agreement (PPA).
Suspension of Feed-in Tariff
The auctions will replace the current FiT scheme which is modelled as once-off negotiated concessions where developers obtain licenses for viable projects on a first come first served basis, develop the project and then supply electricity to the off-taker at pre-determined tariffs for a fixed (usually long) term. The Cabinet Secretary for Energy & Petroleum, Charles Keter, announced Tuesday, 15th November, 2016 the establishment of an IPP-PPA Review Task-Force whose mandate is to review all existing PPAs with an aim of “obtaining cost effectiveness of power”, and announced further that processing of FiT Expressions of Interest “have also been suspended for this review to optimise the best tariffs going forward”.
The auctions are expected to promote the uptake of renewable energy, especially solar energy which remain largely untapped, while achieving a number of other economic objectives, including energy diversification.
Kenya’s interest in energy auctions is driven by their proven potential to address failures associated with FiT scheme where projects are not coordinated with holistic grid-infrastructure plans resulting in bungled grid connections and long-term overpriced contracts which do not accommodate rapidly decreasing costs of renewable energy technologies.
Cost of Electricity
It is expected that energy auctions will yield record-low tariffs as low as USD.6 Cents (Kshs.6) per kilowatt-hour for solar-generated power resulting in a lower Levelized Cost of Electricity (LCOE). Under FiT scheme, tariff for solar-generated power is priced at USD.12 Cents (Kshs.12) per kilowatt-hour.
Kenya developed interest in the energy auctions following success of the same in countries like Brazil, China, Morocco, Peru, South Africa, Zambia and more recently Uganda where energy auctions yielded tariffs of USD.6 Cents per kilowatt-hour.
Ease of land acquisition, a friendlier licensing & permitting regime, easier access to project finance and strong project completion guarantees will be essential to the success of the auctions because they give IPPs the headroom to quote the lowest tariffs. The government will therefore be expected to be more involved in providing support to mitigate the risks involved through:
- Disseminating high level study of the national grid and renewable energy resources to determine optimal locations for projects;
- Undertaking or facilitating land acquisition for developers;
- Easing up the licensing & permitting procedures applicable to the projects;
- Provision of tax incentives for developers or solar equipment;
- Taping into available multilateral technical support programs like World Bank’s Scaling Solar which facilitates energy auctions through provision of technical assistance, standardised documents, financial guarantees, pre-approved financing and insurance products to alleviate investors’ concerns and make the market more attractive.
Incidentally, land acquisition and licensing formalities are the blight of ongoing FiT projects like the Kinangop Wind Park which was deserted after the developer failed to reach a settlement with land owners.