PUBLICATIONS

Powering Progress: Embracing Private Sector Participation in Kenya’s Electrical Energy Supply

2024-05-13

Powering Progress: Embracing Private Sector Participation in Kenya’s Electrical Energy Supply

  1. Introduction

    Envision having a variety of options for electricity suppliers in a similar way as mobile phone or internet service providers, through a competitive marketplace of convenience and choice. The days of enduring extended blackouts during rainy days or facing sudden spikes in electricity bills might soon be a thing of the past. This vision is becoming increasingly tangible as efforts to open the electricity market to private sector participation gather momentum. This ongoing shift holds the potential to transform electrical energy supply, promising to offer consumers reliable and affordable electricity while availing opportunities for independent power producers and private sector involvement across the electrical energy value chain.

    Kenya has progressively implemented energy sector reforms geared towards extending reliable and affordable electricity to all its population.  Our long-standing history with Independent Power Producers (IPPs) has encouraged private sector investment and participation in electricity generation. This has enabled the availability of diversified power sources, including renewable energy, allowing Kenya to produce more power than it consumes. Yet this surplus is juxtaposed with a lack of energy security for many consumers and high electricity costs.[1] This shows that Kenya’s challenges lie in energy efficiency, and less in the availability of electrical energy supply.


    [1] Latest statistics from the Energy & Petroleum Regulatory Authority show that the peak demand for electrical energy stood at 2,171 MW as of December 2023, whereas installed capacity stood at 3,689 MW. This means that Kenya’s generation capacity was more than the demand by 1,518 MW as of Dec 2023.


    In recent years, the government has implemented various legal and governance interventions to address these challenges. The National Energy Policy[1] was published in 2018 to promote an affordable, reliable, and competitive energy supply that meets national and county development objectives. Policy recommendations included the establishment of a robust legal, regulatory, and institutional framework conducive to the liberalization of the energy sector, with key recommendations targeting enhancements in energy generation, transmission, distribution, and supply. Based on these legal recommendations, further legal developments have occurred towards reducing the cost of electricity and ensuring its reliable supply through market liberalisation.


    [1] National Energy Policy, Ministry of Energy, October 2018 < https://bit.ly/4dqsnS3>

    2. Legal and Policy efforts towards liberalisation of the energy market

    2.1. The National Energy Policy, 2018

    The creation of more competitive market structures in the energy sector, and particularly in the electricity supply industry, is a pertinent priority under the National Energy Policy.

    Whereas electricity generation has been liberalized, with several licensed Independent Power Producers (IPPs), there has been limited private sector participation in the supply and distribution of electricity.  As a result, the liberalisation of the energy sector was a central theme in the policy, with cross-cutting policy recommendations comprising, inter alia:

    • collaboration with private sector for energy efficiency and conservation to improve energy security and competitiveness;
    • support for Public Private Partnerships (“PPP”) to facilitate private sector participation in financing, construction, development, operation and maintenance of energy infrastructure and delivery systems; and
    • encouraging private sector to generate electricity for own consumption and for export of any surplus to the national grid through Feed-in-Tariffs.

    The National Energy Policy is succeeded by the Energy Act, 2019, which enables private sector participation in the electrical energy value chain as envisioned above.

    2.2. The Energy Act, 2019

    The current Energy Act (CAP. 314) was enacted and came into effect in March 2019, repealing the Energy Act of 2006, the Kenya Nuclear Electricity Board Order of 2012, and the Geothermal Resources Act of 1982. Its enactment consolidated the laws relating to energy including regulation of the production, supply, and use of electricity among other energy forms.

    One of the key changes introduced under the Energy Act is an expanded involvement of private sector in energy, including the importation, exportation, generation, transmission, distribution, and supply of electrical energy. Section 2 of the Energy Act broadens the meaning of an “undertaking” to mean ‘any business undertaken pursuant to a license or a permit and includes all the assets and liabilities from time to time constituting or belonging or appertaining to such business, whether public or private, for –

    • the importation, exportation, generation, transmission, distribution and supply of electrical energy; or
    • the production, storage, distribution or supply of any other form of energy.’

    Part IV of the Energy Act further enables licensing for a person who wishes to carry out, among others, the retail supply of electricity. Section 119 (2) requires that licensing for electric power undertakings be through a fair, open and competitive process. This is supported by Section 145 (4) of the Energy Act, allowing a licensed electricity supplier to enter a contract with a consumer who is receiving electrical energy from another licensee, provided that such new licensee assumes all obligations of the previous licensee.

    Presently KPLC remains the main buyer in the electricity market, which bulk purchase is effected through Power Purchase Agreements with Independent Power Producers. Opening the market to private sector is anticipated to improve service delivery and cost-effectiveness of the electricity supply industry.

    Enhanced private sector participation in electricity distribution to end-consumers has the potential of optimizing efficiency, reducing costs, and enhancing the reliability of electricity. This shift for greater private sector participation within the electricity supply industry supports the broader objectives of the Energy Act, promoting competitiveness that meets the evolving needs of consumers and facilitates economic development.

    Despite legal provisions allowing for private sector participation, the same has had slow uptake due to absent regulations that define the processes underpinning the same. The recent Energy (Electricity Market, Bulk Supply and Open Access) Regulations, 2024have been enacted to address this gap.

    2.3. The Energy (Electricity Market, Bulk Supply and Open Access) Regulations, 2024

    In a big step towards energy sector liberalisation, the Energy (Electricity Market, Bulk Supply and Open Access) Regulations, 2024 (the “Electricity Market Regulations”) have introduced open access for systems of transmission and the distribution of electricity. This development empowers licensed suppliers to use existing infrastructure in the distribution of electricity, subject to payment of wheeling charges.[1] This opens the market to increased competition and participation from various stakeholders, including private sector. Nevertheless, Regulation 7 (3) of the Electricity Market Regulations imposes a restriction on licensed suppliers, prohibiting them from providing electricity to consumers who are already under contract with another supplier, to the intent that a consumer would have to terminate an existing supply contract prior to signing a fresh contract with a new supplier . This regulation impedes the smooth transition of end-consumers serviced by the Kenya Power and Lighting Company (KPLC) to alternative suppliers, contradicting efforts to diversify electricity providers. This constraint could create a superficial opening of the market, limiting the full realization of market liberalization objectives.


    [1] A charge levied for the use of a distribution system and its associated facilities.

    3. Lessons from private sector participation in Master Planned Developments

    In Kenya, master planned developments give insight into the potential of private sector participation in the electricity supply industry. By way of example, the Tatu City Power Utility Company represents the transformative power of private sector participation, particularly in enhancing the reliability of electricity supply. The activation of Tatu City’s 135MVA is a substantial investment that has resulted in electricity uptime of 99%, with downtime virtually eliminated. Such achievements underscore the potential of private sector to optimize efficiency in the electricity supply industry.

    4. Lessons from foreign jurisdictions on their experience with private sector participation in the electricity supply industry

    Latin America and the Caribbean have the largest number of privately operated utilities in electricity distribution, followed by Europe and Central Asia. That being said, the full transfer of assets rarely occurs in electricity supply and the same is predominantly undertaken through PPP arrangements. Private participation is therefore conducted under a broad range of legal agreements, such as management and lease contracts.[1]

    Colombia has had relative success with private sector participation in the electricity supply industry. In 1994, the electricity supply industry in Colombia was opened to the private sector, introducing private sector participation, independent regulation of distribution and transmission, and competition in power retailing.[2] This private sector involvement has led to significant improvements in service delivery leading to increased investment in infrastructure expansion and efficiency in operations. Notable achievements include reductions in outage durations and frequency, decrease in network distribution losses in the past 25 years and 100% access to electricity for the total population by 2018, including in rural regions.[3]

    Generally, it has been found that on technical, financial, and commercial indicators, private sector has in Latin America (Brazil, Colombia, Peru, and Chile) outperformed public utilities, and succeeded in providing comparatively affordable electricity to end-consumers.[4]


    [1] Public Private Infrastructure Advisory Facility, Does Private Sector Participation Improve Performance in Electricity and Water Distribution? (IBRD/The World Bank2009).

    [2] Public Private Infrastructure Advisory Facility, Does Private Sector Participation Improve Performance in Electricity and Water Distribution?

    [3] Res4Africa and PWC, Private Sector Participation in African Grid Development (Res4Africa 2021).

    [4] Res4Africa and PWC, Private Sector Participation in African Grid Development (Res4Africa 2021).

    5. Conclusion

    Private sector participation offers potential for improving electricity accessibility in Kenya. However, Regulation 7 (3) of the Electricity Market Regulations presents a barrier by hindering customers from easily switching to an alternative electricity supplier. This effectively ties approximately 76% of Kenyan consumers to KPLC, reinforcing its monopoly in the electrical energy supply sector.

    It is possible that this restriction has been enacted to facilitate a sustainable transition to open markets. This is particularly significant due to KPLC’s several active Power Purchase Agreements (PPAs) with IPPs. Many of these agreements are structured with provisions such as the ‘Take or Pay‘ mechanism, which obligates KPLC to pay for electricity generated whether taken or not by it. Given these onerous contractual obligations, allowing consumers to freely switch between suppliers could adversely impact the financial stability of KPLC.

    On the other side of the coin, this limitation may discourage potential electricity suppliers from entering the market, entrenching the subsistence of high costs of electricity and an unreliable supply. Empirical evidence from other jurisdictions suggest that private sector participation can lead to enhanced efficiency through increased investment and infrastructural improvement, resulting in a more dependable and cost-effective supply of electricity. These benefits may not be realized under the current regulatory limitations.

    Given these constraints, it may be worth it to firmly push for the renegotiation of PPAs with IPPs and revisit the regulations to facilitate greater market liberalization and competition in the electricity supply industry. By removing barriers to consumer choice and encouraging the entry of new retail suppliers, Kenya can work towards achieving energy security and affordability for end-consumers.

    Esther Omulele, Joy Muya, and Cecile Naitore.