REGULATING THE ENERGY SECTOR IN KENYA

By: Joe Ng’ang’a, Energy Regulatory Commission, Kenya

Geothermal Working Group MeetingAfrica Union Commission

Kampala, Uganda

19th – 23rd September 2011

BACKGROUND The Energy Regulatory Commission (ERC) is

established under the Energy Act, 2006

Parliament passed the Act in November 2006 and itreceived presidential assent on 30th December 2006.

The Minister for Energy operationalized the Act witheffect from 7th July 2007 through Legal Notice No. 142

Amongst others, the Act: Transformed Electricity Regulatory Board (ERB)

to Energy Regulatory Commission (ERC) with regulatory mandate for the entire energy sector.

BACKGROUND (2) The Energy Act, 2006 consolidated under one act

the legal framework for electric power, renewable energy and downstream petroleum sub-sectors.

The Act confers powers to the Minister for Energy to make regulations for electrical energy (s 63), petroleum (s 102) and renewable energy (s 103) on the recommendation of ERC.

BACKGROUND (3) The Act created an enabling regulatory

environment for power producers to invest in the country

Created a more effective regulatory framework for the petroleum and renewable energy sectors

Established the Rural Electrification Authority and Energy Tribunal.

ERC MANDATE ERC was created as a single sector regulatory

agency with responsibility for economic and technical regulation of electric power, renewable energy and downstream petroleum sub-sectors with powers to, inter alia:

Issue, renew, modify, suspend and revoke licenses and permits

formulate licensing procedures, enforce and review regulations, codes and standards

ERC MANDATE - (2)Recommend to the Minister regulations

necessary for the sectorSet, review and adjust electric power tariffsApprove power purchase and network service

contracts Investigate and resolve complaints and

disputes on any regulated matterProtect interests of various stakeholdersPrepare indicative national energy plan

ORGANISATION STRUCTUREThe Management of ERC is vested in the Commissioners consisting of:-

The Chairperson appointed by the President for a four year term (renewable once)

The Director General, who is the Chief Executive Officer of the Commission, appointed by the Minister for a period of three (3) years (renewable once)

Five other Commissioners appointed by Minister to represent theprivate sector in

general. They are appointed for a three (3) year term (renewableonce).

Section 15(1) of the Act provides for the appointment ofsuch other staff as would be needed for the properdischarge of the functions of the Commission

INDEPENDENCE OF THE COMMISSION

Section 4(3) of the Energy Act provides that:-

“Except as otherwise provided for in thisAct, the Commission shall be independentin the performance of its functions andduties and exercise of its powers and shallnot be subject to the direction and controlof any person or authority”.

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INDEPENDENCE OF COMMISSION (2)Exceptions…

Under Section 111(3), the Minister may,from time to time, give directions inwriting to the Commission with respectto the policy to be observed andimplemented by the Commission

The Commission’s decisions may bechallenged by a party through the filingof an appeal with the Energy Tribunal

INDEPENDENCE OF THE COMMISSION (3)Challenges… Section 111(3) of the Act exposes the

Commission to the possibility of undueexternal pressure (usually political)

ERC has limited powers to sanction regulated entities (e.g. impose fines)

PS, Ministry of Energy is a Commissioner

Commissioners lack security of tenure

DETERMINATION OF TARIFFSAll contracts for the sale of electrical energy,

transmission or distribution services, between and among licensees and large retail consumers shall be submitted to the Commission for approval before execution

In considering a contract, the Commission shall ensure that the rates or tariffs established in the contract are just and reasonable

DETERMINATION OF TARIFFS(2)… just and reasonable tariff shall

mean a rate that enables a licensee to, inter alia:Maintain financial integrity; attract capital;operate efficiently compensate investors for the risks

assumed.

TRIGGERS OF A TARIFF REVIEWEnergy Act, 2006 provides for an

application by a consumer or a utility; ERC can also act on its own motion

Retail Electricity Tariffs Review Policy, 2005 provides for retail tariffs to be reviewed every three years

INCENTIVES AND SUBSIDIES IN THE SECTOR

Investment costs for transmission projects, geothermal exploration and drilling costs are borne by GoK

Development partners offer concessionary funds with low interest, moratorium and long tenor

Inter-consumer subsidies under the uniform tariff policy where for instance rural consumers enjoy the same tariff as their urban counterparts

Intra-consumer subsidies where lifeline consumers are subsidized by domestic consumers with large consumption

PLANNING MANDATE OF ERCSection 5 (g) of the Energy Act mandates ERC

to develop indicative national energy plans

ERC has set up a Stakeholder committee with representatives from: MoE, KenGen, KPLC, GDC, REA, KNBS, KenInvest, KETRACO,KEPSA, Vision 2030 Board and the Ministry of State for Planning, National Development and Vision 2030 to undertake least cost planning

DEMAND FORECASTThe peak demand forecast rises from

1,227MW in 2010 to 15,026MW in 2030 and 16,905MW in 2031.

The energy demand increases from 7,296GWh in 2010 to 91,946GWh in 2030 and 103,518GWh in 2031

Thus current peak load is expected to grow by about 12 times by the year 2030

The main driver for this growth is Kenya’s Vision 2030 strategy

Least Cost Power Development Plan

By 2031 installed capacity will be 21,620 MW of: 5,530 MW Geothermal 4,000 MW Nuclear 2,720 MW Coal 2,340 MW GT- NG 2,036 MW Wind 2,000 MW Imports (regional interconnections) 1,955 MW MSD 1,039 MW Hydro

Proposed Regional Interconnections1,200km of 500kV HVDC line

between Kenya and Ethiopia

423km of 220kV double circuit linebetween Olkaria, Kenya and Tororo, Uganda

500km of 400kV line between Isinya, Kenya and Singinda, Tanzania

LICENSING MANDATE OF ERCIn accordance with Section 27 (1) of the Energy Act,

a licence is required for: the generation, transmission, distribution and

supply of electrical energy (to utilities orlicensees)

electricians and electrical contractors

Performance Monitoring of licenseeswith respect to quality of supply and service

electricians and electrical contractorsperformance

LICENSING ACTIVITIESReviewing and recommending issuance, renewal, modification,suspension or revocation of licences and permits for utilities-

To ensure electricity is generated, transmitted, distributedand supplied in a safe, secure and reliable manner,

The licences and permits include conditions setting out therights and obligations of licensees, as well as end-users

Licences required for undertakings of more than 3 MW;permits apply for projects of 3 MW or less

Permit not required for undertakings of less than 1 MWwhich cannot be conveyed to a transmission or distributionsystem (i.e. of own use)

LICENSING PROCESS Applications are made by the party wishing to carry

out electric power undertakings

The application is reviewed and if found materiallycomplete the license or permit is processed within90 days. Aspects to be assessed include feasibility ofthe project, technical and financial capability ofapplicant, bulk tariff offered, compliance withenvironmental laws, amongst others

Upon issue of the licence or permit, the applicantpays a grant fee, and thereafter annual fees, to theRural Electrification Authority.

LICENSED ELECTRIC POWER PRODUCERS Kenya Electricity Generating Company (KenGen) accounts for 1,180 MW

(72%) of the total installed capacity of 1,639 MW consisting of hydro,geothermal, thermal and wind power plants

Independent Power Producers (IPPs) provide the balance (28%):

Iberafrica Power, Tsavo Power and Rabai Power operate thermalpower plants (MSD) of, respectively, 108MW, 74MW and 90MW makinga combined capacity of 272 MW

OrPower4 Inc. operates a 48 MW geothermal power plant

Mumias Sugar produces 38 MW of cogeneration, of which 12 MW is forits own use, leaving a balance of 26MW for export

An Emergency Power Producer has a 60 MW short-term power plant

OTHER LICENSED ELECTRIC POWER PRODUCERS

Imenti Tea Factory operates a 920 kW hydro power plant of which about500 kW is for own use, balance being sold to KPLC under the Feed-in-Tariff Policy;

James Finlay, Sotik Tea Company, Sotik Highlands Tea Estate andUnilever Kenya operate hydro and thermal power plants for own use;

Oserian Development operates a 3 MW geothermal power plant andPan African Paper Mills operates a 9 MW thermal power plant for ownuse;

Base Titanium, Turkana Wind Power, Triumph Power, Gulf Powerand KPRL are also licensed but are yet to construct their plants.

TRANSMISSION, DISTRIBUTION AND SUPPLY LICENSES FOR KENYA POWER

Kenya Power, the sole offtaker, purchases power from KenGenand IPPs through Power Purchase Agreements (PPAs) approvedby the Commission, and has been issued with- One Transmission Licence for the existing transmission

network comprising 1,323 km of 220 kV lines and 993 km of 132kV lines;

Four Distribution and Supply Licences for its Nairobi,Coast, West and Mt. Kenya Regions;

Two Distribution and Supply Permits for the isolated gridsof Lamu and Garissa and Twelve Generation, Distributionand Supply Permits for the isolated grids at Elwak,Habaswein, Mpeketoni, Mfangano Island, Merti, Wajir,Mandera, Moyale, Lodwar, Marsabit, Hola and Bargoi.

MONITORING OF THE ENERGY SECTOR

Technical performance of licensees is monitored for compliance to ensure that they: operate in accordance with their license/permits

conditions, operate efficiently, safely and protect the environment, Meet expectations of their customers, for acceptable

Quality of Supply and Quality of Service,

Monitoring entails technical audits, analysis of periodic reports and investigations of selected accident and incidents

TYPICAL TECHNICAL AUDIT ISSUES

Design and constructionOperation and maintenanceCustomer serviceMetering and billingQuality of supply / product

SAMPLE OF ISSUES RAISED WITH LICENSEES

• Understanding of the Regulatory framework

• Stock levels of materials to meet obligations

• Adequacy of permanent and contracted personnel

• Quality of materials used

• Adherence to environmental health and safety

standards

• Inspection of new facilities prior to commissioning

COMPLAINTS/DISPUTES RESOLUTION The Commission approves customer service charters and

complaints handling procedures of the licensees byensuring provision of a platform to adequately addressconsumer complaints / expectations

If any complaint is not resolved by the licensee, thecomplainant is advised to lodge it with the Commissionfor a fair and independent hearing

Complaints vary in nature from quality ofproduct/service, metering, billing, tariffs, wayleaveinfringement to damaged equipment, etc.

COMPLAINTS AND DISPUTES RESOLUTION (2)

Once the complaints are lodged with theCommission, they are addressed throughmediation, arbitration or a fullCommission hearing

The Commission has issued new Energy(Complaints and Disputes Resolution)Regulations, 2010 consistent with theEnergy Act 2006

NEW DISPENSATION…New Kenya Constitution promulgated on 27th

August 2010

Revision (Repeal?) of Energy Act, in progress

Rules and regulations under the Act will need to be revised too

But…

New legistative framework should lead to an even more favourable regulatory environment

END OF PRESENTATION.

THANK YOU FOR YOUR ATTENTION!

QUESTIONS?