AOP > Explore > Case Study: Kenya Mobilizes Private Investment through Independent Power Producers
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In the past, Kenya’s power sector utilized concessional financing from development partners and financial institutions to obtain capital for the construction of large-scale energy infrastructure, from building power plants to installing transmission lines. However, two decades ago, Kenya began to effectively mobilize private investment to meet its financing needs. In contrast to most sub-Saharan countries, in which electricity is often 100% state-owned, generated and distributed, Independent Power Producers (IPPs) make up a sizable share of Kenya’s electricity supply mix, representing approximately 30% of generation capacity and 53% of incremental generation capacity since 1990.
Entering the market through a mix of directly negotiated and competitive bid projects, IPPs began under regulated power purchase agreements to supplement power production. IPPs are considered attractive due to their tendency to exceed the technical and operational performance of their public counterparts, to reinvest in technology and innovation, to recoup the cost of investment through the retail of electricity and to reduce the burden of public sector financing.
Through its initiative known as ‘Maximizing Finance for Development,’ the World Bank spearheaded the utilization of commercial financing, in partnership with the Kenyan government, to meet energy infrastructure needs in the country. Since 1997, this approach has resulted in progressive reforms in sector policies, laws, regulation and institutions to create conditions that foster private sector investment and establish effective planning, tendering and contracting capabilities.
The first phase of reform differentiated policy and regulatory functions from commercial interests, liberalized generation activities, unbundled generation from transmission and distributition activites, established the national sector regulator and introduced cost-reflective tariffs. Two major utilities in the country – Kenya Power and Kenya Electricity Generation Company – are now publicly listed companies that are able to tap into capital markets for outside investment. The second phase involved ameliorating the operational and financial performance of sector utilities, establishing a close relationship between generation and distribution utilities through dynamic power purchase agreements, and establishing new entities with directives for developing transmission, geothermal resources and rural electrification.
Roadblocks to Private Investment on the Continent
Challenges remain in driving private […]
