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Project Design Study on the Renewable Energy Development for Off-Grid Power Supply in Rural Regions of Kenya Project No

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Project Design Study on the Renewable Energy Development for Off-Grid Power Supply in Rural Regions of Kenya Project No Project Design Study on the Renewable Energy Development for Off-Grid Power Supply in Rural Regions of Kenya Project no. 30979 Final Report November 2014 Submitted to KfW Development Bank by: Economic Consulting Associates (UK) Trama Tecno Ambiental (Spain) Access Energy (Kenya) Economic Consulting Associates Limited 41 Lonsdale Road, London NW6 6RA, UK tel: +44 20 7604 4545, fax: +44 20 7604 4547 Executive summary Executive summary Background and introduction German Development Cooperation, through KfW (Financial Cooperation) and GIZ (Technical Cooperation), intends to assist Government of Kenya in promoting the development of new medium-sized hybrid mini-grids (PV-/Wind-Diesel) focused on nascent small and medium-sized growth centres. To assist in identifying and preparing this project, KfW Development Bank contracted Economic Consulting Associates (ECA) of the UK, in conjunction with Trama Tecno Ambiental (TTA) of Spain and Access Energy of Kenya to undertake the Project Design Study on the Renewable Energy Development for Off-Grid Power Supply in Rural Regions of Kenya. The work is divided into 4 main tasks – policy and regulatory framework, minigrid lessons from SSA and Kenya, design of mini-grid interventions, project implementation and next steps. Task 1: Policy and regulatory framework for mini-grid development in Kenya Policy, regulatory and institutional framework Kenya’s energy policy and law are currently being reviewed (a sixth draft of energy bill is currently in circulation) to reflect the adoption of the Kenya Vision 2030 and the promulgation of the Constitution of Kenya 2010. Although the details are yet to be formalised, the policy direction is clear in respect of accelerating universal access to electricity, both through grid extensions and through isolated mini-grids. It is intended that renewable energy will play an increasingly important role in mini-grids. The development of hybrid mini-grids is one of Kenya’s important projects within the Scaling-Up Renewable Energy Program (SREP). Institutional responsibility for rural electrification has been allocated to the Rural Electrification Authority (REA). Reflecting increasing importance being given to renewables as well as the progressive delegation of the implementation of rural electrification to the county governments, the Government of Kenya (GoK) proposes that REA will be replaced by an institution with a broader mandate, the National Electrification and Renewable Energy Authority (NERA). REA works closely with the national distribution company Kenya Power (more commonly referred to as KPLC). Other key institutions involved are the Energy Regulatory Commission (ERC) and the County Governments. For the future development of mini-grids, technical support and capacity-building are particularly needed by the County Governments, covering technical aspects, administration and financial management. Streamlined regulatory procedures need also to be developed. Existing mini-grids At present, there is provision for different types of mini-grids in Kenya, the predominant type being the first category: Final Report: Kenya Off-Grid Power Supply ECA, TTA and Access Energy; November 2014 i Executive summary Public mini-grids – these are developed by REA which owns the assets; KPLC operates the systems on exclusive concessions; uniform national tariffs. Private mini-grid concessions – generally full private concessions, but O&M agreements are possible; scheme-specific tariffs. This model is allowed but there is no precedent of private mini-grid concessions in Kenya. Off-grid feed-in tariffs (FiTs) and power purchase agreements (PPAs) – FiT framework is in place but no PPA projects as yet. Community mini-grids – new policy to promote community schemes; at present only a few micro-grid community schemes operating with NGO-support New policy directions are for the public mini-grids to be privatised and for Counties to develop schemes which can later be transferred to operators other than KPLC (private or county government). The policy and regulatory framework is evolving in Kenya, broadly towards good practice that is evident from regional and international experience. Key elements needed include having a clearly articulated strategy for mini-grid development, light handed regulation, and one-off capital rather than recurrent subsidies. Licensing and permitting of mini-grid operators The agencies involved in providing licenses and permits are the ERC and the County Governments (also NEMA – this is dealt with in the environmental section). At present, there are no procedures which are specific to mini-grids. Electricity generation, distribution and supply licences, and power purchase agreements have been designed for large power projects. The current licensing and permitting procedures are thus not suitable for small mini-grid projects. A lengthy process is involved (typically 3 years) with high transaction costs. Many micro-grid sites are currently operating without a permit due to this. There is no programmatic approach for firms interested in developing multiple sites, and no provisions for connection of mini-grids when extension of the national grid reach the site. Light-handed regulation for mini-grids is needed – some specific aspects are covered under financial and economic analysis below. Task 2: Lessons learned and best practice analysis in SSA and Kenya Experience in Sub-Sahara Africa Three case study countries have been analysed, providing examples of various innovative features and a variety of experience of different technologies and delivery models. Final Report: Kenya Off-Grid Power Supply ECA, TTA and Access Energy; November 2014 ii Executive summary Business/ Country Case study management Innovative/ noteworthy features model Innovative energy management technology (energy dispensing meters) Santo Antâo Public Cape island solar PV Community ownership (municipality) with Private Verde hybrid mini- private participation in O&M Partnership grid Community participation in civil works and community training. Yeelen Kura has installed 9 solar mini-grids Yeelen Kura ranging in size from 50kWp to 150kWp Private Mali solar hybrid concessions Good example to illustrate pros and cons of mini-grids mini-grid concessions. More than a hundred unregulated IPPs Private running diesel mini-grids. Private diesel sector Somalia mini-grids driven, Several IPPs considering investment in unregulated renewables to reduce costs. A number of lessons emerge for Lessons learned applicable to Kenya from the SSA case studies: Technical – the concept of Energy Daily Allowance in Cape Verde is an effective load management tool. Smart metering and time-of-use tariffs can also assist. Where consumption levels per customer are very low (Mali and Somaliland), flat rates or load limited supplies may well be good options. Regulation – the benefits of light handed regulation of mini-grids are demonstrated in Somaliland and Mali. Performance monitoring needs to be carefully designed to avoid introducing perverse incentives (Mali). Private sector involvement has been beneficial in various ways, including leveraging parallel financing (Somaliland) and improving O&M of schemes (Mali) Community involvement in mini-grid development from an early stage has proved valuable in all countries. Experience in Kenya The categories of existing mini-grids have been described above, the predominant model being the public KPLC-operated systems. Private involvement in mini-grid development is only recent yet some important lessons transpire for the future development of mini-grids: Final Report: Kenya Off-Grid Power Supply ECA, TTA and Access Energy; November 2014 iii Executive summary Site selection: largest off-grid sites in Kenya have already been electrified. Opportunities for mini-grid development are in the small- scale (<100 kW). Technical aspects: The historic energy consumption patterns of KPLC mini-grids is a valuable benchmark for the design of future mini-grids, especially in regards to sizing. Hybridisation with renewables has had positive impacts in reducing generation costs. Research indicates that northern Kenya is attractive for mini-grids with a large penetration of solar energy (>85%). The use of pre-paid meters, smart meters and remote monitoring, has positively impacted performance of mini-grid operations. Light-handed regulation: existing unlicensed mini-grids have been able to charge cost-reflective tariffs and develop a tariff scheme more suited to the market (low upfront connection fees). This model could be self- regulating. Community involvement: there are clear advantages of interacting with the demand side, especially in relation to the promotion of productive use of electricity. Task 3: Design of pilot mini-grid interventions Selection of sites The three pilot sites were selected from a list of 64 recommended greenfield sites, which was compiled from studies undertaken by various government energy programs and recommendations of GIZ and the Ministry of Energy. A shortlist of the best 10 sites were chosen on the basis of absence from the national grid, sufficient demand for electricity, population, economic activity, hybrid PV-diesel opportunities and potential for expansion and synergies. After further desk research, field visits were conducted at 6 sites. The final choice was made through scoring additional criteria which covered local dynamics, demographics, geography, economics, potential for productive activities, ability and willingness to pay, accessibility,
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