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DE RUEHNR #3258/01 2081343
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P 271343Z JUL 06
FM AMEMBASSY NAIROBI
TO RUEHC/SECSTATE WASHDC PRIORITY 3283
INFO RUEHXR/RWANDA COLLECTIVE PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEHRC/USDA FAS WASHDC 1300

UNCLAS NAIROBI 003258 
 
SIPDIS 
 
DEPT FOR AF/E, AF/RSA 
 
SIPDIS 
 
E.O. 12958:  N/A 
TAGS: ENRG ECON ETRD KE
SUBJECT: Kenya Dodges Bullet; Adequate Rainfall Prevents 
Power Shortage 
 
REF: NAIROBI 285 
 
¶1. Summary: The April rains exceeded expectations, filling 
Kenya's hydropower reservoirs close to capacity and 
avoiding a recurrence of the power rationing in 2000 that 
cost the economy $48 billion and cut GDP growth to 0.4% in 
¶2000.  The 140 MW generators temporarily installed in case 
the drought persisted have raised power costs, but were not 
needed.  Kenya Electricity Generating Company (KenGen) 
wants to retain the thermal capacity to diversify its 
sources, and hopes to recover the contract costs through 
power exports to Uganda.  However, if export negotiations 
founder, the Emergency Power Supply Committee may cancel 
the contract with Aggreko and give up the thermal plants. 
End Summary. 
 
Drought Threatened Hydropower Generation in Early 2006 
--------------------------------------------- --------- 
 
¶2. About 60% of Kenya's installed capacity of 1,085 
megawatts is hydropower, and the shortfall of rain in 2005 
reduced water levels behind the hydroelectric dams 
alarmingly by early 2006.  The forecast of continued 
drought in 2006 raised fears of a recurrence of the drought 
of 2000, when a shortfall of over 400 Megawatts forced a 
power rationing program that cost the economy $48 billion 
and cut GDP growth to 0.4% in 2000.  In 2000, the GOK's 
contract with a foreign company to bring in emergency 
thermal generating capacity was criticized as too little, 
too late, and too expensive. 
 
Kenya Prepared for Hydropower Shortage 
-------------------------------------- 
 
¶3. To avoid a repetition of power rationing, Kenya 
established the Emergency Power Supply Committee consisting 
of the Kenya Association of Manufacturers, KenGen, 
parastatal Kenya Power and Lighting Company, the 
Electricity Regulatory Board, and the Ministries of Finance 
and Energy in early 2006 to get bids and negotiate a 
contract with an independent power producer to provide 
temporary thermal generating capacity.  In March, the 
Committee signed a contract with British firm Aggreko to 
provide 220 MW of capacity on terms both less expensive and 
more flexible than the 2000 contract.  The first 40 MW 
plant opened near Nairobi in May, and a 100 MW plant was 
installed in June, but did not begin operations.  In June 
2006, KenGen began charging consumers an average Ksh4.3kwh 
(6 US cents) surcharge to cover Aggreko's fuel costs. 
 
Now Kenya's Dams Are Almost Full 
-------------------------------- 
 
¶4. Fortunately, the weatherman was wrong, and KenGen 
reports the April rains exceeded expectations.  The water 
level at the main reservoir, Masinga Dam, is near capacity, 
just three meters below spillage.  KenGen reports the dams 
downstream from Masinga on the Tana River are also near 
full capacity.  Turkwell, the other main reservoir in the 
west of the country, is also at one of its highest levels, 
even before the main rains fall in that region.  Kenya, 
which normally has to import 30 MW of power from Uganda, 
finds itself with a rare energy surplus.  Unless the 
October rains fail badly, Kenya's power supply seems 
assured in 2006, and the emergency generators will not be 
needed. 
 
Terminating Aggreko Contract Would Save Millions of Dollars 
--------------------------------------------- -------------- 
 
¶5. According to KenGen Managing Director Eddy Njoroge, 
terminating the contract and letting Aggreko remove the 
thermal plants would save consumers about Ksh1.8 
billion/month ($25 million).  Treasury would also save the 
Ksh500 million/month ($6.9 million) retention fee owed to 
Aggreko regardless of whether its generators were used. 
Termination would also release some Ksh5 billion ($69.4 
million) that KenGen had committed from its budget to 
finance the hiring of emergency generators, capital that 
could otherwise be used to expand and diversify Kenya's 
power sources. 
 
Kenya's sources of electricity 
------------------------------ 
 
¶6. Electricity demand in Kenya is estimated at 1,070 
Megawatts, and is expected to rise to 1,520 Megawatts by 
¶2009.  Currently, 26% of Kenya's electricity is generated 
 
from thermal plants and 14% from geothermal and other 
sources.  The government has announced plans to diversify 
sources using part of the Ksh7.4 billion ($103.7 million) 
raised in the May flotation of 30 per cent of KenGen's 
equity at the Nairobi Stock Exchange. The capital will be 
used to establish a geothermal development fund and to fund 
prospecting for natural gas and coal.  In addition, 
Woodside Oil is expected to begin offshore exploration 
drilling for oil in late 2006. 
 
Export the Surplus Thermal Capacity or Relinquish It? 
--------------------------------------------- -------- 
 
¶7. KenGen wants to retain the 140 MW thermal generators 
Aggreko installed to diversify its power sources and 
conserve hydropower reservoirs.  KenGen hopes to export the 
surplus power to Uganda, which is suffering one of its 
worst energy shortfalls in recent years.  EPC chairman 
Pradeep Paunrana said the EPC wants the export price set to 
allow KenGen to earn a small profit on the Aggreko 
investment and to help KPLC recover part of the technical 
costs of transmitting the power to Uganda. A KenGen source 
told Embassy the Committee has already signed a non-binding 
Memorandum of Understanding (MoU) with Uganda government to 
export surplus electricity.  Press reports claim Uganda is 
demanding a lower price and moving the generators closer to 
the border to reduce transmission losses.  KenGen's Njoroge 
said the Aggreko contract could be terminated after the 
October rains if no deal has been reached with Uganda.  In 
any case, the expected growth in demand for electricity and 
the lack of sites for additional significant hydropower 
dams will require Kenya to develop thermal, geothermal, 
solar, or wind capacity. 
 
Comment 
------- 
 
¶8. Led by the private sector, Kenya did a creditable job of 
preparing for the threat of protracted drought and 
associated power shortages.  Even though the drought ended, 
the case of Uganda demonstrates the value of paying for 
insurance.  While the increase in already-high electricity 
tariffs must have had some economic impact, Kenya is 
temporarily in an enviable position: its power sources are 
more diversified, it has a power surplus, and it is in a 
position to recoup some of its costs by exporting power to 
Uganda, which is facing a multi-year shortfall.  While 
negotiations continue with Uganda, KenGen is waiting to see 
if the October rains fail to top off the hydropower 
reservoirs before the Committee decides the fate of 
Aggreko's thermal generating plants.  However, this surplus 
is temporary, and Kenya knows it must build new power 
plants soon, or face shortfalls like Uganda.  End comment. 
 
Hoover