VZCZCXYZ0001
RR RUEHWEB

DE RUEHNR #4048/01 2841157
ZNR UUUUU ZZH
R 111157Z OCT 07
FM AMEMBASSY NAIROBI
TO RUEHC/SECSTATE WASHDC 2865
INFO RUEHXR/RWANDA COLLECTIVE
RUEHBJ/AMEMBASSY BEIJING 0367
RUEHBY/AMEMBASSY CANBERRA 0287
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC 3009
RHEBAAA/USDOE WASHDC

UNCLAS NAIROBI 004048 
 
SIPDIS 
 
SENSITIVE 
 
SIPDIS 
 
STATE FOR AF/E, AF/EPS, AF/PD, EB/ESC/IEC, AND OES/ENV 
 
STATE PLEASE PASS USAID FOR AFR/EA 
 
TREASURY FOR VIRGINIA BRANDON 
 
STATE PLEASE PASS USTR FOR WILLIAM JACKSON 
 
E.O. 12958:  N/A 
TAGS: ENGR EPET ECON EINV BTIO SENV KE
SUBJECT: KENYA RACES TO AVERT ENERGY SHORTAGE IN THE FACE OF SURGING 
EAST AFRICA DEMAND FOR PETROLEUM 
 
REFS: (A) NAIROBI 2918  (B) NAIROBI 2064 
 
      (C) NAIROBI 0266 
 
Sensitive but Unclassified.  Please protect accordingly.  For 
internal USG distribution only. 
 
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Summary 
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¶1.  (SBU) Strong economic growth, expanding trade, and rural 
electrification are driving demand for electricity and petroleum 
products in Kenya and the region beyond projected supplies, thus 
threatening an energy crisis that could slow economic growth. Kenya 
has plans to expand refinery and pipeline capacity and to diversify 
and expand its energy sources, including wind, coal, and geothermal. 
 KenGen, Kenya's power producer, has also proposed demand management 
to large industrial consumers to reduce peak demand.  Unless Kenya 
speeds up its investment program and its industries find ways to 
generate their own power or reduce demand during peak hours, even 
regular rains may not be sufficient to avoid power shortfalls in the 
near future.  End summary. 
 
-------------------------------------------- 
Oil Demand Outstrips Delivery Infrastructure 
-------------------------------------------- 
 
¶2.  (SBU) In a classic good news/bad news catch 22, Kenya is now 
facing the twin challenges of constrained and expensive energy 
supplies in the midst of rising demand for energy on account of its 
robust economy.  Exacerbating Kenya's dilemma is growing demand 
among its neighbors for petroleum products imported via Mombasa. 
Consequently, Kenya's petroleum sub-sector has witnessed phenomenal 
growth in both domestic and regional demand for petroleum products 
despite high crude oil prices.  Total through-put in the Kenya 
pipeline increased by 39% from 2002 to 2006, partly due to increased 
use of diesel generators in Nairobi, Eldoret (a major manufacturing 
center in the northern Rift Valley), and Uganda.  The Kenya 
Institute for Public Policy and Research Analysis (KIPPRA) estimates 
that annual demand for petroleum products in East Africa will 
increase 600% by the year 2030, from 2 to 14 million cubic meters, 
thus challenging regional governments to develop effective policies 
and undertake major infrastructure development to meet the rising 
demand. 
 
¶3.  (SBU) However, Kenya's infrastructural capacity to process, 
store, transport, and distribute petroleum products is constrained 
by the limited capacity of the country's one refinery in Mombasa and 
its sole pipeline from there to Nairobi and Eldoret.  Many large 
trucks are thus needed to carry petroleum products to points in 
Kenya, Uganda, and other East African countries, further damaging 
Kenya's deteriorating roads.  Parastatal Kenya Petroleum Refineries 
(KPR) is seeking investors to fund a $320 million, three-year 
upgrade of the refinery to enable it to process heavier, cheaper 
grades of crude oil more cleanly, and produce a higher proportion of 
lighter distillates, including low-sulfur diesel.  KPR also wants to 
build facilities to import, store, and transport liquid petroleum 
gas and improve the refinery terminal.  Shell, British Petroleum, 
and Caltex own half the refinery, but have declined to fund the 
upgrade. 
 
¶4.  (SBU) After Australia's Woodside Energy's offshore test well off 
of Lamu came up dry (ref C), the Government of Kenya (GOK) began 
reaching out to Libya (ref A) and China for discounted oil and the 
investment needed to upgrade and expand the Mombasa refinery and 
pipeline.  The parastatal Kenya Pipeline Corporation (KPC) plans to 
construct four pumping stations to double the flow rate of the 
Mombasa-Nairobi section of the pipeline to 880 CBM/hour and to 
expand and extend the Nairobi-Eldoret section to the Uganda border 
to feed demand in Uganda, Rwanda, Burundi, and the Democratic 
Republic of Congo (DRC).  KPC hopes to complete both projects around 
the end of 2008. 
 
--------------------------------------------- ------- 
Electricity Production Barely Keeping Up With Demand 
--------------------------------------------- ------- 
 
 
¶5.  (U) During the past four years of economic growth, Kenya's 
demand for electricity rose 10% annually, while supply grew about 
8%.  Demand is expected to grow 5%-6% annually in the next 10 years, 
and the Kenya Electricity Generating Company, or KenGen, estimates 
demand will nearly triple to 3,076 MW by 2022.  Kenya's current 
electricity generating capacity is 1,155 MW, but peak demand is 
1,050 MW.  Demand is expected to reach 1,082 MW by the end of 2007. 
This leaves a reserve margin of only 4%, well below the 15% industry 
rule of thumb.  Once completed, the Sondu Miriu hydroelectric 
project is expected to inject 60 MW to the national grid in November 
2007 and increase the margin slightly.  In the meantime, KenGen has 
proposed demand management to large industrial consumers to reduce 
peak demand. 
 
¶6. (SBU) The peak demand figure disregards substantial latent demand 
due to constrained electricity supply and frequent power outages. 
Currently, only about 15% (about 4 million) of Kenya's population 
has access to electricity and only about 6% (1.3 million) of the 
rural population of 22 million.  With a focus on bringing 
electricity to rural areas, the GOK's Vision 2030 development plan 
calls for increasing the electricity penetration rate to 20% by 2010 
and to 40% by 2020.  Fulfilling a GOK promise, the Kenya Power and 
Lighting Company (KPLC), the country's electricity distributor, is 
already proceeding with rural electrification.  In the latter half 
of 2006, KPLC increased its customer base by 16% to 866,000, and it 
is committed to connecting 120,000 customers per year over the next 
three years.  This should boost the rural economy and reduce poverty 
-- if the power is available to deliver. 
 
¶7. (SBU) Kenya's electricity situation is fragile and cannot 
withstand any unforeseen shocks such as droughts or a system 
breakdown without load shedding.  In addition to capacity 
shortfalls, the power industry suffers from weak power transmission 
and distribution infrastructure.  System losses are currently 
estimated at 23%, well above the international benchmark of 15% for 
similar systems.  The low quality of Kenya's power is demonstrated 
by the frequency and intensity of voltage fluctuations and power 
outages, currently estimated at about 9,000 per month.  In reaction 
to growing complaints that the government is moving too slowly in 
addressing Kenya's energy needs, Energy Minister Kiraitu Murungi 
told attendees at the April 2007 Petroleum Institute of Eastern 
Africa luncheon that the GOK has a package of policy interventions 
that will ultimately reduce bottlenecks in the energy sector, deepen 
competition, improve efficiency, and enhance the quality of 
services.  On several occasions he has declared that geothermal is 
the panacea to Kenya's growing appetite for energy (ref B). 
 
------------------------------------- 
Medium to Long Term Capacity Upgrades 
------------------------------------- 
 
¶8.  (SBU) KenGen predicts that by 2008, supply will be 1,185MW 
against a peak demand of 1,153MW.  To meet growing demand for 
electricity, KenGen plans the following generation and distribution 
projects which will add at least 450 MW by 2010: 
 
- Development of 70 MW additional capacity at the Olkaria Unit IV 
geothermal power plant by March 2008; 
- Purchase of up to 35MW bagasse cogeneration from Mumias Sugar 
Company and 12MW from OrPower in April 2008; 
- Agreement with two Independent Power Producers operating in the 
country to increase their generation capacity by at least 80 MW by 
June 2008. 
- Conversion of Kipevu Gas Turbine to Combined Cycle to increase 
capacity by 40 MW by August 2008; 
- Elevation of Masinga Dam 1.5 to 2.0 meters to increase output by 
90 GWh per year by September 2008; 
- Expansion of the Tana Power Station to increase its capacity by 20 
MW by March 2009; 
- Installation of a third turbine at Olkaria unit II geothermal 
plant to increase capacity by 35 MW by April 2010; 
- Completion of Sangoro hydroelectric project to add 30 MW by April 
2010; 
- Construction of six geothermal wells by Great Wall Drilling 
Company of China; and, 
 
 
- Agreement with a private developer to produce 
 30 MW in Kinangop. 
 
KenGen is also considering wind generation in the northern city of 
Marsabit. 
 
-------------------------- 
Coal May Be Part of Answer 
-------------------------- 
 
¶9.  (U) Kenya currently imports over 150,000 tons of coal from South 
Africa every year, used mainly by the Bamburi Cement Company.  In 
early August 2007, the Ministry of Energy (MOE) announced that an 
analysis of coal deposits obtained from 11 exploratory wells drilled 
in the swampy Mui Basin of Kitui and Makueni Districts 50 to 100 
miles southeast of Nairobi found them comparable to or better than 
South African coal.  Some coal deposits were discovered just 11 
meters from the surface.  The MOE's projections for Kenya's 
electricity investment over the next 20 years propose Ksh133 billion 
(over US$2.0 billion) investment in coal projects to generate an 
additional 1,000 MW.    According to the managing director of the 
Athi River Mining Company Pradeep Paurana and the MOE's chief 
geologist Don Riaro, the newfound coal reserves could ensure that 
Kenya attains full industrial development by 2020.  However, it is 
not yet clear who would fund and develop the coal mines, 
transportation infrastructure, power plants, and links to the 
national grid. 
 
-------------------------------------- 
Managing Demand to Postpone Shortfalls 
-------------------------------------- 
 
¶10.  (SBU) Industry analysts argue that in the short-term KenGen 
must increase consumer rates to raise Ksh1 billion to lease an 
emergency 50 MW thermal generator to boost its dwindling power 
reserve and avoid rationing.  Instead, the company has opted to ask 
the 10 biggest industrial consumers of electricity to switch their 
production to night shifts, away from the daytime peak demand hours. 
 In return, they would get a rebate of Ksh2 for every unit of 
electricity consumed.  Some consumers, however, claim the Ksh2 
rebate is not enough to cover a night shift's higher labor costs. 
One major Kenyan firm, East Africa Breweries (EABL), said it already 
runs on a 24-hour basis, but is taking steps to reduce its power 
consumption over the long term, including producing or capturing 
biogas to power the plant. 
 
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Comment 
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¶11.  (SBU) The high cost of power and the uncertainty of supply 
continue to be major disincentives to both foreign and domestic 
investment in Kenya.  Bottlenecks in fuel refining and 
transportation send shockwaves along the northern corridor.  The GOK 
understands the need to increase and diversify energy production 
sources and expand/improve transportation infrastructure, but is 
distracted by the upcoming election.  It's a close race between 
supply and demand, and Kenya may become a victim of its own success 
in boosting economic growth and rural electrification faster than it 
can provide the power.  Coal and geothermal do appear to be good 
alternatives readily available for the taking.  But American and 
other investors, wary of the country's reputation for corruption, 
crime, and high business costs, remain hesitant to jump in.   End 
comment. 
 
RANNEBERGER