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November 16, 2018

Energy Investments Offer Juicier, Long Term Returns

For lending money to the Kenyan government for five to 10 years, foreign investors in will receive between 5.6 per cent and 6.6 per cent investments returns on an annual basis for buying Kenya’s debut Eurobond.

Yet, this is a bargain for them considering they were coming from low interest rate regimes like the US and UK, where yields have hovered near zero during the period as their central banks were printing hard cash under the so-called quantitative easing programmes.

However, longer-term investors with a 15-year to 25-year horizons will tell you there is more juice in energy projects in Kenya.

Try 12.5 per cent per year for 25 years. KenGen and the Geothermal Development Company can confirm this.

KenGen, which owns and runs its own power stations, will next week commission the second of its 140-megawatt geothermal power plant. Together with the Ol Karia IV power plant commissioned last month, the company says it expects returns of 12.5 per cent for shareholders from these two projects.

This is because, in its power-purchase agreements, it already has factored in the ‘capacity charge’ that will see consumers reimburse the cost of putting up the power plants.

This excludes the charges for electricity generated, for which it has a feed-in tariff for sales to Kenya Power, which then distributes the utility countrywide.

GDC, on the other hand, in keeping with its written mandate to prospect, tap and package steam to be sold to owners of power plants, handed over the first three sites where private investors will put up geothermal power plants to generate about 105MW in total.

Each of the three investors will spend about $72 million (Sh6.5 billion) for their power plant from ground breaking to commissioning. Roughly, they will then make about 12.5 per cent in returns. This is why GDC chief executive Silas Simiyu wants Kenyans to get into the business of power generation.

And as KenGen managing director Albert Mugo pointed out, of the 5,000-plus megawatts targeted to come online in the next three years or so, the State-run utility will only contribute about 840MW – less than 20 per cent. The rest will be by private investors.

Life insurers and pension funds have the financial muscle and investment horizons to match the capital-intensive, long-term nature of such power projects. If they took the plunge, they equally would guarantee their investors and premium holders good returns.

Pension funds in Kenya stand at about $6 billion (Sh541.74 billion) cumulatively. The 184 licensed Saccos in Kenya have deposits of about $2.3 billion (Sh207.67 billion), according to the sector regulator Sasra.

All this money can be directed into the energy sector to bring guaranteed returns, especially for pension funds and life assurance firms, with long maturity times that suit their investors.

According to Simiyu, in most cases when entities come to develop energy plants, they only need to raise 25 per cent of the amount required. The rest of it is usually debt.

Local investment company, Centum, which will build the Lamu coal-power project at a cost of over Sh140 billion, does not have a war chest to do this. It will raise about 30 per cent – Sh42 billion – internally and from other investors, then the rest it will be in debt form.

Currently, many banks and development finance institutions are lining up to fund such renewable energy projects.

As KenGen commissions Ol Karia IV next week, the Japanese International Cooperation Agency has expressed interest to fund Ol Karia V to generate about the same quantity of electricity.

DEG of Germany, AfD of France, the African Development Bank, among others, are also keen to fund geothermal projects in the country. KenGen has also said it will use joint ventures to develop Ol Karia VI and VII by 2018.

These are good opportunities for Kenyan entities and investors to establish Special Purpose Vehicles and bid for these projects so that they are locally owned. It can’t be that Americans and Germans can bring money all the way from their countries to invest in such projects while local investments earn peanuts.

At the moment, besides TransCentury – which is involved in Menengai through its subsidiary Civicon – Sossion Energy and Centum, most of the other independent power producers in Kenya are foreign-owned.

The skills for putting these projects together are not lacking either.

KenGen has had to learn the ropes with the implementation of these projects, from steam prospecting to power generation and sale to the national grid. It is even opening a consultancy in Ol Karia where it will be training people from the world over on geothermal power dynamics, projects and so on.

GDC already has people in Ethiopia and other countries training personnel.

These entities can provide interested Kenyans with the expertise to put these projects together without breaking a sweat or bringing in expensive international consultants.

The government, as part of its efforts to get Kenyans involved more in this sector, should also set up a one-stop shop where people interested in such projects can get all the services – from the steam purchase agreements, building the power plants and the associated substations to piping the steam to the power plants and signing power purchase agreements.

Local investors should not run from one office to the other in exhausting efforts to put such projects together when KenGen or Kenya Power can put together the same in a matter of hours.

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