Solarcentury has come out strongly in support of the energy auction set to take place in three months time.  This will see the firm launch more solar projects across the country with the aim of creating a positive impact of the renewable source.  The energy auction was announced after the completion of mapping areas viable for small-scale solar, wind and hydro plants.

But what is an energy auction, its impact and challenges? 

A renewable energy auction is a process in which government issues a call for tenders to install a certain capacity of renewable energy-based electricity. It is also referred to as ‘demand auctions or procurement auctions’.
According to International Renewable Energy Agency 2013 publication, “Project developers who participate in the auction submit a bid with a price per unit of electricity at which they are able to realize the project. The government evaluates the offers on the basis of the price and
other criteria and signs a power purchasing agreement with the successful bidder.

The number of countries that adopted renewable energy auctions
increased from 9 in 2009 to at least 44 by early 2013, out of which 30 were developing countries. The renewed interest in auction schemes is driven by their potential to achieve deployment in a cost-efficient and regulated manner. Auction schemes have benefited from the rapidly decreasing costs of renewable energy technologies, the increased number of project developers, their international exposure and know-how, and the considerable policy-design experience acquired over the last decade.

The Kenyan auction, government intends to publish regulations for the tendering. They will replace the current feed-in-tariff (FiT) as investors seeking licenses for generation of electricity will have to use tariffs approved by the Energy Regulatory Commission (ERC). The sale of licenses will see project sites allocated to the lowest bidder proposing lowest tariffs to customers and size of the project.  Moreover, opportunities will be availed to solar companies or investors to come and bid for renewable energy sources at a low cost.

Feed-in-Tariff policy

The Feed-in-Tariff policy was adopted by developers, EPC (Engineering, Procurement and Construction) companies and financiers for the development of renewable energy sources such as solar in Kenya, was first proposed by ERC in 2012 after a study by Global Village Energy Partnership. It recommended that suppliers should earn $0.12(KES12.16) per kilowatt hour (kWh) for projects generating a minimum of 0.5-40MW. This led to a lag in exploitation and investment in renewable energy sources as the FiT rate did not initially stimulate the development of Kenya’s utility –scale solar market.

The Director at Solarcentury East Africa, Guy Lawrence observes that the low FiT is attractive now as it will attract renewed interest from the market, which clearly indicates that the FiT is commercially viable. “This means that the market can be confident that utility-scale projects in Kenya are being developed in a steady, sustainable financial environment,” Guy said.

Moreover, appetite of the government to exploit natural resources other than expensive diesel –generated plants or geothermal, availability of financiers and local presence of reliable solar firms will increase solar investments in the country.

Though, certain challenges can be accrued if procedures and regulations during the auction process aren’t adhered to. One of the challenge is the transition period may take longer than expected as some projects could either be affiliated to  government  ministries or Members of Parliament(MPs). This could cause delay in startups of projects in solar, wind or hydro plants. Secondly, the issue of transparency could arise in the auction process whereby the lowest bidder is not awarded a project due to corruption.

When well designed still, the price competition inherent to the auction scheme increases cost efficiency and allows price discovery of renewable energy-based electricity, avoiding potential windfall profits and underpayments. While auctions have become very attractive, they only benefit the successful bidders and tend to favour large players that are able to afford the associated administrative and transaction costs.

In case the auction runs smoothly, Kenya’s economy will thrive, cost of power will go down and competition will rise at both local and international markets, hence growing the country’s image and market.

Guy states, “Increasing capacity to meet growing demand will become more realistic thanks to the projected  increase in the availability of solar energy , whose Levelised Cost of Electricity(LCOE) is now less than other generation technologies. Essentially, solar is already one of the cheapest forms of energy and is set to fall further as technology efficiencies improve.”

Recently, Kinangop Wind Park Limited, a consortium of Norwegian private equity firm, Norfund, South African asset Manager, Old Mutual and Sydney-based fund Macquarie sued the government for compensation over project’s failure. The consortium was to build a 60MW wind park in Nyandarua County worth KES15 billion but due to delays and continued frustrations from the local community the investors pulled out of the project. As at now, we the Lake Turkana Wind Power Project being constructed and is set for completion in 2017.

African Development Bank in a report forecasts that the electricity demand in Kenya is estimated to go up by around 14 per cent between now and the year 2030. Further, in the next few years, between 300 to 400MW of solar electricity is expected to be developed and constructed in Kenya by Independent Power Producers (IPP) including Solarcentury and assimilated into the national grid. Currently, Kenya has an installed power generation capacity of more than 2.200MW from 1,600MW recorded in 2013.

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