East Africa Power Report Q2 2012

Kenya

BMI View: Kenya's power sector continues to introduce a more diversified energy-generation capability.Although hydropower generation remains vulnerable to drought and variations in rainfall, additionalhydro facilities are being developed in order to reduce the country's dependence on costly oil-firedcapacity. Over the longer-term, the favoured form of renewable energy is geothermal, where potential isbelieved to be considerable. Meanwhile, coal-based generating schemes should provide medium-termelectricity supply.

In the five years from 2011 to 2016, Kenya's overall power generation is expected to increase by anannual average of 7.23% to reach 10.76TWh. Driving this growth will be a 5.04% annual averageincrease in hydropower and a 9.85% annual average rise in the supply of renewables-based electricity.Meanwhile, oil-fired generation is expected to fall by over 18% per annum as hydro increases inavailability. We expect coal-fired power to become commercially available in the latter part of ourforecast.

In addition to investments in oil and gas exploration, and the development of new coal-fired andhydroelectric power stations, Kenya plans to significantly increase the amount of energy generated bygeothermal facilities. The country is already Africa's largest producer of geothermal power thanks to itsstrategic position over shifting tectonic plates. Over the next two to three years, the government plans toinvest US$1.4bn in the construction of several new geothermal power plants with a total installedgeneration capacity of 280MW. By 2030, Kenya hopes to be generating 5GW of power from geothermalpower; that would put Kenya among world leaders in geothermal terms.

Electricity feed-in tariffs (FiTs) in Kenya have increased interest in renewable energy sources in thecountry. Kenya's FiTs guarantee the price paid for electricity from renewable sources, ensuring thesetechnologies are cost competitive with more conventional power plants, and therefore encouraging thedevelopment of renewable facilities in the country.

Due to the expected rise in net energy generation over the next few years, Kenya's power supply shortfallshould eventually fall. This trend has potential to provide the country with a net export capability later inthe decade. A gradual decline in the percentage of transmission and distribution losses from around 15%will help balance the market. By 2017, we predict that Kenya's power sector will develop a net exportpotential of 0.02TWh, with potential for this to rise to 0.55TWh by 2021.

Considering this key themes, major trend and changes for Kenya’s power sector this quarter include:

Kenyan renewable energy company Kinangop Wind Park is planning to construct a 60.8MWwind power plant in Kinangop Plateau, Nyandarua County. The company aims to supply morepower to the national grid through the plant.

Kenya's state-owned power operator Kenya Electricity Generation Company (KenGen) hasgenerated US$920mn for its Olkaria IV geothermal plant, which will receive joint funding fromKenGen, the Kenyan government, the World Bank, Germany's KfW, the European InvestmentBank, the Japan International Corporation Agency and the French Development Agency. Theplant will have a capacity of 280MW, and is scheduled to become operational in 2014, with aninvestment of nearly US$1bn. Kenya has the potential geothermal capacity of 7,000MW, and isaiming production of at least 5,000MW by 2030.

Sudan

BMI View: Sudan's power sector is benefiting from large-scale investment in new infrastructure. Chinahas emerged as one of the biggest players in the sector, having already played a major role in developingSudan's hydroelectric power facilities. Hydropower currently accounts for almost 60% of Sudan's totalpower generation output, with the remaining output largely comprising oil-fired facilities. Meanwhile,there is growing interest from foreign investors in the potential to develop thermal and solar powersources in Sudan. A diversified approach to power infrastructure development could help Sudan extendthe availability of energy to rural and peripheral regions.

From 2011 to 2016, Sudan's overall power generation is expected to increase at an annual average rate of0.75% to reach 8.21TWh. Contributing to this growth will be a 0.36% annual average increase in oil-firedpower generation. Meanwhile, hydropower generation is expected to increase by an average of 1.02%annually over our forecast. Sudan is becoming a place of considerable interest for companies looking toinvest in underdeveloped infrastructure markets where there is much scope for growth. Most notably, thecountry has been one of the largest beneficiaries of China's Africa strategy. Between 2001 and 2007,Sudan received the second largest (after Nigeria) level of infrastructure financing commitments fromChina, totalling US$1.3bn. Much of this has been directed at the power sector and one of the mostpertinent examples of this is the Merowe Dam, which was inaugurated in 2009 and has the largestcapacity of any hydropower dam in Africa.

We envisage Sudan's net power consumption increasing from 5.31TWh in 2011 to 6.58TWh by 2016;this reflects growth of almost 4.57% over the period. Underlying the rise in energy consumption will be asteady increase in GDP. In 2012, BMI predicts that Sudan's economy will grow by just 2.4%. However,between 2012 and 2021 we forecast an average annual increase in real GDP of 4.6%.

Recent years have seen the introduction of new energy transmission infrastructure alongside major powergeneration projects. In addition to extending its national electricity transmission and distributioncapabilities, there is potential for Sudan to engage in cooperative electricity transmission projects withneighbours such as Ethiopia.

Despite our prediction that Sudan will steadily expand its power output over our forecast period, weexpect all of this increased power generation to support rising domestic demand. We do not expect Sudanto export significant quantities of power and do not currently maintain a forecast for exports. However,we do predict that a gradual decline in the percentage of transmission and distribution losses from around12.5% in 2011 will help balance the market.

Until 2010, South Sudan was not even connected to the Sudanese national grid. Since gaining politicalindependence in January 2011, a key concern of South Sudan has been how to develop its powergeneration, transmission and distribution capabilities. Given China's interest in South Sudan's oilresources, BMI expects China to become a major player in the development of South Sudan's energysector.

Tanzania

BMI View: Tanzania's power sector is suffering from chronic energy shortages, partly due to the impactof recurring drought on the country's hydroelectric power facilities. Tanzania currently depends onhydroelectricity accounting for over half of its total power generation output. Meanwhile, the country'sthermal power infrastructure, which mainly utilises natural gas, operates at well below capacity, withlocal and international firms encouraged to participate in new power generation schemes.

BMI’ forecasts for this quarter see Tanzania's overall power generation expecting to grow by an annualaverage of 11.3% in the five years from 2011 to 2016, to reach 8.23TW h, which includes a 5.7% annualaverage increase in hydropower. Meanwhile, thermal power generation is expected to increase by anaverage of 19.0% annually over our the same period. Tanzania is highly dependent on hydropower, and isthe primary source of power generation in the country. However, low water levels at the Mtera dam havehampered this source of power, following a widespread and prolonged drought in East Africa.

In 2011, Tanzania continued to be plagued by chronic energy shortages, owing to both recurring droughtand the under-capacity of the existing natural gas supply infrastructure. In response to the country'senergy crisis, Tanzania's Parliament approved an emergency power rescue package, with the aim ofadding 572MW to the national power grid by December 2012, against the current deficit of 260MW.

Meanwhile, with the support of the World Bank and the African Development Bank (AfDB), theTanzanian government has devised a 25-year Power Sector Master Plan (PSMP) to tackle the powershortage. They have pledged to increase generating capacity by 1,021MW in the short-term, with a viewto reaching 1,718MW of installed capacity by 2015.

Although Tanzania liberalised its energy sector in 2008 with the passage of a new Electricity Act, thestate-owned utility Tanesco continues to enjoy a dominant position within the market. Nevertheless, inrecent years Tanzania has sought to encourage local and international firms to participate in powergeneration schemes.

We envisage Tanzania's net power consumption increasing from 3.5TWh in 2011 to 5.0TWh by 2016,reflecting annual average growth of 7.1% over the period. Underlying the rise in energy consumption willbe a steady increase in GDP, together with the continued expansion of Tanzania's population. Followingan increase in 2011 real GDP of an estimated 6.18%, BMI forecasts average annual growth of 6.2%between 2011 and 2021. Meanwhile, Tanzania's population is expected to rise from the current level of46.2mn in 2011 to 54.0mn in 2016.

Over the longer-term, increased power generation could improve the country's capability to export greaterquantities of electricity. By 2016, we predict that Tanzania's power sector will develop a net exportpotential of 1.79TWh, with the potential for this to reach 9.68TWh by 2021. Meanwhile, the gradualdecline in transmission and distribution losses from around 19.9% in 2011 will help balance the market.

Uganda

BMI View: Uganda's power sector is suffering from a shortage of generating capacity due to years ofunderinvestment, which has resulted in power infrastructure falling into disrepair. The country currentlydepends on hydroelectricity for around 62.03% of its total power generation output (according to 2011estimates from BMI); the remainder of Uganda's power generation comes from thermal power stations,using a mixture of bagasse and biodiesel fuel. In addition to introducing new hydro facilities, the sector'slong-term development will be characterised by a move towards renewable energy sources.

In the five years from 2011 to 2016, Uganda's overall power generation is expected to increase by anannual average of 9.02%, to reach 4.28TWh. Driving this growth will be a 6.51% annual average increasein hydropower. Meanwhile, thermal power generation is expected to increase by an annual average of14% over the period. In the short-term, Uganda's dependence on hydroelectricity for the bulk of its powergeneration means that the country is vulnerable to fluctuations in rainfall.

This weakness became clear in 2011, when a widespread and prolonged drought in East Africa badlyaffected power output in the region, where most of the electricity is hydropowered. With drought-strickencountries forced to introduce emergency measures, the power crisis illustrates that major reforms andcapacity expansion programmes are essential to sustain economic growth in the region.

Nonetheless, we note that Uganda has several major hydroelectric projects currently underway.

These aimto improve the country's power supply and increase access to electricity. One such project, the Bujagalihydropower project, is a 250MW hydroelectric power plant which is managed by South African powerutility Eskom. According to Uganda's Electricity Regulatory Authority (ERA), full commissioning of theBujagali project is due in April 2012.

We highlight that we see a downside risk to our forecasts, as electricity could fall beyond the affordabilityof a considerable group of consumers, following the decision taken by the Uganda government to abolishelectricity subsidies paid to power generators to cushion consumers; a move that, according to Reuters,will see tariffs rise by an average of 42%.

Under its Renewable Energy Policy, the government aims to increase the use of renewable energy to 61%of total energy consumption by the year 2017. Uganda's new Renewable Energy Feed-In-Tariffs (REFIT)system, introduced in early 2011, appears to be one of the most sophisticated in Africa.

Ugandan net power consumption looks set to increase from 2.16TWh in 2011 to 3.30TWh by 2016, risingfurther to 4.90TWh by 2021. Underpinning the increase will be a steady rise in GDP, as well as sustainedpopulation growth. Following an increase in 2011 real GDP of an estimated 6.2%, BMI forecasts averageannual growth of 7.91% between 2011 and 2021. Meanwhile, Uganda's population is expected to risefrom the current level of 34.5mn in 2011 to 40.3mn in 2016. During the period 2011-2016, the averageannual growth rate for electricity demand is forecast at 8.61%, but is due to slow later in the decade to anaverage of 8.29% in 2016-2021.

Due to the expected rise in net energy generation over the next few years, Uganda's power supplyshortfall should eventually decline. This trend has the potential to provide the country with a net exportcapability later in the decade, with a gradual decline in the percentage of transmission and distributionlosses from around 6.8% (according to 2011 estimates from BMI) helping to balance the market.