Kenya's Biggest Challenge: Power

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Includes: AFK, EZA, NGE
by: Peter Thoms

Summary

Kenya's growth is outstripping its electricity supply.

Massive power projects are underway.

U.S. investors looking for broader ways to play Africa my consider AFK, ORA, EZA, NGE.

Kenya, a visually stunning country of 45 million people, is blessed in many ways. It has the largest and most advanced economy in East Africa along with the best ICT (Information and Communications Technology) infrastructure of any country in the region. Ocean access via the port of Mombasa, a significant tourism business, recent discoveries of oil in the north near Lake Turkana and significant potential for geothermal power generation in the Rift Valley are all positive factors for Kenya's continued expansion.

This spring I traveled to Kenya to investigate a number of investment opportunities for our Africa investment strategy. I had meetings with the senior management of 14 of the largest and most dominant companies in East Africa. A topic that came up in several of my meetings with executives was concern that Kenya's growing economy was outpacing the ability of the country's power grid to feed it.

While the Westgate Mall attack in Nairobi last year has certainly hurt tourism, perhaps the biggest challenge the country faces in the next several years will be producing enough additional electricity to keep the economy on its current upward trajectory. In the next few years, one of two things will likely happen: 1) either Kenya is successful in adding a large amount of generation capacity or 2) the overloaded grid will start to become a meaningful headwind to growth. Already a lack of reliable power is beginning to hinder growth, but the government is well aware of the issue and has mandated an aggressive expansion in the power sector.

Kenya Electricity Generating Company, commonly known as KenGen, produces about 80% of Kenya's electricity. The company is 71% owned by the government of Kenya and its remaining shares are traded on the Nairobi Securities Exchange under the symbol KEGN. Hydroelectric power remains KenGen's leading source for generation, but the company is trying to shift rapidly toward geothermal (steam) power. Hydro is a clean, renewable source of energy but it is also very dependent on the rainfall pattern in Kenya-which in recent years has been unreliable. KenGen thus faces the challenge of growing Kenya's electricity output very rapidly if it is to keep pace with electricity consumption, which has been growing at about 6% per annum for the last decade. Geothermal generation is a big part of the answer in two ways: it increases absolute capacity but it also reduces KenGen's reliance on hydro. While geothermal plants are expensive to construct and take a long time to get up and running, once built they provide a stable and reliable source of clean energy.

On my trip to Kenya in May I visited KenGen's Olkaria Geothermal Power Plant, a $1.3 billion project that is billed to have capacity of 280 megawatts (MW) and is now the largest geothermal project in Africa. The plant is located within the confines of Hell's Gate National Park in the Rift Valley a short drive from Lake Naivasha. In July and August a total of 140MW came online at the plant, bringing its total output to 210MW. U.S.-based Ormat Technologies (Symbol: ORA) has taken part in the construction. Progress with Olkaria has been encouraging, but there is much more to do in coming years if the power grid is to be a help instead of a hindrance to growth.

Kenya is home to some of the most innovative companies in Africa, and its economy has the potential to grow rapidly for years to come. We will, however, be monitoring the progress of the power sector with great interest.

Africa as a whole continues to grow rapidly and we are very constructive on the long-term outlook. Please read our Case for Investing in Africa for details. There are several funds that offer exposure to the region. We prefer, however, to take a more targeted approach to investing in Africa and therefore focus our research efforts on individual local companies whose prospects we like. U.S. investors looking for broader ways to play Africa have relatively few options, including the Market Vectors Africa ETF (Symbol: AFK), the iShares MSCI South Africa ETF (Symbol: EZA) or the Global X MSCI Nigeria ETF (Symbol: NGE).

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.