The KenGen Ksh15bn bond beneficiaries

Going by the debate so far, the 12% bonds seems to have tickled the interest of retail investors who usually stay away from bonds given the return is far lower than current or expected interest. Ther reasons for this change are many but a major one would be changing perceptions about the NSE. How will the different players benefit from this bond?

• Retail investors:- despite a drop in inflation, its unlikely that it'll go below double figures before 2012. That means that in real terms, a retail investor will be making a loss from investing a Ksh100k of his in the bond. Although its unusual in Kenya, you may not be able to get the full principal in the first 2 years. It'll be 2017 before you double your money.
• High net worthy: If you have Ksh5m and the risk-aversion of a typical elderly investor, then the 12% is sound return. However, NSe shares pay over 10% in dividend alone.
• Money market fund managers: will love this bond because it make them very competitive against savings accounts.
• KenGen shareholders: interest payment of just over a Ksh1bn will hit the P&L every year. In the first few years, there will be no concomitant revenue from the project to offset this. Something to ponder?
• Electricity consumers: should hopefully see fewer rationing episodes.

The bond offer closes tomorrow.

Electricity: Time to utilise HEP for businesses only

Unless we suddenly discover oil, we are headed for crunch time in electricity consumption. We've so far muddled along on the believe that just keeping ahead of the demand for electricity will do us good. Hydro-electricity power has so far been our largest source of electricity (60%) but its not looking promising given changing weather patterns and our inclination to burn charcoal from every piece of forestry. And its dependency on oil for production.

Let us be honest about geothermal electricity. This has been talked about for a decade now. The reason for non-implementation is largely due to the large initial capital outlay that is required. Given competing priorities for bond funding, KenGen may struggle to raise well-priced sufficient funds via this route.

KenGen says it has around 18% spare capacity at any given time. The spare capacity is the gap between its generated units and those bought by KPLC. Lets agree two things:

-electricity demand won't fall, rather it'll rise as economy, households grow

-but supply may fall if rains fail

Other sources being explored are:

- from neighbours one being an EAC agreement so we can source from Tororo (but note Ug had rationing issues this year) and the other from Ethiopia. Not security issues given their being prone to instability

-the expensive Ibeafrica option

Without industry, we can't grow. My proposition is that given 65% consumption of the electricity is by industry (as per chart), let gova pass a law that every house (new or old) will need to source all its electricity requirements from solar power. I am aware that this will be difficult especially for apartment dwellers, but this is not a green exercise. Its a needs-be exercise. For the rural areas, it removes the constraint on consumerism (even a lower middle class), taking off due to dependency on RE programme. Downside is the initial cost, but note every household currently pays Ksh35k connection fee to KPLC for an interment product

PS:

The impact on KPLC's bottom-line might actually be negligible. Although this it’s fastest growing customer sector, its probably the most expensive to administer.

Overhaul of the power sector

If I was to be asked which economic sector is really in need of overhauling in Kenya over the next 3 years (apart from banking, stockbroking, insurance, agriculture, car, transport to name but a few), i'd say the power sector is. And it would probably be the easiest to do. So what are some of my suggestions:

Short-term

KPLC needs to be better at collecting debts especially those owed by the government.
The pricing issue with KenGen needs to be passed onto the customer-the customer who is also a taxpayer is already paying for this thru the govt covering the shortfall between what KPLC is paying and what it should be paying KenGen. At the moment we are trying to hide the fact that power costs alot to produce in Kenya. This is the reality, so lets pay KenGen in a timely manner so they can continue to reinvest and find cheaper ways of producing more power.

Medium-term

We should introduce another distributor into the market-either serving certain areas of Kenya or in direct competition with KPLC. We should let KPLC be a private entity-so gove divesture to KQ's level. Of the two, its more important that we have some government conttrol over power generation.

Long-term

We must redouble efforts to utilise the most natural of our resources-the sun- to generate enough power. We should go further and require that all buildings-old and new-have the capability to easily hold the solar panels used.