# **1 Introduction: Successful reforms built on a firm foundation**

Kenya was one of the first countries in Sub-Saharan Africa to institute market-oriented power sector reforms. The far-reaching reforms have achieved much, but challenges remain.

A first wave of reform commenced in 1996, thawing a donor-coordinated five-year freeze on sector funding. To meet the conditions of the new funding agreements, generation was split from transmission and distribution, the first two independent power producers (IPPs) began operation under seven-year contracts, and tenders for two larger 20-year IPPs were floated. In addition, the Electric Power Act of 1997 was passed, an independent Electricity Regulatory Board (ERB) established, and tariffs adjusted to 75 percent of long-run marginal cost. These steps are illustrated in figure 1.

A second wave began in 2002, this one led by local champions with the support of newly elected President Mwai Kibaki. Momentum built through the advancement of a new locally derived policy. Sessional Paper No. 4 of 2004 on Energy set the basis for passage of the 2006 Energy Act. Soon after, the Kenya Electricity Generating Company Limited (KenGen), was partially privatized through an initial public offering of 30 percent of its equity on the Nairobi Stock Exchange, increasing transparency and efficiency. The ERB was transformed into the Energy Regulatory Commission (ERC) in 2007, giving it greater independence and authority. In the process, its mandate was enlarged to include regulation of renewable energy and downstream petroleum activities. The Energy Tribunal was established at the same time to deal with appeals and disputes arising from ERC decisions. The sector was further restructured, with the establishment of the Rural Electrification Authority (REA) in 2007; a separate transmission company, Kenya Electricity Transmission Company (KETRACO), in 2008; and the Geothermal Development Company (GDC), also in 2008. The main institutions of Kenya’s power sector are described further in box 1.

In the wake of these reforms, Kenya Vision 2030 was launched in 2008. A 22-year development plan, it sets out a path to Kenya becoming an industrializing, middle-income country by 2030. Much of the plan depends on the continued development of the energy sector, and power subsector, in order to support industrialization, the advancement of modern infrastructure, and socioeconomic development through increasing the access, availability and quality of supply. Some notable advances have been made in this regard, including increasing electricity access to around 75 percent,<sup>3</sup> moving to a position of ‘surplus’ capacity through a more resilient technology mix<sup>4</sup> with total generation now at 2,370MW, improved operational efficiency of the sector, and the successful attraction of private sector investment into independent power projects (of which there were 12 in 2017). While some of these outcomes can be linked to sector reforms, others—including in particular electrification and geothermal power development—depended critically on concerted action and significant funding from the government.

> 3 Based on the World Bank’s Multi-Tier Framework Survey.

> 4 In the 1990s, hydroelectric power plants accounted for almost 70 percent of installed capacity which had severe implications in the drought prone region, especially in the critical drought of 1999-2001 where the reserve margin had been reduced to a point that regular load shedding was necessary.

3