Thursday, July 22, 2010

Kenya: Sugar Millers Seek New Revenue Streams in Power and Ethanol

Steve Mbogo, 21 July 2010, Business Daily

Come January 2012, Kenyan consumers will hold sweet celebrations because they will finally access sugar at a cheaper price.

The market will open up to sugar imports from the Common Market for Eastern and Southern Africa region (Comesa).

But as that day draws nearer, Kenya's sugar factory managers are searching for solutions to slash their operating costs and produce sugar that is globally competitive to maintain their relevance in the market.

Kenya's sugar is double the price of products from Comesa states whose entry has been restricted from this market under a regional trade pact that expires in December 2011.

As factories weigh their options, sector regulator Kenya Sugar Board, is pushing two agendas; co-generation and ethanol production.

KSB says it will offer the millers a soft landing when the market is finally liberalised.

When the two projects are complete, the Board plans to push for the transformation of most millers into entities selling sugar only as a by-product of other larger operations.

"Bagasse which is a residual product from cane milling is raw material for briquettes, charcoal, chipboards, paper, mulch, concrete and most importantly, power generation (co-generation)," notes a new policy by Kenya Sugar Board, "It is estimated that the industry has potential to generate up to 190MW of electricity from this source, which is currently under-exploited."

Currently, only Mumias Sugar Company produces electricity for commercial use.

Other millers (Nzoia, Miwani, Sony, Chemelil and Muhoroni) are also being prodded towards co-generation.

However, the board said even as it does so, the lack of a supportive pricing mechanism for co-generation remains a hindrance to investment in this promising area.

The industry has developed a proposal for a more progressive feed-in-tariff policy on biomass generated electricity for consideration by the Energy ministry.

This proposal raises the tariff to 11 US cents from the current 8 US cents.

Christine Chesaro, the Corporate Affairs manager of the Kenya Sugar Board says the proposal for tariff increase has been forwarded to the Ministry of Energy.

Attractive prices will mean more investment in co-generation, resulting in higher electricity output and additional income for sugar millers that should trickle down to cane farmers.

Consumers of electricity will also be winners because cheaper green energy, generated from sugar by-products will replace expensive diesel generated electricity from independent power producers.

The Energy Regulatory Commission (ERC) said the request for a tariff review will be done on a case by case basis with respect to a production cost analysis brought by each miller.

This means that some millers may get a higher tariff, as requested by the industry based on their costs.

ERC Director General Kaburu Mwirichia said sugar millers will have to justify the requested tariff review so that they do not turn co-generation into a cash cow.

"We are keen to encourage generation of renewable energy so a review is possible but the millers have to back it up with financial data that satisfies us to give them a higher tariff," he said.

The lobbying by millers is part of policy changes they would like on the Energy Act to encourage investment in green energy.

Only Mumias Sugar Company currently sells power to the government.

The company generates 38MW of electricity and sells 26MW to Kenya Power and Lighting Company.

Chemelil Sugar Company has partnered with KenGen to generate 25MW of electricity.

The western Kenya based firm has also partnered with a local green energy consultancy group to start co-generation.

Millers are also seeking changes in the regulation that requires the current feed-in tariff to be in force for 15 years.

They want a periodic review because the timeline is too long to appreciate economic changes like inflation.

Edward Musebe, the managing director of Chemelil Sugar Company said another policy change they are seeking is review separation of tariffs to appreciate the two seasons when millers function at optimum and at lowest capacity because of external factors.

Mr Musebe says that during the months of March, April and May, heavy rainfall in the sugar belt makes it very difficult to transport cane to the factories, lowering the capacity and generation.

The current tariff policy does not appreciate this reality and levies penalties on firms that fail to deliver agreed amount of electricity when the power purchase agreement was signed.

Increased co-generation of electricity is critical for the survival of the millers because it offers a major income stream to help them cope with the planned opening of Kenya sugar market to imports.

Expiry of the Comesa safeguards in December 2011 is expected to open up the local sugar industry to cutthroat competition from Comesa imports from the bloc.

The country currently imports 260,000 tonnes of sugar, or 36 per cent of the country's consumption of 720,000 tonnes, from Comesa member countries.

The co-generation should help Kenya meet its goals of increasing supply capacity to cope with growing demand and diversify from weather dependant hydroelectricity that accounts for 60 per cent of total electricity supply.

The country produces about 1,080 MW of power and at peak hour, demand almost reaches 1,000 megawatts.

It requires another 1,800 megawatts in new power generation to its grid to meet growing demand, according to projections by the World Bank.

Major producer

A briefing by the board, indicates that the sugar industry's bio-ethanol strategy has been completed and will guide the players towards becoming a major ethanol producer.

This drive is meant to help meet the ready market for ethanol that will expand exponentially next September when Kenya starts blending petroleum with ethanol, according a Kenya Gazette notice issued earlier.

Starting September, all petrol sold in Kenya will be blended with 10 per cent of ethanol at the Kenya Pipeline Company's depots in Kisumu, Eldoret and Nakuru, said the gazette notice signed by Minister of Energy Kiraitu Murungi.

To meet the national bending of 10 per cent and remain with additional ethanol to serve current export and domestic markets, Kenya would need to more than triple its current ethanol production.

Spectre International is Kenya's largest manufacture of ethanol, churning out about 27,000 cubic metres of ethanol per year followed by Agrochemical and Food Company that manufactures 21,600 cubic metres of ethanol every year.

Mumias Sugar Company is expected to start producing ethanol by the end of 2011, according to its corporate affairs manager Pamela Lutta.

Apart from the extra income, the new project will be a major turning-point in the planned privatization of the five sugar factories in Kenya.

Cheaper imports

The end of Comesa safeguards and the resulting competition from cheaper imports was seen as a major disincentive for investors planning to participate in the privatization process because local sugar factories are not competitive due to high production costs and aging machinery.

But with new opportunities to produce ethanol, molasses, and an assured market, the perception is bound to change and raise investor interest.

Privatisation candidates Sony, Chemelil and Nzoia announced plans last year of producing 140 million litres of ethanol annually.