The government will offer guarantees to three independent power producers to start operations next year, ending a period of push and shove with private investors.
"The government, Kenya Power and Lighting Company and the World Bank have configured an arrangement that now allows the producers to come on board. We expect them to be operational by the end of next year," said Energy Regulatory Commission (ERC) director general Kaburu Mwirichia.
As a result, ERC has signed power purchase agreements (PPAs) with Thika Power, Gulf Power and Triumph Power, who are expected to inject 252 MW to the national grid between them by June next year.
Sources familiar with the matter said the government is hard pressed to increase production in the short term to avert power rationing, similar to what happened several months ago.
The country's power reserve has been dwindling, even as demand grows about 8 per cent per year, mostly due to delayed project implementation under the 20-year least cost power development plan.
To meet the rising demand, the government has to inject an additional 2,500 MW in the next five years from a combination of sources that include geothermal, hydro, wind and heavy diesel.
"This is an ambitious plan and may not be fully practical. The intricacies surrounding PPAs and securing finance still pose major hurdles in getting the power plants to the implementation stage," said Ms Betty Maina, chief executive office, Kenya Association of Manufacturers.
The Treasury has for the past five years been reluctant to offer security to investors in a bid to avoid liability should they fail to honor their loan obligations or incur operational costs.
Sources say the unfolding energy crisis has, however, forced the Treasury to rethink this stance.
Mr Mwirichia said the government had been forced to buy emergency power from Agrekko, a Dubai-based company that had scaled down operations in Kenya after a decision to stop buying power from the firm was reached two years ago, ostensibly because the power was too expensive.
Agrekko had scaled down power generation from 290MW to 60MW and moved some of its generators to Japan. But it has now returned, with the generators located at Embakasi in Nairobi and Muhoroni in Western Kenya. It is providing 120 MW to the national grid.
"It is like we have no choice. It still remains a better alternative, considering that we did not receive adequate rainfall owing to the recent drought to fill the dams to produce hydro electricity," said Mr Mwirichia.
Private sector players say the government failed to increase power generation from cheaper sources, leading to the current situation.
The government invited IPPs in 2000 following drought that severely reduced hydro power generation in the Seven Folk Dams cascade.
"World fuel prices are not about to come down any time soon. Fuel business for electricity generation, unless checked, will soon become the preferred business in Kenya at the expense of the consumer," Ms Maina said.
The fuel cost component has increased electricity charges, leading to increased production in the country.
Industry sources said that although Kengen produces over 50 per cent of the total electricity used in Kenya from water and geothermal sources, it receives just 28 per cent of the income in the industry, while fuel cost taking 45 per cent.
"Petrol thermal accounts for 38 per cent of the total energy produced, but a large percentage of what we pay for electricity goes to fuel cost," says Ms Maina.
She said electricity cost remains at US cents 14.83 per KWh and, if not checked, it might make local manufacturers unable to compete for regional markets.