Kenya shuts 14 MW hydropower dam due to drought

* Impact on overall power supply seen as minimal

* Says station could be switched on again by year-end

NAIROBI, June 30 (Reuters) - Kenya has closed a 14 megawatts power generation unit at its Masinga Dam due to a long dry spell that has depleted water levels, a statement from the nation's main electricity generator said on Tuesday.

Kenya Electricity Generating Company (KenGen) (KEGN.NR) said the move would free up water for a second unit downstream and reduce the impact of the closure on the country's power grid, at a time of rising demand.

"Masinga Dam water level has been declining steadily due to poor hydrology for the past two years from 1,956.5 metres in May 2007 to the current level of 1,035.5 metres," KenGen said.

"The station is expected to be up and running before the end of the year depending on the performance of the short rains."

Kenya's 'short' rains season start in October.

Businesses in east Africa's biggest economy say frequent power blackouts increase the cost of doing business.

Policy makers have been eyeing geothermal sources of power to keep up with electricity demand, which expands by about 8 percent annually, on the back of a growing economy and population.

The country's peak power demand is 1,050 megawatts against an installed capacity of 1,100 that includes emergency reserves. (Reporting by Duncan Miriri; Editing by Helen Nyambura-Mwaura and James Jukwey)