Kenya - Update on report of the presidential taskforce to review of PPAs

published on 16th May 2022

The President of Kenya on the 29th of March, 2021 set up taskforce to review power purchase agreements (PPAs) entered into by Kenya Power and Lighting Company Limited (KPLC) (Taskforce).

The Taskforce delivered its report to the President on the 28th of September, 2021 proposing a raft of changes to reform the regime on PPAs.

The Taskforce was set up in response to KPLC posting its worst financial performance in 17 years in the financial year ended June 2020 and public outcry over the high costs of electricity in the country.
PPAs with IPPs were widely identified as contributing to this poor financial performance and to the high electricity costs to consumers.

The Taskforce noted in its report that as per the financial statements of KPLC for the year ended June 2020, that IPPs only supply 25 % of KPLC’s power but account for 47 % of its power purchase costs. Kenya Electricity Generating Company PLC (KenGen), the majority state owned generation company, on its part supplied 72 % of KPLC’s power but only accounted for 48 % of its power purchase costs.

Recommendations

The following were the priority recommendations made by the Taskforce in the Report.

Within four months, enter into and conclude negotiations with IPPs on reductions in PPA tariffs. Such negotiations to be within existing contractual arrangements.
All unsigned PPAs to be cancelled. All new PPAs to be aligned to the Least Cost Power Development Plan (LCPDP) as revised per Taskforce recommendations.
Institute and intensify reforms at KPLC to refit it into a proper commercial entity.
KPLC to take the lead role in LCPDP formulation and related PPA procurement.
KPLC to institute Due Diligence and Contract Management frameworks for PPA procurement and monitoring.
KPLC to institute one and five-year rolling demand & generation forecasts and associated models.
KPLC to adopt standard PPAs and proposed government Letters of Support.
Forensic audit by KPLC on all PPAs’ procurement and monitoring and also an audit of system losses arising from heavy fuel oils.
In line with the Constitutional stipulation for transparency in public sector dealings, KPLC’s annual reports to include the names and beneficial ownerships of IPPs with which it has contractual arrangements.

The President when receiving the report in a press statement announced his office’s intention to realize a 33% reduction in the cost of electricity by Christmas day, 2021 by implementing s the recommendations of the Report.

The President in his speech delivered during independence day celebrations on the 12 of December, 2021 announced that the reduction in costs would be done in two phases with a 15% reduction to be realized with respect to December electricity bills and the further 15 % to be deferred.

The initial 15% saving was effected by the Energy and Petroleum Regulatory Authority in January, 2022 through a revision of the Schedule of Tariffs, prescribing the tariff, charges, prices and rates charged by KPLC. KPLC obliged and consumers have already seen the reductions in the power bills.
The further 15 % was to be achieved through other measures as per the Taskforce recommendations including the review of existing PPAs with the intention that the further reduction would be achieved by end of March, 2022.

As of April, 2022 the further 15% reduction in electricity costs is yet to be made. Prevailing media reports suggest that the Kenyan Government was yet to approach IPPs on the renegotiation of their PPAs.

While there might be a level of uncertainty on when the Kenyan government may initiate these steps, the manner in which it may do it can be gleaned from the Taskforce Report.

From the outset it must be said that Taskforces recommendations were all to be conducted within the contractual stipulations and through negotiations. There is no recommendation to take unilateral actions in breach of the PPAs, the interest being at all times for Kenya to always act within its contractual obligations.

So far as operational PPAs are concerned, the Taskforce recommended the termination or renegotiation of certain identified PPAs. The Athi River Gulf, Thika Melec and Triumph thermal plants were cited as potentially having breached material terms of their PPAs. A further investigation recommended for Iberafrica Power and Rabai Power thermal plants for similar infringements and similar actions. The termination or renegotiation of these PPAs was identified as leading to significant cost savings to KPLC.

Further for the Lake Turkana Wind Power Project, the Taskforce recommended the renegotiation of the tariffs down towards the KenGen pricing levels with a proposal to achieve the same through refinancing of the plant by extending tenor and reducing the interest coupon. Similar proposals were made with respect to the Kipeto wind and OrPower geothermal power plants.

For committed and pipeline projects, which may arise further costs in future, various proposals were made based on the status of performance of the PPAs.

For PPAs where construction is complete but PPA have lapsed or there is an event of default, the Taskforce recommend that either new commercial operation dates be negotiated if the capacity is deemed to be required, or that the PPAs be terminated if not.

For PPAs where construction is yet to commence but is set to do so imminently and conditions precedent been performed, then a 12 – 24 month delay to the commercial operation dates are proposed to be negotiated.

For PPAs where CPs have not been met, then a 12 – 24 month delay to the commercial operation dates are proposed to be negotiated.

For plants under receivership, the Taskforce recommended the termination of the contracts based on the insolvency provisions in the PPAs.

For unsigned PPAs the taskforce recommended deferral to the regime of revised FiT policies and reverse auctions.

Opportunities for New Entrants

The above notwithstanding, it does create opportunities for new IPP entrants who can supply electricity within the set expectations under the LCPDP.

Further, recommendations by the Taskforce are intended to address some of the systemic challenges regarding transparency in PPA awards, that may make it challenging for interested IPPs to access the market.

One Taskforce recommendation in this regard involves the conduct of a forensic audit on existing PPAs with the intention to examine the procurement processes used, selection criteria used to identify the operators amongst other things. The Taskforce was of the view that where the process of awarding PPAs are seemingly opaque, it may lead to a premium being levied on IPP projects.

The Taskforce commendably made a raft of recommendation to address other institutional challenges that contribute to the decline in the performance in this sector. This is in acknowledgment that IPPs should not be the only target of their proposed interventions. Therefore potential investors in this sector also stand to benefit from the implementation of the Report recommendations.

Conclusion

Whether the recommendations will be fully implemented remains to be seen. Nonetheless the question of the cost of energy will continue to be pertinent especially at this time when Kenya is experiencing its highest fuel prices amidst its attempt to successfully recover from the pandemic.
We shall report on the further developments on this matter in our upcoming articles.