vellum

Review of Power Purchase Agreements in Kenya for Affordable Electricity

 

On September 29th 2021, H.E. President Uhuru Kenyatta directed the Cabinet Secretary, Ministry of Energy, to implement the recommendations of the Presidential Taskforce on Review of Power Purchase Agreements. The Taskforce was constituted vide Gazette Notice No. 3076 of 29th March, 2021, following public concerns on the high cost of electricity for both individual consumers and enterprises.

Among the key findings included in the report were: the vast differential between KenGen and Independent Power Producers (IPP) tariffs and electricity dispatch allocations; the lack of proper demand forecasting and planning, leading to irreconcilable projections as against demand; the existing risk allocation imbalances between KPLC and IPPs further exacerbated by poor contract management frameworks; and an uncoordinated institutional architecture that inadvertently contributes to enhanced operational costs passed on to consumers.

According to the Kenya Association of Manufacturers (KAM), the high cost of electricity in the country is attributed to various factors including expensive Purchase Power Agreements, high cost of fuel; multiple taxes and levies imposed on electricity bills, VAT and Fuel Cost Adjustment, as well as depressed demand growth – despite the increased power generation capacity, among others.

This has led to Kenya having one of the highest electricity tariffs in the region pushing up the cost of production for local industries and rendering the manufacturing sector uncompetitive. Currently, the tariff for industrial consumers stands at US cts 18/kWh, compared to Ethiopia US cts 4/kWh, Egypt US cts 6/kWh, Uganda US cts 12/kWh, Tanzania cts 7/kWh and South Africa US cts 9/kWh.

The recommendations which were considered by the President in summary provide for a path towards the reduction of the cost of electricity by over 33% within four months. in reducing system losses and aligning Power Purchase Agreements to the Least Cost Power Development Plan will reduce the overall cost of electricity.

In substantive terms, the 33% reduction would mean that in an instance where a person is spending Ksh. 500 per month on electricity, by 31st December, 2021 they shall be spending Kshs. 330 per month. This will be achieved through reduction of consumer tariffs from an average of Ksh. 24 per kilowatt hour to ksh. 16 per kilowatt hour which is the current tariff.

In summary, the Taskforce recommendations towards reduced cost of electricity include:

  1. Review and Renegotiations with Independent Power Producers (IPPs) to secure immediate reduction in Power Purchase Agreements (PPAs) tariffs within existing contractual arrangements;
  2. Cancellation with immediate effect of all unconcluded negotiations of PPAs and ensure that future PPAs are aligned to the Least Cost Power Development Plan (LCPDP);
  3. Fast-track and deepen the ongoing reforms at KPLC to restructure it into a commercial entity that is both profitable and also capable of delivering efficient and cost-effective electricity supply to all consumers;
  4. KPLC to take the lead in formulation and related PPA procurement of the LCPDP;
  5. KPLC to instate Due Diligence and Contract Management frameworks for PPA procurement and monitoring along the lines of the drafts provided by the Taskforce;
  6. KPLC to institute one and five-year rolling demand and generation forecasts and associated models;
  7. KPLC to adopt standard PPAs and proposed Government Letters of Support (LoS) along the lines of the drafts provided by the Taskforce
  8. KPLC to undertake a forensic audit on the procurement and system losses arising from the use of Heavy Fuel Oils (HFOs); and
  9. In line with the constitutional imperative of transparency in the public sector, KPLC’s annual reports should include the names and beneficial ownerships of all the IPPs with which it has contractual arrangements

 

Spread the love