Ministry of Energy officials get fresh power to dish out energy contracts

Ministry of Energy officials are set to get sweeping powers to award multi-billion shilling electricity generation contracts to investors in an impending policy shift that is intended to yield lower consumer tariffs, but is also fraught with the risk of conflict of interest.

New draft regulations expected to come into force in three months’ time give the Ministry of Energy bureaucrats the power to select electricity generation projects and award them to bidders who offer to charge consumers the lowest tariffs.

“We are transitioning to the auction model and will give projects to investors with the lowest pricing and highest efficiency,” the Energy Regulatory Commission (ERC) director of electricity, Joseph Oketch, said.

The competitive bidding window, according to Mr Oketch, is a sure-fire policy tool to slash electricity bills.

The auctions will replace the current feed-in-tariff (FiT) system, where investors identify potentially viable power projects and then acquire licences to operate them at pre-determined rates without any requirement for tendering.

Energy ministry officials said the new system is intended to introduce competition among investors and give consumers the benefit of paying the lowest possible electricity tariffs.

Critics of the plan, however, argue that the auctions could also present potential conflict of interest where bureaucrats only clear the way for projects in which they have vested interests.

“We expect the auction system to take effect in the next three months. It will help us plan since we will only auction what the country needs as opposed to the current regime where private investors set the agenda,” said Energy principal secretary (PS) in charge of electricity, Joseph Njoroge.

Mr Njoroge denied there would be conflict of interest under the new regulations, arguing that the auctions will be based on competition that should see contracts go to lowest bidders.

The current feed-in-tariff offers investors pre-determined rates for wind power, geothermal, solar, hydropower and biomass energy sources, which take into account the cost of their investment and offers headroom for a profit margin. 

All power supply tariffs signed between power producers and the electricity distributor, Kenya Power are approved by the ERC.

Critics, however, argue that there will be need for a high level of transparency in selecting and approving viable projects because any secrecy will give room for bureaucrats to flog only projects of their choice and not necessarily those that offer the best price to consumers.

“People might hide behind the auction window to award politically correct companies or serve selfish interests,” said an investor, who is developing a solar park but requested anonymity to avoid antagonising the Energy ministry officials.

The new system of awarding power generation contracts is set to place Kenya in the league of nations that use auctions to develop renewable energy sources, including South Africa, Morocco, Brazil, Zambia and the United Arab Emirates (UAE).

More than 60 countries have embraced the auctions, according to International Renewable Energy Agency (IRENA), which cites South Africa and the UAE as success stories where the auctions have significantly slashed solar power prices.

The UAE in May held an auction for 800-megawatt solar park in Dubai, billed to be the largest, attracting a record low bid of Sh3 per kilowatt hour (kWh) or $0.03.

This is cheaper than Kenya’s fixed tariff of Sh12 per unit ($0.12) for a solar power project with a capacity of up to 40MW and connected to the national grid.

Currently, investors get power project licences from the ERC on a first-come, first-served basis, and on the project’s viability.

Under the auction system, renewable energy developers will bid for contracts and those with the lowest bids will win government support.

Kenya’s renewable energy market has recently attracted dozens of local and multinational investors, who are constructing solar farms, wind parks and geothermal wells.

This is in response to the government’s call for private investors to develop clean energy plants as part of the country’s goal to add 5,000MW to the national grid by 2020. Uganda last year ditched the feed-in-tariff for solar energy projects in favour of auctions.

Sector players reckon that the auctions work well for large-scale projects while feed-in-tariffs best suit smaller plants with a capacity of below 20MW where competitive auction is unnecessary.

They have, however, warned against a rushed switchover, without doing proper documentation, a situation that could spook investors.

“The PPAs [power purchase agreements] for the auction system should be bankable and the ministry should build capacity and credibility for smooth implementation,” said Guy Lawrence, the East Africa director at UK-firm Solarcentury, which installed a solar carport at Garden City in Nairobi.

Under the auction system, the ERC will strip investors of their independence in choosing project sites and deciding project capacity as well as turnaround period.

To cushion investors from losses shock, it’s often a global standard for governments to provide land and build infrastructure like substations.

“We will identify for them the region, power capacity and the time needed to complete the project,” said Mr Oketch without indicating whether the deal will come with government land.

“This will help us plan well and match demand with supply. We want to reduce cases of having stranded power which forces consumers to pay for idle plants through capacity charges.”

It has been suggested that auctions work well in South Africa “the most industrialised economy in Africa with a lot of demand and mature power infrastructure”.

Zambia in June awarded a contract for a 45MW solar plant to American firm First Solar following an auction that yielded lower tariffs of Sh6 or half Kenya’s rates.

Kenya adopted the feed-in-tariff in 2008 as a policy instrument to attract investors in the renewable energy space as an alternative to expensive diesel-generated electricity.