Economy

World Bank in deal to guarantee power purchase contracts

The World Bank has committed to provide a guarantee to commercial banks that issue stand-by letters of credit to five Independent Power Producers (IPPs), boosting efforts to improve the country’s electricity production.

The letters of credit will act as security for power purchase agreements between Kenya Power and Thika Power, Orpower4, Gulf Power and Triumph Generating Company.

“The guarantees are payment security for ongoing obligations of Kenya Power under its power purchase agreements with the IPPs and of the Government under its Letters of Support for the projects,” Johannes Zutt, the World Bank country director told the Business Daily.

Once obtained from a bank, the letter assures that a buyer’s agreed payment to a seller will be received on time. In the event of a default the bank would cover the full or remaining amount of purchase.

Thika Power had been scheduled to sign a partial risk agreement with the World Bank on Tuesday morning but the event was postponed at the last minute due to what Kenya Power termed “unforeseen circumstances”.

Thika Power is constructing a 95-megawatt thermal power plant at Witeithie, near Thika town. The World Bank lending arm, International Finance Corporation (IFC), last month invested Sh3 billion in the power project.

Analysts said the letter of credit by the World Bank could help boost the implementation of power projects across the country as demand for energy continued to climb on economic take off.

“Financing for the energy sector is largely viewed as risky because of the huge investment involved. Any guarantees would help to build confidence and boost project implementation,” an official of Ministry of Finance said.

Finance minister Njeru Githae said in June that the government was about to complete financial closure with several IPPs including Thika Power (87MW), Triumph Power (82MW), Gulf Power (80.3MW) and Orpower (52MW).

The government has, since 1997, signed contracts with independent power producers for generating approximately 400MW with Off-take agreements ranging from seven to 20 years.

The minister, however, said lack of clarity on the legal framework between the government and private sector continued to affect progress.

The government has published the Public Private Partnership Bill, 2012 to tackle such challenges. The Energy Regulatory Commission (ERC) data show the demand for electricity has grown tremendously from 4,200 gigawatt hours (GWh) in 2005 to 5,318GWh in 2010.

Kenya is pursuing several projects to boost power output with focus on geothermal sources. The country has relied on hydro-power, which has proved unreliable during drought.

Kenya has potential to produce 7,000MW of power from geothermal and is targeting production of at least 5,000MW by 2030, the date that now guides the country’s development under a blueprint called Vision 2030.

Wind power projects

Several wind power projects have also been rolled out including those by KenGen in Ngong area. Statistics by the Energy ministry show that the installed wind energy capacity to the grid was 5.45MW as at December 2011 and a further 20 megawatts are expected to be commissioned by end of 2012.

The 300MW Lake Turkana Wind power project is expected to be commissioned in 2014. Other committed projects include 110 megawatts at Kinangop and Ngong.

As of last year, proposals for development of 650MW have been received for wind energy capacity at Marsabit, Isiolo and Ngong, the ministry said.

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