Kenya has backed down on a push to change power purchase agreements (PPAs) from being denominated in foreign currency to the shilling, departing from one of the major proposals of the John Ngumi-led taskforce.
Energy Cabinet Secretary, Davis Chirchir, says departure from the PPA taskforce’s recommendation is based on a study that has been conducted recently by the energy sector stakeholders, which has revealed that going this route does not present a feasible option for the country’s energy sector.
When the proposal to switch PPAs from foreign to local currency denomination was presented, Independent Power Producers (IPPs) said this would present a challenge given that the revenue they raise to finance their projects is denominated in foreign currency.
IPPs argue that a switch in the denomination of PPAs with Kenya Power would leave them vulnerable to foreign exchange pressures as far as servicing their debt obligations is concerned.
“On the viability of introducing a policy that uses local currency denominated PPAs, or having a mix of local and foreign currency PPAs in renewable energy, the sector recently conducted a feasibility study on the viability of Kenya shilling denominated PPAs and the study found that this option is not viable,” says Chirchir.
The 2021 task force report identified foreign currency denomination of PPAs as one of the main reasons for the high cost of power in Kenya due to the exposure of the tariff to fluctuation by the shilling against major currencies.
The government says that it is now proposing that the country embarks on a pilot phase of shilling-denominated PPAs with small-scale projects as a test aimed at assessing the extent to which the same can be scaled without hurting Kenya’s energy security.
