Kenya Power’s deal that forced World Bank out of wind farm

Electricity distributor Kenya Power signed an onerous power purchase agreement with a Turkana-based power producer forcing the World Bank to withdraw its backing for the project.

Also see: World Bank move signals trouble for energy security

The World Bank says its decision to withdraw guarantees it had agreed to offer the mega project is partly informed by the power purchase agreement that commits consumers to paying billions of shillings for electricity not used — effectively beating the project’s primary purpose of reducing the cost of power in Kenya.

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The bank says in a letter to sponsors of the Lake Turkana Wind Power (LTWP) that its recent assessment of the plan has led to the conclusion that the viability of Kenya Power would also be seriously compromised if the giant project is implemented as proposed by its owners.

“We believe that the take-or-pay provisions in the PPA between LTWP and KPLC would expose Kenya Power to unacceptably large financial risk given the possible curtailment,” the bank says in a letter signed by Johannes Zutt, its country director for Kenya.

Mr Zutt says in the letter that was written after a World Bank mission to Nairobi between September 25 and 28 that the multi-lateral lender was particularly unsettled by the discovery that the Power Purchase Agreement (PPA) Kenya Power signed with LTWP commits the electricity distributor and consumers to paying for excess power from the wind farm.

About 70 per cent of the surplus electricity from the wind farm would be paid for through consumer power bills leaving government-owned Kenya Power with the remaining 30 per cent or about Sh2.6 billion, says the World Bank in a letter seen by the Business Daily.

Mr Zutt says such an arrangement would beat the logic of putting up the wind farm to reduce the high cost of power brought about by heavy reliance on fossil fuel generation.

“KPLC’s financial stability is critical to the continuing effort to increase access to electricity in Kenya, and we urge caution in putting unsustainable financial obligations on it,” the World Bank says in the letter.

It advises that the project be implemented in phases noting that commissioning of the project would “dramatically” scale up wind power share in the national grid from current one per cent to between 14 and 17 per cent.
“After careful review and analysis and based on the discussion of the latest mission, we have concluded that we are unable to support the LTWP as currently structured,” the bank says.

That position is in direct conflict with that of the owners of the project and Vision 2030 director general Mugo Kibati who announced last week that they had decided to proceed without the World Bank because of its lengthy internal procedures.

The bank, which was to offer guarantees to investors in the Sh66 billion project in case power produced was not bought, officially dumped the project on October 6, 2012.

Besides demand side concerns, the bank also doubted Kenya Electricity Transmission Company’s (Ketraco) ability to complete the Sh20.6 billion transmission line between Loyingalani and Suswa in time for immediate addition of Turkana wind power to the national grid.
The World Bank says its experience with construction of power lines in Kenya is that it cannot be completed within the stated time, a reality that would expose Kenya Power to paying for electricity it will not be able to supply to consumers and consumers to paying for what they did not use.

The bank entered the project last year in response to a government request for assistance in the provision of guarantees to the sponsors.
The guarantees assignment was to be shared between the World Bank’s soft-lending arm, the International Development Association (IDA) and its political risk underwriting associate, the Multilateral Investment Guarantee Agency (Miga).

At 300MW, the Turkana project is billed as Africa’s largest wind farm but the World Bank now says its viability lies in a phased implementation that brings on board between 60MW and 100MW at every stage and is timed with the expected rise in demand over the next 10 years.

The World Bank says in its letter to the stakeholders that even if power demand grew by 10 per cent annually and assuming a suppressed demand of 200MW, consumers (based on annual net cash flow between $70 million and $100 million) would still be condemned to paying $30 million or Sh2.5 billion for the surplus power.

The amount would rise to $100 million or Sh8.5 billion if annual demand grew by five per cent per annum.
The bank further claims that Kenya Power does not have the experience to handle such quantity of electricity raising the prospect of disrupting the power system. The thinking within government however appears to be diametrically opposed to the multilateral lender’s position.

Last week, LTWP officials joined Mr Kibati to announce that the project would proceed, betraying an ill-concealed tinge of triumphatism over World Bank.

Mr Kibati accompanied by Carlo Van Wageningen, the LTWP chairman, said the project plan would soon be closed because it had the backing of the government.

“We will close this project very soon because the Government is committed to seeing it through.”
A source at power transmission firm Ketraco told the Business Daily that the agency was happy with the World Bank’s decision to quit.

“We are happy that the World Bank has withdrawn. They were putting a lot of hurdles in our way but now we can go ahead.”

The World Bank’s letter, which says Kenya could be stuck with excess power worth up to Sh8.5 billion annually, emerged as the Ministry of Energy confirmed the project will go ahead but with no State guarantees.

Spain will provide €110 million (about Sh14.9 billion) to build the line with counterpart State funding set at €49 million (about Sh6.62 billion).

A substation to be built at Loyangalani will cost about Sh4.32 billion while Sh190 million will be used to compensate those displaced by the line.

Energy PS Patrick Nyoike on Friday maintained that the Treasury would not offer guarantees to the financiers led by the African Development Bank (AfDB).