Economy

Power producers push for electricity auctions

Kenya's Energy Cabinet Secretary Monica Juma.

Kenya's Energy Cabinet Secretary Monica Juma. PHOTO | PSCU

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Summary

  • Electricity Sector Association of Kenya (ESAK) chair George Aluru said the government should transition to open auction tenders as opposed to the current feed-in-tariff.
  • Currently, Kenya applies a feed-in-tariff on electricity generators which means the companies setting up plants in the country structure their business to sell at the set rates even when some can produce at much lower costs.
  • The government has been unable to deliver a new round of energy price cuts through renegotiating IPP contracts, illustrating the disadvantage of the fixed price feed-in-tariff regime.

Independent power producers have asked the government to shift to electricity auctions to cut the cost of electricity rather than tearing up existing contracts.

Electricity Sector Association of Kenya (ESAK) chair George Aluru said the government should transition to open auction tenders as opposed to the current feed-in-tariff that has reduced competition among private players and kept electricity costs high for Kenyans.

Currently, Kenya applies a feed-in-tariff on electricity generators which means the companies setting up plants in the country structure their business to sell at the set rates even when some can produce at much lower costs.

“With auctions, the government comes and say maybe it needs 80 megawatts of solar or wind in a certain place and then many people will come and bid and say I can do it at four or six cents for instance, based on costs, the capability of the person bidding and other factors,” Mr Aluru said.

“This way costs will come down because of competitive tendering which means private players will compete by generally trying to undercut each other.”

The government has been unable to deliver a new round of energy price cuts through renegotiating IPP contracts, illustrating the disadvantage of the fixed price feed-in-tariff regime.

Energy and Petroleum Cabinet Secretary Monica Juma said in January the cost of power would come down by March 31 to fulfill President Uhuru Kenyatta’s promise of reduced electricity bills to homes.

The cuts were hinged on a deal to review power purchase agreements (PPAs) signed over the years by Kenya Power.

The IPPs, which are owned by powerful institutions like the World Bank, opposed a unilateral push to lower the cost at which they sell electricity to Kenya Power, setting the stage for a legal battle.

The IPPs say they spent billions of shillings in building power plants through a combination of debt and shareholder funds that were sourced on the strength of the PPAs or wholesale electricity tariffs.

The fear of a legal tussle with powerful foreign investors forced the State to retreat and opt for a negotiated deal with the IPPs.

The IPPs opposed the reduction, arguing that Kenya has no unilateral right to alter the contracted capacity and payments, saying instead that the State has a duty to protect PPAs — which are inked over a period of 20 years.

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