Shockwaves have swept through the independent power producers (IPPs) and their lenders following reports that the government was considering renegotiating power purchase agreements signed between them and the State-controlled utility, Kenya Power.
I have received several calls from owners and persons with links to the merchant power plants — responding to an article I wrote for this column last week — warning that forced contract renegotiation was not a viable thing for the government to opt for because of the risk or not honouring legal sanctity and enforceability of contracts.
I was reminded that power purchase agreements (PPAs) are enforceable contracts under Kenyan laws and that one party cannot on its own vary the terms of the contracts. I was also reminded that the PPAs were protected by risk guarantees issued by both the Treasury and international development finance institutions and therefore any unilateral reduction of power prices agreed upon will result in heavy damages being awarded against the government.
I was reminded that the proposed renegotiations were bound to hurt investors, equity holders and other financial institutions which financed the projects on the basis of executed PPAs. I was told that unilateral action to change contract terms could amount to expropriation of rights and that if the government proceeds with the renegotiations, quality investors would no longer come to Kenya.
I was also reminded that the ‘take or pay’ clauses embedded in PPAs are the only contractual remedy available to the investors when the off-taker fails to take delivery of power.
Clearly, the government, in seeking to renegotiate the contracts, will be navigating a legal minefield. Yet even with these solid legal arguments, countries are being forced by economic circumstances to choose between obeying the letter of the law in the PPA contracts and delivering cheap power to consumers and the economy.
Indeed, Kenya is not alone in seeking to renegotiate PPAs. The Indian state of Andra Pradesh recently appointed a high-level committee to renegotiate PPAs that it signed with merchant power plants several years ago.
In Pakistan, the government recently agreed with 47 IPPs to bring down PPA prices. Karachi defended the decision on renegotiations, saying they were necessary to restore the financial sustainability of the electricity sector.
In South Africa, Public Enterprises minister Pravin Godhan recently suggested that PPAs concluded during the first two bid windows of the country’s IPP programme needed to be renegotiated to alleviate pressure on consumer electricity tariffs.
In Ghana, the government renegotiated several PPAs, explaining that it needed to do so in order to manage the effects of capacity charges on consumer electricity tariffs.
The government also argued that PPA had contributed to excess generation capacity relative to demand even despite the fact that Ghana continued to suffer from persistent blackouts.
A standing committee on renegotiation of tariffs recommended a raft of measures, including termination of a number of PPAs, postponement of PPAs that were in the pipeline, a moratorium on new PPAs and the rescheduling of commercial operation dates for merchant plants about to be completed.
The case for renegotiating the PPAs in Kenya would appear to be very strong. Indeed, PPAs have caused the government to over-contract capacity. We have more power than Kenya Power is able to sell.
Currently, we have a total of 34 power purchase agreements that have been already signed and issued to those merchant power plants.
Out of these, four namely Malindi Solar (40Mw), Eldosol Solar (40Mw), Solenkei Solar (40Mw) and Kipeto Wind (100Mw) are ready to roll, having served Kenya Power with commercial operation dates.
We are a stage where, like in Ghana, we are witnessing an unprecedented build-up in the so-called ‘capacity charges’.