What power purchase task force must do


Mr John Ngumi. FILE PHOTO | NMG

First, a quick update on the John Ngumi-led task force on renegotiation of Power Purchase Agreements (PPAs). I gather that at the end of the deadline for submissions of views, the team had received 60 items.

They range from representations of merchant power producers, consumer associations, State-owned power producers, private sector associations and lobbies, the diplomatic community, international development finance institutions and individuals with interests in the power sector.

The impression you get is that some of the parties making submissions have misinterpreted or misunderstood the mandate of the task force. It seems that some people used the opportunity to present grievance lists.

There are submissions with specific policy recommendations. In summary, the suggestions include the following: PPAs should be denominated in shillings; mandate for PPA negotiations be transferred from Kenya Power to the Energy and Petroleum Regulatory Authority; terms of PPAs be standardised; existing PPAs be allowed to run their course; and, projects that are about to be commissioned proceed.

Since I wanted to assess the general sentiment of the international investing community on the renegotiation process, I decided to take a closer look at representations by the American Chamber of Commerce, the British High Commission, the CDC Group, IberAfrica and Quantum Power East Africa.

In summary, the views in this category include following. First, that the task force must uphold the sanctity of existing contracts. Secondly, any moratorium must not suspend the legal validity of PPA that are in force. Thirdly, if any renegotiations must happen, it must be by mutual consent between the merchant plants and Kenya Power.

This category of investors is unanimous that a shift from ‘take or pay’ to ‘pay when taken’ would dampen investor interest.

Clearly, the process of renegotiating PPAs is not going to be easy. Opposition from lobbies representing interests of merchant power plants is going to be intense.

We must make our case simply and plainly by stating that we are right now at a place where maintaining private sector investment in the electricity sector can no longer be a priority.

The basic problem we have is too much expensive power. We accepted too many opaque and unsolicited proposals from merchant power plants and ended up dishing out too many PPAs.

Worse, all agreements we have signed have take-or-pay clauses that come with capacity charges, meaning that Kenya Power is under an obligation to pay the merchants even where their generation has not been consumed.

This is the reason we are proposing a shift to a pay-when-taken system.

Under the independent power producer (IPP) model we follow, a power plant that comes on stream do with its own revenue requirements, meaning that Kenya Power must apply for a tariff increase whenever a new plant comes into operation.

The point is this. Renegotiation of power purchase agreements is no longer a choice for us. The circumstances have made it an imperative.

It is unfair to ask us to retain the take-or-pay model just because we must sustain the bankability of merchant power plants.

What should we expect from John Ngumi? Cancellations of licences in the hands of people found to have no capacity to implement the projects and are merely keeping the papers to speculate and to flip third parties at a profit. Can the committee explore the viability of negotiating longer tenures?

How about a moratorium on new power purchase agreements? Is postponement of commercial operations dates viable?

In South Africa, the CEO of Eskom, the equivalent of Kenya Power, Andre de Ruyter, suggested that IPPs look at lowering their financial costs through refinancing. Is that a viable solution? Over to you, Mr Ngumi.