Carefully manage Kenya Power’s role when using task force report

Though the 200-page report of the Presidential Task Force on Power Purchase Agreements (the PPA Task Force) is a bit of a wandering read, it contains a few thoughts for Kenyans. That a Presidential Task Force struggled for information on PPAs and other data on Independent Power Producers (IPPs) from Kenya Power (KPLC) management and required intervention by the KPLC Board, beggars belief.

As the report notes, two alternative conclusions can be drawn from this inability or refusal to provide information. The first is that KPLC does not have the information. As the Task Force noted using 2019/20 financial year data; power costs accounted for 66 per cent of total KPLC sales, and IPPs accounted for 47 per cent of these power costs (Kengen accounted for 48 per cent). How basic cost of sales data is not available is, as the report puts it, “inconceivable”.

The second conclusion the Task Force drew was equally alarming; that KPLC has the information but refused to release it. An immediate recommendation in response to this state of entropy was for a forensic audit into how existing PPAs were entered into, and how they are monitored. The report also calls for an audit of KPLC’s commercial customers with a focus on system losses.

The one recommendation, or promise, that got everyone interested is the one to reduce consumer tariffs by a third by Christmas. The Task Force reckons that KPLC can generate annualised savings of Sh7.5 billion to Sh8.3 billion in the short term, and a further Sh4.9 billion in the medium-term, and pass this saving back to consumers.

This excludes potential efficiency gains that KPLC could make with a better commercial and more results-driven management orientation. Indeed, the focus of the savings is Heavy Fuel Oil (HFO) thermal plant capacity charges and fuel management, and the wind and geothermal charge at the Kengen tariff level, and in the medium-term shifting HFO plants to the use of natural gas.

This tariff point is actually a bigger one. The thinking is to build greater predictability and stability by benchmarking proposed IPP tariffs against Kengen’s tariffs for “technologies where Kengen is present” while getting Kengen itself to focus on efficiency and innovation to drive down its own costs and tariffs.

By looking at currency depreciation over time, an argument is made to get future PPAs denominated in Kenya Shillings. Linked to this is the need for fairness, predictability, transparency and accountability in IPP/PPA procurement and monitoring to avoid a “Kenyan premium” being levied on IPP projects. This all sounds too simple, and there’s probably a devil that will emerge in the practical detail.

As I said when I wrote about this subject a fortnight ago, better planning for the power sector as a whole is extremely important. There are two perspectives the report offers. The first is the need to escape the paradox of power generation overcapacity amidst unmet or frustrated demand.

The second one speaks to the idea that power sector planning must lead, not lag, economic development planning, so getting good demand forecasts to tease out generation needs will require visionary thinking around what the future Kenyan economy will look like, especially with more decentralized, distributed development.

The report’s implementation will be driven at the policy level by the Cabinet Sub-Committee on KPLC and the PPA Task Force Implementation Committee. The National Treasury and Ministry of Public Service will offer financial and performance management oversight. The President’s Delivery Unit will monitor and report implementation progress to the National Development Implementation and Communication Cabinet Committee. These moving parts must work in perfect harmony.

And therein lies a greater challenge. The entire report revolves around KPLC. On the one hand, KPLC must lead the formulation of the Least Cost Power Development Plan and related PPA procurement, adopt standard PPAs and government support measures, institute due diligence and contract management tools for PPA procurement and monitoring, institute one and five-year rolling demand and generation forecasts, and carry out (as noted earlier) a forensic audit of all PPA procurement and monitoring.

On the other hand, the self-same KPLC must now “right fit” its organizational and operational structures towards “delivering affordable, accessible and reliable power while generating surplus to fund its activities and deliver returns to shareholders”. That includes establishing an IPP office, a Meteorological office (given growing renewable energy sources), and a Demand Planning and Forecasting division even as a business process review is carried out and a performance-based balanced scorecard is mapped out.

Comprehensive procurement reform (including another forensic audit of procurement systems and hiring of a completely fresh team after an interim period of outsourcing) is also expected to happen.

Other proposals include vetting of staff and use of wealth declarations; better managing technical (with KETRACO) and commercial (revenue and billing cycle) system losses. Finally, throw in thoughts around governance reform, including hiring new senior management and buying in outsourced skills and services as required, as well as financial restructuring across the income statement and balance sheet.

Of the report’s 100 or so recommendations, 90 per cent are to be implemented by the end of 2021, which is ambitious. That many key proposals relate to a limping KPLC could make the task even harder.