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Kenya Power freeze puts new energy plant billions on the line

kenya power
A Kenya power technician at work. Kenya Power chairman Mahboub Maalim Mohamed says the monopoly electricity distributor will not sign new PPAs pending a sector review FILE PHOTO | NMG 

Mega electricity generation projects valued at billions of shillings are in limbo after distributor Kenya Power froze the signing of new power purchase agreements (PPAs) indefinitely, citing financial constraints and excess capacity.

Kenya Power chairman Mahboub Maalim Mohamed said the monopoly electricity distributor would not sign new PPAs pending a sector review intended to establish the country’s additional demand for energy.

Mr Mohamed said electricity generation has overshot Kenya’s Power ability to absorb it, hence the need for a moratorium on any new projects.

The decision means investors who have lined up energy projects could be left in limbo with billions of dollars of investments getting stuck until the freeze on new power deals is lifted.

“There's an excess capacity of power generation right now in Kenya,” said Mr Mohamed in an interview.

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Kenya Power currently has 23 PPA applications under consideration with a total generation capacity of 2,240.5 megawatts (MW).

These include the High Grand Falls Hydro Project, which has 750 MW, said Mr Mohamed.

Kenya’s total installed capacity increased slightly to 2,339.9MW in 2017 from 2,327.0 MW in 2016, according to official statistics.

This is against a peak demand of 1,802 MW, with the balance being the reserve power meant for emergency situations such as plant repair shutdowns.

Ambitious plan

President Uhuru Kenyatta’s administration in 2013 set an ambitious plan to instal an additional 5,000 MW to the national grid by 2017 from renewable sources such as geothermal, solar and wind farms with a target to connect all homes to power by 2020.

Kenya Power acting chief executive Jared Othieno now says any new deals will be thoroughly scrutinised in line with demand.

“We are going to have more due diligence to see that they are coming in at a time when we can meet the demand,” said Mr Othieno.

The country relies on a mix of hydro, geothermal and thermal power.

Hydro capacity increased by 7.5 MW to 826.2 MW in 2017 boosted by new hydroelectric power plants in Genro Teremi Falls, Gura and Chania.

Thermal capacity increased by 5.3MW to 806.9MW while solar capacity increased by 0.1 MW to 0.7 MW in 2017. Installed capacity for geothermal, wind and co-generation remained at the same level in 2017 as in 2016.

Mr Mohamed said excess capacity was impacting negatively on Kenya Power’s balance sheet.

“Right now Kenya Power is obligated to pay for such deemed oversupply ...of course hitting its finances. Therefore Kenya Power board of directors will in future consider PPAs based on demand,” said the Kenya Power chairman.

Ongoing projects

Analysts said Kenya Power must, however, assure investors of ongoing projects.

“It’s an important positive step but work remains to be done,” said risk management expert Deepak Dave of Riverside Capital, a Nairobi-based advisory firm that has been engaged in PPAs before.

“It's about time generation, transmission and distribution lined up, and they need to comfort the market that it's not a case of them being on the hook for cash they won't be collecting.”

Kenya Power's ability to honour obligations for power deals has come into question in light of its recent financial woes.

KenGen, which accounts for some 75 per cent of power purchased by Kenya Power, saw its investors in December raise concerns about debt owed to the electricity generator by the distributor amid the latter's financial headwinds.

KenGen shareholders during the company’s Annual General Meeting sought assurance from their board that the Kenya Power debt, which is booked as Sh21.8 billion as at the end of the financial year, will be cleared.

Kenya Power paid off KenGen a total of Sh18 billion after closure of its annual financial report, leaving a balance of about Sh3.3 billion, but new billings have since raised this amount to Sh15.5 billion as at Tuesday.

The firm posted a 63.7 per cent decline in net profit to Sh1.92 billion in the financial year ended June 2018 on higher costs.

Despite revenue rising by 4.23 per cent to Sh125.8 billion on increased customer base, increased power purchase and higher finance costs depressed its bottom-line. Power purchase costs, excluding fuel and foreign exchange, increased by Sh2.59 billion to Sh52.79 billion.

Energy Secretary Charles Keter told the Senate in December that three thermal power plants with combined capacity of 190 MW were not needed after Kenya increased its share of cheap wind power.

Disconnect plants

But taxpayers should raise Sh9 billion to pay off the owners to disconnect the plants from the national grid or allow them to run down their contracts set to expire within five years, Mr Keter said.

Iberafrica Power Plant's 56 MW contract is set to end in October next year, Tsavo Power’s (74 MW) will end in September 2021, while Kipevu Diesel’s (60MW) contract runs up to July 2023.

The 310 MW Turkana Wind Farm, which was switched on in October, is now injecting up to 240 MW into the grid.

Kenya Power has been left in a financial tight spot after it breached the terms attached to Sh59.6 billion worth of its loans.

Consequently, the State utility is seeking to secure fresh short-term loans to refinance its existing short-term debts on a longer tenor to ease strain on its coffers.

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