Kenya is set to declare wholesale power supply contracts null and void following a drop in demand in the wake of the global Covid-19 pandemic, setting the stage for a crisis in the electricity market that could hurt supply.
The Ministry of Energy says that it will declare force majeure on power generation contracts, which technically means that Kenya will not be bound by the existing pacts on payment of electricity from the more than 10 power producers.
A declaration of force majeure excuses a company from contractual agreements when an extraordinary event that is beyond its control occurs.
The Ministry argues that restrictions imposed to limit the spread of Covid-19 like night curfew had reduced demand for electricity, making it difficult for Kenya Power #ticker:KPLC to afford the energy without increasing retail prices.
Power generators, on the other hand, argue that the reduction in their earnings will hurt their financial muscle and jeopardise their commitment to supply adequate electricity to Kenya Power, which could lead to unstable supply to both homes and businesses.
Some have demanded that the government offer proof that it is effectively impossible to perform its contractual duties as a result of the coronavirus pandemic.
Energy Secretary Charles Keter told the Business Daily that the ministry had resorted to force majeure after consumption plunged with the closure of factories and hotels in the wake of the pandemic.
“We may not be able to meet the take or pay conditionality under some of the PPAs and there is a need that they come back to the negotiation table to enable us reach an agreement,” Mr Keter said.
“Demand is down and yet we still have to maintain the transmission and distribution network as well as expand to the areas we have not sufficiently served. We have started writing to them to invoke the force majeure based on demand”.
The clause known as take-or-pay compels Kenya Power to buy the agreed amount of electricity regardless of whether or not the utility needs the energy.
Demand for electricity dropped 15.3 percent to 645.29 million kilowatt-hours (kWh) in April as the global coronavirus pandemic hit consumer demand and forced firms and industries to cut back on their operations.
This has left Kenya Power with nearly 203 million kWh of power that was produced by the generators, but which it did not need following the drop in demand. Despite this, the electricity distributor had to pay hundreds of millions of shillings to the generators for the excess energy.
The April numbers are the first full month data on power consumption after Kenya imposed a night curfew on March 27 and restricted movement in and out of the counties hit by the pandemic, including Nairobi.
The Energy and Petroleum Regulatory Authority (EPRA) has linked the drop to reduced consumption by industrial and commercial users, who account for 70 percent of Kenya Power unit sales.
However, the electricity regulator said that consumption of electricity by domestic customers had increased as employers increasingly ask staff to work from home in the wake of the pandemic, which has drastically changed the way business is conducted.
With the changing consumption patterns, Mr Keter has asked Kenya Power not to pay for the extra power arising from the effects of coronavirus, which amounts to declaring force majeure. Such a move may allow a party in a contract to avoid liability for nonperformance. Natural disasters, strikes and terrorist attacks can all be deemed as force majeure events.
Legal experts are of the view that the coronavirus pandemic likely qualifies, but any company invoking force majeure must show proof of incapacity.
A CEO of one of the power plants set to be affected by the declaration said that this posed a risk to supplies.
“A financially weakened power plant may not guarantee electricity supply in an environment of force majeure,” said the executive who preferred not to be identified for fear of reprisal by the Energy ministry. “Electricity is an essential service and all options must be exhausted before a party declares force majeure.”
Kenya Power last week issued its third profit warning in a row, citing reduced electricity consumption due to the coronavirus disease control measures and rising cost of buying wholesale power from firms like KenGen #ticker:KEGN.
The alert means the utility’s net earnings will decline by at least 25 percent of last year’s profit of Sh262 million — which was the worst in 16 years.
Lake Turkana Wind Power, which owns the Sh70 billion wind power plant in Northern Kenya, says that it is in talks with Kenya Power to manage the plunge in demand.
“Fortunately, we don’t have any force majeure letter subsisting under the Power Purchase Agreement. We work with Kenya Power to manage operational aspects, including the lower demand,” LTWP Executive Director Riwan Fazal said in an email response to the Business Daily.