Electricity consumers will pay Sh4.6 billion to a special fund created to cushion Lake Turkana Wind Power investors from losses.
The money, to be collected from consumers in the form of higher power bills, will be put in a yet-to-be created "security support facility" account that the Treasury has jointly created with the Energy Regulatory Commission (ERC).
ERC director of electricity Joseph Oketch said the contingency facility will take care of risks associated with Kenya Power’s payment obligations to the Lake Turkana power investors.
“This is in the event that Kenya Power, for any unforeseen reason, fails to pay the private power producers,” he said.
Mr Oketch said the move is in line with a global practice that allows governments to set up contingency funds to manage risks for private investors.
This, he said, is crucial to maintaining Kenya’s profile as an investment destination.
The Treasury declined to offer the project a government-backed "letter of support" that cushions private investors from unforeseen political and economic risks.
The guarantees are, however, booked as national debt, and have the effect of pushing up the country’s debt stock, currently standing at Sh3.8 trillion, or half the gross domestic product (GDP).
“We were avoiding debt,” said the ERC citing the defunct Kinangop Wind Park whose owners have sued the government for Sh15 billion after the Treasury-backed project collapsed under the weight of political pressure.
The special fund was created as part of an agreement that required consumers to raise the amount once the 310-megawatt Lake Turkana power project began supplying at least 50-megawatts to the grid.
It was formalised in a gazette notice issued in 2013 indicating that consumers would pay €42.6 million (Sh4.6 billion) over an unspecified period of time.
The wind farm, which is billed as Africa’s largest wind project, is set for completion in July and at full capacity will produce enough electricity to power one million homes.
“The security support facility shall be collected and remitted by KPLC into an escrow account established as security for KPLC’s payment obligations to Lake Turkana Wind Power under the power purchase agreement in respect of the 300MW wind that the commission has approved,” the gazette notice dated November 2013, said.
The support facility is to be charged on all units consumed monthly until the total amount in the escrow account is equal to €42,600,000.
Ahead of schedule
Construction of the wind farm is ahead of schedule with 155 turbines having been installed by last October to generate the first 132 megawatts or nearly thrice the 50 megawatts that was to be ready by last September.
But the government has delayed building a transmission line connecting to the national grid due to land compensation hiccups, denying consumers early cheap wind power.
This has again exposed consumers to a monthly fine of Sh700 million from January to be paid through their bills to the developers.
But Energy ministry officials recently held discussions with the wind farm mandarins to delay the penalty, temporarily sparing homes and businesses from higher bills.
The 428-kilometre high-voltage line was approved in August 2014 and the government agreed to pay the investors a monthly compensation should there be delays in injecting power to the grid after January 2017, according to Kenya Electricity Transmission Company (Ketraco).
The Sh20 billion line will transport electricity from the wind power project in the northern town of Marsabit to the national grid at Suswa substation in Narok.
Electricity from the wind park will cost Sh8.7 per unit (8.5 US cents), which is in a similar cost range as geothermal power, or three times cheaper than diesel-generated electricity.
At 310 megawatts, the wind power plant will account for 13 per cent of Kenya’s total power capacity of 2,400 MW. Wind power now accounts for only one per cent of what the Kenyan economy consumes, led by geothermal at nearly half the energy mix, followed by hydropower and thermal sources.
UK-based Aldwych is the single largest investor in the €623 million (Sh68 billion) wind project with a 30.7 per cent stake.
Investors include Google
Other investors in the consortium include Google, KP&P Africa B.V., Industrial Development Corporation of South Africa, Industrial Fund for Developing Countries, Norwegian Investment Fund for Developing Countries and Vestas Eastern Africa.
Electricity retailer Kenya Power will be required to issue monthly updates indicating the pass-through charges to consumers towards the contingency fund.
“The notice shall also show the amount collected by KPLC by way of the security support facility and standing to the credit of the escrow account on the last business day of the month preceding the date of the notice,” reads the gazette notice.
The Lake Turkana project was originally meant to start in 2011 but construction delayed.
This came after the World Bank in 2012 pulled out of the financing deal, citing Kenyan economy’s insufficient demand to absorb the expected surplus electricity.
The World Bank withdrew its guarantee to the investors of the mega project since the power purchase agreement had committed consumers to paying billions of shillings for electricity not used — effectively beating the project’s purpose of slashing power costs in Kenya.
The Bretton Woods institution had instead advised Kenya to stagger the construction of the wind power plant in phases, in tandem with demand growth.
The World Bank estimated Kenya could be stuck with excess power worth up to Sh8.5 billion annually from the Lake Turkana plant, which is expected to inject power to the grid this year.