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The companies making a killing as Kenya Power limps

BUSINESS
By Macharia Kamau | April 4th 2021

Kenya Power and Lighting Company's technical teams. [Jonah Onyango, Standard]

Companies supplying electricity to Kenya Power made a killing last year even as the electricity distributor recorded huge losses.

In a year when many firms across different industries were reeling from the effects of the coronavirus pandemic, earnings by electricity generators largely remained the same, with some posting substantial growth.

Kenya Power paid Sh82 billion in non-fuel costs – which are the basic power purchase costs – to the different electricity producers in the period to June 2020, an increase from Sh76 billion paid in 2019.

Its breakdown of how much it paid each firm shows that the producers’ earnings were largely unaffected.

This was during a period when Kenya Power had to contend with lower consumption and even then, more of its customers were unable to pay their bills following the reduced demand for products among entrepreneurs, salary deductions and layoffs.

Among the highest-paid power producers include KenGen, which was paid Sh41 billion in non-fuel costs, according to Kenya Power’s annual report for the period to June 2020.

Second on the list is US-headquartered Ormat, which operates geothermal power plants in Olkaria through its Kenyan subsidiary Orpower, earning Sh12.4 billion while Lake Turkana Wind Power earned Sh12.2 billion.

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Also on the list of high earners are thermal power plants, which continue to earn billions despite their diminished importance following cleaner and cheaper generating capacity that came about following the commissioning of the 164MW Olkaria 5 geothermal power plant.

Kenya Power reported a net loss of Sh939 million in the year to June 2020, from a profit of Sh262 million the previous year.

It made a gross loss of Sh7 billion, with the net loss narrowing due to a Sh6 billion tax credit following the relief measures that the government put in place last year including lowering corporate tax to 25 per cent from 30 per cent.

The billions of shillings that the electricity-producing firms earn, both thermal and clean energy, are guaranteed in the power purchase agreements (PPAs) that they have with Kenya Power.

This is such that even when the power retailer invoked force majeure (unforeseeable circumstances that prevent someone from fulfilling a contract) clauses on contracts it has with power producers, hoping to share some of the burdens dealt to it by the pandemic, it is proving to be a winding process.

Guaranteed payments

Factored in the PPAs are capacity payments, which guarantee the payments to the electricity generators even when they have not supplied power to the grid.

The capacity charges are in most instances higher than the money paid for energy supplied.

These have recently caught the eye of Auditor General Nancy Gathungu, who noted that in the financial year to June, capacity payments accounted for more than half of the money that Kenya Power paid to the producers.

“The financial statements reflect cost of sales of Sh87.49 billion. Included in these is power purchase costs of Sh47.49 billion, which relates to capacity charges as per the PPAs,” said the Auditor General’s report accompanying the company’s annual report.

“These charges, which account for 54 per cent of the total cost of sales, are significant and considering their fixed nature, may have adversely affected the company’s performance resulting in losses.”

Ms Gathungu further noted that in responding to her query on what appears to be a lopsided way of acquiring electricity, Kenya Power’s management said plans are underway to re-negotiate downwards the capacity charges on the existing PPAs.

The company also said it is working on aligning the commencement dates for power projects that are in the pipeline so that they are aligned to the its medium-term power demand such that there is no excess power generation.

“However, until these strategies are implemented, the company will continue bearing high fixed capacity charges,” said the Auditor General.

Kenya Power withdrew the force majeure notices in September last year when demand for electricity rose to pre-pandemic levels.

It has, however, been tussling with the power producers on the validity of invoking the clauses.

This is in contrast with what has been taking place across different industries. If anything, Kenya Power has obtained concession from its other partners including banks in restructuring some loans, even moratoriums on others.

But nothing appears to be forthcoming from the power producers and in its annual report, the firm says “the negotiations on force majeure were still ongoing at the close of the year”.

This could be an indicator of the push and pull behind the scenes with the producers, who might not be settling for anything less than what is due to them without considering the impact of the pandemic on the distributor that was already limping before Covid-19.

Kenya Power reports that due to decline in consumption of power, it experienced a revenue loss of Sh5.6 billion between April and June 2020.

A review of annual reports of Ormat and KenGen, which are publicly-listed and have to make public their dealings with the power retailer, shows that more than half of the earnings from Kenya Power were in form of capacity charges.

In its results for the year to December 2020, Ormat said its revenues from Kenya were generated under long-term contracts which, it noted, have a fixed energy rate.

Thus despite the force majeure notices that were issued by Kenya Power following the decline in electricity consumption, the company had its revenues almost intact.

“We experienced a higher rate of curtailments during the first half of 2020 by KPLC in the Olkaria complex that was reduced in the second half of 2020,” said the firm in the report.

Ormat – through Orpower – sells electricity to Kenya Power under a 20-year PPA ending between 2033 and 2036.

“The impact of the curtailments is limited because of the structure of the PPA which secures the vast majority of our revenues with fixed capacity payments and is unrelated to the electricity actually generated (in 2019 and 2020, capacity payments represented 70.1 per cent and 74.4 per cent of our revenues, respectively),” the report said.

Revenues from sale of electricity in Kenya contributed 16.4 per cent to Ormat’s total revenues, making the Olkaria plants key for a company that has operations in markets far more advanced than Kenya including the US and Turkey.

“A substantial portion of international revenues came from Kenya and Turkey... our operations in Kenya contributed disproportionately to gross profit and net income,” said the firm.

Ormat said it is hopeful that Kenya Power will make good the payments, noting that in addition to the PPA that sets out the obligations it also has a support letter from the Kenyan government.

In the case of KenGen, capacity charges accounted for about 54 per cent of the revenues that the firm got from sale of electricity to Kenya Power.

Of the Sh41 billion paid, Sh25.6 billion was in form of capacity charges while energy charges stood at Sh8.8 billion.

Pricing model

Kenya Power has expressed concerns about the power pricing model that compels it to pay producers the capacity charges as opposed to energy charges.

However, the firm is only protesting about the ‘take-or-pay’ model now, while it has been the structure of paying the generators for a while.

In the model, the producer is paid whether Kenya Power takes the electricity or not as long they had their power plant ready to dispatch power to the grid.

“The take-or-pay pricing model for PPAs with IPPs (independent power producers) resulted in fixed capacity charges that are unfavourable in the absence of demand growth and during declining demand like this period of the Covid-19 pandemic,” said the firm.

“The company is also engaging the government to consider reviewing the take-or-pay pricing model for PPAs with independent power producers, which results in fixed capacity charges.”

Perhaps as a result of company’s push, the government recently set up a taskforce to review the PPAs, with one of the objectives being to achieve relief for electricity consumers and ensure the long-term viability and sustainability of the energy sector.

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