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How power line meant to bring down cost of electricity will push up bills

BUSINESS
By Macharia Kamau | October 22nd 2017
Part of the turbines at Lake Turkana Wind Power farm at Sarima, near Lake Turkana in Laisamis, Marsabit County on March 15, 2017. The firm had installed all the 365 turbines on Africa’s largest wind farm that costs Sh 75 billion. Photos By ALI ABDI/STANDARD.

Kenya has been forced to pay Sh5.7 billion in penalty over the delay to connect power generated from Turkana Wind Power project to the national grid.

Kenya Electricity Transmission Company (Ketraco) is yet to complete the power transmission line that was expected to cut power costs by enabling Kenyans access to cheap electricity generated using wind in Marsabit County.

The Ministry of Energy has told a parliamentary committee that it has set aside Sh5.7 billion in the supplementary budget to pay Lake Turkana Wind Power (LTWP) as a penalty for failure to deliver the transmission line last year as agreed with the firm.

The Government had guaranteed that the power line would be ready to evacuate electricity to the national grid by the time LTWP completed its plant in December 2016.

Failure to have the transmission infrastructure, the Government would have to pay a monthly penalty equivalent to the amount electricity that LTWP would have been selling to Kenya Power until the line comes on board.

The line, which is now scheduled for completion mid next year, is set to become a major burden for electricity consumers as some additional costs will be factored in power bills beginning next year.

Also, it has become clear that the cost of constructing the 428 kilometre line from Marsabit to Suswa could double owing to delays, with electricity consumers set to pick the tab for additional costs.

There are two major pain points that will result from the escalation of costs. This is the hiring of a new contractor for the power line to take over where the now bankrupt Spanish firm Isolux left as well as paying penalties to Lake Turkana Wind Power that built a wind power plant in Marsabit but cannot sell the electricity due to lack of transmission infrastructure.

Ketraco last week said it is finalising the process of hiring a new project contractor to replace Isolux that is to blame for the stalling of the transmission line.

However, Ketraco Chief Executive Officer Fernandes Barasa, who spoke on Wednesday, did not give details of the new contractor, including the cost implications or the name of the company that will replace Isolux. But the new arrangement is the latest development in what is expected to cost the taxpayer more than was initially planned.

Isolux was awarded a Sh21 billion ($208 million) contract in 2011 to build the 428 kilometre line, which is 60 per cent complete.

The Ministry of Energy told the Parliamentary ad hoc Committee on the Supplementary Budget for the 2017/18 financial year that Kenyans would pay Sh5.7 billion next year to LTWP as a penalty for failing to have the line ready in time as agreed.

“(The Ministry of Energy) highlighted that the additional allocation amounting to Sh5.7 billion in the development budget was sought of a penalty for failing to connect power to the national grid after the Lake Turkana Wind Power project was completed in January,” said the committee in a report tabled in Parliament this month.

“The amount will be recovered in six months after the company starts selling power to Kenya Power.”

According to the Ministry, the Sh5.7 billion is a negotiated penalty as the full amount would be above Sh8 billion.

Barasa said Ketraco is concluding the process of hiring a firm that will replace Isolux and conclude the project by end of April next year.

FINANCIAL PROBLEMS

“We are bringing on board another Spanish company since the financier is from Spain. We expect them to come on board as early as next week,” he said but declined to name the new contractor.

“Civil works such as building of tower foundations and tower erection are going on, many of these are done by local firms. What the contractor will do is fast track procurement of outstanding materials. We expect the line to be done by April 30, next year.”

Isolux was awarded the contract for the line in June 2011. It was expected to start construction early 2012 and have it ready by end of 2013. A mix of factors however got in the way, including Isolux’s financial problems that started being evident earlier this year when Energy Ministry officials started expressing displeasure in the speed at which it was executing the project as well as the lengthy land acquisition process.

Construction works started November 2015 and was expected to be completed in August 2016. This has, however, been pushed forward severally, initially to December 2016 and then March and later to June this year.

It is expected to be commissioned in May next year. Other than the financial challenges facing the Spanish contractor, the 428 kilometre double circuit 400kv line traverses several counties and cutting in to land owned by different individuals and where the National Land Commission spent considerable amount of time negotiating land acquisition.

Barasa defended Ketraco from having knowledge that Isolux may have been in financial difficulties at the time of awarding it the multi-billion shilling contract. He said Ketraco had done due diligence and that Isolux started experiencing problems after the award of the contract, which he said was due to rapid expansion in other countries.

MITIGATIONS

He said there are measures provided in the contract that Ketraco will go back to in a bid to get the taxpayer money paid to the firm that failed to deliver.

“At the time of the doing financial evaluation, there were no indications of bankruptcy. If you look at the cause of their receivership, it was because they invested in foreign markets and this came after they were contracted to work in Kenya. We had looked at their position and projections and it was sound,” he said.

“There are mitigations that were provided in the contract and as Ketraco, we are going to these mitigations in view of the termination.”

The wind power project was put up at a cost of Sh70 billion. The money was provided by a consortium of financiers led by the African Development Bank (AfDB) and it is a mix of both debt and equity.

 

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