Government wants energy deals pegged on shilling

[Photo: Courtesy]

Kenya wants electricity producers to sign power purchase agreements (PPAs) in local currency in an attempt to shield electricity consumers from sudden spikes in prices whenever the shilling depreciates against major global currencies.

The Ministry of Energy also wants industry players to source some of their project financing locally in the long-term plan that is expected to bring down the cost of power by reducing the foreign exchange component in the bill.

The local currency was exchanging at Sh85 against the dollar five years ago, but has weakened to Sh101 currently, meaning that Kenyans could be paying 15 per cent more on dollarised loans.

Loans advanced to power sector firms for infrastructure projects such as power generation plants and transmission lines are mostly in US dollars.

A study commissioned by the ministry proposes that all power producers putting up new plants with a capacity of 10 megawatts sign PPAs with Kenya Power denominated in local currency.

Plants with production capacity of between 10MW and 40MW would use a hybrid system, factoring in local and foreign currency.

“For projects of 10MW and below, PPAs should be denominated fully in local currency. Given their size, these projects can comfortably be financed in local currency by local banks and institutional investors. For projects above 10MW, a hybrid tariff with partial indexing to hard currency is the most viable option,” said the report looking into the viability of financing power projects locally.

The study was done by Dalberg Advisors and funded by GuarantCo, which mobilises local currency investments in infrastructure projects.

“A consideration can be given to large power projects, which cannot be completely financed by local currency and therefore take hard currency financing,” said the consultants.