State renews push to review key power deals to cut costs
By Kamau Macharia | March 14th 2021
The government is in yet another attempt to review the contracts that power producers have signed with Kenya Power as it tries to tame the high cost of electricity.
The Energy ministry yesterday set up a team that will review all the existing Power Purchase Agreements (PPAs) that the power utility firm KPLC signed with independent power producers.
One of the key tasks for the committee is to talk to power producers and renegotiate the PPAs.
The PPAs contain details on how much the generators are paid by Kenya Power for the electricity sold to the firm.
The ministry had in 2016 attempted to review the PPAs that thermal generators have with Kenya Power but the task force charged with the job advised the government to let the PPAs lapse.
Energy Cabinet Secretary Charles Keter yesterday constituted the Standing Committee on Review and Renegotiation of PPAs.
Mr Keter urged the task force to renegotiate the PPAs with the power producers and review documents that may have put the government at a disadvantage when engaging private sector players in the power sector.
These include letters of support that the government has issued to players in the power sector.
He also said the committee chaired by Owiti Awuor would “develop a suitable strategy to engage the power generators in renegotiations for sustainable solutions for the energy sector and economy - as well as review committed generation projects with a view of transitioning to Energy Auction”.
In energy auctions, power producers bid to supply power and the power distributor would ideally take the player with the lowest bid.
The committee will also “recommend a standardised take and pay structure for future PPAs”. In a ‘take and pay’ scenario, Kenya Power would be required to pay for the power it gets from the power producer.
This is in contrast to certain instances where the company has ‘take or pay’ PPAs with the electricity producers, where it pays them even where it does not take any power from them.
Most PPAs demand KPLC to make payments as long as the power producer’s plant is on standby.
The PPAs set to be renegotiated include those operational as well as committed – the latter being the agreements that power producers have signed with KPLC but are yet to start feeding the grid as their power plants are not yet ready.
According to the Energy and Petroleum Regulatory Authority, as of last year, there were over 40 firms that had signed PPAs with Kenya Power, with the power plans scheduled to be ready over the next five years.
The plans have a total generating capacity of 2,115MW, although most of them are either solar or wind plants.
The move to review PPAs follows a near similar process that the ministry undertook in 2016.
This followed a directive by President Uhuru Kenyatta to relook the power agreements that thermal power producers have with the State with a view of reviewing them and bringing down the cost of energy.
This was aimed at cutting the cost of power for both domestic and commercial consumers, with industry noting that power remained one of the biggest cost centres for them and makes their products uncompetitive when pitted against imports.
President Kenyatta had then directed the termination of lopsided contracts with Independent Power Producers (IPPs) to reduce the cost of power.
He said it was unfair for Kenyans to continue struggling with the high cost of power because of skewed deals with IPPs operating thermal generators.
The IPPs’ contracts, the president said, ought to be pegged on performance to ensure Kenyans have access to reliable power at affordable rates.
“If there is any unfair deal between the country and the IPPs, I urge that the contracts be legally terminated in the shortest time possible so that we can save the country from exploitation,” said the Head of State.
The task force then noted that it could be too costly to review or terminate the contracts.
Thermal producers use heavy fuel oil in power production and end up being the most expensive producers.
It was however an exercise in futility with the committee that was given the task of returning a verdict that it would be too costly to change the terms that the companies have with Kenya Power.
It instead advised the government to let the contracts lapse on their own.
Some of the contracts are expected to lapse in 2035.
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