Firms could lose lucrative power deals for breach of contracts

Kenya Power and Lighting Company's technical teams at KPLC Huruma Sub-station, Nairobi. [Jonah Onyango, Standard]

Nearly all electricity producers have at some point breached the terms of their contracts with Kenya Power.

This is according to a task force on the review of power purchase agreements (PPAs) chaired by John Ngumi, who also chairs the Industrial and Commercial Development Corporation (ICDC) board.

The finding means Kenya Power could force the independent power producers to renegotiate the contracts or terminate them altogether, giving the State a way out of the expensive PPAs that have been blamed for the high cost of electricity in the country.  

This could see Kenya Power save more than Sh13.42 billion annually, which is expected to benefit consumers in the form of a 33 per cent reduction in the retail cost of electricity by the end of this year.

“The proposed near-term actions could reduce the ongoing power procurement costs by Sh7.59 billion ($69 million) to Sh8.47 billion ($77 million) annually… the switching of HFO (heavy fuel oil) thermal stations to natural gas… could add another Sh4.95 billion ($45 million) of annual savings,” said the task force in its report presented to President Uhuru Kenyatta two weeks ago but made public yesterday.

The contract breaches vary, with the task force finding out that some thermal power producers have inflated the cost of the heavy fuel oil they use to generate electricity, which is reflected in consumers’ monthly bills.

Wind power firms, the team further found out, have failed to feed the electricity grid with the amount agreed in the PPAs.

Following the findings, the task force recommends that Kenya Power should “pursue the HFO thermal plants for breaches of the PPA, resulting in a 40 per cent decline in capacity charge.”

Renegotiating contracts with the thermal plants could result in a reduction of costs by Kenya Power to the tune of Sh3.85 billion ($35 million).

According to the task force, further close monitoring of how the thermal power plants procure their fuel oil could result in savings of another Sh1.32 billion ($12 million)

The Lake Turkana Wind Power (LTWP) and the Kipeto Wind will also be required to negotiate their PPAs. This is based on the performance of Lake Turkana Wind Plant, which is contracted to feed 300 megawatts (MW) to the grid but has been doing around 150MW, indicating underperformance.

The two wind plants will be required to take a similar tariff as State-owned power producer KenGen for its Ngong wind power plant.

This is expected to save Kenya Power Sh1.32 billion ($12 million) annually in the case of LTWP and Sh660 million ($6 million) annually in the case of Kipeto.

The task force also recommends the renegotiation of Kenya Power’s PPA with Orpower, which produces electricity at Olkaria using geothermal.

This, the task force says, is due to the maturity of the project. This is expected to save Kenya Power Sh1.32 billion ($12 million).

The task force also proposes the conversion of some of the HFO plants to natural gas plants, which is considerably cheaper. This could see fuel costs decline by 40 per cent.

The task force found that thermal companies have been inflating the cost of acquiring HFO and recommended that Kenya Power terminate or renegotiate their contracts based on this breach. It also found the thermal IPPs exaggerated the cost of constructing their power plants.

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