How Kenya may have short circuited its power sector with PPA moratorium

This is even as demand for electricity has been growing and there was a real threat of demand outstripping available capacity.

Other than the Cabinet's freeze on any new PPAs in 2021, Kenya Power has since 2019 adopted a cautious approach in signing new agreements.

The Cabinet in March 2021 issued a moratorium on signing of new PPAs or renewal of expired contracts.

This was at the time the Presidential Taskforce on Review of PPAs was being formed that would later that year make radical proposals including renegotiation of PPAs.

Cabinet in late February this year lifted the ban on signing new PPAs.

During the moratorium period, the only major PPA Kenya signed with the state-owned Ethiopia Electric Power for delivery of 400 megawatts (MW).

Kenya Power in late 2018 suspended signing of new PPAs. At the time, the power retailer had said it was taking a step back to undertake a comprehensive review of the power demand and supply that would then guide the implementation of generation in subsequent years.

Energy and Petroleum Cabinet Secretary Davis Chirchir now warns that the country could in the coming years face difficulties in matching electricity demand and supply if it does not move fast to restart building power plants.

This is even as analysts noted that Kenya might face stringent requirements from developers and financiers of power plants that may have been rattled by the recommendations of the taskforce on review of PPAs.

The CS said nearly all power plants with signed PPAs have already been delivered.

The remaining major projects are the three geothermal power plants at Menengai that GDC is developing through a public-private partnership model with IPPs.

Electricity demand

Each plant is expected to produce 35 megawatts or a total of 105MW, which the CS said does not tally with the growth in electricity demand.

"The moratorium slowed down the development of power projects. Kenya's demand for power has been on the rise as the economy recovers from the effects of the Covid-19 pandemic while many developers scaled down operations during the moratorium or were forced to abandon their projects," said the law firm in an analysis of what the lifting of the moratorium meant for the local power sector.

"Developing power projects is a difficult and lengthy task and the balance between demand growth and the time it takes to develop and on-board new projects has been upset."

"The Government will have to accelerate the development of new generation capacity to ensure that economic growth does not suffer due to the undersupply of electricity.

"However, it remains to be seen whether developers will be willing to engage with the Government and do what they can to fast-track projects."

Even as the country needs investors more now to build power plants, it could also be facing a tough time in getting investors to put up plants in the country.

Bowmans noted that the events of the last few years may see investors - particularly financiers - placing tough requirements before putting money in Kenyan projects.

Other than the finger pointing at IPPs as being responsible for high cost of power by senior government officials, the taskforce on review of IPPs may have also muddied the waters in its recommendation open up the agreements that the power producers have with Kenya Power for renegotiation.

"The taskforce process has done some damage to Kenya's image as an investor-friendly jurisdiction" said Bowmans, adding that the problem is made worse by slow process of putting in place regulations that would ensure effective implementation of the Energy Act 2019.

"Private capital has a long memory and the steps taken by the Government during this process will remain at the back of the minds of investors and potential investors for many years to come."

This may result in more stringent bankability requirements being imposed on future projects, the lawyers said.

"Uncertainty caused by the taskforce stalled the development of policies, laws and regulations meant to give effect to the Energy Act, 2019. For example, the market is still waiting for the implementation and enactment of regulations of the REAP (Renewable Energy Auction Policy) and the 2021 FIT (Feed in Tariff) Policy."