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

Energy and Petroleum Cabinet Secretary Davis Chirchir (right) with PS Alex Kamau during a past meeting. [Antony Gitonga, Standard]

A slowdown on signing new power purchase agreements (PPAs) with private power producers could leave the country severely short of its energy needs as controversy rages over the 'expensive' contracts Kenya Power has with the firms.

The Ministry of Energy has noted that at the moment, there is minimal activity in building of new power plants, which it said was due to freeze on new PPAs.

Without such contracts that guarantee Kenya Power will buy their electricity, independent power producers (IPPs) cannot proceed with building power plants.

With no new electricity-generating plants being developed and with nearly all those that were in the project pipeline having been completed, the country could be courting a crisis unless it acts fast.

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.

Kenya Power offices along Harambee Avenue, Nairobi. [Jonah Onyango, Standard]

"Of concern is that because there were no PPAs signed over the last four to five years, if we do not work as a team and map out the next five years and going into the future... it will mean that we will not be very far from what is happening in South Africa and Zambia in the next few years," said Chirchir, referring to the power rationing that the South African countries have had to institute due to mismatch in electricity demand and supply.

"There are no power plants being built today. Apart from the 35MW which we are waiting for whose PPA was signed in 2014, we have not signed any PPAs since 2017."

"It means that when we are ready to sign the next PPAs, the power plant development might take between three to five years and deliver energy to the grid post-2027, maybe even 2029."

The concerns expressed by the Chirchir are against a growing demand for electricity.

According to the Energy and Petroleum Regulatory Authority (Epra), demand has consistently grown, with peak demand reaching 2,149 MW in December.

Peak demand - a measure of the highest load demand in the interconnected network for a specified period - was consistently on the rise last year, only slightly dipping in the months tending to the general elections last year.

The peak demand put against the available electricity generating capacity has in the recent past been a concern for the industry.

Kenya's installed power-generating capacity stands at 3,074MW as of June 2022.

The installed electricity generating capacity - which is all the electricity that power plants in the country can produce, if they were to be switched on at the same time - when put against the peak demand of 2,149MW appears to imply there is a 30 per cent reserve margin.

This, however, might not be the case. Output from power plants is unlikely to achieve the installed capacity due a mix of factors including the fact that power plants rarely get to produce their maximum installed capacity due to factors such as efficiency or age of a plant.

Another factor is that many of the power plants commissioned in the recent past are powered by solar and wind which are highly intermittent.

A senior official from one of the power utilities explained that due to these factors, the country has an available capacity of about 2,400MW, a huge difference compared to the installed capacity.

The amount of available capacity could be alarming when looked at from a demand point of view and imply that demand is nearly outstripping the available capacity.

Even as the ministry noted that the country faced a crisis and needed to restart building power plants, it could face a different environment when talking to power producers and their financiers.

Law firm Bowmans Kenya in an analysis noted that moratorium on new PPAs will result in a slowdown in the investments that are flowing into the power sector.

Slowed development

The government, the law firm noted, will need to move fast and increase the number of projects in the pipeline.

Kenya Power technicians repairing a power line in Migori town. [Caleb Kingwara, Standard]

"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."