State pushes for joint procurement of fuel by power firms

The Ministry of Energy and Petroleum is now pushing for the joint procurement and importation of Heavy Fuel Oil (HFO) by power producers in the country ostensibly to bring down the cost of electricity.

According to documents tabled before a parliamentary committee yesterday, the Ministry is currently at an advanced stage of engaging various stakeholders in the sector including thermal generators (KenGen and IPPS), fuel suppliers, Energy and Petroleum Regulatory Authority (Epra) and Kenya Power with a proposal to import the HFO through an Open Tender System, which will allow for the consolidation of HFO requirements and sourcing by one importer.

HFO is the residual product that remains after refining crude oil. HFO is used in heaters, boilers, furnaces, kilns and power generators. It is also used to generate motion and/or heat that have a particularly high viscosity and density.

“This will help the country attain lower prices through lower freight and premiums on account of economies of scale and that the generators will access the product at uniform price. This is now in the implementation stage,” reads a presentation by Kenya Power Managing Director, Joseph Siror to the National Assembly Committee on Implementation.

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Siror, who was appearing before the MPs, explained that during the power purchase agreement meetings with power producers, stakeholders agreed on adoption of an Open Tender System (OTS) for HFO procurement by power producers using thermal generation and that denomination of HFO Supply Agreements be in Kenya Shillings.

The MD had appeared before the committee to appraise the MPs on strategies that KPLC had put in place in order to provide relief for electricity consumers in the country, and ensure the long-term viability and sustainability of the energy sector.  

Siror said that the OTS procurement process will be run through monthly tenders and entails sourcing of HFO predominantly from the spot market without any prior contracts.

The MD further told the committee that that the Ministry of Energy had created two working groups to fast track the shift to OTS and that the two groups had already finalised on the unified HFO specifications and made recommendations on the transition to OTS. The recommendations were then forwarded to the PS State Department for Petroleum Mohammed Liban, for guidance.

“The PS State department for Petroleum, through a letter dated May 14, 2024 recommended the use of OTS and also development of the OTS tender terms and conditions, amendment of the Petroleum Pricing Regulations and stakeholder participation prior to tender call,” added Siror.

“The PS further recommended constitution of a HFO OTS committee chaired by the State Department of Petroleum and composed of current HFO suppliers, HFO receiving terminals, Epra, supply represented by industry coordinator, State Department of Energy, Kenya Power and the thermal power producers," he added.

And in a bid to further reduce the cost of power, the MD submitted that KPLC has initiated strategies such as renegotiation of Power Purchase Agreements (PPAs) with Independent Power Producers (IPPs).

The committee heard that the renegotiation focused on removal of Deemed Generated Energy (DGE)- transition to ‘Take and Pay’ in place of ‘Take or Pay’, currency of invoice settlement- denomination of currency in Kenya Shilling, review of escalation factors- consumer price index (CPI), credit period for payment of billed energy, default rate and PPA term.

“HFO- Negotiations with thermal power plants regarding conversion from the use of Heavy Fuel Oil to Liquefied Natural Gas (LNG) are also ongoing,” Siror further told the MPs.

The report also noted that Kenya Power had finalized the development of the Least Cost Power Development Plan (LCPDP) which is a power generation, and Transmission Master plan aimed at apprising stakeholders and investors of the government's intents and plans on power development.

At the same time, data relayed by the report has exposed the billions of shillings expended by KPLC in the last financial year, in the purchase of energy.

The report details that in the 2023/2024 financial year, Kenya Power used Sh11.38 billion for the purchase of power from grid connected sources (excluding imports), Sh10.42 billion from renewable energy sources, Sh7.72 billion from KenGen/ the Rural Electrification and Renewable Energy Corporation (Rerec) and a further Sh3.66 billion from IPPS.

This was compared to the 2022/2023 financial year where it spent Sh12.57 from grid connected sources, Sh11.24 billion from renewable energy sources, Sh8.05 billion from KenGen/Rerec and Sh4.51 billion worth of energy from IPPS.