How Kenya is locked in costly power contracts

In the absence of revision clauses for idle capacity costs in the power purchase agreements signed with Kenya Power, electricity consumers are at the mercy of independent power producers.
The National Assembly Committee on Energy heard from Auditor-General Nancy Gathungu last week that there might not be a legal basis for starting to revise the fees that are to blame for the country’s high electricity prices.
No matter whether an IPP generates power or not, it must pay the capacity price. It raises the price of electricity tremendously and is passed on to consumers.
“The PPAs did not have a capacity charge revision clause and therefore there may be no legal framework that can be used to initiate these revisions. The revision would purely depend on the goodwill from IPPs to renegotiate the agreements,” Ms Gathungu said.
Contracted capacity
Despite IPPs charging high capacity charges, the Auditor-General said, they are operating below their contracted capacity.
This means that consumers are paying more for capacity charges than the actual power they sell to Kenya Power.
The auditor noted that independent power producers’ capacity charge costs for the two years (2020–2021 and 2021–2022) were higher than the price of the energy purchased, indicating that the IPPs were operating below their contracted capacity and being compensated for unused capacity.
Taxpayers paid KSh47.5 billion to IPPs as a capacity charge in the 2019–2020 fiscal year and KSh49.2 billion in the 2020–2021, according to the audit report.
“Any idle capacity on the IPP is borne by the consumer due to capacity charge contractual obligation and will extend through the contract, which is normally 20 to 25 years,” Ms. Gathungu said at the parliamentary committee hearing on the high price of energy.
The State-owned generator was compensated less than the IPPs despite producing less power than the Kenya Electricity Generating Company.
KenGen was only paid KSh41.9 billion despite producing 8,172GWh over the course of two years, or 67% of total production.
IPPs who produced 4,215 GWh, or 33%, were compensated with KSh56.3 billion.
The MPs were informed that certain IPPs kept 100% of the capacity fees even though they sold less than 10% of their electricity to Kenya Power.
“This capacity charge needs to be looked at again. Kenyans pay IPPs to keep their generators there rather than for any actual services? This is biased,” said Vincent Musyoka, the committee’s chair.
“The majority of these generators, even when turned off, are obviously only there to be paid for. What kind of enterprise does the owner run without taking any risks?”
However, the IPPs attempted to deflect any culpability by asserting that they always had the power available and that Kenya Power is the only party who can dispatch it.
The IPPs also informed the committee that they utilize the capacity charge to pay back the loans they took out to build the power facilities.
Standard requirement
They said that the capacity charge was a necessity in all PPAs worldwide and that it was included in PPAs to ensure investors got their money back.
Additionally, they justified the consumer-funded idle capacity, claiming that it was one of the specifications set forward by the government during the bidding process.
The PPAs have been the subject of calls for renegotiation from MPs, who see them as unfair and a burden on consumers who must pay numerous unneeded fees.
With plans in place to switch to cheap power, Kenya Power’s managing director Joseph Siror informed the MPs that the utility company will no longer sign any new PPAs with the IPPs.
“We no longer support this kind of arrangement. We are currently telling the IPPs to come and establish power plants in the nation, and then we will choose the offer that is the least expensive on the market, according to Dr. Siror.
Contract renegotiations
The IPPs have informed MPs that although they are not completely opposed to renegotiating their contracts as part of the attempts to alleviate the high cost of power, their requests should also be taken into account in the arrangement.
They listed the cost of fuel as one of the key concerns that Parliament and the government should take into consideration during the re-negotiation along with loans they took out from commercial banks and are currently repaying.
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