Set up of Presidential Taskforce to Review PPAs

published on 20th May 2021

The President of Kenya on the 29th of March, 2021 set up a 19 member taskforce to review power purchase agreements entered into by Kenya Power and Lighting Company Limited (KPLC) (Taskforce).

The terms of reference of the Taskforce are to:

undertake a comprehensive review and analysis of the terms of all Power Purchase Agreements (PPAs) entered into by KPLC;
probe the compliance of the PPAs and all associated agreements with Government policies, legislation and regulations and identify what appropriate actions should be taken, including the termination or renegotiation of the PPAs;
review the sustainability and viability of all independent power generation projects that have been proposed, are under implementation, or in operation, and make appropriate recommendations;
review the allocation of risk between the independent power producers (IPPs) and KPLC under the PPAs, and make appropriate recommendations;
review the Take-or-Pay approach applied under the PPA structure and recommend a viable Pay-when-Taken (merchant plant) approach, or any other viable payment structure, for use in independent power generation projects;
develop a suitable strategy for engagement with the IPPs and lenders, in order to achieve relief for electricity consumers and ensure the long-term viability and sustainability of the energy sector;
review the current methods for sourcing of IPPs and recommend appropriate alternative sourcing frameworks, including energy auctions;
recommend legislative, regulatory, policy or administrative interventions for the implementation of the recommendations and strategies of the Taskforce;
develop a detailed action plan for implementing the recommendations made by the Taskforce; and
perform any other function or tasks as the Taskforce may find necessary in order to deliver on its mandate.

The Taskforce is to serve for a period of 6 months commencing on the 29th of March, 2021, after which it is expected to deliver its report however its term may be extended.

During the tenure of the Taskforce moratoriums will be put in place on PPAs as follows:

a moratorium was placed on all PPAs not concluded as at the 29^th of March, 2021, including any related letters of support and legal opinions pending issuance by the Attorney-General; and
a moratorium was placed on the renewal of any PPA whose renewal would occur during the pendency of the Taskforce, with the exception of those that shall receive approval by the Board of Directors of KPLC for the purposes of renegotiation but, at all times, subject to ratification by the Cabinet Subcommittee on KPLC.

The setting up of this Taskforce seems to have been prompted by many factors including most notably a sense that current PPAs costs are high and that they are placing a large financial burden on KPLC and consumers.

Notably KPLC posted its first loss in 17 years in the financial year ended June 2020. Some of the reasons proffered for this performance by the auditor general (the government auditor) in her notes to the financial statements of the company include the following:

Covid-19 pandemic resulting in shutting/scaling down of key electricity consumers and the difficulty in recovering debts owed to the company.
High system losses at 23.46% attributed to rapid growth of the distribution network without commensurate increase in demand.
Aggressive connectivity and grid reinforcement measures connected with the government’s push to create universal access by 2022. This used up internal funds and medium term commercial debts to fund these long term projects without matching revenue inflows.
Delays in restructuring tariffs to reflect electricity purchases, transmission and distribution costs. KPLC has been for a time pushing for a 20% increase in tariffs from the regulator the Energy and Petroleum Regulatory Authority.
Lastly and most significantly for the purposes of this discussion the auditor general identified the take or pay pricing model in PPAs resulting in fixed charges that are unfavourable due to lack of demand growth and given the declining demand due to the effects the pandemic has on industry.

On this last point, PPA capacity charges accounted for 54% of the total cost of sales for the financial year. Given their fixed nature they have been identified as contributing substantially to the decline in performance of the company.

The auditor reported at the time that the management of KPLC had indicated that it had plans underway to renegotiate its PPA downwards and also to align the commercial operation dates of pending PPAs in line with the medium term power demand to ensure that there is no excess power generation.

These developments are definitely worrisome for IPPs with existing PPAs. While we will have to await the findings and recommendations by the taskforce to know what actions they propose to take we can anticipate some of the challenges they may face.

PPAs are founded on contract and as such any changes to the same would have to be agreed upon by both parties. Therefore KPLC would have to engage in negotiations with the IPPs in order to have a binding variation of terms. Each IPP depending on their circumstances may have little to no room for negotiation as there are other binding commitments the IPPs will have that are backed by the PPAs especially relating to the financing of their respective projects.

Unilateral actions by KPLC such as repudiation will activate costly default clauses which include the payment of liquidated damages. Further it may lead to litigation that will be too costly from a reputational standpoint as it will paint Kenya as a country that resorts to using political machinery to dishonour its obligations. It is worth pointing out that KPLC is majority owned by the Kenyan government.
PPAs in the pipeline will certainly be affected and it is certain that there will be strong push to get the lowest possible tariffs negotiated. Kenya has long been planning to introduce an auction system and this may be the mechanism proposed to be used to achieve the desired result.

While the focus has been drawn to PPAs there are other opportunities for KPLC to reduce the electricity costs to consumers. A good starting point is the factors identified in the financial statements by the management of KPLC and reported by the auditor general.

Already KPLC, as announced by its chair Vivienne Yeda during its AGM, has chosen not to continue its push for higher tariffs to consumers at least in the short term. It has instead chosen to focus on strengthening its cash position by managing costs by sealing loopholes that lead to financial losses, improving revenue collection and collecting debts and improving service delivery.

Pandemic related challenges may be beyond immediate resolution however demand generation remains a key issue that would need to be addressed in order to see a turnaround in the company’s financial position.

In any event, the work of the Taskforce will likely have a significant impact on the PPA regime going forward. We will await the findings and report of the Taskforce (if it will be made public) and update on their proposed strategies to deal with the challenges they identify in our future articles.