The Presidential Taskforce on Review of Power Purchase Agreements ("PPA Taskforce"), constituted in to address concerns about the high cost of electricity, has recently presented its report to the President of Kenya with its recommendations. Although the full report has not been published, we understand from the State House Press Release the main recommendations of the PPA Taskforce to be:
- review and renegotiation of existing power purchase agreements ("PPAs");
- immediate cancellation of all ongoing but un-concluded PPA negotiations;
- reforms at the Kenya Power and Lighting Company ("KPLC");
- KPLC to take the lead in formulation and related PPA procurement of Kenya's Least Cost Power Development Plan;
- institution of contract management and due diligence frameworks on Independent Power Producers ("IPPs") and PPAs;
- adoption of standardised PPAs and government letters of support;
- forensic audit on the procurement and systemic losses arising from the use of heavy fuel oil (thermal plants); and
- Inclusion within KPLC's annual reports of the names and beneficial ownership of all IPPs with whom KPLC has contractual arrangements.
We understand from the State House Press Release that the main aim of these recommendations is to reduce the cost of electricity in Kenya by over 33% within four months.
These recommendations have been received with mixed reactions by various energy sector stakeholders. However, in the wake of the recent challenges faced by the electricity sub-sector (including the declaration of force majeure on some PPA's by KPLC during the COVID-19 pandemic), many existing IPPs have expressed their willingness to sit at the renegotiation table with a view to negotiating a viable and sustainable PPA business model.
It remains to be seen whether the PPA renegotiations can be undertaken within the four-month period recommended by the PPA Taskforce, keeping in mind all the competing interests of the general public, government, political actors, investors, sponsors, developers, lenders, shareholders, guarantors and other interested actors. It appears that such renegotiations may result in reduced tariffs in return for an extended PPA term.
Notably during the tenure of the PPA Taskforce, a moratorium was placed on "all PPAs not concluded as at [29 March 2021] including any related letters of support and legal opinions pending issuance by the Attorney General and the renewal of all PPA's not concluded as at [29 March 2021]". It is not surprising that one of the recommendations of the PPA Taskforce is the immediate cancellation of all un-concluded PPA negotiations. However, it is not clear whether such cancellation would extend to those PPAs that are signed but not yet effective due to unfulfilled conditions precedent, such as letters of support and legal opinions pending issuance by the Attorney General. This will no doubt affect the various sponsors and project developers who have invested considerable time and resources undertaking the PPA preliminaries including acquiring land rights, obtaining licences and seeking social buy-in from local communities, in the hope of setting up power plants in Kenya.
Proposed KPLC reforms and the recommended PPA contract management framework may be a welcome change for the general public and may enhance the value for money attained from these PPAs in line with the Least Cost Power Development Plan. Together with the recommendation that KPLC should take the lead in the formulation of the Least Cost Power Development Plan and related PPA procurement, there is hope that an optimum balance between demand and supply of electricity in Kenya may be achieved in a viable and sustainable manner.
It is anticipated that the implications of these recommendations will be fully grasped when the entire report of the PPA Taskforce is published. We note that the PPA Taskforce was also mandated to develop a detailed action plan for the implementation of its recommendations and we look forward to reviewing this. In response to the PPA Taskforce recommendations, the government issued the following directions on 7 October 2021:
- declaration of KPLC as a special government project;
- setting up of an inter-ministerial team to audit KPLC and oversee KPLC reforms;
- immediate implementation of the PPA Taskforce's recommendations;
- immediate suspension of all ongoing and pending PPA negotiations;
- prioritised review of existing PPAs to lower costs of electricity;
- investigation of system losses, procurement practices, insider trading and conflicts of interest in KPLC by an multi-agency investigative team including the Directorate of Criminal Investigation, Financial Reporting Centre and the Assets Recovery Authority; and
- engagement of all energy sector state agencies to align Kenya's demand, supply and costing of electricity.
A systemic change of the energy sector will require enormous political goodwill. It will also require the cooperation and involvement of the various stakeholders, including sponsors, guarantors, lenders and financiers of energy projects. This is needed in order to arrive at a feasible, economically viable, sustainable and bankable PPA structure with adequate government support measures and realistic risk allocation between the public and private actors in this space.
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