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Benefits of the lift on the ban of power purchase agreements (PPAs) in Kenya

In March 2021 a task force was formed to review power purchase agreements (PPAs) in Kenya. In September, of the same year, the task force submitted its report.

According to the report some IPPs supplied power at an inflated rate. The rate was Sh23 per unit compared to just Sh0.5 charged by Kenya Electricity Generating Company (KenGen). The latter is the main supplier to Kenya Power.

As a result, the then president, Uhuru Kenyatta, ordered the cancellation of all ongoing and incomplete power purchase agreements. Kenya Power has therefore not signed any new PPA with any IPP in a period of over a year.

Recently however the current cabinet lifted the ban in a bid to increase power generation. This comes at a time when annual droughts are becoming more, reducing hydropower generation as a result.

This is what the lift on the ban on power purchase agreements (PPAs) in Kenya means.

  1. Fixed Electricity Rates

Noteworthy, today’s energy market is plagued by fluctuating costs. It is therefore difficult to budget energy expenses in the long run.

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However, with a PPA in place, Kenya Power can more accurately predict energy expenses over the short and long term. This is because a fixed rate is agreed upon upfront, thus no need to worry about surprise energy expenses or the financial risk of traditional energy sources.

  1. Escape from development and maintenance costs

PPA often is combined with a BOT or concession agreement. Therefore, the project company is in addition to obligations relating to the sale and purchase of the power generated, required to design, construct, operate, and maintain the power plant in accordance with agreed specifications.

In that case, the off-taker, in this case, Kenya Power, does not have to worry about the BOT-related costs.

  1. A greater variety of energy options

Limited energy options make it difficult to leverage and find the best value for energy. With PPAs in place there Kenya Power has options to shop around and find an energy partner willing to negotiate the best rates.

Kenya power will be working with a private company to source a PPA, so there is no need to deal with the limitations of the utility companies. Since it will have more options to choose from, it is in a position to find the partner that best aligns with its energy goals.

  1. Guaranteed deliverability

Underperformance and delays by the power producer may lead to sanctions or require the project company to pay liquidated damages. This applies if the construction of the project is not completed on schedule. It also applies in tariff abatements where the power plant does not meet agreed performance standards during the operational phase.

Private project proponents and their lenders will therefore try their level best to limit the impact of liquidated damages on their ability to recover their capital investments and earn a return.

Overall the lift on the ban on power purchase agreements (PPAs) is expected to ensure a steady and reliable supply of affordable electricity to Kenyans.

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