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Kenya's cabinet approved on Feb. 28 the removal of the September
2021 moratorium on new power purchase agreements (PPAs).
The moratorium was put in place by previous Kenyan president
Uhuru Kenyatta's 'PPA Taskforce' in September 2021, suspending
activity for investors seeking agreements with the government to
sell power to the grid. The PPA Taskforce aimed to reduce the cost
that the heavily indebted state-owned utility Kenya Power was
paying independent power producers (IPPs) for electricity.
According to S&P Global Market Intelligence sources, the
taskforce successfully renegotiated PPAs with three small IPPs
under the Kenyatta administration, but there has been no further
progress since President William Ruto took office in September
2022.
Resuming the issuance of PPAs and deprioritizing contract
renegotiations aligns with the government's aim to increase foreign
direct investment (FDI) to counterbalance efforts at fiscal
consolidation. Precedents of unilateral PPA alterations or
cancellations have been unsuccessful given the resulting threat of
costly international arbitration claims and reputational damage
hindering foreign investment. These precedents include Ghana's
attempt to stop paying IPPs for power not consumed in 2019.
FDI and GDP growth
Kenya can ill-afford such a situation. Increasing FDI has become
an increasingly important factor for GDP growth because of deep
public spending cuts and a large trade deficit exacerbated by high
food, fuel, and fertilizer prices. Kenya is also facing debt stress
and has been forced to cancel plans to borrow long-term debt from
international capital markets.
Recent efforts to improve Kenya Power's financial position and
reduce its future deficits are likely to improve its ability to pay
creditors and suppliers. This is a positive development for IPPs
selling power into the grid that often experience payment delays.
Improvement measures include debt repayment moratoria for some of
the utility's debts (excluding commercial loans) organized by
several development finance institutions and the Kenyan government,
as well as the highly probable increase in power purchase costs for
consumers, which is to take effect on April 1.
The Cabinet has committed to engagement with IPPs under the
Renewable Energy Auction Policy (REAP). The policy was designed by
the former government to increase competition among IPPs, and while
it is unclear whether the current government will make adjustments,
major changes are unlikely.
In its current form, REAP will be applied to all new wind and
solar power projects and other renewable energy projects with a
capacity of over 20 megawatts (MW). Projects to be developed under
REAP would have to tender a bid based on a US dollar price per
kilowatt hour at which the power would be sold. The authorities
would accept the lowest-cost bids first, with bids accepted
sequentially (in terms of increasing unit cost) until the
government's target power capacity for the bid round was
covered.
Geothermal projects
Biogas, biomass, and hydropower projects under 20 MW would be
approved under the existing FiT policy, while geothermal projects
would be approved separately under the Policy on Licensing of
Geothermal Greenfields, given their higher upfront costs.
The government is likely to favor development of new geothermal
power stations over solar and wind projects in the one-year
outlook. S&P Global Market Intelligence sources indicated that
new Cabinet Secretary for Energy Davis Chirchir wants to increase
the reliable baseload power supply before adding more intermittent
sources of power (that is, solar and wind power) to the grid.
Although Kenya began importing power from Ethiopia recently and
it is improving energy connectivity with Uganda and Tanzania with
cross-border transmission lines, the government favors domestic
projects for energy security reasons, particularly using geothermal
sources. To this end, on Feb. 28, the cabinet approved projects to
add power capacity at the Olkaria I and Olkaria IV geothermal power
station sites and are in negotiations with investors planning to
construct another geothermal power project at the Menengai Crater
in Nakuru county.
Indicators of changing risk environment
Approval of additional geothermal projects beyond the Globaleq
Menengai development would make progress with new solar and wind
power projects more likely.
If main opposition leader Raila Odinga organizes sustained mass
protests after power tariffs are increased on April 1, the
provision of subsidies will become more likely, hindering Kenya
Power's ability to improve its financial position and increasing
the risk of delayed payments to its suppliers.
This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.
