PRIVATE SECTOR INVESTMENT IN KENYA POWER SECTOR

A Presentation by: Laurencia K. Njagi, Company SecretaryKenya Power & Lighting Company Ltd

To the Law, Justice and Development Week 2012

PUBLIC PRIVATE PARTNERSHIPS IN THE POWER PUBLIC PRIVATE PARTNERSHIPS IN THE POWER SECTOR IN KENYA SECTOR IN KENYA

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http://www.kplc.co.ke/

INTRODUCTIONINTRODUCTION

Comprehensive reforms implemented between 1993 Comprehensive reforms implemented between 1993 and 2000 in accordance with the Energy Sector Policy and 2000 in accordance with the Energy Sector Policy Framework Papers 1993-1995 and 1996-1998 .Framework Papers 1993-1995 and 1996-1998 .

Objectives of the reforms were to enhance Objectives of the reforms were to enhance operational efficiency and attract private sector operational efficiency and attract private sector investment in power generation. investment in power generation.

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INTRODUCTIONINTRODUCTION

The private sector participation would:The private sector participation would: (i) Create competition in the generation function;(i) Create competition in the generation function;(ii) Improve operational efficiency; and(ii) Improve operational efficiency; and(iii) Complement GoK’s investment which could be (iii) Complement GoK’s investment which could be

used in other sectors not attractive to private used in other sectors not attractive to private sector.sector.

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SUMMARY OF IMPLEMENTED REFORMSSUMMARY OF IMPLEMENTED REFORMS

Separation of commercial functions from policy Separation of commercial functions from policy setting, and regulatory functionssetting, and regulatory functions. .

This involved transfer of power assets owned by This involved transfer of power assets owned by government and two regional development government and two regional development authorities to two main public companies i.e. the authorities to two main public companies i.e. the Kenya Power & Lighting Company Ltd. (transmission Kenya Power & Lighting Company Ltd. (transmission assets) and Kenya Power Company Ltd., now assets) and Kenya Power Company Ltd., now KenGen (generation assets).KenGen (generation assets). 44


Unbundling of generation function from Unbundling of generation function from transmission and distribution functions. transmission and distribution functions.

KenGen undertaking generation function and KPLC KenGen undertaking generation function and KPLC undertaking transmission and distribution functions.undertaking transmission and distribution functions.

KPLC and KenGen were required to operate on a KPLC and KenGen were required to operate on a commercial basis under a Power Purchase commercial basis under a Power Purchase Agreement which was first entered into in 1999.Agreement which was first entered into in 1999.

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Legislative reform through the enactment of the Legislative reform through the enactment of the Electric Power Act, 1997.Electric Power Act, 1997. Establishment of a power sector regulator in 1997– Establishment of a power sector regulator in 1997– the Electricity Regulatory Board with the mandate to the Electricity Regulatory Board with the mandate to set retail tariffs, approve negotiated PPAs between set retail tariffs, approve negotiated PPAs between KPLC and generating companies and overall KPLC and generating companies and overall regulation of the sector.regulation of the sector.

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The Electric Power Act, 1997 was repealed in 2006 The Electric Power Act, 1997 was repealed in 2006 and replaced with Energy Act -to consolidate and replaced with Energy Act -to consolidate electricity and petroleum regulation into one electricity and petroleum regulation into one regulator. regulator.

Development of power generation projects on the Development of power generation projects on the basis of approved national least cost investment basis of approved national least cost investment plan.plan.

Cost reflective electricity tariffs.Cost reflective electricity tariffs. 77

PPP Projects in Energy SectorPPP Projects in Energy Sector

No.

Plant Capacity (MW)

Type FCOD/Status

Procurement Method

1. IberAfrica 106 Thermal 1997 Open competition on first 56MW, then extension in 2007

2. Tsavo Kipevu II

74 Thermal 2001 Open Competition

3. OrPower 4 100 Geothermal 2000 Open Competition for phase 1 later expansion

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No Plant Contracted

Capacity (MW)

Technology

Full Commercial Operation

Date/Status

Procurement Method

4 Rabai 90 Thermal 2009 Open Competition

5 Mumias 25 Bagasse 2008 Co-Generation

6 Thika 87 Thermal 2013 Open Competition

7 Triumph 83 Thermal 2013 Open Competition

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No.

Plant Contracted

Capacity (MW)

Technology

Full Commercial Operation

Date/Status

Procurement Method

8 Gulf Athi River 80 Thermal 2014 Open Competition

9 Aerolus Kinangop

60 Wind 2014 Feed In Tariffs

10 AGIL Longonot

140 Geothermal

2014 Unsolicited Proposal

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Other 4 mini hydro projects under feed in tariff.Other 4 mini hydro projects under feed in tariff.

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CRITERIA FOR PROJECT DEVELOPMENT ON A PPP BASIS:CRITERIA FOR PROJECT DEVELOPMENT ON A PPP BASIS:

(i) Least Cost Power Development Plan(i) Least Cost Power Development Plan

Kenya has a 20 year Least Cost Power Development Kenya has a 20 year Least Cost Power Development Plan for transmission and generation systems that is Plan for transmission and generation systems that is updated annually.updated annually.

The Government and KenGen agree on the projects The Government and KenGen agree on the projects to be developed by KenGen based on its financial to be developed by KenGen based on its financial and technical capacity. and technical capacity.

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CRITERIA FOR PROJECT DEVELOPMENT ON A PPP BASIS:CRITERIA FOR PROJECT DEVELOPMENT ON A PPP BASIS:(i) Least Cost Power Development Plan(i) Least Cost Power Development Plan

KPLC procures private investors to develop plants KPLC procures private investors to develop plants not being developed by KenGen.not being developed by KenGen.

Most of the geothermal and hydro projects are Most of the geothermal and hydro projects are implemented by KenGen due to low IPP bidders implemented by KenGen due to low IPP bidders interest.interest.

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(i) Least Cost Power Development Plan(i) Least Cost Power Development Plan

In order to remove the risk of geothermal steam, a In order to remove the risk of geothermal steam, a fully state-owned geothermal company has been fully state-owned geothermal company has been established to carry out geothermal exploration and established to carry out geothermal exploration and development and to sell steam to private development and to sell steam to private developers and KenGen for conversion to electricitydevelopers and KenGen for conversion to electricity..

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(ii) Bridging Capacity Gap(ii) Bridging Capacity Gap

In the event of delays in the implementation of a In the event of delays in the implementation of a committed project in the LCPDP, a decision is made committed project in the LCPDP, a decision is made to procure development of a power plant of a to procure development of a power plant of a technology which can be implemented in a short technology which can be implemented in a short period by private investors to bridge the capacity period by private investors to bridge the capacity gap.gap.

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(ii) Bridging Capacity Gap(ii) Bridging Capacity Gap

This has been the case for a number of thermal This has been the case for a number of thermal projects. projects.

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((iii) Feed In Tariffs For Renewable Energyiii) Feed In Tariffs For Renewable Energy

Kenya has a Feed In Tariff with set energy charge Kenya has a Feed In Tariff with set energy charge rates for various renewable energy sources to rates for various renewable energy sources to encourage their development. encourage their development.

Proposals from interested developers are analyzed Proposals from interested developers are analyzed and approved if found adequate by a Standing and approved if found adequate by a Standing Committee under the Ministry of Energy.Committee under the Ministry of Energy.

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((iii) Feed In Tariffs For Renewable Energyiii) Feed In Tariffs For Renewable Energy

PPA negotiations are carried out between the PPA negotiations are carried out between the private investors and KPLC. private investors and KPLC.

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(iv) Unsolicited Proposals(iv) Unsolicited Proposals

Some projects have been awarded for development Some projects have been awarded for development as PPPs following unsolicited proposals.as PPPs following unsolicited proposals.

Mostly in technologies like geothermal and wind which are Mostly in technologies like geothermal and wind which are difficult to subject to competitive bidding without investing difficult to subject to competitive bidding without investing first to ascertain the natural resource potential.first to ascertain the natural resource potential.

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LOCATION OF THE PLANTLOCATION OF THE PLANT

A decision on the siting of the project is made based A decision on the siting of the project is made based on the location of the natural resource (hydro, on the location of the natural resource (hydro, geothermal and wind), the proximity to the load geothermal and wind), the proximity to the load centre and transmission and distribution connection centre and transmission and distribution connection facilities.facilities.

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PROCUREMENT PROCESS AND APPROVALPROCUREMENT PROCESS AND APPROVAL

Kenya has a Public Procurement and Disposal Act, Kenya has a Public Procurement and Disposal Act, 2006, that governs procurement by government and 2006, that governs procurement by government and state corporations.state corporations.

Competitive bidding is the normal method of Competitive bidding is the normal method of procurement.procurement.

The Act provides for a review mechanism of The Act provides for a review mechanism of appeals from bidders who are dissatisfied with the appeals from bidders who are dissatisfied with the procurement/evaluation outcome. procurement/evaluation outcome. 2121


The Public Private Partnerships Regulations made The Public Private Partnerships Regulations made under the Act provide specialized procedures for under the Act provide specialized procedures for procurement and approvals of PPP projects and sets procurement and approvals of PPP projects and sets out a PPP Secretariat under the Ministry of Finance.out a PPP Secretariat under the Ministry of Finance.

A PPP Bill is before parliament as a stand alone A PPP Bill is before parliament as a stand alone legislation for PPPs.legislation for PPPs.

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The negotiated PPAs are subject to approval by the The negotiated PPAs are subject to approval by the sector regulator, the Energy Regulatory Commission.sector regulator, the Energy Regulatory Commission.

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IPP PRICESIPP PRICES

The prices payable to IPPs in the PPAs are derived The prices payable to IPPs in the PPAs are derived from competitive bidding process.from competitive bidding process.

For the Feed In Tariff Policy projects, the rates are For the Feed In Tariff Policy projects, the rates are set by Feed In Tariff Policy. set by Feed In Tariff Policy.

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The prices for unsolicited proposals are negotiated The prices for unsolicited proposals are negotiated i.e. project costs, cost of funding are screened i.e. project costs, cost of funding are screened including the rate of return to be allowed and are, including the rate of return to be allowed and are, where applicable, compared with those of existing where applicable, compared with those of existing projects.projects.

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The rate of return is guided by ERC’s Tariff Policy The rate of return is guided by ERC’s Tariff Policy which had followed a study.which had followed a study.

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RISKS THAT KPLC AND GOK HAVE TAKENRISKS THAT KPLC AND GOK HAVE TAKEN

KPLC has taken the market/demand risk -PPAs are KPLC has taken the market/demand risk -PPAs are on a take or pay basis– this arrangement will be on a take or pay basis– this arrangement will be reviewed as the market becomes competitive.reviewed as the market becomes competitive.

The forex risk is borne by electricity consumers. The forex risk is borne by electricity consumers. Payments are denominated in either dollars or Payments are denominated in either dollars or Euros. The variations are passed through to Euros. The variations are passed through to customers.customers.

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RISKS THAT KPLC AND GOK HAVE TAKENRISKS THAT KPLC AND GOK HAVE TAKEN

Political risks are borne by GOK through a legally Political risks are borne by GOK through a legally binding letter of support issued to the projects.binding letter of support issued to the projects.

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PAYMENT SECURITIES PROVIDEDPAYMENT SECURITIES PROVIDED

The payment security provided to IPPs by KPLC has The payment security provided to IPPs by KPLC has usually been stand by letters of credit from usually been stand by letters of credit from commercial banks in Kenya covering 3 – 4 months of commercial banks in Kenya covering 3 – 4 months of payments;payments;In view of planned increased IPP participation, KPLC In view of planned increased IPP participation, KPLC

requested GOK to support the sector by providing requested GOK to support the sector by providing sovereign guarantees to IPPs.sovereign guarantees to IPPs.

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PAYMENT SECURITIES PROVIDEDPAYMENT SECURITIES PROVIDED

In order to manage contingent liability, GOK In order to manage contingent liability, GOK requested IDA to provide partial risk guarantee to four requested IDA to provide partial risk guarantee to four projects (87MW Thika), (83MW Triumph), 80MW Gulf) projects (87MW Thika), (83MW Triumph), 80MW Gulf) and 52MW geothermal extension) thus dispensing and 52MW geothermal extension) thus dispensing with sovereign guarantees.with sovereign guarantees.

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FACTORS THAT HAVE CONTRIBUTED TO SUCCESSFUL PPPS FACTORS THAT HAVE CONTRIBUTED TO SUCCESSFUL PPPS

IN POWER SECTORIN POWER SECTOR

An enabling environment -National Energy Policy and An enabling environment -National Energy Policy and Energy Act, 2006.Energy Act, 2006.Both recognise need for cost reflective retail tariffs Both recognise need for cost reflective retail tariffs

and IPP charges that should, among others, enable and IPP charges that should, among others, enable the investors to attract capital and compensate them the investors to attract capital and compensate them for the risks assumed.for the risks assumed.

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FACTORS THAT HAVE CONTRIBUTED TO SUCCESSFUL PPPS FACTORS THAT HAVE CONTRIBUTED TO SUCCESSFUL PPPS


A mature regulatory framework – ERC was created in A mature regulatory framework – ERC was created in 1997 and has been approving PPAs and setting retail 1997 and has been approving PPAs and setting retail tariffs.tariffs. Capacity of KPLC to procure, negotiate, and monitor Capacity of KPLC to procure, negotiate, and monitor

IPPs.IPPs.

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FACTORS THAT HAVE CONTRIBUTED TO SUCCESSFUL PPPs FACTORS THAT HAVE CONTRIBUTED TO SUCCESSFUL PPPs


Financial stability of KPLC as the off-taker.Financial stability of KPLC as the off-taker.Sound governance of KPLC and energy sector Sound governance of KPLC and energy sector

leadership.leadership.Structured competitive procurement process of PPPs.Structured competitive procurement process of PPPs.

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PRIVATE SECTOR INVESTMENT IN KENYA POWER SECTOR

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