Catch-22 of power: Public or private?

First, here is the news. On the vexed issue of renegotiation of power purchase agreements, I gather that the matter has now been escalated to a cabinet sub-committee co-chaired by Interior minister Fred Matiang’i and his National Treasury colleague Ukur Yatani.

It is a high-stakes affair: We have 31 investors who have signed power purchase agreements with Kenya Power and are in different stages of building their plants but have been told to postpone the works. The confusion has come about because we have contracted more independent power producers than Kenya Power can handle.

The idea of renegotiating the contracts has triggered a wave of uncertainty that is sweeping across the electricity sector with unprecedented ferocity. The Matiang'i and Yattani-led team is said to be leaning towards shifting Kenya from the current ‘take or pay’ model power purchase agreements to a ‘take and pay’ model. 

Under the prevailing model, Kenya Power and, ultimately, the consumer pays for electricity that has not been consumed through what is known as ‘capacity charges’. If the changes being contemplated by the committee come through, Kenya Power and the consumer will be obliged to pay for only what has been used.

We are at a point where the electricity consumer pays too much for power not used. Indeed, capacity charges have now emerged as one of the most significant sources of financial strains and put pressure on consumer prices.

In the financial year ended June 2020, Kenya Power paid a whopping Sh47.4 billion in capacity charges, or more than half of what the company spent on purchasing power from all merchant power plants.

The state of uncertainty sweeping across the electricity sector is captured by the tribulations of an old friend of mine who called last week to respond to a commentary I did on this subject recently. 

A former MP for Gatundu South, Mr Ngengi Muigai, in partnership with foreign investors and European manufacturers of wind turbines, have spent hundreds of millions of shillings developing a wind power plant in the Ngong Forest area under the name Prunus Power Ltd. They signed a draft power purchase agreement with Kenya Power more than 10 years ago.

Mr Muigai said the project has stalled because the commercial date of operations for his plant has been unilaterally moved from 2021 to December 2025. In the middle of building the plant, he continued, the tariff for Prunus was arbitrarily reduced from 12 US cents (Sh12) per kilowatt hour to 10 US cents and, recently, 7 US cents.

Paying a heavy price

“You should spare a thought for investors whose projects are being delayed for faults that are not of their own making,” he quipped, betraying his frustration.

Mr Muigai and company are paying a heavy price for the current disequilibrium in the electricity sector caused by indiscriminate issuance of power purchase agreements. We have ended up with excess generation capacity which Kenya Power has to pay for even when it does not need the electricity.

We are in a place you cannot wiggle out of easily because of the fact that power purchase agreements are long- term contracts. And the typical contract has no provisions to accommodate an unpredictable fall in demand for electricity as has happened in this country following the advent of the Covid-19 pandemic.

It is understood that the sub-committee is considering the possibility of introducing ways of tinkering with the contracts to make them more flexible and to allow downward revision of tariffs, especially when unforeseen circumstances occur.

In the long run, we must make a decision on whether policy should promote publicly funded power projects or independent producers. This is a pertinent issue. Power prices are cheaper in Egypt because the country’s current power investment plan, which is implemented by its state-owned utility, is funded by the state and through concessionary loans. 

Instructively, our goods cannot compete with Egypt’s within Comesa.

Today, the cheapest source of solar power to the national grid is from the state-funded Garissa-based 50MW power plant that sells electricity to Kenya Power at 5 US cents per kilowatt hour. Malindi, Eldosol and Selenkei solar plants will be charging the consumer at 7 US cents.

Why the big difference? You will be told that the Garissa plant’s cost are covered by government subsidies — yet private power plants also get subsidies. The only difference is that, in the case of the latter, the subsidies, which include long-term power purchase agreements and credit enhancements such as sovereign guarantees, are christened “incentives”.

We must accept that the experimentation with private power producers, which we have been trying for several decades, is one of the main reasons why we don’t have cheap power.

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