Hazy fuel concession deals return to haunt suppliers, IPPs

Kenya Power staff work on restoring power in the Ganjoni area in Mombasa County.

Kenya Power staff work on restoring power in the Ganjoni area in Mombasa County on February 9, 2022. 

Photo credit: Wachira Mwangi | Nation Media Group

When giant electricity producer KenGen plugged its newly commissioned 280 megawatts (Mw) geothermal power plants into the national grid in 2015, the impact on the fortunes of the diesel-based Independent Power Producers (IPPs) was instant.

Coincidentally, the huge addition of cheaper geothermal power to the national grid came amidst improved rainfall for two consecutive years into 2016 which saw power generation from the various hydro-dams hit a peak — lowering the demand from the emergency diesel power plants run by IPPs.

The huge addition of geothermal and hydropower to the grid meant financial disruptions for both the IPPs and their contracted suppliers of Heavy Fuel Oil(HFO) because thermal electricity sales to Kenya Power and Lighting Company(KPCL) were hurt by the resultant depressed demand.

Faced with this situation, four of the six IPPs including Gulf Power, Triumph Power, Thika Power, and Iberafrica Power kicked off spirited lobbying for concessions to help cushion them from the potential financial mess due to the turn of events.

Various suppliers of the HFO used to run the thermal power plants by the IPPs also sought cushions from high storage costs due to a slowed uptake of their stocks.

The Energy and Regulatory Corporation (the predecessor of the present Energy and Regulatory Authority, Epra) yielded to the pressure of the IPPs and offered them two concessions through an April 19, 2016, Gazette Notice.

The concessions meant that the IPPs were no longer required to maintain minimum security stock as required by the power purchase agreements (PPAs) signed with KPLC and that KPLC was to allow minimum dispatch for the plants to meet manufacturer requirements.

Working capital

The IPPs argued that the low dispatch coupled with high stockholding meant that the requirement for minimum security stocks was unnecessarily tying up the IPPs and the fuel suppliers’ working capital estimated at $414,942,369.97.

Two IPPs, Rabai Power and Tsavo Power, maintained security stocks above 4,500 tonnes in the entire period and did not take up the concessions.

A latest forensic assessment by the Auditor-General Nancy Gathungu has, however, flagged anomalies in the deal by Epra because KenGen was left out of the concessions that also did not include a downward review of the capacity charges to benefit power consumers.

“The concession was granted to IPPs and not KenGen which commissioned a 280Mw geothermal power plant at Olkaria in 2015 leading to a drop in dispatch of thermal power plants from an average of 33 per cent to 12 per cent,” the Auditor-General points out.

There was no discussion or considerations made by IPPs or Epra on the concessions or benefits accruing to KPLC and consumers from this waiver.

“From our assessment, the Gazette Notice released working capital requirements of $8,313,258.68 for four IPPs. This did not include interest charges that the IPPs would have incurred. However, the benefit was not passed to consumers,” Ms Gathungu further said.

These concessions were available to the IPPs from April 2016 until they were revoked by Epra in December 2021 following the recommendations of the Presidential taskforce appointed to review the PPAs between KPLC and the IPPs.

Suppliers of HFO also successfully lobbied for concessions and now risk a backlash of irregular compensation despite the terms of the Fuel Supply Agreements (FSAs) with the various IPPs.

Following the low thermal power dispatch in 2015 and 2016, Gulf Energy and Vivo Kenya, who were the fuel suppliers for KenGen Kipevu III, Iberafrica, Gulf Power, Triumph Power, Thika Power, and Tsavo Power, wrote to ERC claiming compensation of $9,745,775.50 equivalent to Sh1,010,149,631 at an exchange rate of Sh103.67 citing additional storage and financing costs.

After deliberations, ERC approved the request and the amount was recovered from electricity consumers effective July 1, 2017.

The Auditor-General, however, pokes holes into the compensation deal terming it irregular.

“There was no justification for the payment as the concession had already benefited IPPs. There was also no basis for the fuel compensation since the FSAs were signed between the fuel suppliers and the IPPs and neither the government nor KPLC had guaranteed the fuel uptake from the suppliers. All fuel orders from the IPPs were to be based on non-binding monthly estimates depending on projected energy dispatch levels,” Ms Gathungu said.

Gulf Energy

“The decision to compensate Gulf Energy and Vivo Energy for loses of $9,745,775.50 arising from dispatch of thermal IPPs should be reviewed as it was not supported by the FSAs signed between the suppliers and the IPPs,” she added noting that action should be taken on all parties involved should it be established that the suppliers received an unfair benefit at the expense of consumers.

The audit further reveals that the ERC sought counsel from the Office of the Attorney General who did not give explicit approval to the commission to go ahead with payment to the aggrieved fuel suppliers.

“From our reading of the PPA, FSA, and discussions with KPLC and the IPPs, we ascertained that HFO fuel cost recovery was based on pre-determined specific fuel consumption rates (SFC) for each power plant. We established that the SFC rates are determined by the IPPs in their bids at the time of procurement of the power plants and these rates are not reviewed once the PPA is signed,” the audit report said.

“Essentially, this means that actual usage of HFO stocks is not relevant in the determination of the fuel cost to be recovered from consumers. As a consequence, KPLC exercises minimal oversight over the stockholding of HFO at the IPPs,” it further said.

The PPA requires each IPP to maintain adequate stocks to prevent instances of unavailability of power plants due to a lack of HFO stocks. This requirement was suspended through Gazette Notice 2826 of April 2016 and reinstated in December 2021.

“We ascertained that while KPLC obtained regular stock data from IPPs they were not involved in stock verification at the IPPs through dips and stock count done on a monthly basis. We noted that this was a lapse in the oversight mandate of KPLC in ensuring the adequacy of stocks as per PPA provisions,” the auditors said.