Wind turbines

Some of the wind turbines at the Lake Turkana Wind Power project in Loiyangalani, Marsabit County in June 2018.

| File | AFP

Despite warnings, bankrupt firm was handed transmission line deal 

What you need to know:

  • The government completely ignored the red flags that were raised by the World Bank on the matter.
  • After the withdrawal of the World Bank from the project, the government entered into an agreement with the lenders of the wind power firm.


 

The World Bank was the first major player in the deal to raise an alarm on the multibillion-shilling contract. But the Energy ministry officials remained adamant – the contract had to go on at all costs, despite the red flags.

Minutes of the Kenya Power board dated May 2013 and a Cabinet memorandum on the project reveal that the World Bank, which was to provide a guarantee, or what is known as a Partial Risk Guarantee (PRG), was forced to withdraw from the project entirely after its pleas fell on deaf ears.

The documents show that the lender listed four main reasons for quitting.

First was the size of the plant, which it said could impact on the reliability of systems supply. The World Bank had advised that instead of building the mega project at once, Kenya should consider developing wind power gradually in smaller lots of between 50–100MW. 

Like all the other projects it is involved in, the lender also insisted that the country must procure on a competitive basis to ensure cost-effectiveness. But this wish, too, was not granted. 

The take-or pay obligation in the Power Purchase Agreement (PPA) was another red flag for the lender. It argued that this dangerously exposed Kenya Power to an unacceptable high financial risk of payment of curtailed energy, which the utility company would not be able to dispatch due to system constraints.

“The timeline of 26 months for construction of the transmission line from Loiyangalani was very short. This period was inadequate and KPLC would eventually be paying for power that would not be utilised,” the World Bank predicted. And it came to pass. 

Breach of contract

The last nail on the coffin for the World Bank was that Kenya Power lacked experience in managing dispatch from a large wind power installation into the power system and the project would cause system instability.

After the withdrawal of the World Bank from the project, the government entered into an agreement with the lenders of the wind power firm by providing a letter of support to help it secure the risk guarantee from the Africa Development Bank. To firm it up, then Attorney-General Githu Muigai wrote a letter to the legal advisors of the project noting that Kenya’s letter of support was legal. 

According to the PPA, a security support facility of Sh4.7 billion was to be remitted by Kenya Power into an escrow account. But Kenya Power did not open this account, further breaching the contract. 

There were eight key players in the wind power project: Energy ministry to run things; Kenya Power as the ultimate beneficiary of the plant; Energy Regulatory Commission (ERC), now the Energy and Petroleum Regulatory Authority (Epra); Lake Turkana Wind Power (LTWP); KPMG, a private consulting firm; the now-bankrupt South African firm Isolux Ingenieria SA and KEMA; DEWI, which carried out the wind tests; and NARI Group Corporation & Powerchina Guizhou Engineering Co. Ltd (contracted to build the transmission line). 

The Kenya Electricity Transmission Company (Ketraco) was formed on December 2, 2008, it did not therefore exist at the time of conceptualising the power project and its formative stages. It took over the process of completing the transmission line and thus supervised the process that contracted Isolux Ingenieria SA, for the construction of the 400Kv line with KEMA as the consultant in 2013. 

But the line evacuating the power generated was not fully completed until September 24, 2018 yet the plant was completed on January 27, 2017, resulting in a 21-month delay. 

The special audit by the Auditor-General “noted that there were challenges in completing the transmission line which affected the commissioning of the project transmission line. The challenges related to technical and financial weaknesses of the contractor, M/s Isolux Ingenieria SA”. 

Raised a red flag

The initial completion date was December 31, 2013. The date was extended for the first time to June 30, 2014 and further extended for 2.5 years to December 30, 2016. The line would eventually be completed by a different contractor. 

“This raised a red flag on the capacity and competency of the contractor initially engaged and whether due diligence was conducted prior to their selection,” the report states. 

The company, Isolux, was declared bankrupt during the execution of the contract, which saw Ketraco terminate the contract. The completion delays resulted in claims by LTWP. 

The contract between Kenya Power and LTWP signed on January 29, 2010 required the former to pay for the net electrical output with effect from 50MW from the commencement date. Simply put, Kenya Power was to pay monthly penalties to LTWP for every month’s delay in the event the transmission line was not complete and the generation plant was complete. 

In the 21-month delay, these charges had accumulated to Sh18.5 billion.

Unable to pay the full amount, the Energy ministry paid Sh10.2 billion and agreed with the company that it could collect the rest directly from consumers by increasing its tariff by Euro 0.00845 (about Sh1) per Kwh for almost six years between June 2018 and way May 2024. 

This has now become a bitter pill to swallow as the company waits for approval from Epra to collect the money. 

Payment defaults by Kenya Power

The PPA contract between Kenya Power and LTWP had all the hallmarks of protecting the wind power firm while exposing the consumer to shouldering any negative financial consequences of any event that affected the project.

The company was to sell Kenya Power 300MW of energy at a cost of Sh7.65 per Kwh. All the power produced was to be bought at a fixed price over a 20-year period. 

It also had a guaranteed take or pay basis of up to 55 per cent load factor amounting to 1.4 million Kwh and Kenya Power was to compensate the company for lost production. 

Despite all this, the government was to provide a sovereign guarantee to cover political risks and payment defaults by Kenya Power. The icing on the cake was that the transmission line was to be developed by either an affiliate of LTWP or the government. 

The Auditor-General concluded thus about the contract: “It did not have quid pro quo consideration as the penalty did not apply to LTWP Ltd in the case where the transmission line was completed and the generation plant was not ready.” 

After several variations in the contract, Ketraco finally terminated the contract and got a consortium of Naro Group and Powerchina to complete the job. By this time, Isolux had been paid Sh10.8 billion.

“Further investigation should be carried out to determine any acts of anomaly on individuals involved in the entire process of the project and action taken on those found culpable,” the Auditor-General states in her report.

Contractual implication

In its defence, LTWP maintains that it met its side of the deal and has bills to pay. It notes that the PPA had a firm contractual implication for both LTWP and Ketraco in the event that either entity did not deliver the wind farm or the transmission line on time. It adds that it has loans with repayments of about Sh8.5 billion per year.

“LTWP had to repay its loans and remain operational while awaiting the completion of the TI (transmission line),” the company says in its official response on the claims. It says it has only received Sh5.7 billion of the Sh14.6 billion that it is owed by Kenya Power for this delay and is not charging interest for the balance whose payment has been deferred over six years. 

The wind firm also says it has no input in transferring the costs to the final consumer. 

Though the company has an installed capacity of 310MW, it is yet to fully hit this target. There are many reasons for this.

“Wind farms around the world operate at different capacity factors depending on wind speeds. As wind is an intermittent source of energy, capacity factors for most wind farms in the world average between 30%–40% of the farms’ total installed capacity,” the firm says on its website. 

It adds that since it began injecting power into the national grid on 24 September 2018, the wind farm has averaged capacity factors of above 70 per cent, peaking at 99 per cent ( 307 MW). 

Further, LTWP says between September 2018 and March 2019, it has injected 737,683,544 kWh of clean, reliable, renewable energy into the national grid. This, it says, has increased Kenya’s spinning reserve capacity and reduced over reliance on diesel-powered electricity sources in drier months.

Welcome!

You're all set to enjoy unlimited Prime content.