US power firm Ormat reaping big from Kenya electricity contract

US power company Ormat continued to earn huge payouts from the Kenya Power and Lighting Company (KPLC) despite lower output at its Olkaria wells, exposing the downsides of protective electricity purchase contracts.

Kenya Power is the biggest revenue basket for the US firm outside America contributing 16.3 percent of total revenues in the nine months to September despite the reduced uptake of its power. This was a marginal drop from 16.5 percent of total revenue in September last year despite the limits in output called curtailments.

Ormat earned $421.5million (Sh47.5 billion) from its global electricity sales in the nine months to September. This means it earned about Sh7.83 billion from electricity sales to Kenya Power over the nine-month period.

“The company continued to experience certain curtailments in the first nine months of 2021 by KPLC in the Olkaria complex. The impact of the curtailments is limited as the structure of the PPA (Power Purchase Agreement) secures the vast majority of the company's revenues with fixed capacity payments unrelated to the electricity actually generated,” Ormat said in US Securities Exchange filing.

Curtailment is the deliberate reduction in the output below what could have been produced to balance energy supply and demand or due to transmission constraints.

The company said the sustained revenue streams are a result of its power purchase agreements that have fixed capacity charges irrespective of output.

The firm also said it has a letter of support from the Government of Kenya that covers certain cases of KPLC non-payment — such as those caused by government actions or political situation.

Kenya Power hopes to negotiate its way out of the expensive power purchase agreements that have squeezed its revenues.

An analysis by the Auditor General revealed Kenya power was buying 1 kilowatt hour unit from independent power producers (IPPs) for as high as Sh195 and was only able to sell the same power at Sh15.66.

Kenya Electricity Generating Company (KenGen) supplies 70 percent of Kenya Power energy at Sh5.3  with  IPPs supplying only 30 percent of the energy , yet the former makes more money than KenGen.

KenGen earned Sh44.8 billion in the year ended June 2021 while IPPs made Sh56.3 billion.