private sector investment in kenya power sector

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PUBLIC PRIVATE PARTNERSHIPS IN THE POWER
SECTOR IN KENYA
A Presentation by:
Laurencia K. Njagi,
Company Secretary
Kenya Power & Lighting
Company Ltd
To the Law, Justice and Development Week 2012
1
INTRODUCTION

Comprehensive reforms implemented between 1993
and 2000 in accordance with the Energy Sector Policy
Framework Papers 1993-1995 and 1996-1998 .

Objectives of the reforms were to enhance
operational efficiency and attract private sector
investment in power generation.
2
INTRODUCTION

The private sector participation would:
(i) Create competition in the generation function;
(ii) Improve operational efficiency; and
(iii) Complement GoK’s investment which could be
used in other sectors not attractive to private
sector.
3
SUMMARY OF IMPLEMENTED REFORMS

Separation of commercial functions from policy
setting, and regulatory functions.

This involved transfer of power assets owned by
government and two regional development
authorities to two main public companies i.e. the
Kenya Power & Lighting Company Ltd.
(transmission assets) and Kenya Power Company
Ltd., now KenGen (generation assets).
4
SUMMARY OF IMPLEMENTED REFORMS

Unbundling of generation function from
transmission and distribution functions.

KenGen undertaking generation function and KPLC
undertaking transmission and distribution functions.

KPLC and KenGen were required to operate on a
commercial basis under a Power Purchase
Agreement which was first entered into in 1999.
5
SUMMARY OF IMPLEMENTED REFORMS

Legislative reform through the enactment of the
Electric Power Act, 1997.

Establishment of a power sector regulator in
1997– the Electricity Regulatory Board with the
mandate to set retail tariffs, approve negotiated
PPAs between KPLC and generating companies and
overall regulation of the sector.
6
SUMMARY OF IMPLEMENTED REFORMS

The Electric Power Act, 1997 was repealed in 2006
and replaced with Energy Act -to consolidate
electricity and petroleum regulation into one
regulator.

Development of power generation projects on the
basis of approved national least cost investment
plan.

Cost reflective electricity tariffs.
7
PPP Projects in Energy Sector
No
.
Plant
1.
IberAfrica
2.
Tsavo
Kipevu II
3.
OrPower 4
Capacity
(MW)
Type
106 Thermal
74 Thermal
100 Geothermal
FCOD
/Status
Procurement
Method
1997 Open competition on
first 56MW, then
extension in 2007
2001 Open Competition
2000 Open Competition
for phase 1 later
expansion
8
PPP Projects in Energy Sector
No
Plant
Contrac
ted
Capacit
y (MW)
Technolo
gy
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
9
PPP Projects in Energy Sector
No
.
Plant
Contrac
ted
Capacit
y (MW)
Technolo
gy
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 Geother
mal
2014 Unsolicited
Proposal
10
PPP Projects in Energy Sector

Other 4 mini hydro projects under feed in tariff.
11
CRITERIA FOR PROJECT DEVELOPMENT ON A PPP BASIS:
(i) Least Cost Power Development Plan

Kenya has a 20 year Least Cost Power Development
Plan for transmission and generation systems that
is updated annually.

The Government and KenGen agree on the projects
to be developed by KenGen based on its financial
and technical capacity.
12
CRITERIA FOR PROJECT DEVELOPMENT ON A PPP BASIS:
(i) Least Cost Power Development Plan

KPLC procures private investors to develop plants
not being developed by KenGen.

Most of the geothermal and hydro projects are
implemented by KenGen due to low IPP bidders
interest.
13
CRITERIA FOR PROJECT DEVELOPMENT ON A PPP BASIS:
(i) Least Cost Power Development Plan

In order to remove the risk of geothermal steam, a
fully state-owned geothermal company has been
established to carry out geothermal exploration and
development and to sell steam to private
developers and KenGen for conversion to electricity.
14
CRITERIA FOR PROJECT DEVELOPMENT ON A PPP BASIS:
(ii) Bridging Capacity Gap

In the event of delays in the implementation of a
committed project in the LCPDP, a decision is made
to procure development of a power plant of a
technology which can be implemented in a short
period by private investors to bridge the capacity
gap.
15
CRITERIA FOR PROJECT DEVELOPMENT ON A PPP BASIS:
(ii) Bridging Capacity Gap

This has been the case for a number of thermal
projects.
16
CRITERIA FOR PROJECT DEVELOPMENT ON A PPP BASIS:
(iii) Feed In Tariffs For Renewable Energy

Kenya has a Feed In Tariff with set energy charge
rates for various renewable energy sources to
encourage their development.

Proposals from interested developers are analyzed
and approved if found adequate by a Standing
Committee under the Ministry of Energy.
17
CRITERIA FOR PROJECT DEVELOPMENT ON A PPP BASIS:
(iii) Feed In Tariffs For Renewable Energy

PPA negotiations are carried out between the
private investors and KPLC.
18
CRITERIA FOR PROJECT DEVELOPMENT ON A PPP BASIS:
(iv) Unsolicited Proposals

Some projects have been awarded for development
as PPPs following unsolicited proposals.

Mostly in technologies like geothermal and wind which are
difficult to subject to competitive bidding without investing
first to ascertain the natural resource potential.
19
LOCATION OF THE PLANT

A decision on the siting of the project is made
based on the location of the natural resource
(hydro, geothermal and wind), the proximity to the
load centre and transmission and distribution
connection facilities.
20
PROCUREMENT PROCESS AND APPROVAL

Kenya has a Public Procurement and Disposal Act,
2006, that governs procurement by government
and state corporations.

Competitive bidding is the normal method of
procurement.

The Act provides for a review mechanism of
appeals from bidders who are dissatisfied with the
procurement/evaluation outcome.
21
PROCUREMENT PROCESS AND APPROVAL

The Public Private Partnerships Regulations made
under the Act provide specialized procedures for
procurement and approvals of PPP projects and sets
out a PPP Secretariat under the Ministry of Finance.

A PPP Bill is before parliament as a stand alone
legislation for PPPs.
22
PROCUREMENT PROCESS AND APPROVAL

The negotiated PPAs are subject to approval by the
sector regulator, the Energy Regulatory
Commission.
23
IPP PRICES

The prices payable to IPPs in the PPAs are derived
from competitive bidding process.

For the Feed In Tariff Policy projects, the rates are
set by Feed In Tariff Policy.
24
IPP PRICES

The prices for unsolicited proposals are negotiated
i.e. project costs, cost of funding are screened
including the rate of return to be allowed and are,
where applicable, compared with those of existing
projects.
25
IPP PRICES

The rate of return is guided by ERC’s Tariff Policy
which had followed a study.
26
RISKS THAT KPLC AND GOK HAVE TAKEN

KPLC has taken the market/demand risk -PPAs are
on a take or pay basis– this arrangement will be
reviewed as the market becomes competitive.

The forex risk is borne by electricity consumers.
Payments are denominated in either dollars or
Euros. The variations are passed through to
customers.
27
RISKS THAT KPLC AND GOK HAVE TAKEN

Political risks are borne by GOK through a legally
binding letter of support issued to the projects.
28
PAYMENT SECURITIES PROVIDED
The payment security provided to IPPs by KPLC has
usually been stand by letters of credit from
commercial banks in Kenya covering 3 – 4 months of
payments;
In view of planned increased IPP participation, KPLC
requested GOK to support the sector by providing
sovereign guarantees to IPPs.
29
PAYMENT SECURITIES PROVIDED
In order to manage contingent liability, GOK
requested IDA to provide partial risk guarantee to
four projects (87MW Thika), (83MW Triumph), 80MW
Gulf) and 52MW geothermal extension) thus
dispensing with sovereign guarantees.
30
FACTORS THAT HAVE CONTRIBUTED TO SUCCESSFUL
PPPS IN POWER SECTOR
An enabling environment -National Energy Policy and
Energy Act, 2006.
Both recognise need for cost reflective retail tariffs
and IPP charges that should, among others, enable
the investors to attract capital and compensate them
for the risks assumed.
31
FACTORS THAT HAVE CONTRIBUTED TO SUCCESSFUL
PPPS IN POWER SECTOR
A mature regulatory framework – ERC was created in
1997 and has been approving PPAs and setting retail
tariffs.
Capacity of KPLC to procure, negotiate, and monitor
IPPs.
32
FACTORS THAT HAVE CONTRIBUTED TO SUCCESSFUL
PPPs IN POWER SECTOR
Financial stability of KPLC as the off-taker.
Sound governance of KPLC and energy sector
leadership.
Structured competitive procurement process of
PPPs.
33
34
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