Kenya revives power purchase agreements, aiding foreign investment efforts

Kenya's cabinet approved on Feb. 28 the removal of the September 2021 moratorium on new power purchase agreements (PPAs).

The moratorium was put in place by previous Kenyan president Uhuru Kenyatta's 'PPA Taskforce' in September 2021, suspending activity for investors seeking agreements with the government to sell power to the grid. The PPA Taskforce aimed to reduce the cost that the heavily indebted state-owned utility Kenya Power was paying independent power producers (IPPs) for electricity.

According to S&P Global Market Intelligence sources, the taskforce successfully renegotiated PPAs with three small IPPs under the Kenyatta administration, but there has been no further progress since President William Ruto took office in September 2022.

Resuming the issuance of PPAs and deprioritizing contract renegotiations aligns with the government's aim to increase foreign direct investment (FDI) to counterbalance efforts at fiscal consolidation.  Precedents of unilateral PPA alterations or cancellations have been unsuccessful given the resulting threat of costly international arbitration claims and reputational damage hindering foreign investment. These precedents include Ghana's attempt to stop paying IPPs for power not consumed in 2019.

FDI and GDP growth

Kenya can ill-afford such a situation. Increasing FDI has become an increasingly important factor for GDP growth because of deep public spending cuts and a large trade deficit exacerbated by high food, fuel, and fertilizer prices. Kenya is also facing debt stress and has been forced to cancel plans to borrow long-term debt from international capital markets.

Recent efforts to improve Kenya Power's financial position and reduce its future deficits are likely to improve its ability to pay creditors and suppliers. This is a positive development for IPPs selling power into the grid that often experience payment delays. Improvement measures include debt repayment moratoria for some of the utility's debts (excluding commercial loans) organized by several development finance institutions and the Kenyan government, as well as the highly probable increase in power purchase costs for consumers, which is to take effect on April 1.

The Cabinet has committed to engagement with IPPs under the Renewable Energy Auction Policy (REAP). The policy was designed by the former government to increase competition among IPPs, and while it is unclear whether the current government will make adjustments, major changes are unlikely.

In its current form, REAP will be applied to all new wind and solar power projects and other renewable energy projects with a capacity of over 20 megawatts (MW). Projects to be developed under REAP would have to tender a bid based on a US dollar price per kilowatt hour at which the power would be sold. The authorities would accept the lowest-cost bids first, with bids accepted sequentially (in terms of increasing unit cost) until the government's target power capacity for the bid round was covered.

Geothermal projects

Biogas, biomass, and hydropower projects under 20 MW would be approved under the existing FiT policy, while geothermal projects would be approved separately under the Policy on Licensing of Geothermal Greenfields, given their higher upfront costs.

The government is likely to favor development of new geothermal power stations over solar and wind projects in the one-year outlook. S&P Global Market Intelligence sources indicated that new Cabinet Secretary for Energy Davis Chirchir wants to increase the reliable baseload power supply before adding more intermittent sources of power (that is, solar and wind power) to the grid.

Although Kenya began importing power from Ethiopia recently and it is improving energy connectivity with Uganda and Tanzania with cross-border transmission lines, the government favors domestic projects for energy security reasons, particularly using geothermal sources. To this end, on Feb. 28, the cabinet approved projects to add power capacity at the Olkaria I and Olkaria IV geothermal power station sites and are in negotiations with investors planning to construct another geothermal power project at the Menengai Crater in Nakuru county.

Indicators of changing risk environment

• Approval of additional geothermal projects beyond the Globaleq Menengai development would make progress with new solar and wind power projects more likely.

• If main opposition leader Raila Odinga organizes sustained mass protests after power tariffs are increased on April 1, the provision of subsidies will become more likely, hindering Kenya Power's ability to improve its financial position and increasing the risk of delayed payments to its suppliers.

This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.