KENYA: TASKFORCE ON THE REVIEW OF POWER PURCHASE AGREEMENTS

On 29 March, 2021 H.E. Hon. Uhuru Kenyatta, appointed a Taskforce for the Review of Power Purchase Agreements (the Taskforce).

The Gazette Notice relating to the establishment of the Taskforce, appointment of members and its terms of reference can be found here.

Key points to note with respect to the Taskforce are as follows:

Terms of Reference: 

1. Undertake a comprehensive review and analysis of the terms of all Power Purchase Agreements (PPAs) entered into by the Kenya Power and Lighting Company Limited (KPLC);

   KPLC has been entering into PPAs with the private sector for the better part of two decades. Carrying out the relevant risk analysis on all power purchase agreements will be quite the arduous task for the Taskforce and it remains to be seen whether the Taskforce will be able to complete a comprehensive review and achieve all of its objectives within the initial 6 months tenure.

   During this review exercise, It also needs to be borne in mind that PPAs were entered into at various stages of the Country’s power sector woes with some early PPAs perhaps having more onerous terms but required to (and have) provided power as opposed to resulting in a situation where Kenya has had to undergo extensive load-shedding. The cost-benefit analysis undertaken at the time these PPAs were entered into determined the business case for them and these bargains cannot be wished away now.

2. Probe the compliance of the PPAs and all associated agreements with Government policies, legislation and regulations and identify what appropriate actions should be taken, including the termination or renegotiation of the PPAs;

   PPA’s are legally binding contractual arrangements that cannot be unilaterally amended without the consent of the relevant counterparty. 

   Most, if not all, PPAs entered into by KPLC require an enforceability opinion to be provided by KPLC’s external legal counsel to confirm the validity and enforceability of the PPA and are also only entered into only after they have received an instrument of approval from the energy sector regulatory. Most of these PPAs are also supported by a GOK Letter of Support (pursuant to which GOK provides insulation for certain political risks) and the Letter of Support is issued together with an enforceability opinion from the Attorney General of the Republic of Kenya. KPLC will also provide warranties and representations to the seller under the PPA with respect to the valid, binding and enforceable nature of the PPA.

   Additionally, PPAs do not ordinarily contain termination for convenience provisions and termination must be linked to a specific event of default. Where KPLC is in breach of a PPA (e.g. for a repudiatory breach), KPLC will be liable to pay termination compensation to the seller under the PPA, which will usually include payment of all amounts outstanding under the senior debt financing agreements, equity funded as well as a return on equity. Most PPAs also provide for dispute by way of international arbitration. It would be most unfortunate for the country to find itself battling multiple arbitration proceedings for the unlawful termination of PPAs. Such actions do not bode well for Kenya’s image as a safe investment destination.  

3. Review the sustainability and viability of all independent power generation projects that have been proposed, are under implementation, or in operation, and make appropriate recommendations;

   We assume that this analysis will dovetail with the completion of the Least Cost Power Development Plan 2020 – 2040 which is currently being finalized. Questions also need to be asked of why there has been a failure of demand side facilitation by the public sector to match the supply side generation being provided by IPPs.  

4. Review the allocation of risk between the independent power producers and KPLC under the PPAs, and make appropriate recommendations;

   This has been an on-going organic process between the private sector and KPLC which has resulted in present day PPAs having a very different risk allocation compared to PPAs entered into several years ago.

   That being said, some of the key risks (KPLC credit risk, change in law, change in tax etc.) will remain risks which the private sector will have to be insulated against if such projects are to meet the requisite bankability requirements of funders.

   The Taskforce must also appreciate that negotiated tariffs are a function of risk allocation. Any attempt at switching the balance of risk allocation whereby more risk is assumed by the private sector will affect project bankability and most likely result in higher tariffs. In this respect, a switch to an energy auction system, where the risk allocation has not been carefully thought through, does not guarantee lower tariffs for the consumer.

   Questions have to be asked of the public sector’s delivery record on transmission and distribution infrastructure and the efficiencies within the existing grid system which are impairing KPLC’s financial position and also resulting in the pass through of such costs to the consumer. Looking at IPP contracts in isolation to these wider sector issues will not yield any desirable change within the sector. 

5. Review the Take-or-Pay approach applied under the PPA structure and recommend a viable Pay-when-Taken (merchant plant) approach, or any other viable payment structure, for use in independent power generation projects;

   Amending existing take or pay structures which are enshrined in contract will require approval from the IPPs in order for a legally binding variation to be effected. Revenue certainty is key in financing large scale power projects in Kenya and without any minimum payment guarantees being  in place, it is difficult to see how sponsors and lenders will muster up the appetite to allow such variation or continue to invest in the sector. 

6. Develop a suitable strategy for engagement with the independent power producers and lenders, in order to achieve relief for electricity consumers and ensure the long-term viability and sustainability of the energy sector;

   The Taskforce should focus on the various components of the consumer retail tariff and its integral elements. Whereas a lot of media attention has been focused on high consumer tariffs being down to IPP contracts, it should be noted that IPPs comprise less than 30% - 35% of Kenya’s overall generation capacity and there are other elements (included pass-through KPLC transmission and distribution losses) which play a part in high consumer tariffs. The Taskforce must also be willing to consider other factors (such as the high value of KPLC’s state corporation debtors) when considering whether the IPP contracts are really what is wrong within the energy sector. 

In carrying out its mandate, the Taskforce is required to consult with stakeholders in the electrical energy sub-sector including industry players, large electricity consumers, associations and lobby groups, regulators and Government agencies, and any other person or entity as the Taskforce deems necessary. We hope that there will be meaningful engagement with all industry players prior to any recommendations being made by the Taskforce.

The Taskforce will serve for a period of six (6) months with effect from the 29th March, 2021, but this period can be extended.

During the tenure of the Taskforce:

1. a moratorium has been placed on all PPAs not concluded as at 29th March, 2021, including any related letters of support and legal opinions pending issuance by the Attorney-General. 
2. a moratorium has been placed on the renewal of any PPA whose renewal would occur during the pendency of the Taskforce, with the exception of those that shall receive approval by the Board of Directors of the Kenya Power and Lighting Company Limited for the purposes of renegotiation but, at all times, subject to ratification by the Cabinet Subcommittee on KPLC.

As a key player in the Energy Sector in Kenya, Bowmans will seek to actively engage with the Taskforce to ensure that any recommendations made by the Taskforce strike a balance between the need to ensure the sustainability of the offtaker and the energy sector whilst at the same time respecting the sanctity of contractual relations and maintaining investor confidence in the energy sector.