The PPA Taskforce was appointed by HE President Uhuru Kenyatta on 29th March 2021 against the backdrop of a sustained public outcry from consumers, businesses and individual Kenyans alike, about the high cost of power supplied by KPLC, especially when compared to the cost of power in neighbouring countries and in peer economies. The Taskforce's appointment was also recognition and acknowledgment of the risk posed by comparatively high power prices to Kenya's ambitions of becoming a globally competitive, newly industrialised, middle income and prosperous country by 2030. Government is also deeply concerned about KPLC's parlous financial state, significant blame for which has been attributed by many Kenyans to the cost of power procured from IPPs. Other features that the Kenyan public find inexplicable about Kenya's power situation include the paradox of cries that Kenya has too much power generation capacity amidst widespread underBserved and frustrated demand, and unreliable supply of that power. This unwelcome mix of high costs, frustrated demand, unreliable supply and a financially challenged utility arguably finds expression in Kenya's per capita power consumption ranking extremely low among peer economies.
The cost of power purchased by KPLC for onward distribution to consumers is only one component of KPLC's total costs, but it is the largest one, accounting for 66% of total revenues for FY 2020. Understandably therefore, the Government felt it imperative that as it began addressing the causes of Kenya's relatively high power costs, it starts with a review of how this power is purchased, focusing initially on PPAs entered into between KPLC and IPPs. IPPs supply 25% of KPLC's power, but account for 47% of KPLC's power purchase costs. By way of comparison, KenGen supplies 72% of KPLC's power, but accounts for 48% of KPLC's power purchase costs. Purchases from REREC and imports from Uganda and Ethiopia account for the balance 2% that KPLC purchases. Seen from this perspective, the rationale for this initial focus on KPLC's PPAs with IPPs is clear, prima facie there is a misalignment between the share of IPPs' contribution into KPLC's power mix and the cost of that power.
Specifically, the Taskforce's Terms of Reference were to:
1. Undertake a comprehensive review and analysis of the terms of all PPAs entered into between KPLC and IPPs;
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;
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;
4. Review the allocation of risk between the IPPs and KPLC under the PPAs, and make appropriate recommendations;
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;
6. Develop a suitable strategy for engagement with the IPPs and lenders, in order to achieve relief for electricity consumers and ensure the long-term viability and sustainability of the energy sector;
7. Review the prevailing methods for sourcing of IPPs and recommend appropriate alternative sourcing frameworks, including energy auctions;
8. Recommend legislative, regulatory, policy or administrative interventions for the implementation of the recommendations and strategies of the Taskforce;
9. Develop a detailed action plan for implementing the recommendations made by the Taskforce; and
10. Perform any other function or tasks as the Task Force would find necessary in order to deliver on its mandate.
In carrying out its mandate, and in order to minimise duplication and repeat work, the Taskforce also reviewed recommendations from two previous official reports on PPAs, for 2018 and 2021. The Taskforce established that very few of these recommendations have been acted upon, and by all accounts not even the 2018 was made public. There were some useful and actionable recommendations in these reports, and it is impossible to avoid the conclusion that as a country we would have found ourselves in a far better position today had we acted on them. Accordingly, one of the Taskforce's recommendations is the expeditious implementation of these previous recommendations.
The Taskforce's methodology involved:
a. Four workstreams to focus on specific areas of review. These workstreams were Legal; Policy; Technical & Financial; and Strategy, Planning & Communications;
b. Structured engagements with stakeholders, including government entities such as MoE, KPLC, EPRA, KENGEN, National Treasury; and sector players including IPPs, industry groups, consumer groups (a full list of those with whom the Taskforce engaged is set out in Annexure 7, Schedule 3); and
c. Periodic reporting back and accountability to the Cabinet Sub-Committee on KPLC as stipulated in the Gazette Notice setting up the Taskforce. During its six-month lifespan the Taskforce submitted three interim reports to the Cabinet Sub-Committee, and was invited to make one presentation.
The Taskforce has come out with a detailed set of recommendations, which are summarised in the implementation framework in Chapter 13. This framework includes timelines, responsibilities, and the instruments required to effect the recommendations. Draft instruments have also been provided. We believe that this implementation framework and the tools provided by the Taskforce will differentiate this from previous Taskforces. Getting all these recommendations implemented will take time. Being acutely sensitive to Kenyans' desire for the authorities to get to grips with high power costs as soon as possible, the Taskforce has also come up with 10 priority recommendations which will have impact within the next six months. These recommendations are set out in this Executive Summary.
The Taskforce's recommendations, both priority and medium term, have as their organising impetus and objectives the reasons why the Taskforce was established in the first place:
We will reduce consumer tariffs from an average of KES 24 per kilowatt hour to KES 16 per kilowatt hour within four months following submission of the Taskforce Report.
Our analysis demonstrates that within this period KPLC should be able to generate annualised savings of USD 69 million-USD 77 million (KES 7.5 billion-8.3 billion), and in the medium-term savings of USD 114 million-USD 122 million (KES 12.4 billion-KES 13.2 billion) on power purchases from IPPs alone, which the company should be able to share with consumers. This does not include efficiency savings and increased income that a more commercially-minded and more efficient KPLC can generate.
These savings and tariff reductions are possible and doable. We have the data. We have the implementation tools. We have, or can obtain, the expertise to drive this process from Government's and KPLC's side.
Going forward, we will look to introduce tariff predictability and stability into PPAs.
Key to this will be:
i. Benchmarking proposed IPP tariffs against KenGen's tariffs for technologies where KenGen is present. In turn, pressure will be maintained on KenGen to keep working on efficiencies and adopt innovations that drive down costs and, therefore, tariffs; and
ii. Exploring the use of KES as the PPA currency.
In the drive to get to these lower tariffs, the Government of Kenya will fully adhere to contractual obligations and provisions.
We recognise fully that both Government and KPLC have entered into contracts with IPPs. We will work within the stipulations of these contracts.
Underpinning our recommendations is the goal of having a rational, fair, predictable, consistent and accountable PPA procurement and monitoring process.
We cannot afford a system that relies on investors having to spend copious amounts of time and resources divining who is/are the real power/s behind decision making, what will make him/her/they decide favourably, and when that will be. If we continue with what has been a capricious way of arriving at decisions, we will find ourselves forever constituting Taskforces to get us out of self-made problems. As it is, this is the fourth such Taskforce on PPAs in four years, including a short lived one earlier this year. We cannot go on like this. The uncertainty surrounding the PPA process is unfair to Kenyans and investors alike, and contributes to a "Kenya premium" being levied on IPP projects.
We must plan better for our power needs.
The paradox of power generation overcapacity amidst unmet or frustrated demand has its roots in how we plan for our power needs. Aspiration must be matched by realism regarding power demand patterns, with regular and frequent updates in order to avoid the kind of imbalances that we have today.
Institutional coordination among energy sector players is critical to our attaining sustainable, affordable and reliable power.
We have a multiplicity of players involved in IPPs/PPAs. It is critical that they work with clear objectives and mandates if we are to get the best out of IPPs/PPAs.
Rightafitting KPLC's organisational and operational structures is now a strategic imperative, and not only because of PPAs.
In the process of carrying out its assignment, and notwithstanding that its mandate was not to review KPLC, the Taskforce came to the firm conclusion that any recommendations it made would be redundant if not accompanied by comprehensive reforms to the organisational and operational structures of KPLC to make it fit-for-purpose, its purpose being to deliver affordable, accessible and reliable power while generating surpluses to fund its activities and deliver returns to shareholders.
Kenya has chosen the path of a commercially driven state owned entity to be the sole (for now) power utility. Like any other commercial enterprise, KPLC's vision ought to be driven towards maximising shareholder value by enhancing customer experience, business expansion, and managing operational costs. Based on submissions received, and also based on its own analysis, the Taskforce believes reforms are urgently needed at KPLC, and recommends the rapid commencement and conclusion of such reforms in the following areas:
i. Organisational Structure;
ii. Procurement Reform;
iii. Management of System/Technical Losses;
iv. Governance Reforms; and
v. Financial Restructuring.
Regarding PPAs specifically, the Taskforce experienced delayed or nonBexistent provision of critical information from KPLC, causing initial delays in the commencement of the Taskforce's work. While information did eventually trickle in following persistent follow ups with KPLC's management and, in some instances, engaging the KPLC Board to push KPLC's management to provide requested information, in the end there was information that the Taskforce simply did not receive. Such information includes some IPPs' audited financial models; tender evaluation reports for thermal plants, and data relating to the monitoring of PPAs, including fuel charges. This lack of cooperation forced the Taskforce to devise workarounds in order to overcome the information deficiency.
This experience is one that the Taskforce believes needs serious and urgent attention since it is reflective of broader problems at KPLC. There are two conclusions to be drawn to this inability or refusal to provide information:
i. KPLC does not have the information. This would be an extremely alarming situation. Power costs accounted for KES 87.5 billion or 66% of KPLC's total sales in FY 2020. Of this, IPPs accounted for KES 44.4 billion or 47% of total power costs. Given the amounts involved and their impact on both KPLC and consumer power prices, it is simply near inconceivable that KPLC would not adequately monitor the performance of suppliers to confirm that it is paying for what it gets; or
ii. KPLC has the information but refused to release it. This speaks to an attempt to defeat efforts aimed at streamlining the power sector in order to make power an effective enabler of economic development.
Either conclusion is extremely alarming in the extreme. In order to assist the KPLC Board get control of what appears to be a situation of management helplessness, incompetence or defiance, the Taskforce wrote formally to the Board pointing out these information deficiencies, and also recommending that the Board urgently institutes a forensic audit of:
i. How existing PPAs were entered into and how they are monitored; and
ii. An audit of KPLC's key commercial customers in order to determine the causes and extent of system losses.
The following are priority recommendations to be implemented within 6 months.
1. Set up an Implementation Committee, reporting to the Cabinet Sub-Committee on KPLC, to commence implementation of the Taskforce's recommendations, with an initial one-year mandate.
2. Within four months, enter into and conclude negotiations with IPPs on reductions in PPA tariffs. Such negotiations to be within existing contractual arrangements.
3. All unsigned PPAs to be cancelled. This will give room for any new PPAs to be aligned to the LCPDP as reviewed and, where necessary, revised under the new arrangements being recommended by the Taskforce.
4. Institute and intensify reforms at KPLC to refit it into a proper commercial entity, with the reform process being under the oversight of the PPA Taskforce Implementation Committee. This reform process to be undertaken by the KPLC Board.
5. KPLC to take the lead role in LCPDP formulation and related PPA procurement.
6. KPLC to institute Due Diligence and Contract Management frameworks for PPA procurement and monitoring. We have provided drafts of these tools.
7. KPLC to institute one and five-year rolling demand & generation forecasts and associated models.
8. KPLC to adopt standard PPAs and proposed Government LOS. We have provided drafts of these documents.
9. Forensic audit by KPLC on all PPAs' procurement and monitoring and also an audit of system losses.
10. In line with the Constitutional stipulation for transparency in public sector dealings, KPLC's annual reports to include the names and beneficial ownerships of IPPs with which it has contractual arrangements.