President Uhuru Kenyatta formed a 15-member task force to review all the power purchase agreements that producers have entered into with Kenya Power with a view to giving the public value for money in reduced tariffs.
Critical to the review is the “take-or-pay” approach. Notably, take-or-pay clauses have dominated power purchase agreements (PPAs) in the local electricity generation sector. A PPA is both a legal and commercial document between a power producer, as the seller, and the wholesale electricity buyer, or off-taker. It is at the heart of any power generation project.
An essential component of a PPA is pricing, which ensures cashflow projections and allows forecasting of revenues over a project’s lifetime and, therefore, determines the viability and profitability position. As such, the economics of the project revolve around the terms and conditions of the PPA, which go way beyond the purchase and sale of energy.
Departure towards “pay-when-taken” would be unattractive to prospective lenders and investors in electricity generation, potentially hindering the promotion of energy and infrastructure projects.
Take-or-pay clauses are the type of commercial guarantees without which investors and funding bodies will be reluctant to finance energy infrastructure projects, thus reduce the growing investor appetite.
Merchant power plants, which sell power into competitive wholesale markets and are financed by investors under the pay-when-taken regime, are exposed to a different kind of risk — in terms of the volume of electricity they sell, otherwise known as demand, and the price of that electricity at a given point in time. This is in contrast with rate-based financed power plants under take-or-pay.
However, take-or-pay is not always commercially viable when the position of the purchaser/off-taker is considered, as the purchaser is required to pay for electricity it does not intend to use.
For instance, in the year ended June 2020, Kenya Power paid Sh82 billion in non-fuel costs, basically power purchase costs, to various electricity producers. This is retrogressive when uptake fails to match supply, not to mention the knock-on effects on consumer prices.
Especially with the advent of renewable energy, more countries are embracing pay-when-taken to reduce the high fixed costs of contractual obligation between utilities and producers. High power tariffs are cited as an impediment to industrialisation, attributed to the high cost of doing business.
In Africa, Ghana is the only country implementing pay-when-taken PPAs; South Africa is considering to adopt it. Kenya and South Africa should follow Ghana’s lead.Accra cited perennial financial challenges that have dogged utilities for the regime change.
The task force must strike a balance between that which will bring about value for money and guarantee the certainty that comes with investor confidence in the electricity generation market.
Mr Daniel, an energy economist, is the director of policy and research at The Africa Utility Forum. firstname.lastname@example.org.