Kenya: Power utility struggling to pay producers’ dues

The Kenyan government has been struggling with the financial burden of soaring global fuel prices and dollar scarcity, with the Power and Lighting Company (KPLC) unable to pay Independent Power Producers (IPPs).

According to documents seen by The Africa Report, the KPLC disclosed to parliament that Lake Turkana Wind Power (LTWP) was paid the highest amount of KSh1.53bn ($10.7m) during the nine-month period.

Other top beneficiaries, according to the documents, were Kipeto Energy PLC and Rabai Power. Ethiopian Electric Power (EEP) received KSh327.48m for the period it exported 200MW to Kenya from October 2022.

LTWP, Kipeto Energy PLC, and OrPower4 provide about 42% of the total power dispatched to the national grid. They are pressing the state utility to settle the defaulted amounts and interest charges that would have accrued by the time of settlement.

Outstanding payments

The KSh4.73bn ($33.3m) paid to all the 30 power firms in nine months is less than one-quarter of the KSh21bn the three IPPs cumulatively demanded between February and June 2023, which indicates numerous such payments remain outstanding.

The Power Purchase Agreements (PPAs) are structured to compel KPLC to settle arrears within 30 days, failure to which the government should take over the interest-accruing debt due to existing letters of support offered by the National Treasury.

“It (non-payment) is very bad. [The] treasury has to pay us because of the letter of support. There is already a default of the contract. KPLC has only paid January bills which happened last month (June),” Kipeto chairman Kenneth Namunje tells The Africa Report.

“They are saying there is a problem with the dollar in the market […] We can’t be paid in Kenya shilling.” 

Kipeto Energy PLC, which is in a 20-year contract with KPLC, is demanding an overdue payment of $28.55m for the past five months since January 2023. It wrote to the exchequer two months back concerning the defaults.

LTWP is demanding £67.16m while Orpower4 is owed $47.71m that accrued until the end-June 2023.

IMF pressure

The defaults mirror the deepening financial woes of the state utility, which is under the radar of the IMF for a structural overhaul supported by hiking of consumer tariffs to ease the burden on the national treasury.

The multilateral lender has praised Kenya’s decision to hike electricity tariff which has left some consumer segments paying more by up to 63% since April 2023 amid high cost of living spiralled by energy prices.

“Together with this new tariff structure, timely pass-through of variable costs, and implementation of the Cabinet-approved Action Plan, it is envisaged that KPLC’s liquidity position will improve and there will be no need for extraordinary support for the company,” IMF said in its latest report after approving the disbursement of a $415.4m loan.

Part of the action plan involves developing a turnaround strategy by reducing system losses, transferring assets to Kenya Electricity Transmission Company (KETRACO) by the end of 2024, and settling the KSh19.4bn owed to Rural Electrification Schemes (RES).

KPLC is expected to announce at least a 25% dip in revenue for the period ending June 2023 after giving investors such a warning last May. But with KPLC’s financial position taking a contrasting shape, more policy shifts are likely to be seen to help the utility recover liquidity gaps, say some experts.

“Kenya Power has several issues which must be resolved first. There are, for instance, social programmes that are never reimbursed and are affecting their books. Recommendation of the presidential taskforce has never been implemented,” says George Bodo, a market analyst at Genghis Capital Ltd.

Budgetary support

President William Ruto bowed to the IMF’s pressure to end the 15% cut in power costs issued by the Jubilee regime to ease the cost of living. The cut ended in December 2022 after leaving a liquidity gap that attracted KSh.3.525bn in extra-ordinary budgetary support from the treasury.

Meanwhile, the new Kenya Kwanza administration has intensified its investigation on the shareholders of existing IPPs that bagged lucrative deals under the previous Jubilee regime.

It (non-payment) is very bad. [The] treasury has to pay us because of the letter of support. There is already a default of the contract. 

Parliamentarians want to uncover any corrupt dealings perpetrated by former employees within the Ministry of Energy, KPLC, and top officials under the presidency of Uhuru Kenyatta, whose rule came to an end last year.

About 10 IPPs are on the radar of the National Assembly Energy Committee. These include Rabai Power Ltd, LTWP, Orpower4, and Kipeto Energy Limited Company. Tsavo Power, Iberafrica Power (EA) Limited, Thika Power, Gulf Power, Triumph Power Generating Co. Ltd, and Strathmore University are also on the list.

Failed negotiations

Kenya has unsuccessfully tried to renegotiate previous power deals as per the recommendation of the 2021 presidential task force. 

The last renegotiation attempt started in July 2022 but flopped by December last year at a time when Kenyan households and businesses were waiting for reduced power tariffs.

Some firms, such as Rabai Power Ltd, instead hiked the cost by 46% in 2022 to $0.17 per unit of wholesale power from the previous rate of $0.11 per unit in 2021.

This is way higher than about KSh5-7 ($0.035-0.049) per unit charged by the state-owned Kenya Electricity Generating Company (KenGen). But sector players have always defended their costly prices, noting that KenGen enjoys an amalgam of advantages that allows it to offer cheaper rates to KPLC.

The private producers say KenGen has recouped its investment costs, most of which were supported by the government.

The private producers are consequently reluctant to review the costs on the grounds that they are still serving huge loans drawn during the investments phase. The private sector is also irked by the tiresome licensing process which affects project costs and timelines.

IPPs must have a signed power agreement with KPLC and be approved by the energy regulator before proceeding to mobilise funds for construction. KenGen, at times, is exempted from that process.

“There is a need to ensure a balanced approach which ensures the sustainability of the electricity sector in Kenya,” says George Aluru, the chairman of the Electricity Sector Association of Kenya (ESAK), the lobby group for the IPPs. 

“The ability to charge cost-reflective tariffs based on prudently accrued generation, transmission, distribution and retail costs is critical.”