Kenya to guarantee large energy projects

The Kenya Cabinet has at last moved to secure guarantees needed to speed up implementation of key energy projects whose progress have been dogged by financial uncertainty for nearly one year.

The Cabinet decision will unlock an estimated $1.6 billion in financing from the private sector and development lenders for energy projects.

Three critical wind power projects — including Turkana Wind Power, the largest wind farm in sub-Saharan Africa with a capacity of 300MW; as well as Olkaria 4, which is Kenya’s biggest geothermal power project with a capacity of 280MW — have not been able to reach financial closure after lenders pressed for sovereign guarantees and enhanced risk mitigation packages.

Others are the Songoro Hydropower Project (21MW), the Tana Hydropower Project (10MW), Ngong Wind Power Project (5MW), Early Geothermal Power Project (80Mw), the Kindaruma upgrade project (25MW) and Olkaria 1 and 4 (280MW).

Most affected by indecision over issuance of sovereign guarantees were public private partnership projects such as Turkana Wind Power, the Aeoulos Wind Power project in Kinangop (100MW), the Gulf Power medium-speed diesel power generation project (84MW), the Triumph Energy medium-speed diesel project (84MW) in Athi and the Menelec medium-speed diesel (84MW) and OrPOwer 4 (54MW) projects.

Kenya has had to make the difficult choice of issuing guarantees to large energy projects and risking a massive spike in its public debt in the process — reversing the trend of reduction in the size of public debt witnessed in the past 10 years.

As at 2002, public debt was at 65 per cent of GDP. But the figure has gradually come down to the current level of 43 per cent of GDP.

The Treasury has proved particularly reluctant to issue sovereign guarantees to the massive energy projects, arguing that the debt exposure would jeopardise the country’s international credit rating.
Kenya has been planning to float a Eurobond since 2006.

As the government procrastinated over the guarantees, the Treasury and the Ministry of Energy started pulling in different directions over the fate of the key projects — a good number of which are being implemented as independent power projects (IPPs).

Cabinet papers have been written and discussed, and one consultation after the other held at the Cabinet committee level under the Office of the Prime Minister on the matter.

In fact, there was a time last year when a Cabinet paper prepared by the Ministry of Energy could not be tabled because the Ministry of Energy and the Treasury could not agree on how to structure the guarantees.

That is why observers of developments in the energy sector are treating the latest move by the Cabinet to approve the guarantees as a sign of growing consensus within the government on how to enhance the mitigation risks regime for large power projects.

The most innovate arrangement Kenya has come out with so far is a new mitigation risk package for independent power projects.

When the first generation of IPPs were introduced, they were offered a risk package including power purchase agreements, capacity charges, insulation against fluctuations in both petroleum prices and foreign exchange and, most significantly, six-month letters of credit issued by the Kenya Power and Lighting Company.

Underfunded KPLC