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

With the advent of several large IPPs, it soon became clear that the balance sheet of KPLC was not large enough to cover the amounts stipulated in the letters of credit that were required.

New IPPs coming up started demanding sovereign guarantees — hence the controversy between the Treasury and the Ministry of Energy.

Under the new innovation by the Cabinet, the government will now create a special $209 million escrow fund that will make it possible for KPLC to issue the letters of credit to the IPPs.

With regard to public-funded projects implemented by state-owned companies and supported by multilateral lenders, financial closure has been difficult to reach for totally different reasons.

First, it could not happen until parliament lifted the ceiling on external debt. Under the External Loans Credit Act, the limit was set in Januaury 2009 at Ksh800 billion ($10 billion).

Secondly, many international lenders could not commit because the government has been pursuing a debt management strategy preventing the country from taking loans that do not have a 35 per cent concessionary element.

Which is why the Cabinet has now decided to create another escrow guarantee fund that will allow KenGen and the Kenya Electricity Transmission Company (Ketraco) to borrow money that does not meet the 35 per cent concessionary threshold from EIB and KfW of Germany.

The loans from these two lending institutions will finance additional power generation of 421MW.
Ketraco will also be able to access semi-concessional loans from the Nordea Bank of Finland to construct a substation in Juja and to construct a double circuit 220kv line from Lessos to Kisumu.

Following the decision by the Cabinet to create the escrow guarantee funds, the Treasury will have to present a sessional paper in parliament to effect the changes.

In a conversation with The EastAfrican, Energy Permanent Secretary Patrick Nyoike said that the government will still support the IPPs to secure guarantees provided under either the World Bank’s Multilateral Investment Guarantee Agreement (Miga) or a Partial Risk Guarantee arrangement by IDA.

The inordinate delays in implementation of the projects had raised concerns among energy sector pundits, especially since most of the projects in question were chosen on the grounds that they had short implementation lead times.

Currently, KPLC is connecting new consumers at the rate of 200,000 a year. Demand for electricity has grown exponentially. The reserve margin — the gap between peak demand and what is available — is narrowing by the day.

The Kenyan interconnected power system currently has an effective capacity of 1,289MW during average hydrology. This comprises 719MW hydro, 163MW geothermal and 407MW thermal power, including 146MW of emergency capacity supplied by an emergency power producer. Peak demand is estimated at 1,172MW.