Kenya to guarantee large energy projects

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.