Committee Formed to Review and Renegotiate Power Purchase Agreements

The notice provides that the term of the Standing Committee shall be nine months with effect from 1 March 2021 although the Cabinet Secretary may extend such term through a gazette notice.

The scope of the Standing Committee includes the following:

1. reviewing the law, policy documents, studies, and reports relevant to the proposed PPA renegotiations such as the Energy Act, 2019, the Feed-in-Tariffs (FiT) Policy, the various task force committee reports on independent power producers and power purchase agreements, the ongoing energy auction study and KPLC’s submission on PPA renegotiation and any policy document guiding power purchase agreements.
2. reviewing the terms of the operational and committed power purchase agreements, letters of support and associated project agreements to identify parameters or issues for negotiation with the objective to optimize power purchase costs.
3. reviewing risk allocation in the operational and committed power purchase agreements and its impact on KPLC, the energy sector as a whole and the economy and recommending optimal risk allocation between the developers and KPLC to mitigate risks.
4. developing a suitable strategy to engage the power generators in renegotiations for sustainable solutions for the energy sector and economy.
5. reviewing committed generation projects with a view of transitioning to the energy auction system.
6. recommending a standardised take and pay structure for future power purchase agreements.
7. developing a program for the renegotiation of power purchase agreements.
8. drafting standard letters of information and invitations to generators for renegotiations.
9. renegotiating the power purchase agreements.
10. preparing monthly progress reports and a final report on the above scope.
11. undertaking any task on the review and renegotiation of power purchase agreements that may be assigned by the Cabinet Secretary.

Based on the above, it would appear that the Ministry of Energy intends to, among other things, review the existing framework relating to power purchase agreements and undertake the re-negotiation of the existing power purchase agreements and letters of support. This review has come amidst talks of a looming shift in the procurement of certain renewable energy projects i.e., from the FiT regime which provides for a fixed tariff to an energy auction system that will enable KPLC to procure electricity through a competitive bidding process from independent power producers at the lowest possible price.

There have also been reports of a shift in the approach to tariffs under power purchase agreements to a ‘take and pay’ system. In a ‘take and pay’ system, independent power producers would only be paid for the actual electricity that is transmitted onto the grid. This is in contrast to the ‘take or pay’ system (adopted in several of the existing power purchase agreements) where independent power producers are required to make power available to the off-taker for transmission onto the grid but are paid according to the agreed tariff, irrespective of whether or not the off-taker actually takes the available power.  The adoption of a ‘take-and pay’ system largely transfers risk to independent power producers. Lenders have typically adopted a conservative approach while assessing the bankability of projects on a ‘take-and pay’ system as projects with a ‘take or pay’ model are generally deemed to be more bankable.

The move to review power purchase agreements follows a similar process that the Ministry of Energy undertook in 2016 following a Presidential directive that all power purchase agreements should be reviewed. The task force report constituted in 2016 has not been made public.

At this stage, it is not entirely clear whether and how the constitution of the Standing Committee will have an impact on the existing power purchase arrangements with KPLC, any ongoing negotiations between KPLC and various independent power producers, the issuance of any approvals by the Ministry of Energy in respect of various related matters and whether it will affect the status of any new expressions of interest applications under the FiT regime. The timelines for when the renegotiations will begin are also not clear.

We are following this matter closely and will keep you updated on any developments.

Should you have any questions regarding the information in this legal alert, please do not hesitate to contact Amyn Mussa.

The content of this alert is intended to be of general use only and should not be relied upon without seeking specific legal advice on any matter.