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The Cabinet Secretary for the Ministry of Energy, through Gazette Notice No. 2219 published on 12 March 2021, appointed a committee primarily assigned the review and renegotiation the existing power purchase agreements entered into between various independent power producers and the Kenya Power and Lighting Company Limited (KPLC) (the Standing Committee).
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:
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.