FLATULATION

Weak shilling gave IPPs a windfall - Ngumi report

The report calls for a need to develop locally denominated PPAs to promote use and adoption in local power contracts.

In Summary
  • Last year, the power distributor paid Sh93.9 billion to IPPs
  • Tsavo Power signed a deal with Kenya Power in 2001 when the dollar was trading at Sh72, the greenback is now at Sh111
A customer in Loresho, Nairobi, keys in tokens in her meter box on April 25, 2018. /ENOS TECHE
A customer in Loresho, Nairobi, keys in tokens in her meter box on April 25, 2018. /ENOS TECHE

Electricity consumers in Kenya are paying heavily for the weakening shilling, the latest review of Power Purchase Agreements (PPAs) shows.

The report by a presidential task force to look into power deals between Kenya Power and Independent Power Producers (IPPs)  shows the country is paying Sh31 more per dollar for a deal entered when the US currency was trading at Sh72 in 2001. 

''Most of the PPAs executed between the off-taker and IPPs in the country are denominated in foreign currency,'' the detailed report reads in part. 

According to the task force set up by President Uhuru Kenyatta, the government bears the responsibility to make dollars or euros available, while the off-taker covers any exchange rate fluctuation risks as well as inflation, by passing the additional cost to the consumer.

For instance, Tsavo Power signed a dollar-denominated power agreement with Kenya Power in 2001. The currency was trading at Sh72. Today, the dollar is trading at a high of Sh111, Sh29 more. 

The deal between the two companies, however, expired last month.

Rabai Power on other hand is now earning at least Sh22.40 more per dollar for the deal signed in May 2010 when the US dollar was trading at 107.63. 

The contract which expires in May 2030 means the power producer is likely to reap more as the shilling slides further against the US dollar. The shilling was trading at Sh111 on Monday.

Thika Melec Power Plant is another IPP that continues to reap heavily from the shilling fluctuation. 

According to the report, the Euro-denominated power purchase deal was signed in 2014 when the currency was trading at 110.17.

This means Kenya Power requires at least Sh19 more to purchase a Euro to repay the firm. Euro is trading at Sh130.03

Triumph Power Plant signed an agreement with Kenya Power in July 2015 to supply energy until 2035. The dollar-denominated deal was signed when 102.31 of the local currency was needed to buy a dollar. 

Kenya Power is currently forced to shoulder an extra Sh7.60 per dollar to repay the power producer. This is likely to increase as the shilling further drops against the greenback. 

According to the report which is now under implementation stage, the life of a PPA averages 20 years and the exchange rates between the Kenya shilling and the US dollar/Euro is bound to change significantly over the twenty (20) years. 

The task force has recommended renegotiation of some of the power deals, suspension of expensive ones, and termination of ongoing negotiations.   

The report calls for a need to develop locally denominated PPAs to promote use and adoption in local power contracts.

''The Taskforce recommends that all future PPAs should be denominated in Kenya Shillings. Stability of local currency will enhance bankability of projects,'' the report reads.

It adds that a monetary policy implementing agency will be required to ensure stable macroeconomic stability to avoid fluctuations in the local currency and erosion of the real value of money.