The government guarantees would have helped wind developers facing project delays through lack of financing, and there are concerns that their withdrawal will mean that developers will struggle to contend with rising costs - especially road construction to wind farm sites and transmission lines. With an appreciating economy, costs of construction materials have been rising steadily, and the variation between projected and final cost may be higher than initially anticipated.
Lake Turkana Wind Power (LTWP), developer of the 300MW wind power project in northern Kenya, has raised concerns over the likely additional costs it faces, especially for project construction materials.
Two key projects have been put on hold until the decision by the Kenyan authorities to rescind the guarantees is reviewed and a solution found. These include a $15 million, 200 kilometre road covering part of the distance between the project site and Mombasa, and the building of 426 kilometres of transmission lines, initially estimated to cost $170 million.
LTWP had floated a tender for the upgrading of the road, with the winner due to have been announced by now. But this has also been put on hold until the guarantees issue is resolved. LTWP was hoping to generate 50MW of electricity by June 2011, but this goal has been pushed back to the end of 2012.
The road upgrade is vital to facilitate the delivery and installation of 365 Vestas 850kW turbines plus towers and blades from Italy and Germany at the wind farm's site in Loiyangalani.
Speaking in November at an energy forum organised by Kenya's energy ministry, LTWP chairman Carlo Van Wageningen said the turbines "would require the purchase of aluminium and steel parts whose prices have risen by about 15% over the last six months in the international market on increased demand by big consumers like China and India".
In June, the country's cabinet chaired by President Mwai Kibaki approved the guarantees, under which financial services regulator the Central Bank of Kenya would have been asked to release $200 million to enable the monopoly power purchaser and distributor, Kenya Power and Lighting Company, to issue letters of credit to independent power producers facing delays to projects through lack of financing. However, the decision was quashed two months ago in a move the government says is aimed at reining in public debt.
Finance minister Uhuru Kenyatta confirmed last month that the government is seeking alternative funding avenues since the cancellation of the guarantees may not be reviewed in the near future.
"We have established an inter-ministerial committee with World Bank participation to assist investors secure available alternative risk-mitigation products," the minister said.
According to energy minister Kiraitu Murungi, the negotiations between Kenya and international financial institutions led by the World Bank are seeking a way out of the sovereign guarantees debacle. "We are negotiating with Treasury and World Bank to see what is the best way out because we have to have these projects," Murungi said.
It is not all doom and gloom for developers, though. Kenya's electricity transmission company, Ketraco, has announced plans to invest $1.2 billion over the next four years in the expansion of the country's electricity network to cater for the anticipated power generation from the LTWP and imports from neighbouring Ethiopia. Ketraco's chief executive Joel Kiilu says the link between the wind farm and Suswa is slated for completion in 2013, a timeline likely to be affected by the delay to start the LTWP project.