Dismay at proposal to scrap Kenyan guarantee

KENYA: Wind developers in Kenya might soon find it more difficult to obtain finance for projects after the country's energy regulator proposed the scrapping of government guarantees to buy energy.

The Kenyan government's Energy Regulatory Commission (ERC), which fixes electricity tariffs and approves power-purchase agreements (PPAs), proposed the change in March. It would make permanent the government's withdrawal of sovereign guarantees in October, which caused panic in the wind industry.

The ERC said that the government should only facilitate the signing of PPAs by the state utility, the Kenya Power and Lighting Company (KPLC), once projects have been approved by the Ministry of Energy.

Developers should use the PPAs to negotiate finance without having to seek additional support from the government in the form of sovereign guarantees, according to the commission's director for renewable energy Bernard Osawa.

Developers' demand for sovereign guarantees from the government is too much, says Osawa; PPAs are as good a guarantee as most developers in other countries get, he says.

The proposal would have to be officially drafted by the Ministry of Energy and approved by the cabinet. If it goes ahead, it could affect negotiations between financial institutions and wind developers, because lenders trust these guarantees as a more viable security against their funds than a PPA. To have a PPA as the sole assurance by the power purchaser of its future contractual obligations may not provide enough assurance to lenders since the government has nothing at stake should it not ensure the PPA is honoured.

The PPAs are based on the revised 2008 feed-in tariffs for renewable energy that pay $0.09/kwh for electricity supplied to KPLC.

Seven wind projects, with a total capacity of 625MW, have been delayed in Kenya for lack of financing. KPLC has been carrying $204 million of debt since 2003, which has put off would-be financiers. In October, the country's cabinet proposed the release of $209 million in sovereign guarantees from Kenya's foreign-exchange reserves. However, this was vetoed by the Central Bank of Kenya, which complained the payment would worsen Kenya's debt, a position that was supported by the International Monetary Fund.

Since then, the ministry has been negotiating with the World Bank to provide securities to renewable developers to unlock an estimated $1.6 billion for the development of these new energy sources. Kenya plans to generate an additional 800MW from wind energy by 2012.

Patrick Nyoike, the ministry of energy's senior official, said in October that Kenya planned to link all independent power producers with the World Bank's Multilateral Investment Guarantee Agreement or the International Development Association's partial risk guarantee arrangement, which should be able to provide guarantees for the delayed wind projects. However, this has not been achieved.

Developer Lake Turkana Wind Power has complained that the bureaucracy involved in getting guarantees under these arrangements could delay pipeline projects for even longer.

The 300MW Lake Turkana wind project, which is the largest in Kenya, has made progress after months of delays. In late March, a letter of support from the government revived hopes that construction of the project could commence later in December.

"We now expect to be able to close financial loan deals as soon as possible and get going with the work," Wageningen says.

Work on the project should start by December, with the initial 50MW running on the national grid by September 2013 and full capacity by mid-2014.

Government support for LTWP should unlock the investment potential of other independent power producers, Nyoike says.