By Patrick Hirsh, Head of Project Finance, Bowmans South Africa and Aleem Tharani, Head of Projects, Energy and Infrastructure, Bowmans Kenya
Two major African energy markets that had lost their sparkle are seeking to rekindle consumer and business confidence. This article looks into how transparency and accountability can reignite energy markets in Kenya and South Africa.
Each in its own way, Kenya and South Africa are showing signs of emerging from the sector-wide issues that have been bogging down their economies.
Why demand has dimmed in Kenya
In 2013, the Government of Kenya announced plans to add 5,000MW of new generation capacity to the national grid by the early 2020s, more than doubling the then existing capacity. That proposal has since been put on the back burner because of stagnating demand for electricity, particularly among existing large-scale industrial consumers.
Households in Kenya consume relatively little electricity. Average household consumption is estimated at around 30kWh per month. This is despite the trebling of the residential customer base of the national utility, the Kenya Power and Lighting Company (KPLC), which grew from two million households in 2011 to six million in 2017.
Issues with quality and reliability of supply are two of the reasons for reduced demand. Pricing uncertainty is another reason. KPLC routinely levies surcharges linked to oil prices and local currency fluctuations, pushing up electricity prices and presenting challenges in budgeting for businesses and households alike. Instability of the grid, and perhaps relatively high connection costs, also result in many people still living ‘under the grid’.
Business base being eroded
The erosion of the Kenyan utility’s main revenue base continues. An estimated 55% of its revenues come from 3,600 large, mostly industrial power users, some of which are starting to migrate off the grid in favour of what they see as more attractive distributed generation options.
Not that distributed generation is without its shortcomings. Amid policy and regulatory uncertainty, there is a lack of transparency on power purchase agreements (PPAs) and utility expansion plans, and clarity is needed on policies to integrate distributed assets into the central grid.
Access to finance is also a challenge for smaller factories. Conventional capital from banks is practically unavailable for commercial and industrial projects, while private lenders offer expensive capital.
Some solutions, including much-needed transparency, might be on the way.
Government takes action
At the end of March 2021, President Uhuru Kenyatta appointed a task force to review all PPAs entered into by the KPLC, with a view to achieving greater transparency in the electricity supply chain, addressing high electricity prices and bolstering the long-term viability and sustainability of the energy sector.
The mandate of the task force includes:
- probing all PPAs and related agreements to check compliance with Government policies, legislation and regulations, and identifying appropriate action. This could include terminating or renegotiating PPAs that are found wanting;
- reviewing the sustainability and viability of all independent power producer (IPP) projects that are on the table, being implemented or in operation;
- reviewing the allocation of risk between the IPPs and KPLC;
- reviewing the take-or-pay approach applied under the PPA structure and recommending a viable pay-when-taken (merchant plant) approach, or any other feasible payment structure, for use in IPP generation projects; and
- developing a suitable strategy for engagement with the IPPs and lenders.
Businesses and consumers in Kenya eagerly await news of the task force’s progress towards a more efficient, cost-effective and transparent energy landscape.
Meanwhile, in South Africa, some seismic shifts are taking place in the sector after years of rolling blackouts.
South Africa galvanised into action
On 12 August 2021, South Africa’s Minister of Mineral Resources and Energy released the much-awaited exemption which raises the registration threshold for self-generation facilities from 1MW to 100MW. This has been widely heralded as unlocking significant opportunities for the private sector and should assist in introducing additional generation capacity into the stressed South African grid.
The amendment will allow a generation facility, including an IPP of up to 100MW, to sell electricity to ‘an end-use customer’ – meaning a customer who consumes the power itself.
The biggest beneficiaries of this change will be large industrial and mining companies who will be able to purchase electricity from an IPP for all the power needs within their groups and have the power ‘wheeled’ through the grid to facilities throughout the country. This will allow them to lock in a long-term price for electricity from an IPP under a PPA and obtain certainty on price increases over a long-term horizon.
Two other major energy-related developments are also unfolding in South Africa.
One is the anticipated mid-October 2021 announcement of selected bidders for round 5 of the Renewable Energy Independent Power Producer Programme (REIPPP) for the procurement of 2 600 MW from onshore wind and solar photovoltaic energy. The cut-off date for submission of bids was 16 August 2021.
The other is the Risk Mitigation IPP Programme for 2,000MW of new generation capacity to help close the immediate electricity supply gap.
While selected bidders for the Risk Mitigation IPP were announced earlier this year, the programme has been mired in controversy, specifically in the selection of three projects submitted by a particular bidder which together will account for more than 50% of the new power generated under this programme.
Criticism of these three projects includes allegations of corner-cutting in the environmental impact assessments, as well as concerns over the technology they will use and the level of local content to be employed in their construction.
One disgruntled bidder that was not chosen has challenged the selection of these projects in court, and the outcome (and possible effect on the other projects selected, as well as the programme as a whole) is not yet known.
The Risk Mitigation IPP projects were originally supposed to reach financial close at the end of July 2021. This has since been moved to 30 September 2021, ostensibly to allow for the finalisation of regulatory processes such as approval by the board of the national utility, Eskom, to conclude PPAs with the successful bidders.
Announcing the extension of the commercial closing date, the Department of Mineral Resources and Energy said this was not based on the state of readiness of any of the preferred bidder projects. Rather, it was the ‘lack of readiness’ by the Government, and by Eskom as the buyer of the electricity, to conclude contractual agreements.
The criticisms levelled against various aspects of the Risk Mitigation IPP programme underscore the necessity for transparency and accountability in the decision-making processes of procuring public entities, policymakers and regulators.
While South Africa is desperate for ways to relieve its energy crisis, this must be done – and be seen to be done – in a manner that is consistent with the relevant policies, laws and regulations, and appropriately balances competing interests.
Despite the current energy challenges in both South Africa and Kenya, there are tentative signs that a more predictable and less volatile future lies ahead for their energy markets.