1. POWER PURCHASE AGREEMENTS A Yardstick for Decision Making in KenGen
Presented by: Alfred Oseko
2018 G2G INNOVATION SEMINAR, PRIDEINN PARADISE
18TH JUNE - 22ND JUNE 2018

2. Manager, Regulatory Affairs - Head Office
ALFRED OSEKO
Manager, Regulatory Affairs - Head Office
Bachelor of Laws (LLB) & Masters of Laws (LLM) from the University of Nairobi
An Advocate of the High Court of Kenya
Member of Chartered Institute of Arbitrators (MCIArb)
Member of Law Society of Kenya
Founding Member, Academy of Regulatory Professionals
Mediator
Responsibilities:
Development and management of PPAs
Managing the regulatory environment

3. What does the PPA say?

4. Presentation Outline Introduction Understanding PPA tariff formulation
KenGen decision Making Processes: Scenario Analysis
Budgeting
Procurement
Recruitment
Project Management
Operations and Maintenance
Quantification of the Benefits
Conclusion and Recommendation

5. INTRODUCTION: Overview Of KenGen PPAs
JOH-JHO KT-P1
INTRODUCTION: Overview Of KenGen PPAs
12 PPAs executed and some more in different stages of development.
The PPA Technical and Negotiation Teams are mandated with the exercise of developing the PPAs, formulating the tariffs and negotiating with KPLC.
The PPA is supposed to be a fulcrum of decision making in KenGen. The Bible of KenGen-core business.
Therefore, negotiation, development and implementation of PPAs is a paramount activity in electricity generation business.

6. INTRODUCTION: Definition
JOH-JHO KT-P1
INTRODUCTION: Definition
So what is a PPA?
Power Purchase Agreement (PPA) is a long term contract (20-25) between a power generator and off-taker to buy electricity generated by a power plant.
Power Purchase Agreements (PPA) have five critical functions:
To secure long-term stream of revenue for the power projects through the sale of electricity generated (96% of KenGen Revenue)
PPA is a critical consideration in financing of power projects
Guide the relationship between the Generator and off-taker
Stable consumer tariffs: hedge the risk of fluctuating energy prices
Security of supply is secured by off taker

7. INTRODUCTION: Regulated Energy Sector
Energy sector is regulated in Kenya
Power Purchase Agreement-primary instrument of regulation on generation
Least Cost Power Development Plan vs. Feed-in-Tariff Policy.
Just and Reasonable Tariff-ERC Primary Concern:
Maintain its financial integrity
Attract capital
Operate efficiently
Fully compensate investors for the risks assumed.
Cost Plus Pricing methodology
Return on Equity -12.5% after tax

8. INTRODUCTION: My Thesis Statement
96% KenGen’s Revenue is secured under the PPA, therefore the PPA should be the primary yard stick for decision making.

9. INTRODUCTION: Decision Making in KenGen
JOH-JHO KT-P1
INTRODUCTION: Decision Making in KenGen
Key interrelated decision making processes in KenGen:
Budgeting Process
Procurement Planning Process
Recruitment Process
Project Management Process
Plant Operation Process
Currently, the decision making processes outlined above have minimal, close to no link to the PPA.
At the time of making decisions in KenGen, the critical question to ask should be:
What is the impact of this decision on the PPA?
This question is rarely answered, let alone asked.

10. INTRODUCTION: Objective & Methodology
JOH-JHO KT-P1
INTRODUCTION: Objective & Methodology
Objective
To ensure that key decisions made in KenGen, are made on the basis of the impact they will have on the PPAs.
Methodology
Data collection through a desk-top review of various documents including:
Project reports
Minutes of various decision making organs in KenGen
PPAs and its financial models
Interviews with members of staff including key decision makers.
Data analysis:
The data extracted was analysed to determine the extent to which the decisions made in KenGen have taken into account their impact on the PPAs.
Ethical Considerations:
Confidentiality, transparency

11. UNDERSTANDING PPA TARIFF FORMULATION
Key PPA Development Principles:
Our Strategy: G2G
Good to Great – enough revenue to grow
Generation to Generation –sustainable long term PPA
Regulated Return of Equity: 12.5% after tax
Transparent and Prudent Cost Estimation
Risk Allocation and Mitigation

12. UNDERSTANDING PPA TARIFF FORMULATION Cost Plus Tariff Structure
Capacity charge
Energy charge (kWh
TARIFF
Capacity charge rate (CCR)
Fixed O&M Revenue (FOMCR)
Variable O&M Revenue
(VOMCR)
Chemicals
Lubricants Costs
Casuals
Variable maintenance costs
Make up well
Power Plant construction
Civil Works
Consultancy Cost
Land Costs
Working Capital
Transmission Lines
Interest During Construction
Financing costs: 30% Equity-Return on Equity 12.5% & debt 70% repayment & r%
Staff Costs
Insurance Costs
Land Rents
Fixed Maintenance Costs
Budget Max

13. UNDERSTANDING PPA TARIFF FORMULATION How to make Money for KenGen
JOH-JHO KT-P1
UNDERSTANDING PPA TARIFF FORMULATION How to make Money for KenGen
Return on Equity

14. UNDERSTANDING PPA TARIFF FORMULATION: Key Considerations
JOH-JHO KT-P1
UNDERSTANDING PPA TARIFF FORMULATION: Key Considerations
The Cost Plus Pricing Strategy Demands three Critical Considerations:
Accurate estimation of costs for construction, operation and maintenance of the power plants.
The decision making processes in KenGen are anchored in the PPA threshold.
KenGen’s return on equity is determined by Savings: KenGen should now start engaging in the business of making savings.

15. KENGEN DECISION MAKING PROCESSES: Scenario Analysis
JOH-JHO KT-P1
KENGEN DECISION MAKING PROCESSES: Scenario Analysis
An analysing of KenGen business shows the following as the main process decision areas with the greatest impact on the PPAs.
Budgeting
Procurement
Recruitment
Project Management
Operations and Maintenance

16. KENGEN DECISION MAKING PROCESSES: Budgeting, Procurement and Recruitment

17. Budgetary Proposals informed by the PPA
CASE SCENARIO A: BUDGET, PROCUREMENT, RECRUITMENT AND EFFECT ON RETURN ON EQUITY
YEAR
REVENUE
EXPENSES
PROFIT
% RETURN ON EQUITY
2013/2014
18,334,479,000
15,508,156,000
2,826,323,000 4
2014/2015
29,957,301,000
18,439,974,000
11,517327,000 8
2015/2016
38,609,556,000
31,866,064,000
6,743,492,000
2016/2017
35,440,067,000
26,382,936,000
9.057,131,000 5
Budgetary Proposals informed by the PPA

18. SCENERIO A ANALYSIS: Budgeting
In the power business, the overall budgets are set at the time of developing a PPA and for the entire period of the PPA.
Any annual budgeting process should draw from the PPA budgets thresholds.
Currently, the budgeting process in KenGen is quite delinked from the expenses provided in the PPA hence likely to lead to a mismatch.
In any budgeting process, the critical question to ask is: are the identified needs substantially drawn from what was anticipated in the PPA?
Any needs that cannot directly or indirectly traced to the PPA budgets are found not to be critical, hence should be dropped all together.

19. CASE SCENARIO B: RECRUITMENT PROCESS
YEAR
EFFECTIVE CAPACITY
STAFF
STAFF/MW
CAPACITY GROWTH
STAFF GROWTH
2012/2013
1285.7
2063
0.62
2013/2014
2209
0.58
146
2014/2015
1540.1
2407
0.64
254.4
198
2015/2016
2406
0.65
14.18 -1
2016/2017
1556.5
2476
0.63
2.22 70
2017/2018
The Jury is still Out
Rationalized Organizational Structure informed by the PPA

20. SCENERIO B ANALYSIS: Recruitment
All anticipated fixed and variable operation and maintenance (O & M) costs are provided for in the PPA tariffs. The number of staff and their costs are provided in the PPA for its full life.
Unless for genuinely unforeseeable costs, the procurement and recruitment processes should follows the O & M costs.
As at 30th June 2016:
KenGen: 1 employee : 0.68 MW .
Eskom: 1 employee : 4.70MW.
UEGCL: 1 employee : 3.04MW
Such benchmarks should be used in determining the number of staff provided in the PPA.

21. CASE SCENARIO C: PROJECT MANAGEMENT
Scope: Contracted Capacity, Revenue
Quality: Revenue, contracted capacity, reliability, increase O&M
Cost Overrun: Increases capex, reduces RoE
Time: Affects PPA timelines: TED, COD, recovery period, IDC.

22. SCENERIO “C” ANALYSIS: Project Management
The main task on project managers: Manage projects constraints within the tendered cost, time and accomplish the scope to required quality.
Any variation/claims as to time and scope would lead to cost overruns and obvious revenue reduction, ab initio.
With proper project management, contingency amount remains part of KenGen revenue.
Example: in the 280MW geothermal project, the claims and variations are estimated at over Kenya Shillings 7 Billion.
This means that KenGen revenue was reduced by similar amount, ab initio.

23. CASE SCENARIO D: OPERATIONS AND MAINTENANCE PROCESSES
During plant operations, many decisions are made regarding dispatch, operation and maintenance, staff management etc.
These decisions have a direct cost implication and penalty implications in case of dispatch management. So such decisions should be made diligently to avoid unplanned costs and penalties.
Make power plants as a cost and profit centre
Key Variable:
Load Factors: Energy Revenues.
Capacity availability: Penalties and Adjustments
Effective and efficient maintenance practises
Staff Management: Call outs and over time
Other unplanned expenses

24. QUANTIFICATION OF BENEFITS
Benefits: Likely change on profits if RoE changes from 5% to 12.5%:
Kshs. 9, 057,131,000 to over 22, 000, 000, 000
Reinvestment of profits for the sake of increasing the value of stakeholders.

25. CONCLUSIONS AND RECOMMENDATIONS
PPA Performance Tracking Tools: Development of PPA performance monitoring Tools:
Weekly and Monthly Capacity & Energy Revenue Budget Performance report: Monitors annual budgets versus PPA provisions of revenue. Tracks variances and explains the causes of the variance and proposes mitigation measures.
Revenue adequacy report: New and will track performance of each Power Plants.
Revenue Loss Root Cause Analysis: Picking from PPA Performance Tracking Tools, a Committee comprising of Regulatory, Operations and other relevant departments should be formed to analyse the Revenue Loss Root Cause Analysis and make recommendations on how to fix them.

26. CONCLUSIONS AND RECOMMENDATIONS
Make PPAs Centres for Decision Making: Use PPA Benchmarks/Thresholds. The bible governing day to day management of the company.
PPA Awareness: The ongoing PPA awareness should continue in more structured way. This will make them aware of the consequences of their decisions.
Swift Decision Making: The PPA anticipates quick decision making. This slow decision making attitude unnecessarily increases PPA related costs and loss of opportunities. Culture change: eliminate complacency, slow decision making and indecisiveness.

27. What does the PPA say?

28. JOH-JHO KT-P1
THANK YOU