1. A Presentation by: Laurencia K. Njagi, Company Secretary Kenya Power & Lighting Company Ltd To the Law, Justice and Development Week 2012 PUBLIC PRIVATE PARTNERSHIPS IN THE POWER SECTOR IN KENYA 1

2. INTRODUCTION  Comprehensive reforms implemented between 1993 and 2000 in accordance with the Energy Sector Policy Framework Papers 1993-1995 and 1996-1998.  Objectives of the reforms were to enhance operational efficiency and attract private sector investment in power generation. 2

3. INTRODUCTION  The private sector participation would: (i) Create competition in the generation function; (i) Create competition in the generation function; (ii) Improve operational efficiency; and (iii) Complement GoK’s investment which could be used in other sectors not attractive to private sector. 3

4. SUMMARY OF IMPLEMENTED REFORMS  Separation of commercial functions from policy setting, and regulatory functions.  This involved transfer of power assets owned by government and two regional development authorities to two main public companies i.e. the Kenya Power & Lighting Company Ltd. (transmission assets) and Kenya Power Company Ltd., now KenGen (generation assets). 4

5. SUMMARY OF IMPLEMENTED REFORMS  Unbundling of generation function from transmission and distribution functions.  KenGen undertaking generation function and KPLC undertaking transmission and distribution functions.  KPLC and KenGen were required to operate on a commercial basis under a Power Purchase Agreement which was first entered into in 1999. 5

6. SUMMARY OF IMPLEMENTED REFORMS  Legislative reform through the enactment of the Electric Power Act, 1997.  Establishment of a power sector regulator in 1997– the Electricity Regulatory Board with the mandate to set retail tariffs, approve negotiated PPAs between KPLC and generating companies and overall regulation of the sector. 6

7. SUMMARY OF IMPLEMENTED REFORMS  The Electric Power Act, 1997 was repealed in 2006 and replaced with Energy Act -to consolidate electricity and petroleum regulation into one regulator.  Development of power generation projects on the basis of approved national least cost investment plan.  Cost reflective electricity tariffs. 7

8. PPP Projects in Energy Sector No. PlantCapacity (MW) TypeFCOD /Status Procurement Method 1.IberAfrica106Thermal1997Open competition on first 56MW, then extension in 2007 2.Tsavo Kipevu II 74 Thermal 2001Open Competition 3.3.OrPower 4100Geothermal2000 Open Competition for phase 1 later expansion 8

9. PPP Projects in Energy Sector NoPlantContrac ted Capacit y (MW) Technolo gy Full Commercial Operation Date/Status Procurement Method 4Rabai90Thermal2009Open Competition 5 Mumias 25Bagasse2008Co-Generation 6Thika87Thermal2013 Open Competition 7Triumph83 Thermal 2013 Open Competition 9

10. PPP Projects in Energy Sector No. PlantContrac ted Capacit y (MW) Technolo gy Full Commercial Operation Date/Status Procurement Method 8Gulf Athi River80Thermal2014 Open Competition 9Aerolus Kinangop 60Wind2014Feed In Tariffs 10AGIL Longonot 140 Geother mal 2014Unsolicited Proposal 10

11. PPP Projects in Energy Sector  Other 4 mini hydro projects under feed in tariff. 11

12. CRITERIA FOR PROJECT DEVELOPMENT ON A PPP BASIS: (i) Least Cost Power Development Plan  Kenya has a 20 year Least Cost Power Development Plan for transmission and generation systems that is updated annually.  The Government and KenGen agree on the projects to be developed by KenGen based on its financial and technical capacity. 12

13. CRITERIA FOR PROJECT DEVELOPMENT ON A PPP BASIS: (i) Least Cost Power Development Plan  KPLC procures private investors to develop plants not being developed by KenGen.  Most of the geothermal and hydro projects are implemented by KenGen due to low IPP bidders interest. 13

14. CRITERIA FOR PROJECT DEVELOPMENT ON A PPP BASIS: (i) Least Cost Power Development Plan  In order to remove the risk of geothermal steam, a fully state-owned geothermal company has been established to carry out geothermal exploration and development and to sell steam to private developers and KenGen for conversion to electricity. 14

15. CRITERIA FOR PROJECT DEVELOPMENT ON A PPP BASIS: (ii) Bridging Capacity Gap  In the event of delays in the implementation of a committed project in the LCPDP, a decision is made to procure development of a power plant of a technology which can be implemented in a short period by private investors to bridge the capacity gap. 15

16. CRITERIA FOR PROJECT DEVELOPMENT ON A PPP BASIS: (ii) Bridging Capacity Gap  This has been the case for a number of thermal projects. 16

17. CRITERIA FOR PROJECT DEVELOPMENT ON A PPP BASIS: (iii) Feed In Tariffs For Renewable Energy  Kenya has a Feed In Tariff with set energy charge rates for various renewable energy sources to encourage their development.  Proposals from interested developers are analyzed and approved if found adequate by a Standing Committee under the Ministry of Energy. 17

18. CRITERIA FOR PROJECT DEVELOPMENT ON A PPP BASIS: (iii) Feed In Tariffs For Renewable Energy  PPA negotiations are carried out between the private investors and KPLC. 18

19. CRITERIA FOR PROJECT DEVELOPMENT ON A PPP BASIS: (iv) Unsolicited Proposals  Some projects have been awarded for development as PPPs following unsolicited proposals.  Mostly in technologies like geothermal and wind which are difficult to subject to competitive bidding without investing first to ascertain the natural resource potential. 19

20. LOCATION OF THE PLANT  A decision on the siting of the project is made based on the location of the natural resource (hydro, geothermal and wind), the proximity to the load centre and transmission and distribution connection facilities. 20

21. PROCUREMENT PROCESS AND APPROVAL  Kenya has a Public Procurement and Disposal Act, 2006, that governs procurement by government and state corporations.  Competitive bidding is the normal method of procurement.  The Act provides for a review mechanism of appeals from bidders who are dissatisfied with the procurement/evaluation outcome. 21

22. PROCUREMENT PROCESS AND APPROVAL  The Public Private Partnerships Regulations made under the Act provide specialized procedures for procurement and approvals of PPP projects and sets out a PPP Secretariat under the Ministry of Finance.  A PPP Bill is before parliament as a stand alone legislation for PPPs. 22

23. PROCUREMENT PROCESS AND APPROVAL  The negotiated PPAs are subject to approval by the sector regulator, the Energy Regulatory Commission. 23

24. IPP PRICES  The prices payable to IPPs in the PPAs are derived from competitive bidding process.  For the Feed In Tariff Policy projects, the rates are set by Feed In Tariff Policy. 24

25. IPP PRICES  The prices for unsolicited proposals are negotiated i.e. project costs, cost of funding are screened including the rate of return to be allowed and are, where applicable, compared with those of existing projects. 25

26. IPP PRICES  The rate of return is guided by ERC’s Tariff Policy which had followed a study. 26

27. RISKS THAT KPLC AND GOK HAVE TAKEN  KPLC has taken the market/demand risk -PPAs are on a take or pay basis– this arrangement will be reviewed as the market becomes competitive.  The forex risk is borne by electricity consumers. Payments are denominated in either dollars or Euros. The variations are passed through to customers. 27

28. RISKS THAT KPLC AND GOK HAVE TAKEN  Political risks are borne by GOK through a legally binding letter of support issued to the projects. 28

29. PAYMENT SECURITIES PROVIDED The payment security provided to IPPs by KPLC has usually been stand by letters of credit from commercial banks in Kenya covering 3 – 4 months of payments; In view of planned increased IPP participation, KPLC requested GOK to support the sector by providing sovereign guarantees to IPPs. 29

30. PAYMENT SECURITIES PROVIDED In order to manage contingent liability, GOK requested IDA to provide partial risk guarantee to four projects (87MW Thika), (83MW Triumph), 80MW Gulf) and 52MW geothermal extension) thus dispensing with sovereign guarantees. 30

31. FACTORS THAT HAVE CONTRIBUTED TO SUCCESSFUL PPPS IN POWER SECTOR An enabling environment -National Energy Policy and Energy Act, 2006. Both recognise need for cost reflective retail tariffs and IPP charges that should, among others, enable the investors to attract capital and compensate them for the risks assumed. 31

32. FACTORS THAT HAVE CONTRIBUTED TO SUCCESSFUL PPPS IN POWER SECTOR A mature regulatory framework – ERC was created in 1997 and has been approving PPAs and setting retail tariffs. Capacity of KPLC to procure, negotiate, and monitor IPPs. Capacity of KPLC to procure, negotiate, and monitor IPPs. 32

33. FACTORS THAT HAVE CONTRIBUTED TO SUCCESSFUL PPPs IN POWER SECTOR Financial stability of KPLC as the off-taker. Sound governance of KPLC and energy sector leadership. Structured competitive procurement process of PPPs. 33

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