Negotiating PPAs for Renewable Energy – a Kenyan Perspective

By Eng. David M. MwangiIndividual Energy Consultant

Kenya

Presentation Outline

� Overview of Kenya’s Electricity Sub-Sector

� Existing, committed and planned generation capacity & projected evolution of generation tariffs

� Procurement of power capacity

� Feed-in tariffs for renewable energy projects� PPAs – content and number negotiated

� Risk allocation/mitigation for RE projects in Kenya� Possible areas of improvement in procuring IPPs

� Conclusions

Key Kenyan Power Statistics

Generation Capacity by SourceGeneration Capacity by Source

u Kenya’s system has an installed capacity of 1,655 MW and effective capacity of 1,572 MW comprising:

Installed Effective

Hydro 763 735 (47%)

Geothermal 200 193 (12%)

Bagasse 26 26 (1.7%)

Wind 5.3 5.1 (0.3%)

Sub-Total Renewable 994.3 959.1 (61%)

Thermal 661 613 (39%)

TOTAL 1,655.3 1,572.1 (100%)

Generation Capacity by Generation Capacity by Ownership Ownership -- 11

Installed Effective1. Public Sector MW MW

KenGen 1,177 1,094

Import from Uganda/Tanzania 0 0

Isolated Stations for RE 9.1 7.8

Public Sector Total 1,186.1 1,101.8

%age of Gross Total 72% 70%

Generation Capacity by Generation Capacity by Ownership Ownership -- 22

Installed Effective2. Private Sector MW MW

Iberafrica MSD-HFO 108.5 108.5Tsavo Power MSD-HFO 74 74 OrPower 4 Geothermal 52 52Mumias – Cogeneration 26 26Rabai Power MSD-HFO 90 90Imenti Tea Factory Hydro 0.3 0.3Aggreko Emergency HSD-AGO 120 120 Private Sector Total 468.8 468.8%age of Gross Total 28% 30%

Committed Generation Capacity to be commissioned by end of 2016

Capacity Projected by ERC BY 2031

Technology Capacity (MW) Percentage of total

Geothermal 5,530 26

Nuclear 4,000 19

Coal 2,720 13

GT-NG 2,340 11

MSD 1,955 9

Import 2,000 9

Wind 2,036 9

Hydro 1,039 5

Total 21,620 100

Green energy share 49%

Evolution of Electricity Generation Tariffs Projected by ERC

Procurement of Power Capacity -Unsolicited Project Proposals 1

� Kenya Power has progressively built human capacity for procurement of power plants and PPA negotiations by initially using consultants alongside own staff and then through experience and training

� KP is required by law to procure power capacity through competitive tendering but can accept unsolicited proposals:� If the project is a grid-based renewable generator eligible

to receive a feed-in tariff (REFIT)

Procurement of Power Capacity -Unsolicited Project Proposals 2

� If the project can only be developed by one entity (for example due to restrictions on land ownership or resource control)

� If an emergency situation exists� If there is a proposed expansion of a plant � If the project uses an innovative technology or process or

developer has carried out substantial proprietary studies or data collection

Evaluating Unsolicited Proposals - 1

Typical approaches used by KP to benchmark value for money of unsolicited proposals include:

� “Open book” processes – Developer makes full disclosure of financial model

� Acceptable and pre-determined rates of return� International and local benchmarking of prices, risk

allocations, and terms (where feasible)

Evaluating Unsolicited Proposals - 2

� Ensuring that developer competitively procures essential contracts for supply of project inputs (such as the EPC contract and finance)

� Pre-specifying an acceptable capital structure (typically debt/equity – 75/25)

� Pre-specifying maximum interest rate and minimum repayment period of loans, (e.g. 7%, 14 years)

REFIT policy background

� Time and resources for undertaking feasibility studies, tendering and negotiating PPAs for power plants conventionally was a big challenge

� Ministry of Energy in 2007/08 proposed to Public Procurement Oversight Authority (PPOA) to approve in principle the setting of Feed-in-Tariffs for electricity generated from renewable energy sources - specifically wind, biomass and small hydro

REFIT Background - 2

� PPOA subsequently granted approval and the first Kenyan REFIT policy was launched in March 2008 for wind, biomass and small hydro technologies

� The policy was revised in January 2010 to include geothermal, solar and biogas technologies

� A new revision is in progress as well as a study on small grid-connected renewable energy projects

Factors considered in tariffs determination for REFIT 2010

� Current REFIT include geothermal, wind, biomass, small hydros, biogas and solar technologies

� Factors considered in arriving at tariffs for all technologies:�Estimated costs of the projects

�Avoided costs of alternative projects in the indicative Least Cost Power Development Plan

�Tariffs offered in other countries

Factors considered in tariffs determination for REFIT 2010 - 2

� Some key parameters underlying the 2010 tariffs:

�Project Term - 20 years�Debt to Equity Ratio - 75:25

�Interest on Debt - 12% p.a.�Return on Equity - 18% p.a.

�Debt repayment period - 12 years

January 2010 Feed-in-Tariffs - 1Technology

Type

Plant

Capacity

(MW)

Maximum Firm

Power Tariff

($/kWh) at the

Interconnection

Point

Maximum Non

Firm Power

Tariff ($/kWh)

at the

Interconnection

Point

Geothermal Up to 70 0.085 -

Wind 0.5 – 100 0.12 0.12

Biomass 0.5 – 100 0.08 0.06

Small

Hydro

0.5 – 0.99 0.12 0.10

1 – 5 0.10 0.08

5.1 – 10 0.08 0.06

Biogas 0.5-40 0.08 0.06

Solar 0.5-10 0.20 0.10

January 2010 Feed-in-Tariffs - 2

Technology Project Capacity Limit

(MW)

Aggregate Capacity

Limit (MW)

Geothermal 70 500

Wind 100 300

Biomass 100 300

Small Hydro

-Firm capacity

-Non-firm capacity

10

150

50

Biogas

-Firm capacity

-Non-firm capacity

40

100

50

Solar

-Firm capacity

-Non-firm capacity

10

100

50

Applications under REFIT mechanism from 2008 to May 2011

Matters governed by the PPA:

à operating procedures

à operational targets

à sets out penalties for operational defaults

à Commissioning and Testing

à Operational and Testing

à Operation and Dispatch Procedures

à Repair and Maintenance

à Metering

Power Purchase Agreement Power Purchase Agreement -- 1 1

Matters governed by the PPA continued:

à Sale and Purchase of Electricity

à Invoicing and Payments

à Fuel Supply

à Insurance

à Dispute Resolution

à Termination and Default

Power Purchase Agreement Power Purchase Agreement -- 22

Number of negotiated PPAs for existing plants or import/export

Negotiated PPAs for projects or PPAs to be negotiated for existing plants

RE project risks allocation in PPAs and their mitigation in Kenya - 1

RE project risks allocation in PPAs and their mitigation in Kenya - 2

Possible areas of improvement in procurement of power capacity

� Carrying out technical and environmental due diligence of proposed sites before procurement

� Reaching consensus within Government on security packages before procurement

� Start tendering for IPP capacity at least 4 years before plant is required in service

� Engaging lenders earlier during PPA negotiations, for their comments

Conclusions - 1

1. Kenya’s electricity subsector is of the single buyer model with Kenya Power as the off-taker

2. National installed generation capacity stands at 1655 MW with effective capacity of 1572 MW, of which 61% is of renewable energy sources

3. Peak demand is currently 1215 MW (1315 MW unconstrained)

4. There are 7 generating companies – KenGen, with capacity share of 70%, and 6 IPPs

5. Committed capacity by 2016 - 2734 MW (66% RE)

Conclusions -2

6. ERC projects generation capacity of 21,620 MW by 2031, of which 49% is from renewable sources

7. Generation tariffs are projected by ERC to reduce from Usc 14/kWh in 2012 to about Usc 8.5/kWh in 2030

8. Law requires power capacity to be competitively procured but unsolicited proposals can be accepted in certain circumstances

9. Kenya Power has built HR capacity for procuring power plants and negotiating PPAs

Conclusions -3

10. Kenya has had feed-in tariffs for renewable energy projects since 2008 but the uptake of projects has been minimal with only one small hydro project in operation. The tariffs were reviewed in 2010 and are being reviewed again, as a study on small grid-connected renewable energy projects is ongoing

11. There are 17 PPAs for existing plants/supplies (7 RE) and 21 others (16 RE) have been negotiated for projects or are to be negotiated for existing plants

Conclusions -4

12. In Kenya, PPA risks are allocated and mitigated in ways accepted by the various stakeholders

13. Areas where procurement of power capacity can be improved include better pre-tender due-diligence of project sites, reaching pre-tender consensus on security packages, commencing procurement of IPP plants at least 4 years before required in-service date, and engaging lenders earlier during PPA negotiations

Presenter’s Contact Details

� For any additional information, please do not hesitate to contact:

Eng. David M. MwangiEnergy ConsultantEmail: dmwangi55@yahoo.comEmail: dmmwangi55@gmail.comPhone: +254 20 8085287Mobile: +254 714 610026 / +254 722 741601Skype name: dmmwangi55

Thank You

for your attention