Why MPs want KPLC, power firms probed

The National Assembly has directed the Directorate of Criminal Investigations (DCI), the Auditor General, and the Ethics and Anti-Corruption Commission (EACC) to launch immediate forensic audits and corruption probes into State-owned Kenya Power and a series of private energy producers.

Those under investigation include former senior figures from the Ministry of Energy and Kenya Power, such as the past Energy Ministers and their Principal Secretaries.

This follows a landmark parliamentary inquiry that found skewed contracts have saddled Kenyans with some of the highest electricity costs in Africa.

The report from the National Assembly’s Departmental Committee on Energy, seen by The Financial Standard, unveils systemic failures, opaque dealings, and potentially fraudulent agreements with Independent Power Producers (IPPs), which have driven up the cost of power, stifled manufacturing, and burdened Kenyan households.

The committee has mandated specific, time-bound investigations into several entities, notably targeting the Lake Turkana Wind Power (LTWP) project and OrPower IV, a geothermal producer. 

Special audit

The report singles out the Lake Turkana Wind Power project, Africa’s largest wind farm, for particularly harsh criticism. It cites a 2021 special audit by the Auditor General, which found “serious irregularities, questionable transactions... and ultimately grave illegalities in the project’s land allocation.”

The committee found that the 310 megawatt (MW) project was awarded without a competitive bidding process, in contravention of public procurement laws.

The Power Purchase Agreement (PPA) was also approved with unusual haste and executed before the company had even obtained a generation licence.

A critical flaw identified was the “take-or-pay” structure of the PPA, a common clause in such agreements where the buyer (Kenya Power) must pay for a predetermined amount of electricity whether it needs it or not.

For LTWP, this included payments for “Deemed Generated Energy” (DGE) – power compensation that the plant could have produced but could not deliver, often due to delays in building transmission lines, a risk borne by the State.

The committee found that LTWP received over €127.6 million (Sh19 billion) in DGE payments due to a delayed transmission line, a cost ultimately passed to consumers.

It has now directed the DCI and EACC to investigate Ministry of Energy and Kenya Power officials from that period for “not ensuring the competitive process was followed,” “not conducting an independent legal risk assessment,” and exposing taxpayers to “undue financial obligations.”

The probe also scrutinised OrPower IV, Kenya’s first IPP, which signed an initial PPA in 1998 for an eight megawatt geothermal plant.

Despite operating in the same Olkaria geothermal field as the State-owned Kenya Electricity Generating Company (KenGen), the committee found OrPower’s charges to be “significantly higher.”

The unit charge for OrPower is $0.11 per kilowatt-hour (kWh), compared to KenGen’s average of Sh3.93 (approximately USD 0.03) per unit. 

The report questions a series of amendments made to OrPower’s original PPA, directing the Auditor General, DCI, and EACC to conduct a forensic audit to “establish fraud, collusion, corruption, or other financial irregularities in granting OrPower 4 Inc. favourable tariff prices.”

The report explains the core mechanism driving high costs: the structure of PPAs. Most IPP contracts include a two-part tariff.

This includes a Capacity Charge, which is a fixed fee, payable in foreign currency, to cover the IPP’s capital investment, loans, and profit, irrespective of whether any electricity is actually generated or used. 

This is a “take-or-pay” model. It also includes an energy charge, which is a variable cost for the actual electricity produced. The committee’s analysis revealed a staggering imbalance. 

In the 2021/22 financial year, a massive 87 per cent of the Sh56.27 billion paid to IPPs was for capacity charges, not for the energy consumed.

This means Kenyans are paying billions for idle, unutilized capacity.

“The payment structure for most IPPs is the take or pay arrangement model,” the report states, noting these contracts often span 20 to 30 years and are denominated in US Dollars and Euros, exposing the country to foreign exchange risk.

The MPs also observed that projects implemented by KenGen, which are of similar technology, scope and within the same location, “are less costly and yield lower tariffs compared to IPP projects”. 

With higher tariffs and capacity charges that guarantee that IPPs are paid despite feeding the grid, the private power producers ended up making much more than KenGen, despite the latter supplying more than 60 per cent of power consumed in the country. 

A past report by the Auditor General noted that while KenGen supplied 60 per cent of the power consumed in the country in the year to June 2023, it received only 35 per cent of the money paid to power producers.

IPPs, which accounted for 40 per cent of the power consumed, were paid 65 per cent of the money paid by Kenya Power.

“Capacity charge costs for IPPs during the last two years were higher than the cost of the energy produced,” reads the report by the Energy Committee, also noting that PPAs are mostly denominated in foreign currency, including for locally owned IPPs, which exposes Kenyans to the risk of exchange rate fluctuation and inflation.

Foreign currency

David Gikaria, the committee’s chairman, explained to the National Assembly that they had recommended a hybrid approach that would see PPAs denominated in both local and foreign currency.

“All new power generation plant PPAs to be onboarded to the grid are denominated in Kenyan shillings, foreign currency, hybrid combination of Kenyan shillings and foreign currency to ensure that local costs, taxes are priced in local currencies and debts, financing facilities are priced in their respective currencies,” said the Committee in its report.

It also capped the wholesale power price at Sh9 (seven US cents) per kilowatt hour for new PPAs, noting that this gives room to investors to recoup their investments and have enough to take care of operations and margins.

Gikaria told MPs that this compares to the five US cents (Sh6.50) per unit that KenGen gets for electricity from geothermal. The cost of electricity generated at the hydro dams is sold at a much lower cost. The consequences of costly PPAs are severe and far-reaching.

The Kenya Association of Manufacturers (KAM) told the committee that high power costs make Kenyan goods uncompetitive. 

The report itself notes that Kenya’s electricity is among the most expensive in Africa, a major disincentive to investment. For ordinary Kenyans, the high tariffs translate directly into a higher cost of living. 

The Kenya Medical Association (KMA) testified that soaring electricity bills strain hospital budgets, leading to increased healthcare fees and risking the spoilage of temperature-sensitive medicines and vaccines.

The parliamentary committee has issued a sweeping set of recommendations beyond the criminal probes.

These include lifting a moratorium on new PPAs only after strict conditions are met, including a competitive auction modelled on South Africa’s successful programme.

Parliament has also mandated that all future PPAs be vetted by the Attorney General.

Parliament has also ordered that Kenya Power reduce its high system losses from 23 per cent to 14.5 per cent, a move that would save consumers Sh6 billion annually.

The ordered investigations represent the strongest legislative push by Parliament to untangle the complex web of power contracts that have long been accused of enriching a few at the expense of the nation’s economy and its citizens.