After SGR, Kenya’s next Sh900bn debt trap for power project

Photo/The coal plant site in Lamu

Days after the Nation exclusively reported that Kenya signed a lopsided multibillion-shilling deal for the operation of the Standard Gauge Railway, an American think-tank is warning that the taxpayer is being forced into another Sh900 billion debt trap for the Lamu coal power project.


The Sh900 billion will be paid as capacity charge to Lamu Coal owners for connecting their generators to the national grid, and will be due whether or not the plant is in operation and supplying energy to Kenyans. As a result, experts have warned that building the proposed 981-megawatt (MW) plant in Lamu would be another costly error for the country, and that the taxpayer would be locked into a 25-year power purchase agreement (PPA) that would force electricity consumers to pay more to meet the costs of the project.

Most nations have been abandoning coal-powered plants for clean energy, and as a result Kenya has been criticised for embracing coal-powered generators at a cost that adds to a growing national debt, now at $7.3 billion (Sh739 billion), with China being biggest lender. In 2017, China Power Global signed a $2 billion (Sh200 billion) deal with Amu Power for the coal plant, while the Industrial Commercial Bank of China agreed to finance the project for $1.2 billion (Sh120 billion). But now, experts are warning that this is a bad project; another financial goof.

The shocking details are contained in a new report released Monday by US-based Institute for Energy Economics and Financial Analysis (IEEFA), which conducts research and analyses on financial and economic issues related to energy. Its report shows that the Kenyan taxpayer could be forced to pay at least Sh36 billion in annual capacity charges under the existing 25-year PPA, even if no power is generated at the plant.

The plant, when it was mooted, was supposed to provide dependable power, not only for the SGR, but also for the proposed Sh1.5 trillion Lamu Port-Southern Sudan-Ethiopia Transport project. The three-unit power project, first proposed in 2015,

was also part of a government initiative to build new baseload capacity to replace ageing diesel-fired generation and serve planned future economic growth. But now, the new report says, the project has been overtaken by events, particularly lower-than-projected demand growth, lower forecasted generation from Lamu, and higher anticipated costs for imported coal.


“These developments have undercut the plant’s financial viability and should prompt the Kenyan government to cancel the project,” the report’s lead author, Mr David Schlissel, who is the IEEFA Director of Resource Planning Analysis, said. The coal plant is scheduled to enter commercial service in 2024 and is being built by Amu Power Company Limited, a single-purpose entity 51 per cent owned by Centum Investments, a Kenyan investment firm. The remainder of shareholding is held by Gulf Energy.

The Amu Power consortium also includes Sichuan Electric Power Design and Consulting, China Huadian Corporation Power Operation Company and Sichuan No. 3 Power Construction Company. The contract for the plant was awarded to Power Construction Corporation of China in 2016. However,

construction has not yet started, having been dogged by environmental concerns that have dragged on. Another interest in the project is the American firm General Electric, which in May 2018 purchased a 20 per cent stake for $400 million (Sh40 billion) to design, construct and maintain the 1,050-megawatt plant. In this deal, the US firm was to help develop an environmentally friendly and efficient plant.

The report has used data from the October 2016 Lahmeyer International report; the Development of a Power Generation and Transmission Master Plan, Kenya, 2015-2035; and Kenya’s Updated 2017-2037 Least Cost Power Development Plan (LCPDP), released in June 2018 by the Energy and Petroleum Regulatory Authority. Mr Schlissel said the assumptions used by the coal plant’s developers no longer hold true, and that building the facility would burden consumers with costly power for years to come.

“Amu Power’s claims for the cost of Lamu-generated electricity are unrealistically low, based on outdated costs for imported coal, and on overly optimistic assumptions about how much electricity the plant will generate,” Mr Schlissel said. “Using more realistic assumptions about future Lamu generation and coal costs, electricity from the plant could cost as much as $75 cents (Sh75) per kilowatt-hour (KWh), on average, during the years 2024 to 2037, more than 10 times what the plant’s proponents have claimed.”


This estimate neither includes costs for the Lamu port upgrades that would be required to bring coal to the plant nor construction of the transmission infrastructure needed to distribute the power. The costs of these projects would add significantly to Lamu’s overall impact on electricity consumers and taxpayers.

“Kenya’s own analysis demonstrates that, when using the most likely demand growth scenarios, its abundant renewable resources render no new coal generation necessary in the country until 2029, at the earliest,” Mr Schlissel said. In its application to build Lamu, Amu Power had said electricity from the plant would costs just $7.2 cents (Sh70) per KWh, and this has been a major selling point for the facility, but the economic and financial analysis by the US-based agency on the Amu data shows it to be highly optimistic.

The Lamu PPA includes a take-or-pay clause requiring that annual capacity charges, which start at Sh36 billion, be paid to the plant’s owners, regardless of whether the plant is actually dispatched, as long as the plant is available for dispatch. Second, a portion of this annual capacity charge is scalable, as it is linked to the US consumer price index (CPI) and will increase over time as the CPI rises.

Currently, the CPI is already eight per cent higher than it was in 2014, and is expected to climb another 10 per cent by 2024, when the plant is scheduled to come online. Further increases would likely occur after the plant enters into commercial service. In its application, Amu Power projected that coal for the plant could be imported for Sh5,000 per metric tonne (mt). In contrast, Kenya’s own estimates expect imported coal costs to average Sh10,000/mt next year, and rise to Sh10,800/mt in 2040.


“In other words, Lamu’s fuel costs will be double what the company estimated in its 2014 proposal. Finally, the company’s electricity price estimate depends on the plant operating at extremely high capacity factors, levels that the plant is unlikely to reach,” Mr Schlissel said.

Already, the new 310MW Lake Turkana Wind Farm, which came online at the end of September 2018, has displaced, at lower cost, a significant amount of generation that had previously been produced by thermal units; and the ageing and expensive diesel generation, which also puts the viability of the Lamu coal plant to test. Kenya also has transmission interconnections with Ethiopia and Uganda, which are developing their own renewable resources that might be available for import.

“Kenya Power already has a 25-year PPA with Ethiopian Electric Power through which it will receive 400MW of firm power with related energy at a cost of $7 cents (Sh7) per KWh. As this PPA also has a take-or-pay clause, Kenya Power will have to pay for this power, even if it is displaced by electricity from Lamu,” the report said.

Efforts to get a comment from the Energy ministry proved futile as calls placed to the Principal Secretary, Mr Joseph Njoroge, went unanswered. Amu Power, on the other hand, told the Nation this new report’s analysis is inaccurate.


The consortium argued that, according to the 2017-2037 Least Cost Power Development Plan, Kenya expects an energy demand of between 1,754MW and 9,790MW. “We anticipate that the coal power plant will have utilisation rate of around 95 per cent, meaning Kenyans will only pay for energy consumed and no capacity charge will be accrued,” Amu Power chief operating officer Cyrus Kirima said.

“We also wish to clarify that the coal power will retail at a cost of tariff of $0.7.8/kWh (Sh78) which was locked during the signing of the power purchase agreement.” Amu Power argues that the Lamu coal power plant will provide baseload capacity at the second cheapest non-subsidised tariff in the country after hydro, at $0.5/kWh (Sh50).

“This plant will have the flexibility to profile the generation according to the daily demand pattern compared to other power production technologies that are inflexible; reducing generation costs by between 12 per cent and 36 per cent,” Mr Kirima said.

Source: Daily Nation