In a move aimed at shielding consumers from foreign-exchange
volatility — one of the components that ...
contribute to high electricity costs — Kenya will start using the local currency in power purchase agreements (PPAs) between investors and the utility firm, Kenya Power.
contribute to high electricity costs — Kenya will start using the local currency in power purchase agreements (PPAs) between investors and the utility firm, Kenya Power.
Although
Kenyans are paying for electricity in shillings, they bear the burden
of paying for forex adjustments for projects financed in hard currency
which are passed on by Kenya Power every month.
“It is
important to insulate consumers from exchange rate fluctuations. This
will be possible if we use local currency in financing energy projects,”
said Energy Principal Secretary Joseph Njoroge.
All projects in the energy sector are currently priced in hard currency, mainly the US dollar.
New opportunities
Kenya
believes that transiting the local currency will also open new
opportunities for local banks, insurance companies, pension schemes and
fund managers to participate in energy financing.
The
country, however, will be walking into uncharted waters in East Africa
after an attempt by Tanzania to transition to local currency-denominated
PPAs in 2008 flopped, primarily due to market perceptions around
offtaker creditworthiness, as well as a lack of depth in the domestic
capital markets.
After a period of limited investment
in independent power producers (IPPs), Tanzania transitioned back to
dollar-denominated PPAs in 2014.
South Africa is the
only country in Africa that has successfully managed to implemented a
local currency regime for renewable energy IPPs, which have added 3,052
MW capacity to the grid in the past seven years, with 86 per cent of
debt raised locally from 2012-2014.
In the majority of developed economies, power projects are financed in the local currency.
A
study on local currency-dominated PPAs says Kenya would benefit
significantly by transiting to such deals, in terms of predictable power
bills and deepening of capital markets.
“A hard
currency regime leaves Kenyan consumers, and the economy at large,
vulnerable to external shocks and fluctuations in the value of the
shilling. These risks to consumers would be reduced or eliminated under a
local currency tariff structure,” notes the study conducted by Dalberg
Advisors and funded by GuarantCo, a firm that mobilises local currency
investments in infrastructure projects.
Public debt
The
adoption of local currency would also ease the pressure on Kenya’s
runaway public debt, which has risen sharply over the past few years —
from 44 per cent of GDP in 2013, to 53.1 per cent in 2016; it currently
stands at around 55 per cent.
“If depreciation of the
shilling were to sharply increase, a local currency regime would result
in significant cost savings to the Kenyan consumer,” notes the study.
It
adds that Kenya has the ability to immediately transit to the local
currency regime by ensuring that PPAs for all project with a 10 MW
capacity are fully denominated in local currency.
“Given
their size, these projects can be financed comfortably in local
currency by local banks and institutional investors,” the study notes.
“For
those above 10MW, a hybrid tariff with partial indexing to hard
currency is the most viable option because it minimises risks for IPPs
where project operating expenditure costs are partially incurred in hard
currency.”
It is estimated that over the next 10 years
a staggering $44 billion will be available in local currency, funds
which investors in the energy sector can tap to finance projects instead
of seeking foreign financing.
“Using local currency to
fund energy projects will open opportunities for Kenyans’ participation
in and ownership of energy projects,” said Mr Njoroge.
The
need for local currency in energy financing comes at a time when Kenya
is encouraging private investment in generation projects to meet growing
electricity needs.
The country’s ambitious plan of
raising electricity capacity from the current 2.4GW to 22.7GW by 2030 is
pegged on producing cheaper sustainable energy, particularly from small
hydros, wind and solar.
Kenya is also looking for
private investors to pump resources into transmission lines owing to the
fact that the government is resource-constrainted, making it impossible
for the state-owned Kenya Electricity Transmission Company (Ketraco) to
accelerate projects.
The company, which is
implementing several transmission lines totalling about 5,000 km at a
cost of $2.5 billion, largely depends on the government for financing
either directly or through government-guaranteed debt from foreign
governments and development finance institutions.
It needs about $3.5 billion to develop over 11,000 km of high voltage transmission line over the next 13 years.
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