analysisBy Jaindi Kisero
Nairobi — Long term lenders behind the massive Lake Turkana Wind Power Project - Kenya's largest green-field wind power scheme - are now asking for a government guarantee to cover the risks in the private-sector funded project.
If it is built, the project in northeastern Kenya would be the biggest wind farm in Africa.
Knowledgeable sources told Daily Nation that the lenders have expressed misgivings about the credit worthiness of The Kenya Power and Lighting Company (KPLC), the party that will be responsible for the revenue to service the huge loans in accordance with a power purchase agreement Turkana Wind Power has already signed with Kenya's monopoly electricity distributor.
"It is clear that the project will not only face bankability issues, but will also struggle to mobilise Development Financial Institutions without a sovereign guarantee for KPLC tariff payments", said Mr Hela Cheikhorouhou of the African Development Bank (AfDB) in a recent letter to the ministry of Energy. AfDB is the lead financial arranger for the project.
Lake Turkana Wind Power has negotiated a 20-year power purchase agreement with KPLC, that is denominated in Euros and which includes stand-by letters of credit guaranteeing advance payments.
Whether the government will agree to issue a guarantee to the project remains to be seen, considering that Kenya has been more or less observing a moratorium on sovereign guarantees to loans made on behalf of state corporations.
But in the case of the Turkana project, the stakes are very high for the government because the country is under intense pressure to increase its electricity generation capacity within a very short period.
With a capacity of 300MW, 17 per cent of the country's electricity generation capacity, Lake Turkana Wind Power offers the best chance of meaningfully reducing the country's power deficit in the medium term.
Currently Kenya's interconnected power system has an effective capacity of only 1,289 MW during average rainfall.
This comprises 719MW hydro, 163 MW geothermal, and 407 MW thermal power-including 146 MW capacity of emergency power producers.
This is against a real demand estimated at 1,172 MW. Thus the reserve margin is much lower than the 15 per cent margin required to take care of planned and unplanned system outages.
Kenya has prioritised several generation projects to meet the projected power demand, most in different stages of implementation.
Turkana Wind Power, which is included in the list of the priority projects is supposed to start operating in December 2012.
Lake Turkana's other strong point is the tariff levels it has negotiated with KPLC which, unlike agreements signed with a couple of other independent power producers, does not provide for the so called 'capacity charges' that oblige KPLC to pay for power it has not used.
At a negotiated tariff of 7.22 Euro cents per unit, the price Lake Turkana Wind Power will charge KPLC for electricity will make the project easily the cheapest source of power in Kenya to be connected to the national grid.
Last month, the shareholders of Turkana Wind Power were forced to go back to the drawing board after giant private equity player Globeleq of the United Kingdom, which had been negotiating to acquire a controlling stake in the project, quietly pulled out.
Speaking to the Daily Nation, managing director Mr Chris Staubo, played down the significance of Globeleq's exit, pointing out that the UK group was only one of the several private equity players the company was negotiating with simultaneously.
"We have been negotiating with multiple equity players simultaneously", he said, stressing that the project was receiving attractive offers from other reputable international financiers and private equity players.
The exact reasons why the negotiations between Golobeleq and the shareholders of Turkana Wind Power faltered are still not clear.
According to Globoleq , it was a matter of differences in the scope and modelling of the project.
"Globeleq and its potential partners failed to reach common ground regarding the development of the project " said the group's head of business in Africa, Mr Paul Kunet.
Lake Turkana Wind Power is owned by four local shareholders - businessmen Carlo Van Weinegen, John Thiongo Mwangi, William Dolleman and managing director Chris Staubo.
The foreign shareholders of the company are grouped in a consortium of mainly Dutch investors under a grouping led by KP&P BV of the Nertherlands, most of whom are manufacturers of wind power generation equipment and specialists in implementing wind firms.
Speculation in the energy sector has linked the owners of the project to political allies of President Kibaki, including former State House Comptroller Mr Matere Kereri .
But Lake Turkana Wind Power has explained that Matere , who is also the former chief executive of the Electricity Board. has been hired as an adviser to the project.
"He is not a shareholder but an adviser", said Mr Dolleman, a spokesman for the company.
At stake is a massive project that will entail construction of an expansive wind farm consisting of a total of 365 wind turbines, each with a capacity of 850 KW, at a cost of $ 590 million.
Seventy per cent of the cost will be funded through loans, with the remaining 30 per cent being funded through equity.
The second major component of the massive project will involve the building of a 400 kilometre power transmission line running from Leisamis in Marsabit District through Maralal , Nyahururu, Gilgil and and eventually to Longonot where it will connect to the national grid.
Under the terms of agreement with the Ministry of Energy and KPLC, Lake Turkana Wind Power has been authorised to seek financing for the transmission network on their behalf under the so-called' build ,operate and transfer' (BOOT) scheme.
Actual generation of power is slated for June 2011.
The author is a managing editor with Nation Media Group and specialises in economic and finance issues.