Feature of the week:
Kenya Power declared a Special Project by Government
According to a press release from the office of the President, the government has frozen the contracting of additional power producers by KPLC and ordered a review the current Power Purchase Agreements (PPAs) so as to lower the cost of electricity in the country.
The Interior Cabinet Secretary (CS) stated that the move is in line with the recommendations of the Presidential Task Force on the Review of the PPAs. The recommendation were released on 29th September 2021 and address PPAs that have left KPLC indebted while paying for excess energy which the company does not need in take-or-pay arrangements. These arrangements were blamed on poor negotiations and vested interests.
The recommendations of the Presidential Taskforce were:
- Cancellation with immediate effect of all unconcluded negotiations of PPAs and ensure future PPAs are aligned to the Least Cost Power Development Plan (LCPDP)
- Fast-track and deepen the ongoing reforms at KPLC
- KPLC to take the lead in formulation and related PPA procurement of the LCPDP
- KPLC to institute due diligence and contract management frameworks for PPA procurement and monitoring along the lines of drafts provided by the Taskforce
- KPLC to institute 1 and 5 year rolling demand and generation forecasts and associated models
- KPLC to adopt standard PPAs and proposed government Letter of Support (LOS) along the lines of the drafts provided by the Taskforce
- KPLC to undertake a forensic audit on the procurement and system losses arising from the use of Heavy Fuel Oils (HFOs)
- In line with the constitutional imperative for transparency in the public sector, KPLCs annual reports should include the names and beneficial ownerships of all Independent Power Producers with which it has contractual arrangements
The government has therefore declared KPLC a “Special Project” and an inter-ministerial team has been set up carry out forensic audit and oversight the company urgently.
According to the CS, work is ongoing at an inter-ministerial level to reduce system losses including the theft of power. Further, a multi-agency team comprising of the DCI, Financial Reporting Center (FRC), Assets Recovery Authority and other investigative agencies will be assembled to investigate alarming system losses within KPLC, procurement practices, insider trading, conflict of interests and suspect transactions involving KPLC staff and others.
The system losses of 23.47% have exceeded the 19.99% limit approved by the Energy and Petroleum Authority owing to lack of internal control measures to mitigate losses, including governance.
Commentary
We opine that the Taskforce recommendations are set to ease the burden of PPAs for the company. The target of the recommendations is to reduce the cost of electricity by over 33.0% within 4 months. We opine that this will cushion consumers and it will be interesting to see how the reduction will be effected within that period of time.
Overall, these initiatives (and those aimed at addressing system losses such use of smart meters) are positive for the company. They try to address some of the major concerns we’ve had with the company such as system losses, energy contracts that don’t reflect economic realities of energy demand and corporate governance issues at the company.
Equities Market Summary:
Nairobi Securities Exchange Performance
The All Share Index and the NSE 20 eased by 3.0% and 2.2% w-o-w to close the week at 175.82 and 1,992.92 respectively. The decline was primarily driven by Safaricom’s price decrease (3.6% w/w to KES 41.65). Equity turnover edged up by 77.2% to KES 2.9 billion while the volume traded rose by 40.4% to 79.8 million.
Notable price declines in the week included; HF (6.8% w/w to KES 3.69), Stanbic (6.3% w/w to KES 86.25), CIC (5.1% w/w to KES 2.81), DTB (4.7% w/w to KES 60.50), I&M (4.2% w/w to KES 21.80) and EABL (4.2% w/w to KES 164.75). KPLC rose by 2.9% w-o-w to KES 1.79 buoyed by news of the Presidential Taskforce recommendations. We recommend accumulating some of these fundamentally strong counters such as Safaricom when there is a price decline.
Recommendations:
KCB – Neutral