house - danwatch · excellent wind resource: avg. wind speed ... turkana in north-eastern kenya....
TRANSCRIPT
Contact Sheet for L TWP project lunch. 1 pm to 3pm 13111 March 2012
Companv/Orqanisation Name Title/Function Embassy of Denmark H. E. Geert A. Andersen Ambassador
Carol Olale Trade Council Export Advisor
Embassy of the Kingdom of H. E. Joost Reintjes Ambassador Netherlands
Mr. Hans Docter Deputy Head of Mission
Embassy of Norway H.E. Per Ludvig Magnus Ambassador
Embassy of Sweden H.E. Ms. Ann Dismorr Ambassador
British High Commission H.E.Mr. Peter Tibber High Commissioner I
Mr. Greg Gibson Head of Trade and Investment
Embassy of Spain H.E Javier Herrera Ambassador Ga ref a-CanturriMr. Jose Bernardez Commercial Attache
UNEP Dr. Achim Steiner Executive Director World Bank Johannes Zutt Country Director
Kiaran O'SullivanAFDB Mrs. N.T. Anvaripour Infrastructure Finance Ministry of Energy Mr. P .Nvoike PS Ministry of Finance
I Mr. J. Kinyua PS
Mr. J. Murugu Head of Debt KPLC Eng. J. Njoroge MD and CEO
Laurencia Njagi Company Secretary KETRACO Eng. J. Kiilu MD and CEO
Mr. D. Macharia Company Secretary
VESTAS Hans Vesteraaard Senior VP LTWP Carlo Van Wageningen Chairman
Rizwan Fazal Corp. Finance Advisor Mr. Christian Wright Regional Director
Aldwych International
Email [email protected] [email protected]
ambassaden. nairobi@f orei gnministrise
(Emma PA) [email protected]
[email protected] [email protected] [email protected]@eneravrnin.ao.ke12s@treasu!:l.QO.ke
[email protected] [email protected] [email protected] [email protected] [email protected]. ke
[email protected] [email protected] ri?;w�n. f�z�l@ltw1H:o. ks:
c. wright@ald:i£ich-international.com
Tel. No +254207122848+254700418407
+254204288000
+254 20426800
+254 721 244 311
+254204234000
+254202844000
+254202844000
+254202720222 / 3 / 4 / 5
+254 20 2711434+254 (20) 7624007 -PA+254 203226442+254 20 3226442+21698702361+254 20 2250680+254 20 2252299
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Lake Turkana Wind Power Project: Current status and challenges
The Ambassador of Denmark His Excellency Geert Aagaard Andersen requests the pleasure of the company of
DR. ACHIM STEINER
for a Lunch on Tuesday, 13
th March 2012 at 13.00 hours
Corner of Muthaiga Road & Naivasha & Avenue(see map below)
R.S.V.P Email: carola(@.um. dk Tel: + 254 700 418 407
TRIAD
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lunch confirmations 13th March 2012 at the Residence 12.00-14.00
Name Organisation
Gee rt A. Andersen Embassy of Denmark
Carol Olale Embassy of Denmark
Dr. Achim Steiner UNEP
Johannes Zutt World Bank
Kyran O'Sullivan World Bank
Mr Jose Bernardez Embassy of Spain
Mr. Geir Arne Schei Embassy of Norway
Bjorn Haggmark Embassy of Sweden
Greg Gibson British High Commision
Mr. Patrick Mawala KPLC
Christian Wright Aldwych International
Phylip leferink Vestas
Edward Mungai IFU
Carlo Van Wageningen LTWP
Rizwan Fazal LTWP
Patrick Nyoike PS Min of Energy
Eng. J. Kiilu MD and CEO
Mr. D. Macharia Company Secretary
,,
Lake Turkana Wind Power Project
Briefing note and key issues
1. Background Information
Lake Turkana Wind Power - Quick Facts
Excellent wind resource: avg. wind speed exceeding ID mis
428km transmission line (donor financed)
Wind farm size 300MW (353 V52 WTGs)
Total project cost €590m. Debt: €413m; Mezzanine linnnce: E29.5m; Equity: €147m
Shareholders Aldwych (25%), IDC South Africa (25%), KP&P (18.75%), Norfund ( 12.5%), Vestas (12.5%), IFU (6.25%)
Lenders AIDB (lend), Standard Bank, Nedbank and other syndicate parties lo be confirmed
Average KPLC €102.5/MWh power purchase price (2012)
PPA €75.2/MWh for 20 years
Power production l,400GWh/year (P90)
Sa�ed fuel imports €120m per year --
In 2005, Anset Africa and KP&P began the development of this challenging utility scale wind
power project. A special purpose vehicle (SPV) was established for development of the project.
The project is now fully developed and is only pending World Bank Group risk insurance cover,
as requested by the Government of Kenya (GoK), which would allow for the project to reach
financial closure.
The 300 MW wind project is located at a remote location near Loyangalani in Marsabit County,
approximately 12 km east of Lake Turkana in north-eastern Kenya. The closest deep-sea port is
Mombasa, 1,200 km southeast of the site. The Project site is located on the southeast border
of Lake Turkana between two high ranging mountains in the "Turkana Corridor" where a low
level jet stream originating in the Indian Ocean creates favourable wind conditions. The Project
area falls within a valley between Mount Kulal and Mount Nyiru that produces a venturi effect
(effectively serving as a funnel) in which wind streams are accelerated to high speeds. The site
covers an area of 165 km2 with unique geographical conditions in which daily temperature
fluctuations generate strong, predictable wind streams between the lake and the desert
hinterland.
The Project will comprise of 353 Vestas Wind Systems A/S V52 wind turbine generators
(WTGs), each of 850 kW generating capacity, a Siemens·supplied and built 33 kV electrical
collection network and 33/200 kV substation, and an ABB dynamic reactive power system. The
renewable power generated will be fed into Kenya's national grid and make up approximately
17 per cent of the country's installed power supply in the first year of operation (expected in
late 2014). The transmission infrastructure required for the Project is the responsibility of
Ketraco, with its timely completion to be guaranteed by the GoK. The works will include a 428
18 September 2012
km, 400 kV overhead transmission line and a sub-station at Suswa, 90 km north of Nairobi.1
This infrastructure is scheduled to be completed three months prior to the commissioning of
the first phase of the Project (approximately 26 months after the effective date of the PPA),
while it will take a total of 30-32 months to achieve full commercial operations. The
transmission infrastructure is proposed to be financed with a combination of funds from the
Government of Spain and the GoK as well as other potential Dfls.
Kenya's Least Cost Power Development Plan (LCPDP) of March 2011 was prepared by the
Ministry of Energy and the Regulator (ERC) in cooperation with the power utilities. The Lake
Turkana Wind Power project features at the top of the proposed future IPPs in the LCPDP with
expected commissioning of the proposed 300 MW in 2014-15.
Kenya Power and Lighting Company and the proposed guarantee structure
Kenya has one of the best track records in Africa for facilitating Independent Power Producers
(IPPs) with investments totalling 347MW being commissioned thus far. The seetor benefits
from an independent regulatory authority with minimal market distortions. Furthermore,
Kenya Power and Lighting Company (KPLC) has performed well in paying for the IPP produced
electricity since the introduction of IPPs in 1996, without a single default and, on the whole,
maintains a tariff which covers the cost of service. Despite this success, attracting new private
sector investment in the sector remains challenging due to risk perceptions of international
investors and opportunities elsewhere. While there is a peaceful power sharing arrangement
between the two major parties within the Government of Kenya (GoK), investors remain wary
of civil disturbances and require some form of political risk mitigation for further involvement
in the sector.
In previous IP P's, KPLC provided letters of Credit in order to support payments under the PPA
and the GoK has been willing to provide projects with comprehensive letters of comfort. Given
KPLC's successful track record complying with its payment obligations and the overall
improvement in the company's financial condition during the past seven years, KPLC and the
GoK decided to explore new options with World Bank's International Development Association
(IDA) to extend support to private investors in an efficient yet less burdensome manner. Other
concerns included GoK debt sustainability and compliance with the IMF programme. This led to
an iterative and lengthy process in establishing the final credit enhancement structure of the
project. In the end, the Ministry of Finance (Mof) selected an IDA-issued Partial Risk Guarantee
(PRG) complemented by MIGA guarantees.
The IDA PRG will support the payment obligations of KPLC under the PPA and the payment
obligations of the GoK associated with lost revenues caused by a delay in completion of the
transmission infrastructure for the project. The complementary MIGA guarantees cover
termination payments arising from breach of contract triggered by political events and
backstopping of the GoK Letter of Support. The lender group, led by the AfDB, has clearly
indicated that obtaining World Bank Group cover is critical for their ability to bring the project
to financial closure with the involvement of commercial lenders, as opposed to a DFI exclusive
debt financing.
1 The Suswa sub-station has already broken ground with funding from the Agence Fran�aise de
Developpement, the European Investment Bank and the African Development Bank.
2
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2. Power Purchase Agreement
The amended and restated Power Purchase Agreement (PPA) was signed between LTWP and
KPLC on 29 September 2011 (and restated on 19 July 2012 and approved by the Regulator on 4
September 2012). The signed PPA is a take-or-pay contract at €75.20/MWh ($96.14/MWh) for
20 years. Assessing to what extent this is a reasonable level, it is worth considering a number
of benchmarks:
• It is assumed that the average cost of power purchased by KPLC will amount to
€102.5/MWh ($131/MWh) in 2012, according to the PAD. Thus, LTWP will lower the
average system costs for KPLC.
• It is worth comparing the PPA for LTWP with the PPA for the three HFO plants included
in the PSPGSP. According to the WB PAD, the levelised tariffs range from €173.6-
179.9/MWh ($222-230/MWh). This is between 130%-139% higher than the PPA for
L TWP. There is of course a difference between power sourced on a take-or-pay
contract (as from LTWP) or power sourced on-demand from a despatchable source
such as the three HFO plants. Nonetheless, L TWP will have a first-order effect of
reducing average system costs.
• The PAD (p.29) assumes that the levelised cost of energy from wind power in Kenya is
$122/MWh, 27 per cent higher than the PPA for LTWP. This is also the basis for the
feed-in-tariff for small-scale renewable energy.
• For international comparison, the feed-in-tariff for wind power in Spain in 2012 is
between €79.10/MWh and €94.27 /MWh (applicable to wind farms installed in 2011 or
earlier).
• Finally, the PPA was negotiated in good faith based on an open-books approach. In the
lenders' base case, the equity internal rate of return (IRR) amounts to 14 per cent.
Considering the location, scale and ground-breaking nature of the project, and
comparing to the aforementioned HFO plants (refer to the WB PAD Table 10 showing
that the three HFO plants have equity IRRs in the range from 14.7-18.5 per cent), this is
a very reasonable level.
In summary, the PPA negotiated for the LTWP project is very attractive from KPLC's perspective,
as it offers electricity at competitive prices whether compared to current system costs, the cost
of other generation technologies, or domestic and international wind power tariffs.
3. Curtailment Risk
Curtailment risk refers to the supply-demand balance of the system and to which extend
output from LTWP and from other must-run generation sources exceed total system demand.
In this case, output from LTWP would have to be curtailed. This is a potential problem for KPLC
as the PPA for LTWP is on a take-or-pay basis, meaning that KPLC would have to pay for the
power curtailed. Nonetheless, it is a normal market practice internationally to accommodate
the integration of generation technologies with zero marginal costs.
The project sponsors as well as the lender group have undertaken curtailment studies of the
impact of system integration of LTWP in the six years 2015-20. The results are obviously
dependent on demand growth scenarios as well as the timing of bringing on-line other
generation facilities.
3
• In the base case (which assumes 10 per cent annual electricity sales growth2
, new
generation facilities and load increases coming on-line as planned, normal year
hydrology), there is some (5-10 per cent) curtailment of output from LTWP in 2015,
while there will be system shortfalls (demand exceeding supply) in the following five
years.
• In the worst case (low demand growth, wet years, new capacity on-line as planned,
delays to new loads), there will be significant curtailment of LTWP output.
• On the other hand, with base case increases to demand and delays to new capacity
coming online, there will be significant system short-falls.
These results raise two key questions:
• What is the financial impact on KPLC of curtailment of LTWP?
• What are the economic costs associated with the various scenarios?
Financial impact of curtailment on KPLC
In case of curtailment of LTWP, KPLC will pay the PPA tariff of €75.20/MWh to LTWP of energy
not used. However, approximately 70 per cent of this may be passed on to consumers through
end-user tariffs. The remaining 30 per cent (or approx. €22.2/MWh) will be the direct financial
cost to KPLC.
As a wind power plant enters the merit order before HFO plants (due to the lower marginal
cost of electricity generation), it is necessary to consider the LTWP PPA in light of the PPA with
the three HFO (refer to the WB PAD), as it may be better from a KPLC point of view to keep the
HFO plants as a reserve to accommodate peak demand and provide grid stability (cf. paragraph
61 of the WB PAD).
The wholesale tariff from the HFO plants to KPLC consists of a capacity charge (39 percent, paid
irrespective of dispatch), energy charge (4 percent, paid if dispatched), and fuel cost (57 per
cent, paid if dispatched). With the overall tariff from the HFO plants amounting to
€176.8/MWh, this amounts to €68.9/MWh, €7.1/MWh, and €100.8/MW respectively.
In case of curtailment, in practice the non-zero marginal cost generation technologies, such as
the three HFO plants, will be kept on stand-by. The cost of electricity for KPLC will then be the
PPA of electricity from LTWP (€75.2/MWh) and in addition the capacity charge to the HFO
plants (€68.9/MWh). In total, the cost of electricity to KPLC in the hours of curtailment will
then amount to €144.1/MWh, which is 18 per cent lower than electricity bought from the HFO
plants (176.8/MWh). Thus, it is still cheaper/or KPLCto keep LTWPon line while keeping the
HFO plants on stand by and using them as peaking power and reserve capacity. This would be
consistent with part of the reasons for their approval as stipulated in the WB PAD.
In other words, even in the worst case scenario, financial viability of KPLC is not threatened as
a result of LTWP. Further, LTWP coming on line will in general lower the average cost of
electricity and therefore enhance KPLC's financial viability.
2This compares with 9 per cent annual growth rate in demand in the base case of the World Bank PAD.
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Economic costs of curtailment
Consumers, however, will in the worst case be worse off as the curtailment costs will largely be
passed through to them. The questions remaining to be answered, though, are the following:
• What would be the economic costs in the three scenarios respectively if L TWP is not
realised? In other words, what would be the economic costs of the power rationing
that would occur in all three scenarios without LTWP? How does this cost compare
with the worst case scenario of curtailment with L TWP being realised?
• Without L TWP, there will be higher reliance on the use of marginal and more costly
plants in the system. What is the economic cost of passing on the increased system
costs to consumers?
• What is the economic cost to consumers of the increased usage of costly back-up
generators?
• Even with the risk of curtailment, to what extent and at what costs does L TWP provide
an affordable risk insurance against volatile hydrology and volatile fuel prices?
These questions are not necessarily easy to answer; and it may be appropriate for the World
Bank to assess in more detail these wider aspects of the contribution of LTWP. Either way, the
point is merely to highlight the known risks, and near-certain negative impacts, of not realising
a near-zero marginal cost generation plant as LTWP.
Curtailment risk summary
There is a certain element of risk in the proposed LTWP project as a result of potential
curtailment. However; since KPLC's financial viability is not threatened by this risk, the
likelihood of the proposed PRG (related to the PPA) being called upon is extremely low.
The potential costs to consumers of curtailment should not be ignored. However, this cost
needs to be put in perspective with the significant and tangible positive impacts of LTWP:
1. Indirect provision of much needed reserve capacity in the system
2. Significant reductions in demand rationing
3. Fuel import savings amounting to €120 million per annum
4. Hedging effect against variability in hydrology and volatile fuel prices
5. The positive effect on industrialisation and new demand load as a result of reliable and
inexpensive power supply
6. The complementarity of wind power and hydro power in dry and normal years (where
hydropower may be used as a spinning reserve and to avoid over-extraction)
7. Direct and indirect benefits to the local communities (the project is located in one of
the poorest regions of Kenya) through a comprehensive CSR programme including
LTWP returning the first US$ cent per kWh earned from carbon credit revenues to the
GoK for use in the project area and for the local communities
These latter positive impacts should be seen in relation to the limited risks of curtailment
occurring in the first place. Curtailment is a risk, but the impact is confined and well
understood. The potential upside to the Kenyan economy of the realisation of L TWP is much
higher. And finally, the risk of the PRG being called as a result of curtailment appears minimal.
s
4. Development Fees
As described in Section 1, the Lake Turkana Wind Power project has been under private
development since 2005. That is in itself a remarkable testimony to the stability and soundness
of the Kenyan electricity sector as well as the environment for IPP s in Kenya. However, with the
ever-present risk of a project not materialising, developers are taking on significant financial
risks when developing a project as complex as LTWP. tn addition to the personal investment of
time and resources, legal fees, impact assessments, measurement campaigns, system balance
analysis all add to the cost of developing a project. Development fees are therefore not a pure
reward to the developer, but are largely covering costs already incurred at this stage.
The total development fees agreed for LTWP amounts to €32 million, equivalent to 5.37 per
cent of total project costs. The question is whether this is too much, a reasonable amount, or
too little, and to answer it is useful to compare and assess this level of development fees.
The development fee is included in the total cost of the project and is therefore indirectly paid
by the cash flow from electricity sold under the PPA. Therefore, the first indicator of the
fairness of fees (and project costs in general) is the level of the PPA. As elaborated in Section 2,
the PPA compares very well with both national and international benchmarks.
A second indicator would be to compare with the development fees of another wind power IP P
project in a similar environment. To date, only one privately financed utility scale wind power
project has been implemented in sub-Saharan Africa, namely the Cabe61ica project in Cape
Verde. This project was developed by lnfraCo Africa, which is one of the facilities of the Private
Infrastructure Development Group, which in turn is funded by a number of European
governments, including the UK, Sweden, Germany, Switzerland, the Netherlands, Austria, and
Ireland through their aid agencies, as well as the World Bank. Despite Cabe61ica amounting to
only 26 MW, less than a tenth the size of LTWP, development fees amounted to around €15
million, equivalent to 25 per cent of the total project costs.
Further, as mentioned in the section on the fairness of the PPA, the equity internal rate of
return (IRR) for the project amounts to 14 per cent, which can be compared with the three HFO
plants which have equity IRRs in the range from 14.7-18.5 per cent (cf. the WB PAD).
Finally, the group of lenders for LTWP, led by the AfDB, has a clear interest in keeping the
development fees as low and reasonable as possible. In their due diligence on behalf of the
lenders, AfDB has found the development fees to be fair taking into consideration the risks
undertaken.
In summary, the development fees for LTWP appear reasonable.
5. System Integration of Large Amount of Variable Electricity Generation
The LTWP project at 300MW is large and will make up a relatively large part of total generation
capacity in the Kenyan system. This poses challenges on KPLC as system operator, as they will
have to learn how to manage electricity from a variable source such as wind power. However,
several points should be taken into account when considering this challenge.
• By the time of commissioning the 300MW Lake Turkana wind farm, it will amount to
around 15 per cent of the nominal installed capacity of the Kenyan system.
Considering the dual role of the HFO plants as spinning reserve capacity and peak load
plants, the variability of outputs from LTWP is manageable.
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• With the hydro power currently installed in Kenya suffering from variable hydrology,
integration of wind power will provide a useful complement to the system. Wind
power will allow for sustainable water discharges while hydro power provides a rapidly
variable spinning reserve.
• As noted by the World Bank in the PAD, KPLC is staffed by seasoned professionals with
solid technical backgrounds in the sector. This will ease the process of preparing for
the system integration of L TWP.
• The wind conditions at the site are highly predictable, easing the planning and
integration of the wind resource.
• The WTG supplier, Vestas, has advised system operators in much weaker systems, e.g.
island solutions, and has successfully achieved much higher ratios of wind power
penetration. Vestas is prepared to facilitate the necessary training to prepare KPLC
staff for the integration of L TWP in the Kenyan system.
• There is a period between the financial closure of the project and the date of first
commercial operations date of not less than 29 months. During this time KPLC will
have ample opportunity to be trained both in Kenya and at system operators abroad
used to manage the variable loads from wind power plants.
In summary, while LTWP does present a challenge to KPLC in terms of system integration, this
challenge is by no means insurmountable.
6. Assessment of Social and Environmental Impact of Project
LTWP arranged for local consultants to prepare Environmental and Social Impact Assessments
(ESIAs) for the wind farm and the 400 kV transmission line; these were submitted to NEMA in
May 2008 and July 2008, respectively. Subsequently, a social-economic study report for the
proposed wind farm and transmission line was produced in March 2009, an updated ESIA for
the wind farm power project was produced in July 2009 that reflected a larger project design
and was prepared to meet the requirements of the IFC Performance Standards and Equator
Principles, and a draft ESIA was prepared in June 2010 for the proposed strengthening of the
existing road from Laisamis to Loiyangalani via South Horr. The project design, the ESIAs for the
project components, including the transmission line, and the associated ongoing community
consultation programs were subject to an independent review in May 2011 for compliance
with IFC Performance Standards. The independent review of the ESIA documentation
confirmed that the project, including the associated transmission line, is broadly in line with IFC
Performance Standards. The key issues subject to ongoing assessment work include:
confirmation of sufficient water supply for construction and operations; confirmation of
impacts of building short road bypasses around the communities of Ngurunti, South Horr, and
Kurungu; management of road traffic during construction; and location of workers camps and
office and maintenance facilities.
According to the World Bank, LTWP has demonstrated a sensitivity to the cultural setting of the
area and has engaged each tribal group in an equitable manner in relation to consultation,
management of employment opportunities, as well as development of the Corporate Social
Responsibility Programme (CSRP) that is intended to help meet local needs and interests of the
respective communities within their particular areas of settlement and pastoralist activity. Key
issues and concerns that have been raised during the ESIA process are identified in the ESIA
reports.
7
7. List of Acronyms
AfDB African Development Bank
CSRP Corporate Social Responsibility Programme
DFI Development Finance Institution
ESIA Environmental and Social Impact Assessments
GoK
HFO
IDA
IFC
IPP
IRR
KET RACO
KPLC
LCPDP
LTWP
MIGA
NEMA
PAD
PPA
PRG
PSPGSP
WTG
8. Notes
Government of Kenya
Heavy Fuel OIi
International Development Association (of the World Bank Group)
International Finance Corporation (of the World Bank Group)
Independent Power Producer
Internal Rate of Return
Kenya Transmission Company
Kenya Power and Lighting Company (the off-taker of power from l TWP project)
Kenya's least Cost Power Development Plan
Lake Turkana Wind Power Ltd.
Multilateral Investment Guarantee Agency (of the World Bank Group)
National Environment Management Authority (Kenya)
(World Bank) Project Appraisal Document. Here specifically referring to the PAD
for project P122671: Private Sector Power Generation Support Project (see
references below)
Power purchase agreement
Partial Risk Guarantee I issued by IDA)
World Bank Private Sector Power Generation Support Project
Wind turbine generator
Exchange rates applied as per 11 September 2012
1 EUR= 1.2785 USO
1 EUR= 105.85 KES
9. References
Report no. 66363-KE: World Bank Project Appraisal Document (PAD) for IDA PRGs amounting
to $166m in support of four IPPs (P122671: Private Sector Power Generation Support Project).
This /PP project and its four PRGs were approved by the World Bank's Board of Directors on 28
February 2012. Given its coverage and recent date, this document is highly relevant as credible
background information about the electricity sector and IPPs in Kenya as well as a reference
document for PRGs issued by the World Bank for IPPs in Kenya. The PAD anticipates the
integration of wind power from L TWP several places (e.g. paragraphs 14, 61) and notes the
advantage of the HFO plants to provide grid stability accommodating the integration of a
variable power source.
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ROYAL DANISH EMBASSY
Nairobi
LAKE TURKANA WIND POWER PROJECT: CURRENT STATUS AND CHALLENGES
The Lake Turkana Wind Power (LTWP) project aims to provide 300MW of reliable, low cost wind power to the Kenya national grid, equivalent to approximately 20% of the current installed electricity generating capacity. The wind farm site, covering 40,000 acres (162Km2), is located in Loyangalani District , Marsabit West County, in northern Kenya, east of Lake Turkana. The project will comprise 365 Vestas wind turbines and will also include the upgrading of the existing road from Laisamis to the wind farm site (approx. 204km). The project proponent is the LTWP consortium comprising KP&P Africa B.V. & Aldwych International as co-developers, JDC of South Africa, IFU, Vestas and Norfund.
The project is set to benefit Kenya by providing reliable and low cost power through a renewable source of energy, community development through creation of jobs and reduce cost of fuel importation to the economy. Furthermore, there will be an additional environmental impact through a CSR programme which is being finalised based on input from the community. Lastly, the project will portray Kenya as a prime investment destination to the international investment community by proving that large infrastructure projects are possible here.
The current status of the project is that the Mandated Lead Arrangers (African Development Bank, Standard Bank of London and Nedbank Capital of South Africa) have completed their due diligence. The financial close Is being held-back due to the on-going reviews of the project agreements undertaken by the World Bank through KPLC and Ketraco. These reviews were to be completed in February but may now run into April with potential renegotiations threatening to derail the project. The project needs to achieve financial close by no later than June 15 th
2012. Further delays will jeopardize the viability of L TWP project. The loss of the project will become a significant deterrent to other prospective large scale infrastructure investors given the time and resources spent by LTWP to date.
The Danish Embassy has organized this lunch with stakeholders in Nairobi. During the lunch a presentation on the current status of the project and challenges being encountered will be made. This will provide an opportunity to discuss the project with the relevant stakeholders and interested parties to get input as to how the project's financing can be expedited.
•
Stakeholder Luncheon
Lake Turkana Wind Power Project:
Current status and challenges
March 13, 2012
I. Background
11. Present Situation
111. Next steps & way forward
LAKE TURKANA
2 <-----:__ -�.
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Section I
Background
•
From humble beginnings, and a spirit of true entrepreneurship ...
• 2006 - the first wind measurement mast at Sirima
• Seed capital from the Dutch investors to carry out the feasibility
studies
• Engaged DEWI, KEMA, VTT, Schicon International and
Mammoet to carry out initial feasibility studies
• Acquired project site
• 2007 - commenced discussions with KPLC, MoE, Turbine
Suppliers
4 AKETURKANA
� ... ,... ... ,"""" .. ---·
... LTWP has evolved into a unique renewable energy project of international stature ...
• 2008: Establishment of the KPLC - Ketraco - GoK task force on
implementation of the Transmission Infrastructure
• 2008: Appointment of African Development Bank (AfDB) as
Mandated Lead Arranger
• 2009 - 2011: Procurement of EPC Contractors
• December 2009: Entry of Aldwych International as co
developer
• 2010: Appointment of Co-Arrangers (Standard Bank of London
and Nedbank Capital of South Africa)
• 201 O - 2011: Equity participants enter the project {IDC of South
Africa, Norfund, IFU and Vestas
• August 2011: Commencement of MLA due diligence
5 �AKE T';!_e�f!.'�A
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... backed by leading advisers & consultancies committed to delivering this project. ..
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C 8 .. Cl/ 7.S �7
6.5
6
8 Sl-AKE TURKANA
�-
Kenya ""'*"' ....... -----.
--Ptowl•c•........,.�
* -"'-'-.IW • Pfooll.c•u,a.e
_.....,,..,.
--·
' .. ... �
�· SOMALIA
-
-...
Ocean
- .. --� ............
.j,..AKe TURKANA � - �-·------·
Parkat
_,
1 2
Paul Teasdale Old Road
Loasal Na�onal Pane
1U �I AKE Tl;!.�KANA
�� · ��---
r," f. , I ;-
. r \
�
-, ),, . .•
/ �·�
.. R L
1
j ] ft .,
f i/
f t\ • I
... to deliver the electrical energy generated to the Kenyan Grid at Suswa ...
Lake Turkana
Wind Farm
+
Transmission lnterconnector .-A-.
r---����-- --����--�
·¥ � Substation
Loyangalani
Metering Point
Substation
Suswa
+
National Grid of
Kenya
+
Lake Turkana Wind Lake Turkana Wind Power Kenya Power and
Power Limited
Genco
Transmission Company Ld
Transco
12
Lighting Company Limited
KPLC
'C.l AKE TURKANA � WIN�IW'II .. _
--
... and to ensure that 300MW of wind power can be safely transmitted ...
/ /
-�7,-220 kV network in Kenya: present {bold solid blue lines), additional lines and
substations for the minimum expansion scenario {bold solid green lines) and for
the 2013 LCDP case scenario {thin dotted lines all lines shown) RKANA
--=:.;e
. . . L TWP incorporated three dynamic reactive power compensators into the design ...
Wind Farm
3x100MW
33kV 220kV
: • Loyangalanl DRPCI �
Subsla'tlon
i & :• •
Gltmt
Power Plant • I > TnuJllffliaion Gnd
14
Ollmria
I 111111 IV
fi) (G) l�
11 I r
11 I •
SUIWA Subsla'tlon
Nairobi Narth Ngong
hinya
�l-AKE TURKANA
��.
... following the completion of a comprehensive power and load flow study.
• The system study concludes that 300 MW of stable generation can betransmitted across the Loyangalani-Suswa transmission line and into theKenya system. In addition, following serious faults, the grid will be able toreturn to a stable operating state. This applies both to a normal situationand to degraded operating modes, given the considered systemconfiguration and reasonable operating recommendations.
• The study also stresses that the minimum Kenya power systemexpansions required to have been realized by 2014 are:
- lsinya substation and Embakasi - lsinya and lsinya - Suswa lines inoperation, and
-2x70 MW additional capacity at Olkaria in operation.
• The conclusions of the study are supported by thorough calculations andapplicable safety margins for secure transmission capacity. ��.
The project confor1ns to the IFC Perfor1nance
Standards and World Bank Group Safeguard Policies ..
Environmental Considerations
• ESIAs have been conducted for:
-the wind farm;
-the access road upgrade; and
-the associated transmission line route.
• ESIA licences have been granted by the Kenyan National Environmental
Management Authority ("NEMA") for all three aspects.
• A review by international environmental consultancy, United Research
Sercvices- Scott Wilson ("URS Scott Wilson"), commended L TWP's
plans for work with the local communities around the Project site as part
of the CSR plan.
16 � T=N·
... and all measures to mitigate or address resettlement have been undertal(en ...
• Resettlement is not envisaged for the wind farm site or road
upgrade route, although some temporary small kiosks nearby/
within the road reserve may need to be relocated during
construction.
• L TWP will work with the various contractors, on an ongoing
basis, to ensure their environmental and social management
plans/project execution plans are in line with L TWP's Project
standards and their construction activities will avoid the Sirima
area and thus minimise the impact on the encampment.
• The Resettlement Framework Policy, Resettlement Action Plan
and the Indigenous Person Policy Framework have been
approved by the World Bank and are posted on the info-shop.
17 �Ji.KE TURKANA
�:_-"•
r-.G•ARU.<"
SUS WA
SOOTH HOIU\
SJ'I.M BORU C:E.NTRAL
LORBOKI
,, LOJY.-.NG�I
RUMOaOTI
tomm I r -- OW.wt?.l;i
'-���J_I ____________ !
18
- Lak Tu,J;.an;, Wincf Proleci
'>!:q,nous PeopkJ; Pole'. fr�7lf!\l,'OIA
131:l
t.ilii ,,
.ti
�mr Associates
..
-"41
1 .�,
.anwy2012
,JAKE TURKANA
<..._____:_::_ ......
... to avoid delays in the trans1nission line and have an
early 1nitigation of any potential issues that 1nay arise ..
Item
Compensation of Easement over land
Compensation for affected structures1
Compensation for Trees/Crops/Fruit Trees
Economic Rehabilitation Cost
Disturbance Allowance
Sub-Total (ST1)
Technical Assistance
Formation of Local RAP PAP Committees
Monitoring and Evaluation
Final Valuation and Verification of Assets
Sub-Total (ST2)
Total (ST1+ST2)
Contingency (10%)
Grand Total - -
Amount (KES)
167,417,365.00
331,558, 1 OB
164,486,725.00
500,000.00.00
71,100,821.00
735,063,019
4,000,000.00
14,691,260.00
22,036,890.00
40,728,150.00
775,791,169.00
77,579,117.00
853,370,285.00
19
Table 5. 3: Category of affected structures
Category Unit of Measure
Residential Houses 394
Toilets 114
Domestic Storage Facilities 83
Domestic Animal Units 113
Water Storage Facilities 87
Boreholes/Wells/Ponds 19
Others (Kitchen/Bathrooms etc.) 208
Total 1018
Source: Log Associates Census and Socio-Economic Survey
�Tl;!.R��.
... alongside a co1nprehensive construction and interface management programme ...
990
960 930
900 870 �Q
I= 810
!;: 780
E 7500 .t: 720 � 690
C 660
630
6()0
570
540
510 480
450 420
390
360 330
300 270 240
� W: ri. RFE I - - -;. . _.....,_-dn01a-...iwro�cyci., �
dd 201 1-.07 ! ... .· . O..-baNd ""v_ ...._,,... 4:1201 t-GIMl7 ---- . • WTO....,.,.._tng ...:ardngtodaog 30el3134·3HI01P ! . ... - -� coa.aic.. grid. Sl.D .-xinllng ID ��t3t3'·27·21M.A. J ·Olw-•3110.lf'II ' • &tlia:I ID� I>,'- ElfCIIOFw r• ,.___I I . '
' .l ; - - __,.,.
-At" .,-_:__... - 1- �]I .• ....-G \' � ..::;,...-- ::::l 1-1 ,_ . ...
,, ,_ -·�s .... --1.-t ::I I:
�-
: ,_ .,; :1
.�� :::t � I :!l ::s .. �- Ul4_. - --
� � � � � --s\etl":V
.&,� � -- - C22
. . M1
- •1�� nil!"' � ... -·
K21 �1 ,,--
� 1'11"�-
fJU,:. ..... I
Ro::i\lt
---- f oad·A ·Jt B I Road·c
Fload L l
Roadr owK Road I ·- . --- -
WTG
� \\
\\ �
� u,\\C - \\
....... " 1-vNi: ·-""
.. """-
. • , ___
Road ID·
. . . .·-·
-�
�--- B B:;: � Ii: If'! ::c
l:l n: v-. . � ':I '
.�'HJ , ...
F9 . •,
I:. f9'0"'"
a- -
-�� �
- .
-
Road I &G
E
ID � _1"
- � � f = a � .! IZ 2 .-,
. � ...
' ... IN( I
, 12
.-41\'\.�
-:::;.--.. '
RoadJ �H
.1;!
' II
-·""' -�� I
• I I
DnA..t.� I
r.p RoadJ.
I
Roll•out plan Clvicon-Slemens- .....! J Vestas per Wind Turbine
-�lmlJl�ll•I� -•.W IOU-11-ol 010ll •[MA - In/ J
C) � � � � � g Cl � N � 8 � �
WTG number lcumulatlve) l.AKE TURKANA
20 �,...,'"""e
---
... pro-actively undertaken in a spirit of true public
private partnership with all stakeholders ...
Interf,ll"'e c:lnll Co-Orliint1tion Structure
T..., • Dl'RACO l'mlllllmcbul •
PC!\[
21 �J-AKE TURKANA
�=·
... to address lender and stakeholder concerns of delays in i1nplementing both projects.
Actual days from FNTP OD (assuming FNTP ; 02/01/2012)
394 450 540 637 668 682 714 939 969
Actual months from FNTP OM 22 .::: 23.5 26 :: 30.9 :: 31.9 36 48
Float (wrt required COD dates) I f I I f t
FNTP �---4_._ ................... +-----1-----,-----f----+----t-------o:-----f'------r------:-----,-...-
Village completed for Vestas occupation
Transport road completed -------'
Site roads completed ---
90WTG RFE
�-.. ,,-·-· ·· ··.
T-line in service -----'
33kV s/s in seivice ---'
76,SMW/ 90WTG in seivlce
Required First COD SOMW/ 60WTG
KEMA�
295MW/ 347WTG in service -----
31 OMW/ 365WTG In service -----'
Required Full COD 255MW/ 300WTG ---'
Required Balance of Units COD 295MW/ 347WTG
22 LAKE TURKANA
�-�.
L TWP has been registered with the FCCC and approved at the Gold Standard rating ...
• The Project was successfully registered as a COM validated
project activity with the UNFCCC on 28th February 2011. The
revenue from the sale of carbon credits will be split with the first
US$¢1/kWh (or approximately €11 million per annum) being
paid via the PPA to the GoK and available for CSR projects for
communities in the area and along the route of the transmission
line. Over the life of the Project, the carbon emissions displaced
will be approximately 16 million tonnes, and in excess of €200
million in CER revenues will be generated.
23 ��.
... and is fully committed to a comprehensive, ground-up CSR programme ...
• The socio-econom1ic environment with its remoteness and harsh
climatic conditions has an estimated population of around
20,000 people with a population density of 1.32 persons per
km2.
• In concrete terms L TWP Ltd commits to make available for the
CSRP a minimum of Euros 500,000 which amount may
increase over time to a maximum of 1 % of the L TWP annual
profits.
• Establishment of the Lake Turkana Wind Power Foundation .
24 .... . J-AKE TURKANA
<......._____ :__:_:� .. -
... recognising the intricate and co1nplex socio
econo1nic and cultural interrelationships of the area ...
).00-1 +
2..00 +
'
_________ /
Pivjecl Area ic:s'
,·
KotrdfvWon \�isamis Distrid
·•·
l
�-<
Lalunb
•
+ ·3.00
:too
L1fsamla divmon
�AKE TURKANA ��.
Activity
. access to education
1.1 Construct fttly equipped girls boarding secondary school in each division 12 Construct 2 girls boaroing primary school 1.3 Construct 2 new boys boarding secoo<bry schools 1.4 COOstruct adcitioRal facilities in existing primary schools
a. Classrooms (five per division)
b. Oonnitoriesc. Staff housesd. Eco tllets
e. Common hallf. Kitchensg. Conned power to selected sc.hoof:s
1.5 Sc:holn:iips
.
Improve access to potable water
2.1 Boreholes
2.2 Sand dams - -
2.3 Rocle dams 2.4 Storage tanks 2.5 Protect shallow wells
·-
I First 5 years I Second 5 lears I
1 1 1 0
1
10 16 5 4
15 15 15 10 1 1
3 5 5 5
15 15 25 25 10 10 12 12 25 25
15 15
I 2 3
· 1 3 3
1 3
3
5 '
5
' 9
Third 5 years
2 1 5
1 2
I 1 I 2
4 30 5 6 20
15 20 I 65 10 5 ' 40 1 1 I 4 5 5 18
10
15 15 60 30 30 110 10 10 40
15 15 54 25 25 100: 15 15 4 4 I 13
I
3 2 11
3 3 10 -
3 3 9
6 6 22 5 5 19
The PP A has been extensively negotiated over 36 months ...
• Tariff negotiations commenced in November 2008 (the PPA draft was submitted in
September 2008). LTWP offered a tariff of USO 11.5 cents (EUR 8.5 cents);
• The prevailing feed-in tariff at the time was USO 9 cents (EUR 6.7 cents) and KPLC
felt that a tariff of EUR 6.53 cents (USO 8.82 cents) for L TWP was reasonable
• L TWP reduced its tariff request to USO 11.0 cents (EUR 8.15 cents).
• LTWP offered a discount 23GwH or 2.3o/o to USO 10.75 cents (EUR 7.96 cents).
• Following further requests by KPLC, L TWP made a firm final offer of USO 10.5 cents
(EUR 7. 78 cents). KPLC was still desirous of a lower tariff.
• L TWP then offered a portion of the revenues from the carbon credits.
• Hence the tariff of Euro 0.0722/kWh was reached on November 10th 2008.
• The PPA was finally agreed on November 2nd 2009, approved by KPLC's Board on
November 4th 2009, initialled on Nov 6th 2009, approved by the ERC on Dec 11th
2009 and Signed on Jan 29th 2010.27
<AKE TU��ANA
----:--�.
... witl1 tl1e signed PPA and I11itialled GoK Support Letter
formi11g tl1e backbone of all Contract 11egotiations ...
• January 201 O: Change in Credit Enhancement and implementation of Transmission
Line implementation;
• A new round of negotiations of the PPA commenced in March 2010.
• Following this round of renegotiations, total project cost had increased from EUR 451
million to EUR 611 million (including a Debt Service Reserve L/C of Eur 30 million)
occasioned by three main factors:
- Lender requirements for EPC Contractors to absorb more risk;
- The increased reliance on the L TWP DPRC system; and
- Change in credit enhancement structure.
• A tariff of EUR 7.52 cents was agreed between the Parties and following finalization of
various other technical matters, the PPA was initialled on August 12th 2011, approved
by the ERC on September 2nd 2011 and signed on September 29th 2011.
• The corresponding GoK Support Letter was initialled between GoK and L TVYRe inRKANA 28 � .....
AuQust2011-•
... and at €7.52 cents/l(Wh, the LTWP tariff is
the cheapest power option for KPLC ...
• In September 2010, whilst Project Costs had gone up by 36°/o
and Net Revenues had fallen by over Eur 300M over the life of
the project, L TWP requested a tariff adjustment of only 4.2°/o.
• Based on the open-book approach that was used for the
derivation of the original tariff applied to the latest version of the
model and the same target I RR of 18% in real terms on the
Lenders P90 model, the tariff would be closer to EUR 9.3 cents
(USO 12.1 cents)
29 <..._LAKE T�.R��A
-------o
0.16
0.14
0.12
0.1
0.08
0.06
0.04
0.02
... and below the average FiT levels even by international standards ...
Comparison LTWP .. Feed In Tariffs [USD]
# � # � � # � � � �,;..; �Qi nv � � � _..{Ii �'Ii ,!Ji � <Qv �e,'< 00........
. #'. �(:,j �r:.r f..b',;..;
��� ....,� �'Ii b,,,.
v1,e. �'6 �r,;
� v'ri
�<:'-�
,:;'Ir�'6
v'l,
30
r:::,'1> � b-'� �
'Ii �,,,.
<:'-
/r <l'� '<.�� 0�
b �q,.<:'- br::,
�e; �f 0 ��
� ,.uo.l • rJ> c}�o�- ,p of
cJ'� f..q_
�q
o.:/-'1>
��b
��n;,�
�,,,.� �v �0
-...,'lt
J-AKE TURKANA
� == .. -
... and results in savings of Eur 330,000 per day of fuel on Kenya's import bill.
• The L TWP wind farm project is cited as the next least cost project to be
developed and according to the LCPDP, the wind farm will generate the
lowest cost power available to Kenya, as the LCPDP envisages short-term
marginal costs of power generation in Kenya to be in the range of US$¢12.8 -
US$¢22.6/kWh (see Table 26 in LCPDP of March 2010), compared to
L TWP's tariff of €¢7.52 /kWh or approximately US$¢10.1 /kWh.
• Moreover, the long-term marginal cost is in the range US$¢16.4-
US$¢ 19.3/kWh ( Table 39 of the LCPDP), which further confirms L TWP's
competiveness. The assumptions used in this comparison include a 65°/o
plant factor, crude oil price of US$75 /barrel and coal price of US$90 /tonne.
• It is estimated that once in full operation, the project will aid in displacing
approximately €120million in fuel imports per year, preserving the country's
foreign exchange reserves and bolstering the economy.31
�KE Tti,!�.l�ANA
-� .. -
The financing plan is designed to maximise
participation across the board.
�strument' I Source
Equity LTWP Shareholders
Mezzanine I Mezzanine financiers
Combination of: a. Affi B ''N.' Loan; and / or
Debt I b. Unsubordinated AIDB "B" Loan; and/ orC. "Parallel" Loan Facilities; and / ord. ECA Backed.
Funded I Total Un-funded I Un-funded Debt Service Reserve L/C Facility
Total Project Facilities 32
I
I
I
Amount €
145.5 M
29.lM.
407.4M
}r307.4]MI
flOOl M
582MI
29.0M
611MI
[J,o 01 £Ou:i
25.0%
5.0%
70.0%
100.0°/o
-LAKE TURKAIJIA
���
C
0·-+-'co ::,
+-'·-- Cl)
C +-'
C 0
Q) ·-+-'
en (.) Q)Q) �
Cl) a..
LTWP is ready to 1nove forward and MUST achieve
financial close no later than June 30111 2012 ...
•
•
•
•
•
•
•
•
•
Creation of
task force
Wind resource •
assessment •
Optimization studies
Financial feasibility •
Engineering works
Project costing •
Environmental & social impact assessment •
Site acquisition •
Technical studies
PPA negotiation & GoK Support Letter finalisation
•
•
Financial Close
[June 30th, 2012]
l
PPA approval •
Construction & •
Interface Management
Grid connection •
agreement
EPC contracts •
Way-leaves acquisition •
Legal, technical, financial & regulatory DD
Term Sheet Finalisation
MiGA / IDA/ GoK Support Letter 34
Logistics & planning • Commissioning of
Installation of turbines transmission line & sub-
& substations stations [March 2014]
Building of • Commissioning of wind-
infrastructure farm [ June 2014 -
Project & operations March 2015)
management
Engineering &
procurement
,LAKE TURKANA
��-.
... although it could have achieved Financial Close by March 31 st 2012 ...
;> ;> �"ii QI a. C ::J UJ Ill
;> � QI GI ,ii C Ill
UJ
I Consumer I
KPLC
LlWP
€ Cents 9.38 / kWh
€ Cents 1.86 / kWh ESCROWA/C
€ Cents 7 .52 / kWh
Security Tor KPLC Payment Obligations of Euro 42.6 MWlion
Security over Escrow Facility
I
I
LlWP Lenders
I C Cents 1.86 / kWh1
!!l?;.to US$ Cents 1 / kWh Portion of CER sale proceeds KPLC ESCROW A/C I�I
LTWP I
I
I
L/C/or KPLC Payment
Obligation•
(Euro 42.6 Million)
[!!!!Ya mount required 1n excess of what might be
available from the escrow facility)
r·-·-·-
due to GoK
,,
1) Ch•n1e In TH2) Polltlc•I Event3) KPLC Force M •Jeure4) Termln•tlon Compens-tlon
(any amounts over and above Euro 42.6 Million and accrued from CER proceeds due to GoK
and deposited into escrow)
... with an innovative, hybrid and "custom designed" credit enhancement structure ...
Q Energy Charges
e Security Support Charges
E E E E t"""' lO
r:-... � tj1 '°
0 t"""' T"""i
w w w w
E E ,.. E
-r Lfi rt") 0
r,.:
I-t ari \C r-..:
u V u u u
€15.9m{LC --------�--------------------------�
I I I
60WfGs Commissioned
Interim Energy Payment Period
36
€'42.6m Escrow +LC
N.B. Escrow only funded if Energy Charges are actually paid and is not funded when Energy Charges are Deemed
J-AKE TU RKANA
�--··
... but is committed instead to working with the
MiGA & IDA credit enhance1nent structure ...
Pre-WBG Structure Post-WBG Structure
Cover Commercial DFl'sand Commercial DFl's and Equity
Banks Equity Parties B anks Parties
T-L ine Delay Ri sk GoK Support �
P oliti cal EventsIll Letter backstopped by - KPLC Force Majeure GoKSupport
Cl GoK Support Letter Mi GA Breach of Letter ·-
'
0 Contract I
' Change s in Tax & Law Insurance
�
IDA Guaranteed L/C for ·-
KPLC Payment Escrow A/C (€42.GM) with KPLC ..., €54M (p re Fu ll COD) ? €30M ( Po st Ful l ·-
Obligations L/Cfor €15.9M COD)
37 J.-AKE TURKANA
�-�.
... however, it is presently paralysed from finalising the final stage of its development. ..
Activity
Release of PIM to the MLAs
1 Kick-off meeting with MLAsApproval and signing of the Amended & Restated PP A
1 MLA Due DiligenceI Face-to-face meetings with the Project Promoters, the Arrangers, and the Legal & Financial Advisors Disclosure of draft RAP onto World Bank info-shop Submission and negotiation of final term sheets with MLAs Release of Project package by MLAs to Lenders Lenders' internal approval process Documentation (Financing Agreements) phase Signing of the Financing/Transaction Agreements Clearing Conditions Precedent Financial Close / Drawdown
38
Projected completion date
9th August, 2011
September 27-28, 2011
September 29th 2011
August -December 2011
August - December 2011
December 16th 2011
December 2011- January 2012
January 2012
January - March 2012
January- March 2012
April 2012
January - March 2012
By 15th April 2012
... that puts in jeopardy not only L TWP but interests of various stakeholders ...
• Loss of orders to various entities:
-Vestas(€ 317 million)
-ABB (€ 26 million)
- Siemens (€ 57 million)
-lsolux (€ 142.5 million)
- Local Kenyan Contractors (€ 45 million +)
• Marsabit West County is among the poorest counties in Kenya;
Loyangalani is one of the poorest districts in Marsabit. This
project will ensure that livelihoods are improved and open up
Kenya's northern frontier to immense economic gain.
• During the 32-month construction period, up to approximately
2,500 jobs will be created followed by over 200 full time jobs-J.,AKE TURKANA
throughout the period of ope�tions �·-··
... marks Kenya as an unfavourable destination for investors.
• Foreign Direct Investment into Kenya of€ 582 Million
• The L TWP tax contribution to Kenya will be approximately €22.7
million per year and €450 million over the life of the investment.
• L TWP has incurred just under EUR 16 million on third party
costs for the development of the project. It is anticipated that
additional costs in excess of EUR 7 .9M will be incurred until
financial close bringing the total development costs to an
estimated EUR 23.75 million;
• Of this amount, in excess of Eur 3.5M are costs directly
attributed to the development of the Transmission Line.
• Lender & Investor fatigue
• Limited pool of funds available for such complex projects
40 _J..AKE TURKANA
�,��
I •
Section Ill
Next steps & way forward
•
The ball is in the court of the World Banl(,
KPLCandGoK
• The Vestas contract is only firm until the end of June after which the
guarantee of the timing and pricing of the equipment will no longer be
valid.
• The balance of plant contracts including with Siemens and ABB is are in
similar situations with long-stop dates and large price increases
• It is difficult for the MLAs to make progress in arranging the debt
required to finance the Project with the World Bank review process
ongoing and the uncertainty occasioned as a consequence
• The added costs associated with a further delay will make the Project
economics under a tariff fixed in mid-2011 increasingly difficult to finance
• As the Kenyan elections approach it will be increasingly difficult to get
the necessary agreements concluded with the GoK and will also cause
uncertainty with the Contractors .gnd Financiers �\J.�K�"!A
- .
Q i:: j I . I\ \ ·� w°' � �
-·11) if laJ
)" 2 !: I
� . �
O�Cll
:s D'Z
{ c.- � 3 siI
i;i �� ""' ��
��
�� � ..... �J '5o
�i \
..
'
r
ROYAL DANISH EMBASSY
Nairobi
LAKE TURKANA WIND POWER PROJECT: CURRENT STATUS AND CHALLENGES
The Lake Turkana Wind Power (L TWP) project alms to provide 300MW of reliable, low cost wind power to the Kenya national grid, equivalent to approximately 20% of the current Installed electricity generating capacity. The wind farm site, covering 40,000 acres (162Km2), is located In Loyangalanl District , Marsablt West County, In northern Kenya, east of Lake Turkana. The project will comprise 365 Vestas wind turbines and will also Include the upgrading of the existing road from Laisamls to the wind farm site (approx. 204km). The project proponent Is the LTWP consortium comprising KP&P Africa B.V. & Aldwych International as co-developers, IDC of South Africa, IFU, Vestas and Norfund.
The project Is set to benefit Kenya by providing reliable and low cost power through a renewable source of energy, community development through creation of jobs and reduce cost of fuel Importation to the economy. Furthermore, there will be an additional environmental Impact through a CSR programme which Is being finalised based on Input from the community. Lastly, the project will portray Kenya as a prime Investment destination to the International Investment community by proving that large infrastructure projects are possible here.
The current status of the project Is that the Mandated Lead Arrangers (African Development Bank, Standard Bank of London and Nedbank Capital of South Africa) have completed their due diligence. The financial close is being held-back due to the on-going revlews of the project agreements undertaken by the Worf d Bank through KPLC and Ketraco. These reviews were to be completed In February but may now run Into April with potential renegotiations threatening to derail the project. The project needs to achieve financial close by no later than June 15th
2012. Further delays will jeopardize the viability of LTWP project. The loss of the project wtll become a significant deterrent to other prospective large scale Infrastructure Investors given the time and resources spent by LTWP to date.
The Danish Embassy has organized this lunch with stakeholders In Nairobi. During the lunch a presentation on the current status of the project and challenges being encountered will be made. This wlll provide an opportunity to discuss the project with the relevant stakeholders and Interested parties to get Input as to how the project's financing can be expedited.
Lake Turkana Wind Power (LTWP) Project lunch held on 13.03.12 minutes and action plan
The Danish Embassy organized a lunch with stakeholders of the LTWP project in Nairobi on 13th March
2012. The lunch provided an opportunity to discuss the project with the relevant stakeholders and interested
parties to get input as to how the project's closure can be expedited. Participants in the lunch included
representatives from the Ministry of Energy, KETRACO, Danish Embassy, Embassy of Spain, Embassy of
Sweden, British High Commission, Aldwych International, IFU, L TWP, UNEP, Vestas and the World Bank.
During the meeting emphasis was placed on the urgency to achieve financial closure as soon as possible
with a deadline of June 1 st 2012 after which the project costs will increase significantly. The importance of
the project to Kenya and Africa in general was highlighted by the Executive Director of UNEP; Dr. Achim
Steiner. Its failure would lead to ramifications that would be felt in the whole continent due to the loss of
investor confidence in large infrastructure projects.
Action Plan
1. The parties involved in the completion of the on-going due diligence process should endeavour toensure that all the outstanding issues are resolved before April 15 2012 to ensure the project is notdelayed further.Action: All stakeholders
2. All stakeholders to work in parallel, the Energy PS authorised the reports by Linklaters and PowerGrid of India to be distributed to all concerned stakeholders for comments including developers andMLA lawyersAction: KPLC & KETRACO
3. The World Bank to request the team working on the project in Washington to make a trip to Kenyapossibly within the next two weeks to meet with KPLC and L TWP and discuss the findings of theLinklaters reportAction: World Bank
4. All parties involved to do their utmost to seek authority from approving bodies. The WB will try tohave the finalisation of Spanish government financing agreements as a condition precedent asopposed to ensuring that it is finalised prior to going to its Board.Action: All stakeholders
5. An agreement between Ketraco and Siemens France to be signed latest Friday, 16th of March 2012Action: KETRACO
6. Transmission line funding by the Spanish government: the council of ministers will be seating in thenext three weeks for the approval, after which, if approved a loan agreement will be signed.Action: Embassy of Spain and Government of Kenya
7. Support letter from the Government should be finalised by next week (19th -23rd March).The letterswill be almost the same for all the IPPs.Action: Ministry of Energy and Finance
B. Proposal on a follow up lunch to be held in 3 weeks to take stock of progress so farAction: Royal Danish Embassy
... '
m 1=
Lake Turkana Wind Power (L TWP) Project lunch held on 13.03.12 minutes and actl
The Danish Embassy organized a lunch with stakeholders of the L TWP project in Nairobi on 131h March 2012. The lunch provided an opportunity to discuss the project with the relevant stakeholders and interested parties to get input as to how the project's closure can be expedited. Participants in the lunch included representatives from the Ministry of Energy, KETRACO, Danish Embassy, Embassy of Spain, Embassy of Sweden, British High Commission, Aldwych International. IFU, LTWP, UNEP, Vestas and the World Bank.
During the meeting emphasis was placed on the urgency to achieve financial closure as soon as possible with a deadline of June 15t 2012 after which the project costs will increase significantly. The importance of the project to Kenya and Africa in general was highlighted by the Executive Director of UNEP; Dr. Achim Steiner. Its failure would lead to ramifications that would be felt in the whole continent due to the loss of investor confidence in large infrastructure projects.
Action Plan
1. The parties involved in the completion of the on-going due diligence process should endeavour toensure that all the outstanding issues are resolved before April 15 2012 to ensure the project is notdelayed further.Action: All stakeholders
2. All stakeholders to work in parallel, the Energy PS authorised the reports by Linklaters and Power t IGrid of India to be distributed to all concerned stakeholders for comments including developers and VMLA lawyersAction: KPLC & KETRACO
3. The World Bank to request the team working on the project in Washington to make a trip to Kenya , Jpossibly within the next two weeks to meet with KPLC and L TWP and discuss the findings of the VLinklaters reportAction: World Bank
4. All parties involved to do their utmost to seek authority from approving bodies. Th�I try to t,/'have the finalisation of Spanish government financing agreements as a condition l,re�d�nt as opposed to ensuring that it is finalised prior to going to its Board. Action: All stakeholders
( 5. An agreement between Ketraco and Siemens France to be signed latest Friday, 16th of March 2012 //Action: KETRACO J/
6. Transmission line funding by the Spanish government: the council of ministers will be seating in the/ ) next three weeks for the approval, after which, if apptoved a loan agreement will be signed. //
Action: Embassy of Spain and Government of Kenya
7. Support letter from the Government should be finalised by next week (19th -23rd March).The letters fjwill be almost the same for all the IPPs.Action: Ministry of Energy and Finance ..,
8. Proposal on a follow up lunch to be held in 3 weeks to take stock of progress so farAction: Royal Danish Embassy
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BACKROUNO:
a... -
The lake Turkana Wind Power (LTWP) project was first conceived in March 2005 by a group of Dutch
Entrepreneurs, some residing in Kenya and some in the Netherlands. Later that year the project started
its Development process. The project consists of realizing a 300MW Windfarm comprising 365 Wind
Turbines of 850Kw each. The Project site is located in a remote part of North-Western Kenya some
18Km from the South-East shore of Lake Turkana which is affected by predictable and consistent strong
winds all year round. The remoteness of the site (l,200Km form the nearest deep sea port of Mombasa)
with little or no infrastructure available and 428Km from the closest feasible power grid interconnect
point, made this project an extremely challenging achievement. At its infancy, few people would ever
have lent any credibility to this project.
After six years of detailed project development work, Euro 17Million of risk capital expenditures by the
Developers, the LTWP project has reached a stage of full project finance bankability level and is
preparing for Financial Close expected by end April 2012.
The total Project capital cost will be Euro 583 Million to be financed on a 70/30 Debt /Equity ratio.
The Equity portion will be provided by KP&P Africa BV (the founding fathers from the Netherlands),
Aldwych International (UK), IDC (South Africa), Norfund (Norway), Vestas (the wind turbine
manufacturer of Denmark), IFU (Denmark).
The Debt portion will be syndicated by the lead arranger African Development Bank (AfDB) and 2 co
arrangers from the Commercial banking sector, Standard Bank (UK) and Nedbank (S.A.), participants in
the syndication will be the European Investment Bank (EIB), EKF( Denmark), FMO (NL), DEG (D),
Proparco (Fr).
PROJECT BENEFITS TO KENYA:
1) L TWP will be the single largest private investment ever in East Africa
2) The largest Windfarm in Africa
3) At 300MW it will be the largest single power generation plant in East Africa
4) On completion L lWP will contribute 17% of the total installed power capacity in Kenya
S} At Euro cents 7 .52 it will represent the lowest power tariff in Kenya and one of the lowest Wind
Power tariff in the world
6) L TWP will spend Euro 30 Million to upgrade 200Km of road network to enable access of all plant
equipment to site
7) L TWP will return to the Government of Kenya (GOK) up to USO 16 Million/year for 20 years from
the proceeds of Carbon Credits earned by LTWP in form of a grant to be spent on the
development of the communities living in and around the project site and along the
Transmission line route
8) L TWP has assisted the GOK preparatory engineering work to construct the 428 Km Transmission
line required to evacuate the power from the Windfarm. To this effect Euro 2.5 Million have
already been spent and a further 2.5 million are budgeted.
',
PROJECT STATUS AS AT 30TH November 2011:
1) All EPC contracts with the suppliers (Vestas, Siemens, ABB, Civicon, SECO) are in full bankable
and agreed form
2) Equity is agreed upon and in place
3) All licenses (Environmental, IPP, PPA etc .. ) have been delivered to LTWP
4) L TWP is now completing the negotiations with AfDB and the lenders group to reach financial
close by 301h April 2011
5) Ground Breaking is expected by end April beginning May 2011
The above is provided to enable the reader to better appreciate the ensuing concern of L TWP:
0 THE CONCERN:
0
The WBG has recently entered into agreements with GOK to support GOK in providing the necessary
GOK guarantees (letter of support) and the credit enhancement mechanism in support of Kenya Power.
From the outset we wish to be very clear that LTWP is in principle fully supportive of the WBG providing
its assistance to GOK. L TWP further fully understands the benefits that an eventual approval by the
WBG to provide the stated support would bring LTWP and in particular the added comfort it will provide
to the lenders (shifting the Kenya risk to a much more highly rated WB risk). Nowhere does L TWP either
dispute or criticize the good intentions of the WB nor is it the intention of LTWP to bring the WB into
any disrepute whatsoever. It is however a commonly known fact that WB can be slow in completing
their internal approval process. Their due diligence process requires that they evaluate their risk by
reviewing the full project documentation and in many instances will require that project contracts and
project studies etc .. be completed in line with their expectations and requirements. Had the WB been
involved in the project from an earlier stage and at a time when contracts were still under negotiation,
then, this would have been accommodated with minimum disruption to the time lines LTWP had set
itself. Regretfully, in the case of LTWP and the very advanced stage it has already reached, the WB
process could become a serious cause of delay to the Project's financial close. Should the reviews that
they have commenced in August this year result in an obligation for LTWP to have to re-open agreed
and signed contracts, or duplication of studies already carried out or additional studies, then the effects
could be potentially disastrous for L TWP. Aside from unwanted delays it could result in cost increases,
thereby affecting Equity, suppliers and lenders alike. In turn, this could result in having project risk
reassessment by the Lenders, imposing new mitigating arguments and also totally disrupting the critical
balance agreed between the equity partners which took almost 2 years to achieve. Any increase in cost
would then necessarily have to be passed onto the Kenyan consumer through a tariff increase.
Understandably these are all non-wanted effects.
L TWP is not requesting or even insinuating that the WB should abandon this Project, quite the contrary.
LTWP simply pleads with the WB to accept the particular circumstances under which it is brought to
review the works performed by L TWP to bring this project to the Bankable stage it is in. All the actors
'•
that have diligently worked on all the studies required to prove the Project's feasibility are of the highest
International standards. Competent and Independent Consultancy firms have worked on this project
and cannot be doubted. Among the best world renowned Legal firms have been deployed to provide
their services to draft contracts and agreements . The lenders Legal and Technical counsels, again of the
highest international standard and repute have completed their review of the project documentation
and are satisfied with them. Can the WB not work with the same reviews carried out by the lenders?
Lenders that are accepting to put at risk some Euro 440 million in debt contribution to the project?
Lenders with a triple "A"rating? By restarting a whole new review process is the WB really expecting to
find other risks not already identified by such a meticulous and detailed review process undertaken by
other DFl's which apply the same level of scrutiny of institutions like AfDB, Standard Bank and Nedbank?
Our plea therefore is simple, the WB should work with the existing reviews and avoid delaying the
Financial Close of L lWP to duplicate what is already available to them. Their intervention has already
0 paralyzed progress on the Transmission line financial close between the Spanish Government and GOK,
this is directly on the critical path of L TWP's financial close.
0
0
Lake Turkana Wind Power Briefing Document
1. Purpose
The purpose of this brief is to (i) update governments whose companies have an active
interest in Lake Turkana Wind Power ("LTWP") and (ii) have a discussion on how best
they may be able to support the Project going forward.
2. Project Summary
L TWP aims to provide 300MW of reliable, low cost wind power to the Kenya national
grid, equivalent to approximately 20% of the current installed electricity generating
capacity. The Project is of significant strategic benefit to Kenya, and at €584 million will
be the largest single private investment in Kenya's history. The wind farm site, covering
40,000 acres (162km2), is located in Loyangalani District, Marsabit West County, in
northern Kenya, east of Lake Turkana.
The Project will comprise 365 Vestas wind turbines (each with a capacity of 850 kW), the
associated overhead electric grid collection system and a high voltage substation to be
provided by Siemens and a dynamic reactive power compensation system (DRPCS)
supplied by ABB. The Project also includes upgrading of the existing road from
Laisamis to the wind farm site, a distance of approximately 204km, as well as an access
road network in and around the site for construction, operations and maintenance. The
Kenya Electricity Transmission Company Ltd ("Ketraco"), with concessional funding
from the Spanish Government, is contracting Isolux to construct a double circuit 400kv,
428km transmission line to deliver the L TWP electricity along with power from other
Q future plants to the national grid.
The Project proponent is the LTWP consortium compnsmg KP&P Africa B.V. and
Aldv.'Ych International as co-developers, Industrial Development Corporation of South
Africa ("!DC"), Industrial Fund for Developing Countries ("IFU"), Wind Power A.S.
("Vestas") and Norwegian Investment Fund for Developing Countries ("Norfund").
LTWP is solely responsible for the financing, construction and operation of the wind
farm. Aldv.,ych, an experienced power company focused on Africa, will oversee the
construction and operations of the power plant on behalf of LTWP. Vestas will provide
the maintenance of the plant in contract with L TWP. The power produced will be
bought at a fixed price by Kenya Power ("KPLC") over a 20-year period in accordance
with a Power Purchase Agreement ("PPA") that was signed in September 2011.
3. Project Benefits
Reliable Power• Largest single wind farm in sub-Saharan Africa
1
LAKE TURKANA
��
• Reliable wind: the remote site has world class, uni-directional wind speedsconsistently averaging 11.2 meters/ second (40 km/hr)
Renewable Energy • L TWP has been registered with the UNFCCC and approved at the Gold Standard
rating; the carbon credits should earn €200 million over the life of the project. Theincome is to be invested in the community as part of L TWP' s undertaking toreimburse KPLC with up to US$1 cent / kWh
• The Project reduces the need to depend on unreliable hydro and on expensive,unpredictably priced fossil fuel based power generation and insulates Kenya's powertariff by providing a low and consistent power price.
Low Cost Power • The Government of Kenya ("GoK")'s Least Cost Development Power Plan
("LCDPP'') shows that LTWP wind power will be the least cost power generationoption available in the country along with geothermal power at €7.52 cents/kWh(US$9.9 cents/kWh)
• The feed in tariff set for wind projects in Kenya is US$12 cents/kWh which is still notattracting the level of viable wind projects anticipated
• The LTWP tariff will be approximately 60% cheaper than thermal power plants andthe LTWP tariff compares extremely favourably with the Long Run Marginal Cost ofUS$18 cents(€ 13.3 cents) for the sector according to the LCD PP
Communitv Development and Environmental Impact •
•
•
Marsabit West County is among the poorest counties in Kenya; Loyangalani is one of the poorest districts in Marsabit.
LTWP has all the required environmental and social approvals in line with the IFC Performance Standards and the Environmental Impact Assessment is publicly disclosed on the World Bank Infoshop
A Corporate Social Responsibility (CSR) programme is being finalised based on extensive input from the communities in order to ensure that livelihoods are improved
Macroeconomic Impact • The Project will replace the need for Kenya to spend approximately €120 million
per year on importing fuel• The LTWP tax contribution to Kenya will be approximately €22.7 million per
year and €450 million over the life of the investment• Jobs: During the 32-month construction period, up to approximately 2,500 jobs
will be created followed by over 200 full time jobs throughout the period ofoperations
• LTWP will show the international investment community that such largeinfrastructure projects are possible in Kenya and will encourage others to followsuit
4. Status of Project
2
� /'
v· LAKE TURKANA
:___ .. Y,"
Following 6 years of development effort, the Project is virtually complete. During this time the Project developers namely KP&P, Aldwych, JDC, and Norfund have spent €17m and will spend £21m to reach financial dose. A summary of the Project status is: • The PPA is signed with KPLC• The construction contracts are in final form and ready for signature• All permits received and long term land lease obtained• The equity is fully subscribed• African Development Bank (" AfDB"), Nedbank Capital of South Africa and
Standard Bank of London as the Project's Multi-lateral Lead Arrangers ("MLAs")have completed their due diligence of the Project which entailed more than 6 monthsof intensive review covering all aspects of the deal including commercial, legal,environmental, technical (grid stability wind resources, construction contracts,operations plan, etc) with the aid of international, independent legal and technicaladvisors
• The MLAs are waiting on the conclusion of the World Bank due diligence to engagewith the broader lending community to arrange the balance of the debt required forthe Project
• KETRACO's transmission line contract with Isolux is signed, and Spanish funding oftransmission line is slated to be confirmed in March
• KETRACO's acquisition of the wayleaves for the transmission line is stalled until theWorld Bank's own, separate due diligence on the Isolux contract and the systemstability is complete
S. WBG Role and Due Diligence To DateThrough a GoK Letter of Support, the GoK will support the obligations of Ketraco to
(..) construct the transmission line in time and the obligations of KPLC to purchase LTWP'spower. The GoK is seeking a further backstop of these obligations from the InternationalDevelopment Agency ("IDA") arm of the World Bank, while any irreparable breach ofthe GoK obligations will be insured by the Multi Lateral Investment Guarantee Agency("MIGA") arm of the World Bank. The IDA facility will secure the issuance of a Letter ofCredit to support KPLC, Ketraco and GoK's obligations. The World Bank will not beproviding financing to LTWP and will only serve to enhance the credit worthiness ofKetraco and KPLC via the GoK in order to make the Project bankable.
In addition to the due diligence conducted by the MLAs, the World Bank through KPLC and Ketraco, has commissioned its own consultants to review the PPA, the Isolux transmission contract, and to review the potential impact of the Project on the grid system's stability. These reviews were to be completed by February but now may run into April. The World Bank has also requested the Project financial model and the Vestas Turbine Supply Agreement, and it is unclear what further due diligence may be sought in the coming weeks. It is hoped that the extensive due diligence by the MLAs, the extensive negotiations with KPLC and the GoK and the restricted nature of the
3
LAKE TURKANA <-----::=-:.. wr •
World Bank's involvement in the Project will allow the World Bank to be satisfied with the review of the PP A and the transmission line.
The WBG process to full approval is expected to be: March 15th: Date Quality Enhancement Review March 26th; Regional Operations Committee April 12th: Full due diligence complete April 15th: 120 days of Infoshop expires May to June: Documentation of transaction and loan agreement completed June: Word Bank Board joint approval for MIGA and IDA
If this timeline can be maintained with the full support of the parties involved then financial close for the Project in June should be a possibility. Further delays will () irreparably jeopardize the viability of L TWP.
6. Time Sensitivities
LTWP is increasingly concerned about delays to financing the Project for the following reasons: • The Vestas contract is only firm until the end of June after which the guarantee of the
timing and pricing of the equipment will no longer be valid; at this point, the Projectwill have lost its dedicated production slot with Vestas and will probably forceLTWP to seek another wind turbine supplier causing further delay
• The balance of plant contracts including with Siemens and ABB is are in similarsituations with long-stop dates and large price escalation mechanisms
• The PPA with KPLC expires in June unless financial close is achieved• For every day that LTWP is not in operation, Kenya has to rely on more expensive
thermal power requiring fuel imports amounting to almost €330,000• It is difficult for the MLAs to make progress in arranging the debt required to finance
the Project with the World Bank review process ongoing and the uncertaintyoccasioned as a consequence
• The added costs associated with a further delay will make the Project economicsunder a tariff fixed in rnid-2011 increasingly difficult to finance
• As the Kenyan elections approach it will be increasingly difficult to get the necessaryagreements concluded with the GoK and will also cause uncertainty with theContractors and Financiers
• The timing issue with the KETRACO wayleaves
The loss of the Project will send become a significant deterrent to other prospective large scale infrastructure investors given the time and resources expended by LTWP to date.
7. Request for Positive SupportL TWP welcomes the opportunity to discuss the Project with each of the relevantgovernments and welcome's input as to how we can expedite the financing of thiscrucial project for Kenya.
4
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Lake Turkana Wind Power Project
Briefing note and key issues
1. Background Information.-
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. . - .. -- .
: �a-�! Turkaniil Wind Pow&r- Quick Fa�ts-
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Excellent wind resource: avg. wind speed exec:c:ding to mis
428km transmiuion line (donor linaneed)
Wind farm size 300MW (353 V52 WTGs)
Total project cost €590m. Debt: €413m; Mezzanine finance: €29.Sm; Equity: €147m
Shareholders Aldwych (25%), IDC South Africa {25%), KP&P (18.75%), Norrund (12.5%), Vestas ( 12.5%), IFU (6.25%)
Lenders AfDB (lend), Standard Bank, Ncdbnnk and other S) ndicate parties to be con finned
A,·erage KPLC €102.5/MWh power purchase price (2012)
PPA €75.2/MWh for 20 years
Power production l,400GWh/year (P90)
Sand fuel imports €120m per year
In 2005, Anset Africa and KP&P began the development of this challenging utility scale wind
power project. A special purpose vehicle (SPV) was established for development of the project.
The project is now fully developed and is only pending World Bank Group risk insurance cover,
as requested by the Government of Kenya (GoK), which would allow for the project to reach
financial closure.
The 300 MW wind project is located at a remote location near Loyangalani in Marsabit County, approximately 12 km east of Lake Turkana in north-eastern Kenya. The closest deep-sea port is
Mombasa, 1,200 km southeast of the site. The Project site is located on the southeast border
of Lake Turkana between two high ranging mountains in the "Turkana Corridor'' where a low
level jet stream originating in the Indian Ocean creates favourable wind conditions. The Project
area falls within a valley between Mount Ku lat and Mount Nyiru that produces a venturi effect
(effectively serving as a funnel) in which wind streams are accelerated to high speeds. The site
covers an area of 165 km2 with unique geographical conditions in which daily temperature
fluctuations generate strong, predictable wind streams between the lake and the desert
hinterland.
The Project will comprise of 353 Vestas Wind Systems A/5 V52 wind turbine generators
(WTGs), each of 850 kW generating capacity, a Siemens-supplied and built 33 kV electrical
collection network and 33/200 kV substation, and an ABB dynamic reactive power system. The
renewable power generated will be fed into Kenya's national grid and make up approximately
17 per cent of the country's installed power supply in the first year of operation (expected in
late 2014). The transmission infrastructure required for the Project is the responsibility of
Ketraco, with its timely completion to be guaranteed by the GoK. The works will include a 428
18 September 2012
km, 400 kV overhead transmission line and a sub-station at Suswa, 90 km north of Nairobi.1
This infrastructure is scheduled to be completed three months prior to the commissioning of
the first phase of the Project {approximately 26 months after the effective date of the PPA),
while it will take a total of 30-32 months to achieve full commercial operations. The
transmission infrastructure is proposed to be financed with a combination of funds from the
Government of Spain and the GoK as well as other potential DFJs.
Kenya's Least Cost Power Development Plan (LCPDP) of March 2011 was prepared by the
Ministry of Energy and the Regulator (ERC) in cooperation with the power utilities. The Lake
Turkana Wind Power project features at the top of the proposed future IPPs in the LCPDP with
expected commissioning of the proposed 300 MW in 2014-15.
Kenya Power and l.i9/Jti11g Compauy and the proposed 91wra11tee stmc:ture
Kenya has one of the best track records in Africa for facilitating Independent Power Producers
(IPPs) with investments totalling 347MW being commissioned thus far. The sector benefits
from an independent regulatory authority with minimal market distortions. Furthermore,
Kenya Power and Lighting Company (KPLC) has performed well in paying for the JPP produced
electricity since the introduction of IPPs in 1996, without a single default and, on the whole,
maintains a tariff which covers the cost of service. Despite this success, attracting new private
sector investment in the sector remains challenging due to risk perceptions of international
investors and opportunities elsewhere. While there is a peaceful power sharing arrangement
between the two major parties within the Government of Kenya (GoK), investors remain wary
of civil disturbances and require some form of political risk mitigation for further involvement
in the sector.
In previous IPP's, KPLC provided Letters of Credit in order to support payments under the PPA
and the GoK has been willing to provide projects with comprehensive letters of comfort. Given
KPLC's successful track record complying with its payment obligations and the overall
improvement in the company's financial condition during the past seven years, KPLC and the
GoK decided to explore new options with World Bank's International Development Association
(IDA) to extend support to private investors in an efficient yet less burdensome manner. Other
concerns included GoK debt sustainability and compliance with the IMF programme. This led to
an iterative and lengthy process in establishing the final credit enhancement structure of the
project. In the end, the Ministry of Finance (Mof) selected an I DA-issued Partial Risk Guarantee
(PRG) complemented by MIGA guarantees.
The IDA PRG will support the payment obligations of KPLC under the PPA and the payment
obligations of the GoK associated with lost revenues caused by a delay in completion of the
transmission infrastructure for the project. The complementary MIGA guarantees cover
termination payments arising from breach of contract triggered by political events and
backstopping of the GoK Letter of Support. The tender group, led by the AfDB, has clearly
indicated that obtaining World Bank Group cover is critical for their ability to bring the project
to financial closure with the involvement of commercial lenders, as opposed to a DFI exclusive
debt financing.
1 The Suswa sub-station has already broken ground with funding from the Agence Fran�arse de
Developpement, the European Investment Bank and the African Development Bank.
2
2. Power Purchase Agreement
The amended and restated Power Purchase Agreement (PPA) was signed between LTWP and
KPLC on 29 September 2011 (and restated on 19 July 2012 and approved by the Regulator on 4
September 2012). The signed PPA is a take-or-pay contract at €75.20/MWh ($96.14/MWh) for
20 years. Assessing to what extent this is a reasonable level, it is worth considering a number
of benchmarks:
• Jt is assumed that the average cost of power purchased by KPLC will amount to
€102.5/MWh ($131/MWh) in 2012, according to the PAD. Thus, LTWP will lower the
average system costs for KPLC.
• It is worth comparing the PPA for LTWP with the PPA for the three HFO plants included
in the PSPGSP. According to the WB PAD, the levelised tariffs range from €173.6-
179.9/MWh ($222-230/MWh). This is between 130%-139% higher than the PPA for
LTWP. There is of course a difference between power sourced on a take-or-pay
contract (as from LTWP) or power sourced on-demand from a despatchable source
such as the three HFO plants. Nonetheless, LTWP will have a first-order effect of
reducing average system costs.
• The PAD (p.29) assumes that the levelised cost of energy from wind power in Kenya is
$122/MWh, 27 per cent higher than the PPA for L TWP. This is also the basis for the
feed-in-tariff for small-scale renewable energy.
• For international comparison, the feed-in-tariff for wind power in Spain in 2012 is
between €79.10/MWh and €94.27 /MWh (applicable to wind farms installed in 2011 or
earlier).
• Finally, the PPA was negotiated in good faith based on an open-books approach. In the
lenders' base case, the equity internal rate of return (IRR) amounts to 14 per cent.
Considering the location, scale and ground-breaking nature of the project, and
comparing to the aforementioned HFO plants (refer to the WB PAD Table 10 showing
that the three HFO plants have equity IRRs in the range from 14.7-18.5 per cent), this is
a very reasonable level.
In summary, the PPA negotiated for the LTWP project is very attractive from KPLC's perspective,
as it offers electricity at competitive prices whether compared to current system costs, the cost
of other generation technologies, or domestic and international wind power tariffs.
3. Curtailment Risk
Curtailment risk refers to the supply-demand balance of the system and to which extend
output from LTWP and from other must-run generation sources exceed total system demand.
In this case, output from LTWP would have to be curtailed. This is a potential problem for KPLC
as the PPA for LTWP is on a take-or-pay basis, meaning that KPLC would have to pay for the
power curtailed. Nonetheless, it is a normal market practice internationally to accommodate
the integration of generation technologies with zero marginal costs.
The project sponsors as well as the lender group have undertaken curtailment studies of the
impact of system integration of LTWP in the six years 2015-20. The results are obviously
dependent on demand growth scenarios as well as the timing of bringing on-line other
generation facilities.
3
• In the base case (which assumes 10 per cent annual electricity sales growth2, new
generation facilities and load increases coming on-line as planned, normal year
hydrology), there is some (5-10 per cent) curtailment of output from L TWP in 2015,
while there will be system shortfalls (demand exceeding supply) in the following five
years.
• In the worst case (low demand growth, wet years, new capacity on-line as planned,
delays to new loads), there will be significant curtailment of LTWP output.
• On the other hand, with base case increases to demand and delays to new capacity
coming online, there will be significant system short-falls.
These results raise two key questions:
• What is the financial impact on KPLC of curtailment of L TWP?
• What are the economic costs associated with the various scenarios?
Fi11a11cit1l impact of cul'tuilment on KPLC
In case of curtailment of LTWP, KPLC will pay the PPA tariff of (75.20/MWh to LTWP of energy
not used. However; approximately 70 per cent of this may be passed on to consumers through
end-user tariffs. The remaining 30 per cent (or approx. (22.2/MWh) will be the direct financial
cost to KPLC.
As a wind power plant enters the merit order before HFO plants (due to the lower marginal
cost of electricity generation), it is necessary to consider the LTWP PPA in light of the PPA with
the three HFO (refer to the WB PAD), as it may be better from a KPLC point of view to keep the
HFO plants as a reserve to accommodate peak demand and provide grid stability (cf. paragraph
61 of the WB PAD).
The wholesale tariff from the HFO plants to KPLC consists of a capacity charge (39 percent, paid
irrespective of dispatch), energy charge (4 percent, paid if dispatched), and fuel cost (57 per
cent, paid if dispatched). With the overall tariff from the HFO plants amounting to
€176.8/MWh, this amounts to (68.9/MWh, €7.1/MWh, and (100.8/MW respectively.
In case of curtailment, in practice the non-zero marginal cost generation technologies, such as
the three HFO plants, will be kept on stand-by. The cost of electricity for KPLC will then be the
PPA of electricity from LTWP (€75.2/MWh) and in addition the capacity charge to the HFO
plants ((68.9/MWh). In total, the cost of electricity to KPLC in the hours of curtailment will
then amount to €144.1/MWh, which is 18 per cent lower than electricity bought from the HFO
plants (176.8/MWh). Thus, it Is still cheaper for KPLC to keep LTWP on line while keeping the
HFO plants on stand by and using them as peaking power and reserve capacity. This would be
consistent with part of the reasons for their approval as stipulated in the WB PAD.
ln other words, even in the worst case scenario, financial viability of KPLC is not threatened as
a result of LTWP. Further, LTWP coming on line will in general lower the average cost of
electricity and therefore enhance KPLC's financial viability.
2rhis compares with 9 per cent annual growth rate in demand in the base case of the World Bank PAD.
4
Economic costs of curtailment
Consumers, however, will in the worst case be worse off as the curtailment costs will largely be
passed through to them. The questions remaining to be answered, though, are the following:
• What would be the economic costs in the three scenarios respectively if LTWP is not
realised? In other words, what would be the economic costs of the power rationing
that would occur in all three scenarios without LTWP? How does this cost compare
with the worst case scenario of curtailment with LTWP being realised?
• Without LTWP, there will be higher reliance on the use of marginal and more costly
plants in the system. What is the economic cost of passing on the increased system
costs to consumers?
• What is the economic cost to consumers of the increased usage of costly back-up
generators?
• Even with the risk of curtailment, to what extent and at what costs does LTWP provide
an affordable risk insurance against volatile hydrology and volatile fuel prices?
These questions are not necessarily easy to answer, and it may be appropriate for the World
Bank to assess in more detail these wider aspects of the contribution of LTWP. Either way, the
point is merely to highlight the known risks, and near-certain negative impacts, of not realising
a near-zero marginal cost generation plant as LTWP.
Curtail111e11t risk s11mma1y
There is a certain element of risk in the proposed LTWP project as a result of potential
curtailment. However, since KPLC's financial viability is not threatened by this risk, the
likelihood of the proposed PRG (related to the PPA) being called upon is extremely low.
The potential costs to consumers of curtailment should not be ignored. However, this cost
needs to be put in perspective with the significant and tangible positive impacts of LTWP:
1. Indirect provision of much needed reserve capacity in the system
2. Significant reductions in demand rationlng
3. Fuel import savings amounting to €120 million per annum
4. Hedging effect against variability in hydrology and volatile fuel prices
5. The positive effect on industrialisation and new demand load as a result of reliable and
inexpensive power supply
6. The complementarity of wind power and hydro power in dry and normal years (where
hydropower may be used as a spinning reserve and to avoid over-extraction)
7. Direct and indirect benefits to the local communities (the project is located in one of
the poorest regions of Kenya) through a comprehensive CSR programme including
L TWP returning the first US$ cent per kWh earned from carbon credit revenues to the
GoK for use in the project area and for the local communities
These latter positive impacts should be seen in relation to the limited risks of curtailment
occurring in the first place. Curtailment is a risk, but the impact is confined and well
understood. The potential upside to the Kenyan economy of the realisation of LTWP is much
higher. And finally, the risk of the PRG being called as a result of curtailment appears minimal.
5
4. Development Fees
As described in Section 1, the Lake Turkana Wind Power project has been under private
development since 2005. That is in itself a remarkable testimony to the stability and soundness
of the Kenyan electricity sector as well as the environment for IPPs in Kenya. However, with the
ever�present risk of a project not materialising, developers are taking on significant financial
risks when developing a project as complex as LTWP. In addition to the personal investment of
time and resources, legal fees, impact assessments, measurement campaigns, system balance
analysis all add to the cost of developing a project. Development fees are therefore not a pure
reward to the developer, but are largely covering costs already incurred at this stage.
The total development fees agreed for LTWP amounts to €32 million, equivalent to 5.37 per
cent of total project costs. The question is whether this is too much, a reasonable amount, or
too little, and to answer it is useful to compare and assess this level of development fees.
The development fee is included in the total cost of the project and is therefore indirectly paid
by the cash flow from electricity sold under the PPA. Therefore, the first indicator of the
fairness of fees (and project costs in general) is the level of the PPA. As elaborated in Section 2,
the PPA compares very well with both national and international benchmarks.
A second indicator would be to compare with the development fees of another wind power JPP
project in a similar environment. To date, only one privately financed utility scale wind power
project has been implemented in sub-Saharan Africa, namely the Cabeolica project in Cape
Verde. This project was developed by Infra Co Africa, which is one of the facilities of the Private
Infrastructure Development Group, which in turn is funded by a number of European
governments, including the UK, Sweden, Germany, Switzerland, the Netherlands, Austria, and
Ireland through their aid agencies, as well as the World Bank. Despite Cabe61ica amounting to
only 26 MW, less than a tenth the size of LTWP, development fees amounted to around €15
million, equivalent to 25 per cent of the total project costs.
Further, as mentioned in the section on the fairness of the PPA, the equity internal rate of
return (IRR) for the project amounts to 14 per cent, which can be compared with the three HFO
plants which have equity IRRs in the range from 14.7-18.5 per cent (cf. the WB PAD).
Finally, the group of lenders for LTWP, led by the AfDB, has a clear interest in keeping the
development fees as low and reasonable as possible. In their due dillgence on behalf of the
lenders, AfDB has found the development fees to be fair taking into consideration the risks
undertaken.
In summary, the development fees for LTWP appear reasonable.
5. System Integration of Large Amount of Variable Electricity Generation
The LTWP project at 300MW is large and will make up a relatively large part of total generation
capacity in the Kenyan system. This poses challenges on KPLC as system operator, as they will
have to learn how to manage electricity from a variable source such as wind power. However,
several points should be taken into account when considering this challenge.
• By the time of commissioning the 300MW Lake Turkana wind farm, it will amount to
around 15 per cent of the nominal installed capacity of the Kenyan system.
Considering the dual role of the HFO plants as spinning reserve capacity and peak load
plants, the variability of outputs from LTWP is manageable.
6
•
• With the hydro power currently installed in Kenya suffering from variable hydrology,
integration of wind power will provide a useful complement to the system. Wind
power will allow for sustainable water discharges while hydro power provides a rapidly
variable spinning reserve.
• As noted by the World Bank in the PAD, KPLC is staffed by seasoned professionals with
solid technical backgrounds in the sector. This will ease the process of preparing for
the system integration of LTWP.
• The wind conditions at the site are highly predictable, easing the planning and
integration of the wind resource.
• The WTG supplier, Vestas, has advised system operators in much weaker systems, e.g.
island solutions, and has successfully achieved much higher ratios of wind power
penetration. Vestas is prepared to facilitate the necessary training to prepare KPLC
staff for the integration of L TWP in the Kenyan system.
• There is a period between the financial closure of the project and the date of first
commercial operations date of not less than 29 months. During this time KPLC will
have ample opportunity to be trained both in Kenya and at system operators abroad
used to manage the variable loads from wind power plants.
In summary, while LTWP does present a challenge to KPLC in terms of system integration, this
challenge is by no means insurmountable.
6. Asscssmen t of Social and Environme11t.1l lmpact of Pl'ojcct
LTWP arranged for local consultants to prepare Environmental and Social Impact Assessments
(ESIAs) for the wind farm and the 400 kV transmission line; these were submitted to NEMA in
May 2008 and July 2008, respectively. Subsequently, a social-economic study report for the
proposed wind farm and transmission line was produced in March 2009, an updated ESIA for
the wind farm power project was produced in July 2009 that reflected a larger project design
and was prepared to meet the requirements of the IFC Performance Standards and Equator
Principles, and a draft ESIA was prepared in June 2010 for the proposed strengthening of the
existing road from Laisamis to Loiyangalani via South Horr. The project design, the ESIAs for the
project components, including the transmission line, and the associated ongoing community
consultation programs were subject to an independent review in May 2011 for compliance
with IFC Performance Standards. The independent review of the ESIA documentation
confirmed that the project, including the associated transmission line, is broadly in line with IFC
Performance Standards. The key issues subject to ongoing assessment work include:
confirmation of sufficient water supply for construction and operations; confirmation of
impacts of building short road bypasses around the communities of Ngurunti, South Horr, and
Kurungu; management of road traffic during construction; and location of workers camps and
office and maintenance facilities.
According to the World Bank, LTWP has demonstrated a sensitivity to the cultural setting of the
area and has engaged each tribal group in an equitable manner in relation to consultation,
management of employment opportunities, as well as development of the Corporate Social
Responsibility Programme (CSRP) that is intended to help meet local needs and interests of the
respective communities within their particular areas of settlement and pastoralist activity. Key
issues and concerns that have been raised during the ESIA process are identified in the ESIA
reports.
7
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