Kipevu II: a balancing act

Faced with serious shortfalls in electricity supplies, Kenya is attempting to improve the efficiency of its power sector through restructuring and liberalization. Kipevu II, Kenya`s latest independent power project, will not only help the country overcome the supply shortfalls, but will also improve the balance between thermal and hydropower capacity.

In 1997, Kenya experienced a marked shortfall in its electricity supply of 750 GWh, caused partly by system losses and partly by the country`s dependence on hydropower. The government, however, is overcoming these problems through projects such as Kipevu II, a diesel engine power plant being developed under a build-own-operate contract.

In 1996-97, annual electricity generation in Kenya was 4297 GWh. The current electricity demand in Kenya is 3557 GWh of which 20 per cent is accounted for as system losses. Demand over the last five years has averaged a growth of 4.6 per cent, and during the same period the annual growth rate has ranged from between 2.8 per cent and 5.7 per cent.

Electricity generation has therefore not kept pace with demand; in the last decade a growth of about three per cent has been witnessed on the generation side.

The current installed capacity for generation in Kenya is 882 MW. The Kipevu II project will add 74 MW to this and is part of the Kenyan government`s plans to overcome the shortfall in power supply and improve the country`s generating mix.

Kenya`s generating system is largely hydro based and in the past severe drought has caused great shortfalls in supply. Although the recent addition of geothermal and diesel plants has made the generation system increasingly less vulnerable to weather influences, new thermal capacity is still required. In addition, two 55 MW stations in the Kenyan inland have recently been proposed.

A changing sector

In an effort to improve the power sector`s operational efficiency, the power industry in Kenya is being restructured by the government. All generation assets are being placed under one company, Kenya Power Company (KPC), a wholly owned government corporation, and the transmission and distribution assets under another company — Kenya Power and Lighting Company Ltd. (KPLC). KPLC is registered as a limited liability company with the government of Kenya currently holding 51 per cent of its stock.

In order to create the requisite enabling legal framework, the Electric Power Act was passed by Parliament in 1997. The Act established an electricity regulatory board with responsibilities for ensuring a reliable supply of electricity to consumers, adjustment of tariffs and creation of an enabling environment for competition among power producers.

Under the restructured environment, KPLC will purchase electricity in bulk from KPC and other independent power producers (IPPs) for resale to consumers. The intent is to create a commercial environment between KPC and KPLC and to facilitate competition on an equal footing between KPC and the IPPs for the bulk supply of electricity to KPLC.

The first IPPs in Kenya came on stream in 1996, and currently some 200 to 400 GWh of power is generated by two IPPs. An additional 170 to 180 MW in new generation capacity is slated to be added as IPP projects, including Kipevu II.

In addition to the reforms and restructuring of the electricity sector, KPLC has undertaken its own internal improvements since 1995 with a view to enhance efficiency, reduce operational costs, improve customer service delivery, and overall change the corporate culture in anticipation of the ongoing liberalization of the sector, and prepare it for an increasingly commercial environment. KPLC today has the a reputation of being a well run and financially stable utility in sub-Saharan Africa.

Kipevu II

The Kipevu II power project is the latest in a series of base load, diesel engined power projects developed by Wärtsilä NSD Corporation through its subsidiary Wärtsilä NSD Power Development Inc. (WPD).

Wärtsilä NSD manufactures and assembles engines at production plants in Finland, the Netherlands, France, Sweden, Norway, Spain, India and the USA. The company has acted as developer, constructor or vendor for over 35 `greenfield` independent power projects in emerging markets worldwide.

Throughout the world, Wärtsilä NSD has participated in more than 3200 power facilities with a global installed base of more than 23 000 MW. Since its inception in 1991, WPD has completed 11 power projects as developers with an aggregate project value of over $600 million. WPD is presently working on seven additional projects throughout the world in addition to the Kipevu plant.

The Kipevu II project was originally bid in November, 1996, in response to a request for proposals issued by the government of Kenya in July, 1996. The requirement was to build, own, and operate a 74 MW power plant known as Kipevu II, located in Mombasa, Kenya. Negotiations commenced in July 1997 and a Power Purchase Agreement (PPA), Security Agreement, and a Land Lease Agreement were signed on November 3, 1998.

The PPA is between a special purpose corporation, Tsavo Power Company Limited, incorporated in Kenya, and the Kenya Power and Lighting Company Limited. The term of the PPA is 20 years from the commercial operations date. KPLC has agreed to pay a fixed monthly capacity payment plus an energy payment based on actual energy delivered and the pricing is designated entirely in US$. There is no government guarantee but KPLC has agreed to a security arrangement based on a letter of credit and a revenue account.

Tsavo Power Company Limited is currently owned by affiliates of Wärtsilä NSD Corporation but the intention is to introduce new partners to the project as soon as possible. These are expected to be a major local development and investment group, an international power company and a major British development group that will also provide part of the debt. The expected contract structure for the project is shown in Figure 1.

The project is essentially a mid-peak power plant intended to provide power locally and to act as a backup for Kenya`s hydroelectric generation system. During dry years and during periods of local power shortage, the plant will be heavily loaded.

WPD is acting as lead developer and is currently engaged in negotiating key project agreements and arranging finance. The Engineering, Procurement and Construction (EPC) agreement and the Operation and Maintenance (O&M) agreement will be with affiliates of Wärtsilä NSD North America Inc. The initial Fuel Supply Agreement (FSA) will be with a major oil supplier through the port of Mombasa. It is very likely that the local refinery, currently operated by a consortium of Shell-BP, Caltex and the government of Kenya will be able to provide heavy fuel oil of the quality required.

All of the project agreements are expected to be executed and firm commitments obtained for all of the equity and debt for the project — by the third quarter of 1999 — in which case the project will enter commercial operation in late 2000.

Design

The power plant, a Wärtsilä Power Master plant, will consist of seven 18-cylinder Wärtsilä 38 engines of approximately 10.5 MW each running on heavy fuel oil.

The plant design is based on the proven Power Master design of power plants now operating in various parts of the world. The basic layout and general configuration will be similar to the recently completed 125 MW Tapal power plant in Pakistan. Certain adaptations will be necessary to suit the specific conditions at the site and the fact that another power plant, Kipevu I, is in construction on an adjacent site. The final appearance of the power plant will be similar to the Pare Pare project (a 60 MW Power Master powered by six Wärtsilä 38 engines) in Indonesia.

The Wärtsilä 38 engines are well proven on base load operation, having been successfully operated since 1996 at the Tapal project in Pakistan and at the Elcosa project in Honduras since 1995. Both of these projects were constructed by affiliates of Wärtsilä NSD Corporation and initially operated by the operations group of Wärtsilä NSD.

Wärtsilä NSD will, through its affiliates and local construction contractors, provide a fixed price contract under the terms of which engineering, procurement, construction, project management, start-up and testing services will be provided as necessary to deliver a complete and operable power plant with all necessary auxiliaries and related facilities consistent with the requirements of the PPA.

Efficient operation

Tsavo Power Company Ltd. will enter into an O&M agreement with Wärtsilä NSD Nederland. Wärtsilä NSD Nederland will utilise the services of Wärtsilä NSD Operations Inc. to mobilise the project and to support operations.

Under this agreement, the operator will provide all operation and maintenance services necessary or advisable to efficiently operate and maintain the plant, including all associated mechanical, electrical, fuel handling, pollution control and utility connections in good operating condition with the objective of minimising costs, minimising net plant heat rate, maximising capacity factor, maximising mean time between failures and maximising asset life.

The plant has been designed to meet the applicable World Bank Pollution Prevention and Abatement Guidelines for New Power Plants. An important item in the initial development of the project will be the production and approval of an Environmental Impact Assessment Report (EIAR) required in order to obtain the Electric Power Production License that is required under Kenyan Law.

The complete EIAR was prepared by Ecological Services International of Ontario, Canada. Obtaining the Electric Power Production License is generally regarded as being the pacing item in closing finance for the project.

Naturally, the project owners will work closely with its consultants and contractors, and the relevant Kenyan authorities, to implement the recommendations of the environmental assessment and ensure compliance with applicable World Bank and Kenyan government standards.

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Figure 1. Structure of the Kipevu II IPP project

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Figure 2. The design of the Kipevu II project will be similar to that of the Pare Pare project, a 60 MW Wärtsilä Power Master powered by six Wärtsilä 38 engines in Indonesia

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