Ormat Kenya’s ultra premium profits raise eyebrows in USA
American Independent Power Producer (IPP) Ormat Power is on the spotlight in the US for booking outsized gains from Kenya, just days after the President appointed a taskforce to investigate power producers.
The company’s filings to the Securities Exchange Commission of the United States of America says a huge percentage of income comes from Kenya Power.
The utility firm has been struggling to pay Ormat and as of July 2021, it owed the independent producer Sh4.3 billion.
“A substantial portion of international revenues came from Kenya and, to a lesser extent, from Honduras, Guadeloupe and Guatemala and other countries.
Our operations in Kenya contributed disproportionately to gross profit and net income,” the energy firm said in SEC filings.
The company earns twice more than Kengen per megawatt hour. The taskforce investigating power prices advised that all IPPs should slash their tariffs to match state owned Kengen. Kengen is one of the most profitable firms in the region.
An analysis by the Wall Street Journal owned newsletter Daily Grant says, “ultra premium represents the secret sauce of that windfall.
Zachary Truesdell the former MD at Matador Global Management estimated to Grant last year that Ormat earned $94 per megawatt/hour of power provided to Kenya Power, more that double the $45 paid to Kengen.”
In the SEC filings, the company acknowledges receiving a letter from Kenya’s Parliament to explain the nature of its dealings with Kenya Power, but says it was not about negotiating tariffs.
“In July 2021, Ormat received a letter from the Kenya National Assembly with a request to respond to various questions and to provide materials regarding our Olkaria complex operations and its PPA.
Ormat is engaged in conversations with the Kenya National Assembly to respond to their requests,” said Ormat to the US regulator and investors.
This web of activities and pricings are an eye opener into how private and foreign players could be charing consumers of their hard earned money through ultra-high power tariffs.
The company’s revenue from Kenya has improved from 15 per cent of total revenue last year to 17.5 per cent of the total revenue in 2021.
“As of June 30, 2021, the amount overdue from KPLC in Kenya was $43.5 million of which $13.2 million was paid during July 2021.
These amounts represent an average of 77.2 days overdue,” the SEC files say.
Ormat said it believes it will be able to collect all unpaid revenue in Kenya. This belief, it says, is supported by the fact that in addition to KPLC’s obligations under its power purchase agreement, the company holds a support letter from the Government of Kenya that covers certain cases of KPLC non-payment.
This includes cases such as where caused by government actions/political events.
Additionally, the company continued to experience certain curtailments in the first and second quarters of 2021 by KPLC in the Olkaria complex. The impact of the curtailments is limited given that the structure of the PPA secures the vast majority of the Company’s revenues with fixed capacity payments unrelated to the electricity actually generated.
Due to the high amounts paid to IPPS and high system loses, Kenya is grappling with sky-high electricity prices that continue to keep the cost of living high, while pushing investors out of business which in turn keeps unemployment high.
In an interesting twist in the sector however, Kenya Power announced last week that it has bounced back to profitability, with Sh1.5 billion in net earnings for the year ended June 30, 2021 compared to a Sh939 million loss last year.