Co-authored by Denis Yegon (Financial Analyst) and Irene Karbolo (Commercial Transactions Lawyer)
Why Transmission is Ripe for PPPs
Kenya’s energy sector has long been regarded as commercially viable, demonstrating sector revenues exceeding KES 231 billion annually and attracting private investment in power generation for decades. Yet, for all this success, private capital has largely stopped at the power plant gate. The recent commercial close of energy transmission PPP between KETRACO, Africa50 and POWERGRID marks an important shift in Kenya’s energy story, one that extends private sector participation beyond generation.
Transmission assets share several characteristics that align well with PPP structures. They demand significant upfront capital investment, but once built, their operating costs are relatively predictable, and their economic value is realized steadily over long asset lives. This combination produces stable, long-term cash flows, an attractive proposition not only for project lenders, but also for institutional investors such as pension funds seeking core or core-plus infrastructure assets.
In this context, transmission PPPs offer a practical and timely response to Kenya’s transmission financing needs and rising demand, driven in part by the expansion of renewable energy.
Which transmission projects are suitable for PPPs?
While the transmission asset class may be well suited to PPPs, public concerns about tariff affordability often dominate debates around private sector participation in the energy sector. Consequently, careful selection and prioritization of transmission projects for implementation based on the system benefits is crucial. In Kenya’s case, the Least Cost Power Development Plan (LCPDP) provides a transparent, data-driven roadmap for generation and network expansion. For investors, this clarity reduces uncertainty around future electricity demand and ensures that load growth and associated risks are well understood by the public sector.
The recently concluded transaction in Kenya includes two strategically significant assets. The 400kV Lessos–Loosuk transmission line that will provide an alternative evacuation route for renewable energy from Lake Turkana Wind Power project and traverses the North Rift geothermal complex, positioning it as a primary evacuation corridor for upcoming geothermal generation. Meanwhile, the 220kV Kibos–Kakamega–Musaga line extends high-voltage supply into Western Kenya, increasing renewable energy penetration and expanding access to historically underserved areas.
Collectively, these projects will enable displacement of expensive thermal generation in Western Kenya, reduce system losses, connect new users and improve reliability thus addressing suppressed demand. All of these contribute to lowering the long-run marginal cost of electricity. Therefore, while availability payments may result in a modest near-term increase in tariffs, the long run effect is expected to be positive to the end-users.
Structuring for bankability
One of the most consequential structuring decisions for Transmission PPPs is the choice between availability-based and user-pay models. Under availability-based payment model, the private partner is paid for keeping the asset operational in accordance to stipulated standards. This model is suitable for national grid systems, whereby transmission operators typically have no control over how much power flows through the network. In Kenya, this approach has been adopted, reflecting the reality of the grid’s utilization driven by system dispatch and planning decisions. This mirrors international best practice adopted in markets such as Latin America and India.
That said, user-pay models which are based on actual flow of power, remain viable where the customer base is clearly defined and demand is predictable. For example, for dedicated transmission lines serving mines, industrial parks, or data centres from a specific generation source. Kenya’s Open Access framework could support such arrangements, particularly for clean energy supply from geothermal fields serving energy-intensive users in special economic zones (SEZs).
Ultimately, the choice of payment model is critical as it shapes the project’s risk profile, influences the cost of capital, and determines investor appetite.
Structuring for Affordability and Value for Money
The energy sector in Kenya has, at times, faced pressure to renegotiate Power Purchase Agreements (PPAs) over concerns on affordability. In the case of transmission PPPs, novel solutions have been incorporated borrowing from recommendations of the 2021 Presidential Task force on Reviewing PPAs.
Foremost, a blended currency tariff is adopted, with payments split between local and hard currency. This reflects the underlying cost structure of the project recognizing that a significant portion of operating and maintenance expenses are incurred locally while also providing the private party with protection against foreign exchange volatility on external financing obligations obtained in hard currency.
Transmission PPPs also provide for structured commissioning milestones, distinguishing between “cold” commissioning (construction completion) and “hot” commissioning (actual power flow through the lines or substations). Consequently, payments are more closely aligned with operational readiness, reducing unnecessary fiscal exposure. Provisions for sharing gains from refinancing are also incorporated, as once construction risk falls away, the project may be refinanced on improved terms, allowing the public sector to share in the upside.
Additionally, equity returns are carefully benchmarked to ensure they are neither inflated by perceived risk nor suppressed to levels that would deter investors. This is reinforced by competitive procurement of EPC costs through transparent e-reverse auctions, thus enhancing value-for-money assurances. Furthermore, local content requirements are embedded in the transaction agreement ensuring that project benefits extend into the domestic economy.
Lessons Beyond Technicalities
Beyond technical structuring, one of the most enduring lessons learnt from delivering Kenya’s first transmission PPP is the need for tenacity. Project development can be tedious, complex, and at times even adversarial. As infrastructure finance professionals, it is easy to become absorbed in risk matrices, financial models, and contract negotiations but it is crucial not to lose sight of the bigger picture: the project’s ultimate purpose which is to improve lives. Keeping that goal in mind helps teams persist through inevitable setbacks and maintain momentum.
Finally, stakeholder coordination is critical to maintaining momentum. Close collaboration among government agencies, project sponsors and lenders ensures alignment across approval. This is reinforced by structured public engagement, which mitigates social risk and reduces the likelihood of delays further down the line.
Overall, Kenya’s transmission PPP offers a template for scaling up investment in the country’s energy infrastructure, thereby ensuring access to affordable and reliable electricity for consumers.
