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Electricity House

Electricity House in Nairobi.

Photo credit: Dennis Onsongo | Nation Media Group

What you need to know:

  • Is the government forcing the company to bear a financial burden it is not able to carry? 
  • What magic wand has been waved at Kenya Power to deliver the 15 per cent tariff reduction?

Even the harshest and most strident critics of the government must agree that a 15 per cent reduction on the electricity bill is a major achievement.

If President Uhuru Kenyatta’s promise of a further 15 per cent reduction can be achieved and gazetted in the next few months, we should start feeling a discernible impact on our bills and, most critically, on the balance sheets of industrial consumers.

Kenya Power does not have a good balance sheet. That is why sceptics have greeted the plans with cynicism, questioning how a financially weak company that has, until recently, been permanently at the door of the Ministry of Energy begging for tariff increases has suddenly acquired capacity to absorb such huge tariff reductions.

Is the whole thing driven by populism? Is the government forcing the company to bear a financial burden it is not able to carry? In my view, it displays the mind-set of the usual knee-jerk cynicism that dismisses every statement by a politician as — by definition — a lie. 

From what I am able to gather, the 15 per cent tariff reduction that was announced last week has been generated from savings Kenya Power must make from improved efficiency. The second part of the task of bringing the tariffs down — namely; negotiating with the IPPs, including Ken Gen, to agree to implement measures to generate the additional tariff savings — will clearly be the hard part.

What magic wand has been waved at Kenya Power to deliver the 15 per cent tariff reduction? If you want answers, take time to carefully go through the analytical work and data contained in the report by the John Ngumi-led Presidential Task Force on Review of Power Purchase Agreements.

Reduce corruption

What I found most significant in that report is the cogent analytics and data presented in there to prove the point that electricity tariffs can come down substantially by doing very basic and simple things.

First, reduce corruption in procurement of meters, poles, transformers and conductors. Put a stop to the prevailing situation, whereby hundreds of thousands of electricity meters purchased at billions of shillings cannot be traced in the system. Put a stop to the puzzle about installed meters that are not vending.

Don’t tie valuable cash in buying and storing too much inventory. The story is told of a case where the company was found to have purchased electricity poles that can last it five years.

Secondly, stop theft of electricity by big and industrial consumers by reviewing metering policy for large consumers and ensuring that all meters are placed outside customer premises, where they are easily accessible to meter readers. Last year, a forensic audit on industrial consumers unearthed theft of electricity running into millions of shillings every month.

Thirdly, monitor and scrutinise fuel oil tenders. There is a great deal new insight in the task force report in the analysis and data which empirically demonstrates that it is possible to achieve substantial tariff savings by eradicating entrenched corruption in purchases of heavy fuel by independent power producers (IPPs). Kenya Power spends a whopping Sh12 billion annually on heavy fuel oil invoices.

To appreciate that the regime of procuring heavy fuel oil is mired in corruption and rent-seeking activity, look at the statistics and data in the task force report on the huge and inexplicable variations in invoices from different IPPs.

Closer scrutiny

It is all confounding because the price of heavy fuel oil is indexed on Platt — the international reference price — meaning that the only difference in invoices from the IPPs should be on the cost of transport.

The data produced by the task force found that, even in the Nairobi area — where the price differential should be limited since the cost of transport is the same — there were significant differences during the same financial period.

Kenya Power can earn hundreds of millions of shillings in tariff savings just by closer monitoring and scrutiny of heavy fuel oil tenders by the IPPs.

I will stop there as I do not want to cram the column with all areas of tariff savings that have been identified by the task force. The important point to emphasise is that the work by the task force has given us an empirical basis to prove that it is possible to bring electricity prices down.

Will IPPs agree to bring their prices down? The government has made it clear that it will not force them to reduce prices. My hunch is that, if diplomacy fails, then IPPs must brace themselves for a period of unprecedented scrutiny of their operations and invoices. The task force presented the analysis showing glaring breaches on power purchase agreements (PPAs). 

The problem is that we have not had an institutional mechanism for regular monitoring and reporting of breaches on PPAs. Let us celebrate affordable power when it happens.

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