State in fuel subsidy pact with Kenya Power to tame costs

Fuel pump

An attendant at Rubis petrol station on Koinange Street, Nairobi, on March 14, 2022. 

Photo credit: Dennis Onsongo | Nation Media Group 

The State is in a fuel subsidy deal with Kenya Power to allow the utility to lower consumer electricity bills without hurting its cash flows.

Mr Daniel Kiptoo, the director-general of the Energy and Petroleum Regulatory Authority (Epra), confirmed that the State is offsetting key levies charged on consumers including the fuel cost charges (FCC)— a levy influenced by the share of electricity from diesel generators.

Epra is mandated to publish new electricity prices each month to cater to fluctuations in fuel and water prices and foreign exchange rates.

Epra has not adjusted these pass-through costs — the FCC, the Foreign Exchange Rate Fluctuation Adjustment (FERFA) and the Water Resources Management Authority (WARMA) Levy — since December 2021.

“The government working with the regulator in cushioning consumers in a similar fashion to the petroleum stabilisation despite the global rise in energy prices. The holding constant of the pass-through costs, particularly the FCC, cushions consumers from the shocks in the FCC,” Mr Kiptoo said.

Variable electricity cost

The FCC is the single largest variable electricity cost adjusted monthly and is collected by Kenya Power to be reimbursed to thermal power generators for their fuel purchases used to generate power.

The FCC tracks changes in world prices of petroleum as well as fluctuations in the quantity of oil consumed by electricity generation and is passed on to consumers.

The Treasury has already offered Kenya Power a Sh7.05 billion subsidy to allow the utility cut consumer electricity bills by a further 15 per cent without hurting its cash flows.

“To shield KPLC from the effects of the electricity price reduction prior to the implementation of this second phase, the company has been allocated Sh7.05 billion in the proposed budget for 2022/23,” the Budget and Appropriations committee revealed in its report to lawmakers in June.

Inflation has forced the government to subsidise the cost of select key commodities to cushion consumers from a high-cost living and stimulate production in key sectors of the economy.

The government disbursed Sh3 billion to subsidise the prices of fertiliser to farmers between the April and June planting season and has allocated a further Sh2.7 billion for the next planting season in October.

It has also been subsidising fuel prices since last year amid record-high prices that have had a ripple effect on the cost of other goods and services including electricity, food and transport.

Sh16.67 billion

Last week, President Uhuru Kenyatta handed Kenyans a major reprieve from an expected increase in fuel prices increase by moving the National Treasury to unleash Sh16.67 billion for the subsidy to retain the current fuel prices.

The government had frozen the fuel subsidy for three months which saw a record increase in the prices of the commodity.

The fuel subsidy was this week followed by a maize flour subsidy that will see the commodity — a staple in Kenyan households — retail at Sh100 for a 2-kilogramme packet down from as high as Sh230 after the Agriculture ministry inked a deal with millers.

The uptake of thermal electricity by Kenya Power rose 23 per cent to hit a four-year high in January due to interrupted geothermal production and poor hydrology, raising fears of expensive power.

Mr Kiptoo said the electricity subsidy to Kenya Power is helping President Kenyatta to deliver his promise to cut power prices by 33 per cent in two tranches.

Epra lowered energy charge tariffs by up to 23 per cent in January to achieve the first phase of the power prices reduction pledge.