The mirage of low-cost power: Why Uhuru price order has failed

It costs nearly half a shilling more to buy a unit of electricity than it did a month ago despite numerous government statements of lower power prices before the end of last year.

The energy regulator has gazetted new electricity prices for December, which are the highest in over 40 months.

Into the first week of the New Year, it is about three weeks since President Uhuru Kenyatta announced that the State would adopt a two-phased approach to lowering electricity prices, with the initial 15 per cent reduction being achieved before the end of the year.

Earlier, during Mashujaa Day celebrations, the Head of State had announced that power prices would reduce by 33 per cent by December 24.

Utility firm Kenya Power followed suit and issued a statement indicating it would implement the President’s directive, announcing that it would reduce power prices accordingly in the December billing.

However, the firm left out the crucial details of how it was going to undertake the exercise.

“In fulfilment of this pledge, Kenya Power wishes to inform its customers that the first 15 per cent reduction in the cost of power will be implemented on power consumption in the month of December, 2021. This will be reflected in power bills covering that period,” said Kenya Power.

Monthly adjustments

The Energy and Petroleum Regulatory Authority (Epra) raised the fuel cost charge (FCC) component of the electricity bill by Sh0.42 to Sh4.63 per kilowatt-hour (kWh), the highest since June 2018 when it reached Sh4.75.

The component is one of three that are adjusted monthly to reflect changes in global fuel prices that affect import prices of diesel that is used to generate a significant amount of electricity locally.

The other two are adjusted to reflect fluctuations in the value of the Kenyan shilling against major world currencies, more so the US dollar, and the water use levy.

The changes usually take effect on the 8th of each month, which means electricity users with prepaid meters are currently paying Sh0.42 more per unit until the next review, while the higher prices will be reflected in the monthly bill of post-paid users.

Herein lies one problem in actualising President Kenyatta’s bid for cheaper electricity.

Kenya Power revenues

The adjustable components are key in cushioning Kenya Power from higher costs of reimbursing power producers fuel costs, as well as paying them for power purchases, considering the payments are done in foreign currencies.

This leaves two options of either letting the costs be absorbed by consumers as currently is or by Kenya Power, which would surely sink the utility firm that highly depends on the billions generated from the variable costs.

For instance, consumers paid the utility firm Sh11.18 billion for the fuel costs in the financial year ended June, and Sh6.99 billion for currency fluctuation.

However, the viable solutions to both the utility firm and consumers are long-term and their implementation would likely take years.

This includes gradually phasing out expensive thermal power generators whose power purchase agreements (PPAs) have elapsed or negotiating with those that have longer tenures for their terminations.

It also includes denominating the PPAs in the Kenyan shilling to cushion consumers from shouldering fluctuation in the local currency.

Reducing system losses

However, President Kenyatta said the first phase of making power cheaper that was to be concluded before the end of last year was by reducing system losses incurred by the power distributor.

The losses stem from power theft and ageing transmission lines, meaning a significant portion of the power it buys is not sold to consumers, who are forced to shoulder this burden.

Kenya Power incurred system losses amounting to 24.14 per cent way above the allowable threshold by Epra, which cost consumers an additional Sh5.01 billion on their power bills.

However, reducing the losses is a long-term undertaking, which cannot be done within weeks.

The utility firm has ramped up disconnection of illegal connections, especially in informal settlements, to reduce power theft in recent months, as well as rolling out thousands of new smart meters.

Meanwhile, reducing transmission losses requires an overhaul of the ageing power transmission network, a capital-intensive multibillion-shilling process that would take years to complete.

Renegotiating agreements

However, the government appears to fancy its chances of bringing independent power producers (IPPs) to the negotiating table to review their PPAs with Kenya Power.

President Kenyatta said renegotiating with IPPs is expected to actualize the second 15 per cent reduction in electricity prices.

In his New Year address, the President set a March timeline for the changes.

“Reforms in the energy sector will also continue apace, with electricity prices expected to be reviewed even further downwards by the end of the first quarter of the year 2022,” said President Kenyatta.

This as the government has mellowed its previous strong approach of exploring terminating the PPAs based on the technical difficulty of pulling it off, and has instead adopted a softer stance on the issue.

The Office of the Attorney General, the government’s principal legal advisor, recently told lawmakers that the PPAs cannot be terminated unless they are compensated billions of shillings for the remainder of their contracts.

This means the government is tied in its ability to force the IPPs to the negotiating table.

Just a week after the President’s Mashujaa Day directive last October, IPPs officially launched their association, the Electricity Sector Association of Kenya (ESAK), promising a strong fight for their survival. ESAK had been largely idle for over two years since its founding in 2019.

The IPPs are owned by powerful individuals and multilateral lenders that could have forced the state to reconsider its strong stance.

For instance, the World Bank’s International Finance Corporation (IFC) invested €28.1 million (Sh3.6 billion) for the founding of the Thika Power Limited, and €20.7 million (Sh2.6 billion) in Gulf Power Limited.

The World Bank is Kenya’s largest multilateral lender.

Tariff review

However, the government also appears to be seriously exploring the option of reviewing current power tariffs, which offer a smoother path to cheaper electricity for consumers, notwithstanding the fallout it could have on Kenya Power’s revenues.

The energy regulator last month told the Daily Nation it was waiting for a tariff review application from Kenya Power to kick-start the process of lowering electricity prices.

The current tariff was set in 2018 and is reviewed every three years.

Some of the fixed tariff components that could be lowered—should the tariff be lowered—include the consumptions charge, value added tax (VAT), Epra levy and Rural Electrification Programme (REP) charge.

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