What you need to know:
- Power generator last week announced that its earnings had almost doubled, but questions abound as to why its single largest customer, Kenya Power, is heading to report close to Sh3 billion in losses.
Kenya Electricity Generating Company’s (KenGen) last week announcement that it had more than doubled its net profit to Sh18.38 billion for the full year ending June 2020, has shed the light on the power value chain where the producer is making huge profits while the distributor is sinking in financial abyss.
The energy generator’s 133 per cent jump in earnings is hard to compare with its key partner in the business; Kenya power, the only buyer of its product.
The two have their profitability graphs facing different directions despite having their fates tied in the supplier-distributor relationship, a very strange one. So strange that Kenya Power is expected to make a Sh2.98 billion loss official anytime this quarter after the figures emerged in documents submitted to the National Treasury while KenGen maintains a Sh21 billion gap in net earnings between it and its only distributor. How?
That remains the puzzle whose explanation according to experts is found in the operations within the two power parastatals, skewed power purchase deals and the market inefficiencies that have resulted to the puzzling power value chain where the producer is far richer than the distributor who should essentially be making the money like it happens in most value chains.
Analysts contend the power distributor may have had a fair share of their internal inefficiencies coupled with years of government policies that have pushed power distribution towards social and political realms than business while keeping generation a pure business.
An energy expert who spoke to Smart Business seeking anonymity places the woes for Kenya Power squarely on government policies largely bordering on politics.
“It is political and the Last Mile Project is an example. KenGen is doing fine because there is no political interference and KenGen has to meet all costs through borrowing largely through donor agencies or through their own earnings. Kenya power has had to borrow even from local banks to take care of the burdens brought about by the last mile consumers,” the expert who headed the energy regulator before retiring told Smart Business.
The government has, however, defended the plan to connect all households to power as a fully funded scheme where Kenya power is compensated even as the State’s remittances to Kenya power under the Rural Electrification Scheme have been lagging more than Sh11 billion in the last two years.
The Last mile project is not the only shock the government may have caused in the Kenya Power systems. Back in 2013, when Kenya Power was still making double digit billions in net earnings, a plan was hatched to raise Kenya’s installed generation capacity to 6,762 megawatts in just 40 months. The Jubilee administration, which was new in power drew the controversial plan to add 5,000MW to the country’s electricity supply buoyed by the argument that Kenya was going to grow industries, have an electric train on the standard gauge railway line, build resort cities and establish several special economic zones with huge demand for electricity.
Electricity generation deals were signed and Kenya Power which then had just 2.3 million customers was pushed to hook more households to the grid, spent hugely to expand distribution lines by over 20,000 kilometres and doubled its number of substations, sinking some billions of shillings into the process.
Seven years later and the long awaited 5000MW is still far from reality, the installed capacity still falls below 2800 MW and the infrastructure built to distribute almost double this capacity remains idle, adding to the technical losses much as they are expensive to maintain.
The expansion also missed out on the demand projections, leaving the distributor with power purchase deals that compels it to pay for the energy generated even if it has nowhere to sell it. The clause known as ‘take-or-pay’ in the PPAs has seen Kenya Power unable to sell what it buys from suppliers while it still has to pay for it anyway.
Confidential documents from the Energy and Petroleum Regulatory Authority show that by 2026, the demand supply gap is expected to rise from a deficit of 104MW in 2019 to a surplus of 923MW against the slow growth in peak demand from the current 1,926MW in 2019 to 2,766MW. Such moves only expanded opportunities for KenGen whose latest earnings from electricity sales grew 13 percent despite the Covid-19 driven demand drops.
A letter written to the Ministry of Energy by the then Kenya Power Board Chairman Mahboub Maalim paints the picture of an agency put in the frontline and burdened by the problems from all the other players in the value chain, making its operations difficult and sinking it deeper into the loss territory.
Mr Mahboub, who was concerned that the delayed tariff revision was hurting Kenya Power said that other players in the value chain earned their fair share of funds from the distributor’s sweat while remaining comfortable in the background.
“In principle, the tariff should provide adequate compensation for all sector players, but KPLC has been experiencing persistent revenue shortfalls due to delays in tariff revenue and inadequate compensation. All other entities receive the full revenue requirements provided in the retail tariff plan. KPLC’s revenue, on the other hand, is the residual amount net of actual losses, bad debts and unrealised sales,”Mr Mahboub wrote in the April 2020 letter.
Mr Mahboub may have succeeded in putting a strong case for Kenya Power and many analysts agree the distributor has taken a beating on behalf of other sector players such as the Kenya Electricity Transmission Company and the Rural Electrification and Renewable Energy Company.
Nairobi based economists Robert Shaw contends that Kenya Power has had its woes worsened by inefficiencies in the business of selling power including delayed connections, poor metering which has seen several people use power without paying as well as procurement driven corruption which has increased its mountain of debt without much returns.
Mr George Aluru who sits at the Electricity Sector Association of Kenya (ESAK) Board, a body bringing together Independent Power Producers (IPPs), says comparing KenGen and Kenya Power’s profits may be difficult given that KenGen has a ready customer in Kenya Power and has less market turbulence and costs to deal with compared to the customer-facing Kenya Power.
Like other analysts, he agrees Kenya Power has to deal with inefficiencies.
"There is quite a significant spread between what Kenya Power buys power from KenGen at and the rate at which it sells. Where does all that go? As much as they have been trying in the recent past, energy losses and metering inefficiencies have to be addressed including staffing levels," Mr Aluru told Smart Business.