Inside the politics and numbers behind the ever-rising electricity bills

Unfulfilled pledge: When the 5,000 MW project was launched in 2013, it was expected that the cost of electricity would drop to Sh9 per unit within four years but it did not.

For each unit of power, consumers pay an average of Sh23.10 or 31 per cent more than they did just six years ago when a unit cost Sh16.

And in the next few months, electricity bills are set to get even higher.

Since 2014, the average cost of electricity bill has risen by 37 per cent, outpacing inflation that has averaged six per cent in the last five years.

For instance, 200 units of power cost Sh4,619 in October this year, up from the Sh3,370 annual average recorded in 2014, according to data released by the Kenya National Bureau of Statistics (KNBS).

It is only the power business in Kenya that has defied the laws of demand and supply and survived. Consumers are paying more for electricity even as more of it finds its way into the national grid – and surpasses demand.

When the 5,000-plus megawatt (MW) project was launched in 2013, it was expected that the cost of electricity would drop to Sh9 per unit within four years. It did not.

So why are Kenyans drowning in higher electricity bills?

Electricity bills are packed with add-ons that pay for a long list of items, from installing power lines and transformers to putting up sub-stations, recovering electricity lost as a result of ageing power lines and financing idle capacity.

For residential customers, a single charge added in increments as small as Sh0.01 per kilowatt-hour (kWh) can add up to Sh350 to Sh450 a year to their bills.

For industrial and commercial customers, this can mean an increase of tens of thousands of shillings annually.

Apart from the system losses that consumers pay for, other key add-ons that negatively impact power bills are fuel, forex, inflation, value added tax and three regulatory levies, which in total account for close to 34 per cent of the final bill.

Increasing surcharges has proven to be easier for financing projects than raising electricity tariffs for the country’s seven million customers.

The Energy and Petroleum Regulatory Authority (EPRA), which approves tariff increases, has to approve the surcharges, but the waiting period between when various power companies spend the money and when they recover it from customers’ bills is shorter, making it the favourite option.

These surcharges end up providing power companies with some relief from volatile market swings, a situation that means all the risks are taken up by electricity consumers, but the power generators, transmitters and distributors get to mint maximum profits.

Towns across the country are grappling with ageing infrastructure that is expensive to repair. Power is delivered via thousands of kilometres of cable across the country, most of them having been mounted post-independence with a lifespan of 25 to 30 years, according to a study by civil engineers.

This ageing infrastructure costs consumers dearly. The acceptable average losses stand at between 12 and 15 per cent, which distributor Kenya Power is allowed to pass on to consumers.

But the latest data shows that the power utility’s system losses stand at 23 per cent, meaning the situation is getting worse, not better, despite massive investments to improve electricity transmission and distribution.

Losing 23 out of every 100 units that Kenya Power buys from power producers, which include KenGen, comes at a heavy cost, a substantial chunk of which is passed on to the consumer.

For instance, in the financial year to June 2018, Kenya Power bought electricity worth Sh64.8 billion from the different power producers. A 23 per cent loss would mean that Sh14.9 billion of this was lost either due to technical or commercial challenges.

Also adding to your bill are faulty transformers. Kenya Power was last year found to have paid Sh4.5 billion to Muwa Trading Company Ltd, and India’s Nucon Switchgears PYT Ltd for transformers that were never deployed to sites after they were found to be faulty.

Faulty transformers increase the technical losses added to consumer bills.

The other major challenge that has a direct bearing on the bill is idle capacity.

Electricity production capacity has been growing faster than demand. As at December 2018, the installed capacity stood at 2,711MW, while peak demand stood at 1,860MW.

This means that there is about 850MW of excess capacity or 30 per cent of what is produced going unused. Despite this, it is factored into your power bill pricing.

In the initial months of his term, President Uhuru Kenyatta said the Government would pump in billions of shillings into the energy sector to substantially cut power bills. The investment, the president said, would “lower electricity prices by at least 50 per cent” by 2016.

And true to the promise, his administration has allocated Sh613 billion to the Ministry of Energy since 2013. However, despite the ministry recording relatively low absorption capacity, it has still spent a sizeable Sh264 billion in various power projects, an amount equivalent to the cost of at least eight Thika Highway, between 2013 and 2019.

These projects included geothermal exploration works, putting up new electricity transmission lines, installation of a solar power plant in Garissa and extending power connections to rural Kenya.

The investment from the government is in addition to the billions of shillings spent by the private sector, which, though driven by profit, put up more plants generating electricity from cleaner and cheaper sources that would have driven down power prices.

But rather than providing the promised cheap power, the government last year slapped consumers with an increase in power costs under a new pricing structure authorised by EPRA.

Under the new tariffs, households consuming 200 units of power a month saw an 11 per cent increase in their electricity bills.

The high costs of power have further hurt Kenyan taxpayers burdened by a multitude of levies and made it more difficult to keep businesses alive.

Keter’s take

Energy CS Charles Keter

The Energy Ministry is overseen by Charles Keter, a former senator for Kericho County who in an interview admitted that he had the tough job of balancing between consumer interests and having a self-sustaining industry.

Mr Keter, who has held his position since late 2015, contended that there is no quick fix in solving the high power costs. When asked why consumers were paying dearly for power? Keter reckoned that reducing power costs would happen, but only in the long-term.

In the short-term, he said, his ministry has made efforts to ensure a higher quality of power, while there are some consumer market segments, especially the lower end that have experienced a degree of lower power costs.

“The cost of power is not something that you will press a switch and it comes down. It takes place over time. We started by ensuring that there is reliable and stable power. Today, I can confidently say we have brought down the number of blackouts to minimum levels through strengthening of our systems,” he said.

He added that last year’s review of the power tariff had the impact of bringing down the cost of power for most consumer categories, including the lifeline tariff for low-end consumers using up to 100 units as well as the commercial users.

This, however, was despite pushing up costs for the middle class whose households consume about 200 units of power per month. Keter added that going forward, the Government would only sign agreements with power producers that offer low-cost power and would not renew any PPA for thermal plants that offer the most expensive power.

“We are now focusing on ensuring that the power coming to the grid is cheaper. We will not sign any Power Purchase Agreement that offers an electricity producer more than Sh7 per unit,” he said.

At Sh7 per kWh – which is however subjected to the add-ons to reach Sh23 per kWh, this would be comparable to the cost of geothermal, which is among the cheapest sources of power after hydro at about Sh4 per kWh. The other cheaper option is the Garissa Power plant which sells power at Sh5 per unit.

What must be done to address deep-rooted rot in Kenya’s power sector

Risk of underpricing

Keter also pointed out a drastic reduction in power costs risk setting off unstable utilities. He cited the case of South Africa’s Eskom that has for years subsidised cost of power but now faces collapse and is seeking a Government bailout. Ethiopia, which has for long offered power at rock bottom prices is also considering increasing its tariffs.

The structure of the power industry, analysts note, where politicians in the form of Cabinet Secretaries and Principal Secretaries have a say in nearly every decision has played part in denying Kenyans access to cheap electricity.

“All the institutions report directly to the ministry. And all the managing directors and board members of various institutions are appointed or approved by the Cabinet Secretary. Even the non-executive chairpersons are appointed by the president on the advice of the CS,” said Hindpal Jabbal, a power sector analyst.

“Further, the Principal Secretary sits on the board of each institution and has the leeway to influence, coerce, or arm-twist various decisions, such as the hiring and firing of senior management staff, selection of independent power producers (IPPs), the award of major contracts and the setting of electricity tariffs.”

And with high costs fast making electricity a luxury, Kenya is unlikely to grow its customer base as quickly as it planned to. Yet, for prices to come down, the country needs more customers to plug into the national grid.

Universally, it is an accepted practice to have a power reserve margin of between 12 and 15 per cent that can be used in case of emergencies, such as plant failure or during scheduled maintenance to ensure a constant supply.

In Kenya, the ideal reserve margin would be in the region of 300MW. But, the country has a surplus of 850MW.

And the structure of contracts that power producers sign with the government mean that they are paid even if their plants are idle, a cost factored in the power bills.

CS Keter noted the difference between what is produced and consumed is not huge enough to warrant concerns of surplus that is unaccounted for.

“We do not have idle power,” he insists even as data shows otherwise.

This is despite an April report by the World Bank that noted that growth in power production has not kept up with growth in consumption. The institution noted that while there has been a surge in the number of consumers, these are mostly domestic and many of them in rural areas that do not take as much power.

“Growth in consumption is low by international standards and has been slower than expected — contributing to the current situation of apparent surplus. This may reflect the fact that Kenya’s efforts to increase access have focused more on connections than on other interventions, such as appliance programmes, that would raise consumption,” said the World Bank report.

While the number of domestic consumers has tripled from about two million in 2013 to more than six million at the end of 2018, industrial consumers, who consume the bulk of electricity, have been growing at a much slower pace. There are about 3,900 such consumers.

Yet, despite their low numbers, they accounted for more than half of the power consumed last year, and about half of the money earned by power utilities.

Power infrastructure is another hurdle, and because it has failed to keep up with the growth in power generation, some parts of the country remain either in the dark or underserved by cheap power.

For instance, in the Western region, many residents rely on diesel generators and imports from Uganda. The infrastructure in place cannot move the power produced in areas like Olkaria to the homes and businesses in the area.

The 132-kilovolt (kV) line that would transmit power generated from cheap sources is in no shape to do so. Its replacement, a 400kV line from Olkaria to Lessos, with an extension to Kisumu, remains incomplete due to a lack of funds.

Instead, the region is served by thermal plants, and recently, power generator KenGen installed an additional 30MW generator at Muhoroni, increasing its capacity to 60MW. Kenya Power has to import from Uganda to bridge a deficit.

But under the import terms, Uganda exports to Kenya its most expensive power, which explains why Kenya pays Sh22 per kilowatt-hour of electricity (which is also subjected to the different add-ons) it imports. The Ministry, however, said it has entered an agreement with Uganda that will see the countries trade power both ways (import and export) at Sh10 per unit.

It is also the case in Northern Kenya, which is largely powered by expensive thermal power plants due to a lack of transmission infrastructure.

This premium price that the two regions have to pay is spread across all Kenyan power consumers.

Keter said the line from Olkaria to Kisumu will be completed next year February. It has been dogged by delays, he said, because of difficulties in securing the wayleave.

Almost all thermal plants are owned by private companies and enjoy contract supply terms of between 20 and 30 years plus. The plants generate electricity by burning diesel that then turns the turbines that generate power.

In June 2016, President Kenyatta directed the Energy Ministry to review contracts for IPPs that run thermal plants, with a view of terminating some to reduce the pain for consumers.

A taskforce was commissioned to review their contract, but its verdict was it would cost the government dearly to terminate or modify these contracts. It estimated that it would cost Sh66 billion to terminate the PPAs.

It suggested that it would be cheaper to let the contracts run their course. Some of the contracts extend beyond 2030, meaning consumers will continue to carry these costs for at least a decade.

The costs incurred by thermal plants reflect in electricity bills under the fuel cost charge and is one of the largest items that consumers pay for. Last year, Kenya Power paid thermal power plants Sh23.5 billion.

“We are not renewing any PPA for thermal plants that are expiring. One of them expired this year and another two are expiring over the next two years. We are also in talks with the owners of the plants evaluating the possibilities of migrating from diesel to liquefied natural gas (LNG) which is cheaper,” said Keter.