Weak shilling to push up power bills, again

An electric meter that measures power usage.

Power prices are set to go up this month as the shilling weakens against the United States currency.

The Energy and Petroleum Regulatory Authority (EPRA) on Friday indicated power consumers would this month pay 4.52 cents per kilowatt-hour (KWh) in foreign exchange costs.

This is the highest level since August last year when consumers paid 5 cents per unit of power. It has throughout this year remained low owing to a stable shilling, which has however weakened over the last few weeks.

The shilling has weakened over the last month to a low of Sh102.92 to the US Dollar on Friday from the mean exchange rate of Sh101.28 at the beginning of June.

"… notice is given that all prices for electrical energy… will be liable to a foreign exchange fluctuation adjustment of plus 4.52 Kenya cents per kWh for all meter readings to be taken in July," said EPRA in a Kenya Gazette notice.

The forex cost has since March been in the negative and stood at Sh –0.01 per unit in June, which meant that consumers were credited with a few free units whenever they bought tokens. This might have, however, been eroded by other charges such as the fuel cost charge that had rallied to a high of Sh3.75 per unit in May.

The Foreign Exchange Fluctuation Adjustment (FERFA) component on the power bill is a pass-through cost that cushions power sector players from currency volatility of the shilling when incurring costs denominated in foreign currency.

Loans advanced to power sector firms for infrastructure projects such as power generation plants and transmission lines are usually in US dollars. There are also instances where the loans are in Japanese Yen or Euros.

Whenever the Kenyan shilling weakens against these currencies, the borrowers usually use more of the local currency to repay these debts and these costs are usually passed on to consumers, which are seen in the foreign exchange fluctuation component in the bill.

There is a push to increase the amount of shilling denominated debt to the power sector as well as shift to base the Power Purchase Agreements (PPAs) signed between electricity generators and Kenya Power in local currency. This would cushion power consumers from currency volatility.

Though a long term plan, the energy industry regulator is championing the campaign to increase the number of energy infrastructure projects financed in the Kenyan shilling.

This will be through tapping into the Kenyan institutional and individual investors as well as marketing local fundraising exercises by power players to international investors.

Should the plan come to fruition, it will, however, not affect PPAs that power producers currently have with Kenya Power and financial obligations to lenders would not be affected. The debts and purchase agreements are usually long-term, with many expected running in excess of 20 years.

According to the Gazette notice by EPRA, Inflation Adjustment for the six months to December 2019 will remain unchanged at 25 cents. The charge enables power industry players to pass the increase in the cost of living to consumers and is adjusted every six months.

Fuel cost charge (FCC) will be at Sh3.67 per unit in July, which is similar to levels in June. It has been climbing since August last year when it stood at Sh2.50.

The FCC tends to go up whenever the country turns on thermal electricity generators that use costly heavy fuel oil to produce power. The cost of purchasing the fuel is also passed on to power consumers, another measure that protects the industry’s profits.

A dry spell earlier in the year, as well as the below-average rains over the March-March season, might see the country further rely on the thermal plants.

The Meteorological Department expects parts of the country to receive modest amounts of rainfall up to August, which might mean less reliance on the diesel plants.

“The poor performance of the “Long Rains” March-May 2019 led to decreased water levels in hydroelectric power generating dams. The levels are, however, likely to increase in the Turkwel and Sondu Miriu dams in the coming three months as a result of the good rainfall expected over the catchment areas of western Kenya,” said the Met Department in a recent report.