Why power prices went up and what it means to consumers

Kenya Power workers repair damaged power lines along Moi Avenue in Mombasa. [File, Standard]

The cost of electricity will this month shoot up following a shift in the stand by the authorities to pass to consumers the impact of higher oil prices, a weak shilling and the general higher cost of living.

The Energy and Petroleum Regulatory Authority (Epra) yesterday increased three components of the power bill - the fuel energy cost charge, the foreign exchange rate fluctuation adjustment, and the inflation adjustment. It has throughout this year held these variables constant, suppressing any hikes in cost of power and supporting the reduction effected early in the year following a presidential directive.

The fuel cost charge (FCC) has increased 46 per cent to Sh6.79 per unit of electricity from Sh4.63.

The foreign exchange adjustment has risen 87 per cent to Sh1.37 per unit from 73 cents per unit. The two components are at their highest since 2018, when Epra revised the electricity tariff. Inflation adjustment rose 42 per cent to 67 cents per unit from 47 cents.

The higher variables will mean that a consumer spending Sh100 gets 5.19 units from 6.27 units of electricity previously. Spending Sh500 will give you 25 units compared to 31 units while spending Sh1,000 will get you 51.88 units down from 62.75 units.

"Notice is given that all prices for related electrical energy specified in Part II (the Schedule of Tariffs 2018) will be liable to a fuel energy cost charge of plus 679 Kenya cents per kilowatt hour (kWh) for all metre readings to be taken in September," said Epra in relation to FCC in a gazette notice yesterday.

In paying FCC, consumers cushion thermal power producers - which burn heavy fuel oil to generate electricity - from the high cost of fuel. The cost of crude oil, which informed the new fuel charge, has risen to an average of $117.53 (Sh14,103) in August from $82 (Sh8.140) in January this year.

The Forex adjustment, also a pass-through cost, protects the power sector players from the volatility of the local currency when they are repaying loans, most of them denominated in US dollars as well as when they are importing equipment and other materials not available locally. The shilling has weakened to trade at an average of Sh120.64 to the US dollar in August from Sh113.58 in January.

Inflation adjustment protects the industry from the high cost of acquiring goods and services locally. Kenya Power effected the changes early this week. It is the first time that power prices will change this year, with the authorities having held the three variables constant since January. This ensured that power prices would not go up, defying the steep rise in the cost of crude oil, weakening of the shilling against the US dollar and high inflation, factors that would have ordinarily resulted in higher cost of electricity.

Epra has the leeway to change FCC and the forex adjustment every month depending on the movement in the price of fuel and the shilling against the US dollar. It changes inflation adjustment every six months depending on the average rate of inflation over the half-year period. The new rate announced yesterday will be in place between September and December.

This move by Epra supported the 15 per cent reduction in power prices that the regulator gazetted in January following a nudge by former President Uhuru Kenyatta. A 30 per cent reduction was among the recommendations of the Presidential Taskforce on Review of Power Purchase Agreements (PPAs) formed last year March and reported back with the recommendations in September.

The first round of power price cuts was achieved largely by reducing earnings for Kenya Power. The second round of price cuts would have lowered power bills by another 15 per cent to achieve the taskforce's 30 per cent recommendation remained elusive as Independent Power Producers (IPPs) played hardball, blocking attempts by the Energy Ministry to open for review the contracts that they have with Kenya Power.

While the variables have gone up, the energy charge remained at the same levels following the January reduction with ordinary domestic customers an energy charge of Sh12.60 per unit while the domestic (lifeline customers - who use under 100 units a month) paying Sh7.70 per unit. The cut in power prices early this year did not go well with the International Monetary Fund (IMF) that has been supporting the restructure and turnaround of Kenya Power, among other State-owned enterprises.

IMF in a recent report noted that the price cuts are expected to see Kenya Power lose revenues to the tune of Sh26.3 billion per year. This could complicate the firm's turnaround plans in that while it may have bounced back to profits last year after reporting losses in 2020, it still has a negative working capital according to its latest financial results.