The government is embarking on a major restructuring of Kenya Power that is expected to put the company firmly back on a growth path, but one that will also see it give up a huge chunk of its assets.
In the plan that received Cabinet approval last week, Kenya Power will offload its transmission lines to Kenya Electricity Transmission Company (Ketraco) which are estimated at Sh20 billion.
It will be compensated at market rates but the money is expected to go towards reduction of the company's debt.
In a memo by the Ministry of Energy and the National Treasury, the government will also pay Kenya Power Sh19.4 billion owed by the Rural Electrification and Renewable Energy Corporation (Rerec) for work that Kenya Power did on behalf of the corporation.
The Kenya Power board is also set to look radically different, with the government now saying there will be seats reserved for local investors who hold a 49.9 per cent stake in the firm.
The government, which has a 50.1 per cent shareholding, has previously appointed all the directors.
The government will also push Kenya Power to reduce system losses from the current 22.4 per cent to 14.4 per cent within three years, which might have an impact on consumers in terms of lower electricity tariffs.
“The KPLC transmission assets with a book value of Sh20.2 billion as at June 30, 2022, will be valued and acquired at market value through the use of government on-lent loans for onward transfer to Ketraco,” said the proposal to Cabinet.
The transfer of assets will see Kenya Power’s assets reduce to around Sh255 billion, from the current Sh275 billion.
The value of the transmission infrastructure that Ketraco is set to take over might, however, be higher than the estimated Sh20 billion and would be determined after a valuation is undertaken.
If the restructuring goes according to plan, Ketraco will also acquire the transmission lines owned by Kenya Electricity Generation Company (KenGen) used to move power from electricity generating plants and onto the national grid, including the line that evacuates power from Olkaria I AU (Additional Unit) and Olkaria IV a to Suswa.
"KenGen developed the transmission line on loan on behalf of Ketraco, at an estimated cost of Sh5.3 billion June 30, 2022,” says the proposal, adding that the requisite resources would be provisioned for.
“The transfers are intended for Ketraco to assume ownership of all transmission assets in line with its mandate.
Additionally, Ketraco will assess the possibility of monetising some of its transmission assets as a means of funding future infrastructure projects.”
The sale of the transmission infrastructure is expected to enable Kenya Power to reduce its total debt to Sh83.84 billion.
The firm's total borrowing stood at Sh103.8 billion as at June 2022, of which Treasury said Sh64.1 billion is government on-lent loans.
The company has since the onset of the Covid-19 pandemic enjoyed a moratorium on repayment of government loans but this is set to end next year in June.
The conclusion of the transaction will see Ketraco emerge as an even more influential electricity sector player.
Other than the growth in its transmission infrastructure, the firm was in December 2021 designated as the system's operator - the role was previously played by Kenya Power but there was change following concerns of conflict of interest.
The systems operator decides which power-generating plants supply electricity to Kenya Power at any particular point in time.
The law provides that the system's operator should neither be a power plant operator nor the electricity off-taker to avoid instances of conflict of interest.
The government also said it would pay Kenya Power the money it is owed by Rerec. Kenya Power has been undertaking the operation and maintenance of rural electrification schemes (RES) that are aimed at deepening connectivity in rural Kenya.
Rerec is charged with expanding electricity connectivity to areas that might be seen as not economically viable for Kenya Power.
These include the Last Mile Connectivity Project in which the company spent its funds on condition it would be compensated by the State but the repayments have been slow and in turn caused a strain on Kenya Power.
The memo also said Treasury and the Energy ministry would push for lower system losses - the difference between what Kenya Power buys from electricity generators and what it sells to consumers.
The losses stand at 22.4 per cent and the goal is to reduce this to 14.4 per cent which, the government noted, could yield a saving of Sh6 billion.
Some of the power lost between the point of generation and consumption is recovered from the consumers and there are expectations that some of the savings could be passed to users in the form of a lower tariff.
The Energy and Petroleum Regulatory Authority (Epra) allows the power distributor to recover 19.9 per cent of the losses from consumers.
System losses are made up of two components - technical and commercial losses. Technical losses occur during the transmission and distribution of electricity while commercial losses are theft by consumers, who are in some instances helped by Kenya Power staff.
The 22.4 per cent system losses comprise four per cent transmission losses shared by Kenya Power and Ketraco, eight per cent technical losses and 10.4 per cent commercial losses.
“KPLC, with support from the Ministry of Energy and Petroleum, the National Treasury and Economic Planning, Ketraco and other sector entities will develop and implement a turnaround strategy which includes the reduction of system losses from the current 22.4 per cent to 14.4 per cent… in three years,” said the memo.
It added that commercial losses would go down by five per cent, technical losses by two per cent and another one per cent on transmission losses.
“While reduction of commercial losses may not require much investment, one per cent reduction translates to Sh1.2 billion in additional revenue,” said the memo.
“The focus is therefore on reducing the commercial losses to at least below five per cent. This reduction in commercial losses would realise Sh6 billion over the three years.”
Kenya Power's board is also set for a restructure as the government seeks to ease control as well as delink its development initiatives and leave the firm to operate on commercial principles.
This will in part entail minority shareholders voting in their preferred board directors, as opposed to the current setup where all the directors need to have government backing during elections at the firm’s annual general meetings.
“The structure of the board shall comprise a number of directors, which fairly reflects the company’s shareholding structure.
“A mechanism shall be instituted which shall actualise the fair representation of shareholders by allowing the following during the AGM. The majority shareholder (government) will nominate and vote in their preferred directors to fill their proportionate allotment,” said the memo.
It added that the minority shareholders will nominate and vote in their preferred directors to fill their proportionate allotment.
The Kenya Power board will soon be convening a special AGM to allow shareholders to amend the company’s memorandum and articles of association to allow restructuring of the board.