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Electricity bill to go up in Kenya

FINANCIAL STANDARD
By | May 17th 2011

By Morris Aron

Starting this month, Kenyans will witness another round of increase in the cost of living - they will be paying more for electricity and fuel.

Following a decision by Kenya Power and Lighting Company recently, the fuel cost component in the electricity bill has been revised to a 15-month high, while the weakening of the shilling against major currencies will see a unit of electricity cost a few shillings more as the power utility company factors the exchange rate risks in its billing charges.

Under the new pricing structure, the fuel cost charge – the cost of electricity generated from diesel – has been increased to Sh6.15, up from Sh5.73, the highest level in slightly over a year.

KPLC has also factored in an increase of Sh1.26 per unit as an adjustment to reflect the weakening shilling.

And with the latest increase in the price of diesel, the electricity cost is likely to surge even further.

The challenge for monetary policy is to reconcile a build-up in inflationary pressures with an economy that is growing at a modest pace and below potential. Consumer spending has been driven mainly by an increase in real disposable income as opposed to credit extension. In view of rising inflationary pressures and a weak labour market, the risk is that consumer spending could dip in coming months. Business investment has also not yet recovered in any meaningful way, as business confidence remains fragile against the prevailing charged politics

Fuel cost at Sh6.15, it means that homes, industrial and commercial enterprises that consume on average 635 million units of electricity monthly will pay an extra Sh267 million for power beginning this month.

Apart from the two charges, electricity consumers will still be billed for a number of other charges.

Fixed charges

KPLC charges a fixed charge of a Sh120 — which goes towards expenses like installation and maintenance of poles, power lines and equipment, as well as having a 24-hour customer care.

Then there is consumption charge, which is the actual electricity used within the billing period. On average, one unit is usually equivalent to one-kilowatt hour.

A kilowatt-hour is equal to 1,000 watts of power used for one hour.

It is the money from the consumption charge that KPLC uses to procure power from electricity generating companies, which it then retails to its customers given its role of an electricity distributor.

KPLC currently charges domestic consumers Sh2 per kilowatt-hour (Kwh) for the first 50 units, Sh8.10 per Kwh for consumption of between 51 units and 1,500 units and Sh18.75 for units above 1,500 units.

Electricity bill also contains the Energy Regulatory Commission levy, which is passed to the energy sector regulator at three cents per kilowatt-hour used.

Then there is the rural electrification programme levy, usually charged at five per cent of the cost of the units consumed, which is passed on to the Rural Electrification Authority for implementation of rural electrification projects.

Finally, under the bulging cost of electricity, there is the mandatory 16 per cent Value Added Tax that goes directly to the Kenya Revenue Authority.

The effects of the increment are now being felt far and wide with more consumers terming it insensitive and inconsiderate especially now when the cost of living is shooting through the roof as the price of basic foodstuff, transportation and housing costs rise.

It is not only the fuel cost charge component that is raising eyebrows, there are also concerns as to the manner in which KPLC bills consumers, the myriad components of the bill that make it hard to understand exactly what one is being charged for.

Cynthia Atamba, who works for Turnkey Africa, a software solutions company in Nairobi now pays more for electricity than when she started using the pre-paid system almost a year ago.

"At the start we were told that Sh10 guarantees one unit of electricity. Now, one is never sure what they will be getting and has to wait to load to see for themselves the number of units they get," explained Ms Atamba.

"The charges are too many, too varied and is a cause of concern as to whether we are really getting value for our hard-earned money."

Peter Kiilu, a banker, says KPLC should be considerate, especially now that the economy is harsh and the prices of basic commodities are on the upswing.

"It just shows the level of insensitiveness that KPLC has by immediately and in totality passing the full impact of the rise of oil to the end consumer even after promising not to," said Kiilu.

"KPLC being a monopoly and partly government owned should be more considerate and not fully be driven by the profit motive. It can for example hold back on some of the projects until we pass through the current plight".

Upward revision

The sentiments of Atamba and Kiilu stem from the decision by KPLC to revise upwards the fuel cost component of the total electricity bill a fortnight ago.

KPLC, however, maintains that it is not to blame for the rise in the fuel cost component of the electricity bill.

"KPLC is only a collector of the fuel cost charge, which it pays back to the fuel generators in total, and therefore that money does not constitute income to KPLC and consequently does not contribute to KPLC’s profits," said Migwi Theuri, a spokesman for KPLC.

"KPLC profits only come from sale of electrical units. Also, as the shilling weakens against the dollar, the exchange loss increases."

But even as the blame game shifts back and forth, it is now emerging that a good portion of the current increases are due to the increased role of independent power producers (IPPs)—which are private companies with profit being the main motive in supplying electricity to the national grid. KenGen’s reduced market share in the supply chain has certainly rocked the relatively stable pricing when it was the dominant player generating electricity.

In addition, a bulk purchase agreement tariff between the IPP s and the weakening of the shilling against other currencies has also been blamed for the price surge.

It all began in 2006 with a pricing tussle between KPLC and KenGen that was fired off by the refusal of the power distributor to pay higher bulk purchase rates upon the expiry of an earlier agreement to buy power at a discounted rate in July the same year.

This agreement was arrived upon at a time when demand for electricity was growing and its costs inhibitive to growth. KPLC had entered into an agreement with KenGen to buy power at Sh1.76 per unit.

When the duration of the deal expired, KenGen demanded a revision of the rates to Sh2.36 per unit citing rising costs of doing business.

It took the intervention of Treasury for KenGen to finally settle at Sh2.36 with the difference coming directly from Treasury—taxpayers’ money--to KenGen. But this rate has since changed and KenGen has since entered into the lucrative thermal energy generation business besides offering power generated from geothermal.

Since then, it has become increasingly hard for the Government to go the subsidy route as more and more independent power producers now control a larger fraction of the generation market and in the process making electricity provision a purely profit driven initiative.

Bulk tariff

It is also not clear what the bulk tariff arrangement with KenGen is and who settles what. Attempts to get KenGen’s side of the story proved futile.

Data from KPLC indicate that Independent Power Producers (IPPs) earned Sh8.8 billion of the Sh20.5 billion paid to producers with KenGen accounting 57 per cent of the market down from 75 per cent in 2006.

The rest went to the other players including Aggreko and IBERA.

As it stands, the cost of fuel is bound to get worse going into the future.

All indications are that IPPs will play a more significant role in the coming years as demand for electricity soars—a move that observers of the industry say will skew the arrangement in favour of higher pricing as the profit motive takes centre stage.

Poor weather has reduced the contribution of cheaper hydropower to the national grid at a time when demand for electricity has been on the rise, driven by the recovery of the country’s economy and connection of more Kenyans to the grid.

Experts say that unless drastic measures are taken to stall this development, Kenyans should forget the era of cheaper power—a development that is catastrophic to economic growth, as it raises the cost of doing business.

On Sunday, the price of fuel rose by an average of four shillings per litre—a move that sooner or later will be reflected in the electricity costs.

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