Longer wait for further cuts on electricity bills

It might take a little longer before your power bill can go down further in line with a presidential directive last year. 

President Uhuru Kenyatta had promised Kenyans a 30 per cent reduction in power costs, a pledge informed by a report of the Presidential Task Force on the review of Power Purchase Agreements (PPAs), which he set up to look into the high cost of power and how it can be reduced.

Under the new plan, the cost of power went down by 15 per cent from Sh24 per kilowatt to Sh20.4 by the end of December.

It was expected to decline even further by another 15 per cent to Sh16 per unit by the end last month, when the second phase of the reduction would have been implemented.

But the second reduction did not happen as had been planned, with details emerging that it now depends on the successful renegotiations of the PPAs Kenya Power has signed with the Independent Power Producers (IPPs). The talks between the Energy Ministry and IPPs have just commenced and could take a while before they are concluded. 

The government found little room to manoeuvre in honouring its promise on the second price reduction, having exhausted much of what was within its control in the first tranche that was gazetted in January this year.

While the Energy Ministry recently reported that the negotiations have kicked off in earnest, the process could be delayed following the expected push and pull as the government and IPPs revisit the complex power purchase agreements.

Mr Aleem Tharani, a representative from the Electricity Sector Association of Kenya (ESAK), explained that while the State was able to work on issues within entities such as Kenya Power and the Kenya Electricity Transmission Company (Ketraco), dealing with IPPs is a different ball game.

“When you look at the initial 15 per cent discount that the government was able to achieve, it was through plugging some holes,” he said.

“But the next 15 per cent will be a challenge because it requires coming together and agreeing on something with a contractual counterpart. You cannot bulldoze your contractual counterpart,” said Mr Tharani.

The renegotiation of the contracts that Kenya Power has with the electricity producers was one of the key recommendations given by the Presidential Task Force on the Review of PPAs.

The task force, which was formed in March 2021, reported back to the president in September. In its report, it recommended a 30 per cent reduction in the cost of electricity in the country.

The reduction was to be achieved by reforming the industry, including changes at Kenya Power as well as renegotiating PPAs with IPPs.

The task force had hoped that this would happen within four months, which would have meant the completion of the process by around January this year.

“Within four months, enter into and conclude negotiations with IPPs on reductions in PPA tariffs. Such negotiations to be within existing contractual arrangements,” said the task force in its report. 

Negotiation team

This however did not happen. One of the IPPs noted slow movement within the government at the onset of the implementation of the task force recommendations.

The IPP said while it had been approached by the State last year on renegotiating its PPA, the Energy Ministry had not followed up and as of January this year, the government had not set up a negotiation team.

Mr Tharani said contract renegotiation is not a simple matter and in the case of the PPAs that Kenya Power has signed with the IPPs, it could take a little more time.

“These are time-consuming elements. These are contracts that took two to three years to put in place. They are not going to be reviewed or changed overnight. We have to be realistic about what we can achieve in the short, medium and long term,” he said.

“I know this is an election year, and people like to make promises, but we have to be realistic because such contracts would take time to review.”

Some industry players claim Electricity Sector Association of Kenya (ESAK), which is a lobby group formed recently to push for the interests of IPPs, could have been formed to fight the task force’s recommendations.

However, Mr Tharani reckons it was a coincidence that the lobby was formed when the President set up the task force. 

“The Association was formed with a view of bringing together different players in the energy sector from a private sector perspective. It just so happened that the formation coincided with the president’s establishment of the PPA task force. It is an unfortunate coincidence if you can call it that,” he said.

“But in a way, it is a fortunate coincidence because the establishment of the task force brought a lot of negative light on IPPs, and our view on tackling some of that is that you have to respond in a collaborative manner. The private sector had to come together to respond to some of the accusations.”

He added that most IPPs are willing to have a sit-down with the government and Kenya Power.

The PPA task force in its report and even the Energy Ministry in its statements appear to be of the view that the renegotiations should yield a permanent reduction in PPA tariffs that feature in the remainder of the life of the contracts.

ESAK, however, is of the view that the review should be a short-term measure, which would give the government room to map out medium and long term plans that would ensure power remained affordable.

“These are contracts that have a life of 30 years. It is not uncommon to be faced with a situation where the parties have to sit down and relook what they agreed... maybe put the price down for one or two years but guarantee that if conditions improve they will relook the contracts again,” said Mr Tharani.

More than the other IPPs, thermal power producers are viewed as the bad boys of the power sector.

Kenya has had a love-hate relationship with the thermal IPPs despite saving the situation a few years ago when the country experienced rationing due to drought, which rendered much of the hydro capacity useless but ended up being costly due to the costs of acquiring the heavy fuel oil they use to generate power. The cost is passed on to consumers.

This is reflected in the power bill as the Fuel Cost Charge (FCC). FCC goes up whenever the country has to increase reliance on thermal generators whenever other cheaper power generators are not available due to factors such as scheduled or unscheduled outages of other plants or droughts that limit electricity from hydro plants.

The fuel acquired by the plants is, however, a subject of concern, with the task force noting that they should be audited, considering the huge difference in procurement costs by the different thermal power plants.

“Heavy fuel oil, which costs KPLC Sh12 billion annually, requires close supervision of the procurement as there are significant unexplained variances in pricing between stations of between 10 per cent and 60 per cent,” said the task force in its report.

Mr Tharani noted that in their PPAs, thermal power plants have clauses that require prudence when acquiring fuel to minimise the impact on consumers. He too, however, could not say whether these were adhered to.

“The contracts have mechanisms for checks and balances that deal with fuel procurement process that ensure that they keep the price at the lowest possible benchmark,” he said.