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How graft, dirty deals sank Kenya Power

By Macharia Kamau | October 8th 2021

A utility pole supporting wires for electricity distribution in Nairobi, Kenya on November 11, 2015. [Reuters, Siegfried Modola]

Contracts skewed heavily in favour of power producers, expensive commercial loans, high system losses, corruption, poor governance and political interference. While the list could go on, these may be the key factors that brought Kenya Power on to its knees.

When Interior Cabinet Secretary Fred Matiang'i spoke yesterday on reforming Kenya Power, he singled out Power Purchase Agreements (PPAs) that the firm has with electricity producers. The PPAs spell out how Kenya Power buys electricity from Independent Power Producers (IPPs) and have for long been blamed as among the contributors of the high cost of power.

Matiang'i alluded to shady deals that may have birthed some of the PPAs. He blamed the firm’s decline over time to the point of making losses last year to the PPAs that he noted are heavily skewed in the favour of the IPPs and appear to have been driven by vested interests.

“Needless to say, and it is good to be sincere, that it could be well be that in certain decisions made in the past, we may have missed on thing that we should have noticed earlier. But we would not like to go that direction, now the focus is to ensure that we reduce the cost of power,” he said yesterday after meeting the board and management of Kenya Power.

Matiang'i noted that the firm sinking into losses was largely due to the PPAs that guarantee power producers payments even when they do not offer feed the national electricity grid.

In the 2019/2020 financial year, KPLC posted a loss before tax of Sh7 billion (and a net loss of Sh939 million) and reported a negative working capital position for the fourth year in a row.

“All indicators (point) to ineffective Power PPAs that have left the company heavily indebted while ironically paying for excesses energy it does not need in take-or-pay arrangements blamed on poor negotiations and vested interests,” said Matiang'i.

“Besides high fixed capacity charges amounting to Sh47 billion, the PPAs are bound by Commercial Operation Dates (CODs) that are not aligned with the company’s power demand. This has often resulted in excess power generation even when the demand is low.”

He also noted how electricity system losses were contributing to high power bills.

In its annual report, the company reported system losses stood at 23.46 per cent in the period to June 2020, rising from 18.68 per cent to the current levels over a seven-year period. The acceptable international standard is 14 per cent.

This means out of every 100 units that the firm buys from power producers, it sells 76 units, with the balance being lost.

It categorises losses as technical and commercial, with technical losses attributed to the nature of the infrastructure, while commercial losses are due to theft by customers, including unscrupulous individuals who illegally tap the network, and even employees.

The money lost through system losses is recovered from consumers and in turn has a hand in pushing up the cost of electricity.

At 23.47 per cent, the system losses also exceed the 19.99 per cent limit approved by the Energy and Petroleum Authority (EPRA). This, the interior ministry noted, is due to lack of internal control measures put in place to mitigate losses including governance.

While Matiang'i focused on PPAs and the electricity, perhaps because they are deemed as low lying fruits in the quest for cheap power, Kenya Power has huge debts that are also pulling the firm down.

The firm has over the last decade borrowed heavily, with many of the loans that have been taken in the recent past being commercial loans that are fast maturing and have high interest rates.

Total borrowings grew to Sh122 billion in 2018, nearly three times the Sh43 billion the firm had borrowed as of 2013. The debt, however, has however gone down to Sh109.96 billion as of June last year but it is still a strain on the firm.

Of the Sh109.96 billion that Kenya Power owed lenders in June 2020, about half of it are loans by commercial banks. These are characterised by high interest rates, some as high as 11 and 12 per cent and are also fast maturing.

This is in comparison to concessional loans that have interest rates of between three and five per cent, while the repayments are over a long period of time, some stretching beyond 2030.

Because of this, interest rates continue to heavily pound the company’s earnings. The firm’s finance costs have over the years grown, rising to Sh12.5 billion last year from Sh2.5 billion in 2013.

Kenya Power has in the recent past said it is restructuring some of the commercial loans, which is expected to give it a breather.

The Last Mile Connectivity project has also had a heavy toll on the firm.

While it has significantly increased the number of Kenyans with access to electricity, this has not necessarily resulted in growth in revenues.

Over the last one and a half decades, Kenya’s rate of adding new connections to the national electricity grid has been one of the highest in Africa and possibly the world. The number of households and businesses with access to power has grown to over eight million this year from 686 000 in 2003.

The sharp rise in the number of customers did not, however, translate in sharp rise in the amount of power consumed.

Kenya Power has in the past noted that the last mile customers, majority of them in rural areas, consume about six units per month and in turn low revenues.

Other than bringing huge pool of customers with very low usage rates, the project had been characterised by fraud among contractors. The contractors who were provided with all equipment ended up charging customers for the same. They would, however, fail to remit the funds to Kenya Power. Such lines have since been disconnected.

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