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The real cost of State's bid to keep power bills down

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

The energy sector regulator may have artificially suppressed the cost of electricity in a bid to comply with President Uhuru Kenyatta’s directive to lower power costs for consumers.

The Energy and Petroleum Regulatory Authority (Epra) in January announced a new tariff, reducing power costs by 15 per cent and now appears to be pulling all stops to ensure this is not reversed.

The regulator has since kept the fuel cost charge (FCC) and the foreign exchange adjustments unchanged despite indications that they should have gone up, keeping up with the trend last year.

The two components of the power bill tend to determine the direction that electricity bills take on any given month.

The prolonged dry spell following depressed rains during the short rains season as well as the late onset and poor rains over the March-May long rains season saw the country rely heavily on thermal electricity and less on hydropower.

This usually has the effect of increasing the FCC as was evident last year.

The component rose from a low of Sh2.58 per unit at the start of 2021 to Sh3.3 per unit in June before hitting Sh4.63 per cent by December.

The foreign-exchange rate fluctuation adjustment has also remained constant despite a weakening local currency. The shilling has dropped to a low of Sh115 to the US dollar this month, having gone down from Sh109 to the dollar early last year.

Epra did not respond to our queries on how it has managed to tame prices despite the same conditions that had pushed them up last year.

FCC compensates thermal power producers for costs incurred when acquiring the heavy fuel oil they burn to produce electricity, while the forex adjustment cushions power sector players against a weak local currency when servicing loans advanced in foreign currency.

According to data by the Kenya Bureau of Statistics (Knbs), there was a steady increase in reliance on thermal power producers over the last half of 2021.

The number of units that the costly power producers fed into the national electricity grid increased to 206.6 million kilowatt-hours (kWh or units of electricity) in January this year.

This was up from 84 million units in June 2021. Higher thermal power being fed into the grid would ordinarily see FCC go up.

There was a corresponding decline in the power generated by both the hydro and geothermal power plants, which are the cheapest power sources. Hydro plants were affected by the weather, while several of the geothermal plants had been undergoing maintenance.

The forex charge, FCC, and water charge are reviewed every month. The inflation adjustment, on the other hand, is reviewed every six months. In retaining the variables at the same level, Epra has been able to sustain the 15 per cent reduction in power cost.

In January, Epra published a new tariff that reduced power costs by 15 per cent. This was in line with a directive by President Kenyatta, who in December 2021 instructed the power sector agencies to implement a 30 per cent cut in power prices.

This was to be done in two tranches of 15 per cent each, the first of which took place in January, but power authorities are yet to figure out how to implement the second cut despite the March 31 deadline lapsing.

While it has held the prices stable for the last four months, the Energy Ministry appears lost as to how it will deliver the second tranche of the power cost reduction.

It was dependent on a successful renegotiation of Power Purchase Agreements (PPAs) that Kenya Power has signed with Independent Power Producers (IPPs). The process has, however, been dogged by delays, with reports indicating that the ministry is yet to set up a team to undertake renegotiations.

The Energy Ministry in a recent statement said it has already kickstarted talks with IPPs. “The Ministry of Energy has engaged in extensive negotiation sessions with 77 IPPs, which have established and clarified a pathway to the delivery of the next 15 per cent reduction in power tariffs,” said the ministry, dismissing reports that it has been experiencing difficulties in the negotiations as “unqualified speculation.”

However, the ministry has not indicated when it expects to conclude the negotiations. Industry players also note that while the ministry is seeking to rush the process and possibly conclude it in a matter of weeks, it could take longer.

“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,” said Aleem Tharani, a representative of the Electricity Sector Association of Kenya in a recent interview.