How energy sector agencies reneged on deal to support low electricity cost

State-owned companies left Kenya Power to shoulder burden of 15 per cent subsidy implemented in January last year. [iStockphoto] State-owned entities within the energy sector may be in breach of an agreement reached to support Kenya Power in implementing lower electricity prices last year. The companies were to forego portions of their revenue to support the 15 per cent reduction in the cost of electricity that came into effect in January 2022. This was in a bid to ensure that Kenya Power, which has recently emerged from loss-making, did not suffer huge revenue gaps. The firms, however, left Kenya Power to bear the burden. The tariff reduction is expected to have resulted in a revenue shortfall of Sh26.3 billion over the 12 months to December 2022. To cushion the company from huge losses, the Energy ministry got commitments from KenGen, the Geothermal Development Company (GDC) and the Kenya Electricity Transmission Company (Ketraco) to chip in and support the government's efforts in lowering power prices. In the plan, Kenya Power would through internal cost-saving measures contribute Sh7.85 billion while the three other firms would contribute Sh4.35 billion, bringing the total contribution by the parastatals to Sh12.2 billion over the period that the tariff was in place. Treasury would pay the difference of Sh14.1 billion, which together with the Sh12.2 billion from the power sector agencies would cover the Sh26.3 billion revenue shortfall. KenGen was expected to contribute Sh3.5 billion, GDC Sh346 million and Ketraco Sh500 million. This would be through discounts on the power KenGen sells to Kenya Power and reduced wheeling charges by Ketraco. Kenya Power uses high-voltage transmission lines owned by Ketraco to move power from generating plants over long distances to its own network for distribution to customers. GDC would on the other hand give KenGen a discount on steam charges. The company owns a number of wells at Olkaria, Naivasha, and has a commercial arrangement with KenGen which uses the wells for power production for a fee. The National Treasury committed to pay Sh14.1 billion in two tranches - one over the 20221-22 financial year while the balance will be made over the current financial year and cover the gap that occurred during the July - December half. Kenya Power in its annual report noted that Treasury made good its promise to pay its share and had already disbursed Sh7.05 billion over the January-June half. The Auditor General, however, noted KenGen, GDC and Ketraco did not make any contributions and could be in breach of the commitment they made with the Energy Ministry and Kenya Power. Sector reforms The 15 per cent reduction in power prices was implemented following a directive by former President Uhuru Kenyatta, acting on recommendations by the Presidential Taskforce on the Review of Power Purchase Agreements. The taskforce had recommended a wide range of sector reforms, key among them the reduction of the end-user electricity tariff by 33 per cent. This would be achieved by ridding State-owned entities off inefficiencies and the renegotiation of power purchase agreements (PPAs). "The impact of (the tariff reduction) was a revenue reduction estimated at Sh26.3 billion based on the December 2021 tariff pricing components," said Kenya Power in its recently published annual report. The first 15 per cent was to be achieved through enhanced efficiencies across the electricity supply chain, while the second phase was to be anchored on the gains achieved from the renegotiation of PPAs. "To ensure the sustainability of the company and the sector by extension, the Ministry of Energy obtained commitments amounting to Sh12.2 billion (of which Sh7.85 billion was KPLC efficiency and sales gains) from semi-autonomous government agencies (SAGAs) within the electricity sub-sector," noted the report. "The residual deficit of Sh14.1 billion was taken up by the National Treasury with the aim of ensuring that the revenue gap was entirely covered, in the year under review 50 per cent of this amount was disbursed to KPLC with the balance expected to be availed in the subsequent financial year." The Auditor General in a report following the audit of Kenya Power's financial results for the year to June 2022 noted that KenGen, GDC and Ketraco failed to meet the commitment made to the Energy ministry. "KPLC implemented the tariff reduction from January 2022 but the other agencies did not implement the cost reduction measures as per respective commitments... consequently the company did not realise full revenue support occasioned by the 15 per cent tariff reduction," said Auditor General Nancy Gathungu in her report accompanying Kenya Power's annual report, adding that the entities are in breach of the agreement. The lower tariff saw electricity prices come down, with consumers under the Domestic Lifeline category consuming 50 units of power paying Sh796 down from Sh945 in December 2021. The low prices were in place between January and August 2022 but have since gone up to Sh963 in September and over Sh1,000 this month as the Energy and Petroleum Regulatory Authority (Epra) increased the fuel and forex cost adjustments. Households consuming 200 units per month also saw a drop to Sh4,370 in January 2022 from Sh5,200 in December 2021. Prices went up to Sh5,040 in September last year and further up to Sh5,278 this month. While Epra is yet to publish another tariff, higher fuel, forex and inflation adjustment costs have resulted in higher power costs over the last few months. Epra is legally empowered to change the fuel and forex adjustments every month, and the inflation adjustment every six months based on prevailing conditions. New tariff Following the tariff reduction, the regulator retained these variables at the same levels between January and August last year, a move that was critical in supporting the 15 per cent reduction that happened when it published the new tariff at the start of the year. Holding the variables at the same level over the eight months was despite indications that the cost of electricity should have increased over the period going by the weakening of the shilling, the rise in the of petroleum products globally as well as the high cost of living in the country. The prolonged dry spell, following depressed rains over the last three years meant that Kenyans relied heavily on thermal electricity and less on hydropower. This was made worse by high crude oil prices that surged last year on account of increased demand as economies accelerated recovery from the Covid-19 pandemic as well as the challenges occasioned by the Russian invasion of Ukraine. This usually has the effect of increased fuel cost charge (FCC). This component of the power bill remained the same over the eight-month period at Sh4.63 per unit. It only started going up in September to Sh6.79 per unit and recently hit Sh7.18 per unit. The foreign-exchange rate fluctuation adjustment had also remained constant at 73 cents per unit of electricity between January and August despite the shilling weakening to historical lows against the US dollar. Heavy fuel The forex cost adjustment rose in September to Sh1.37 and Sh1.93 per unit of power consumed this month. The 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. The cheap power tariff has since lapsed with consumers reporting high power bills beginning this month. Kenya Power's revenue grew 9.2 per cent to Sh157.35 billion in 2022 compared to Sh144.12 billion in 2021. The company, however, noted that the revenues could have been higher but were dented by the lower tariff. "Growth in revenue was, however, curtailed in the financial year due to a 15 per cent reduction in the end-user tariff, during the second half of the year," said the annual report. "The tariff adjustment followed a recommendation by the Presidential Taskforce on the Review of Power Purchase Agreements to reduce the cost of electricity by 30 per cent with effect from January 1, 2022. "The impact of the 15 per cent tariff reduction on Kenya Power was a revenue shortfall estimated at Sh13.15 billion for the six months period ended 30th June 2022." The company's profit after tax more than doubled to Sh3.5 billion from Sh1.49 billion, lifted by a lower income tax expense, which dropped to Sh1.62 billion from Sh6.7 billion in 2021. KenGen's revenues grew to Sh49.23 billion over the year to June 2022, most of it from the sale of electricity to Kenya Power. Over a similar period, KenGen said it paid GDC Sh4.36 billion as steam costs. Ketraco was, on the other hand, paid Sh2.67 billion by Kenya Power in wheeling charges but is still owed Sh4.57 billion.

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