Kenya Power's transfer of Sh20b assets to Ketraco gathers pace

The planned overhaul of the electricity distributor mooted in May will see it surrender its transmission lines to its sister State-owned agency. [iStockphoto] Kenya Power, the monopoly electricity distributor, has set rolling plans for the transfer of assets worth billions of shillings to its sister State-owned company, Kenya Electricity Transmission Company (Ketraco). The proposal is part of industry-wide reforms initiated by the Kenya Kwanza administration. The Cabinet approved the plan in May of this year, which will see Kenya Power surrender its transmission lines to Ketraco, with an approximate valuation of Sh20 billion. In preparation for the transfer, Kenya Power plans to hire a transactional advisor to guide the process and ensure that the assets are transferred at commercial market value. The government believes that the surrender of transmission infrastructure will help Kenya Power enhance its efficiency and restructure its balance sheet, with the sale of the transmission infrastructure expected to enable the utility firm to reduce its total debt to Sh83.84 billion. The assets will be acquired by Ketraco at market value, with the deal allowing Kenya Power to offset previous loans provided by the government. Upon completion of the transaction, Ketraco will emerge as a significantly more influential player in the electricity sector, at a time when Kenya Power is under pressure from manufacturers to supply reliable and affordable power to businesses. The assets that Kenya Power will relinquish, located throughout the country, comprise transmission line equipment, land, buildings, and rights of way, including 11 substations and over 1,000 kilometres of transmission lines, over 2,600 electricity towers and prime land situated in Nairobi, Nyanza, Central Kenya, and the Coast regions. Under the deal, Kenya Power and Ketraco will enter into an operations and maintenance agreement to oversee the operations and maintenance of the lines after their transfer. Kenya Power will also assume responsibility for maintaining and operating the network for a minimum of 10 years. "The consultant is to carry out professional valuation, transaction advisory-consultancy services that would assist KPLC obtain market values for transfer of transmission line assets," says Kenya Power. The assignment is expected to be completed within 12 months from the date of signing the contract. As of June 2022, Kenya Power's total borrowing reached Sh103.8 billion, with the Treasury stating that Sh64.1 billion of that amount consisted of government on-lent loans. Since the onset of Covid-19 over three years ago, Kenya Power has been granted a moratorium on the repayment of government loans. However, this concession is scheduled to terminate in June of next year. Ketraco was established in 2008 to collaborate with electricity distributor Kenya Power. Ketraco is charged with overseeing the management of high-voltage electricity transmission lines. Kenya Power, which serves over nine million customers, faced scrutiny in August following a nationwide power outage, one of many in the recent past. The outage lasted for more than 12 hours in some areas, resulting in substantial losses for businesses due to disruptions. Kenya Power purchases electricity from generators and transports it through transmission infrastructure owned by Ketraco. The electricity is then stepped down to the electricity distribution network owned by Kenya Power and ultimately delivered to consumers' premises. Once Ketraco's infrastructure transmits the electricity from the power producers, Kenya Power assumes responsibility for distribution and retail, which is accomplished through mid and low-voltage power lines. Previously, the government rejected proposed legislation that would require Kenya Power to compensate businesses for power outages lasting more than three hours in a single day. Business leaders argue that frequent blackouts from Kenya Power are hindering economic growth. Small businesses Manufacturers, commercial building owners, warehouses, hospitality establishments such as hotels, supermarkets, hospitals, educational institutions, farmers and other small businesses like salons and barber shops require a consistent supply of electricity. Extended power outages typically result in losses and additional expenses from the use of generators. The frequent blackouts caused by supply shortages and ageing infrastructure have compelled most businesses and affluent customers to invest in standby generators or solar systems. Experts say Kenya Power needs to invest billions of shillings in upgrading and expanding its ageing network in the coming years. They also recommended revamping its dilapidated transmission network to keep pace with growing demand and eliminate erratic power supply. Several companies, universities, and factories have opted to switch to solar systems for internal use, abandoning Kenya Power. This ensures a reliable power supply and reduces operational costs. The conclusion of the transaction will see Ketraco emerge as an even more influential electricity sector player. Other than the growth in its transmission infrastructure, the firm was in December 2021 designated as the system's operator - the role was previously played by Kenya Power but there was change following concerns of conflict of interest. The systems operator decides which power-generating plants supply electricity to Kenya Power at any particular point in time. The law provides that the system's operator should neither be a power plant operator nor the electricity off-taker to avoid instances of conflict of interest. Rural electrification The government also said it would pay Kenya Power the money it is owed by the Rural Electrification and Renewable Energy Corporation (Rerec). Kenya Power has been undertaking the operation and maintenance of rural electrification schemes (RES) that are aimed at deepening connectivity in rural Kenya. Rerec is charged with expanding electricity connectivity to areas that might be seen as not economically viable for Kenya Power. These include the Last Mile Connectivity Project in which the company spent its funds on condition it would be compensated by the State but the repayments have been slow and in turn caused a strain on Kenya Power. A Cabinet memo on the impending deal said the Treasury and the Energy Ministry would push for lower system losses - the difference between what Kenya Power buys from electricity generators and what it sells to consumers. The losses stand at 22.4 per cent and the goal is to reduce this to 14.4 per cent which, the government noted, could yield a saving of Sh6 billion. Some of the power lost between the point of generation and consumption is recovered from the consumers and there are expectations that some of the savings could be passed to users in the form of a lower tariff. The Energy and Petroleum Regulatory Authority (Epra) allows the power distributor to recover 19.9 per cent of the losses from consumers. System losses are made up of two components - technical and commercial losses. Technical losses occur during the transmission and distribution of electricity while commercial losses are theft by consumers, who are in some instances helped by Kenya Power staff. The 22.4 per cent system losses comprise four per cent transmission losses shared by Kenya Power and Ketraco, eight per cent technical losses and 10.4 per cent commercial losses. "KPLC, with support from the Ministry of Energy and Petroleum, the National Treasury and Economic Planning, Ketraco and other sector entities will develop and implement a turnaround strategy which includes the reduction of system losses from the current 22.4 per cent to 14.4 per cent... in three years," said the memo. It added that commercial losses would go down by five per cent, technical losses by two per cent and another one per cent on transmission losses. "While reduction of commercial losses may not require much investment, one per cent reduction translates to Sh1.2 billion in additional revenue," said the memo. "The focus is therefore on reducing the commercial losses to at least below five per cent. This reduction in commercial losses would realise Sh6 billion over the three years." Kenya Power's board is also set for a restructure as the government seeks to ease control as well as delink its development initiatives and leave the firm to operate on commercial principles. This will in part entail minority shareholders voting in their preferred board directors, as opposed to the current setup where all the directors need to have government backing during elections at the firm's annual general meetings. "The structure of the board shall comprise a number of directors, which fairly reflects the company's shareholding structure. "A mechanism shall be instituted which shall actualise the fair representation of shareholders by allowing the following during the AGM (Annual General Meeting). The majority shareholder (government) will nominate and vote in their preferred directors to fill their proportionate allotment," said the memo. bngugi@standardmedia.co.ke

Kenya Power's transfer of Sh20b assets to Ketraco gathers pace

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