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Why State bid to cut power bills could short the circuit

Why State bid to cut power bills could short the circuit

When President Uhuru Kenyatta was sworn into office in April 2013 for his first term, the cost of electricity for a household consuming 200 units of power monthly was on average Sh3,288.

The same household last month paid Sh5,019, according to data by the Kenya National Bureau of Statistics (KNBS), a 52 per cent increase in eight years.

Reducing the cost of power for household and industrial consumers was one of the Jubilee government’s election pledges in the run-up to the 2013 general election, but it was not delivered.

And with less than a year to the end of his final term, President Kenyatta two weeks ago gave Kenyans what could be an early Christmas gift, announcing a 33 per cent reduction in the cost of power in the next few weeks.

This will see consumers pay an average of Sh16 per kilowatt-hour (kWh) from the current Sh24 a unit.

However, millions of consumers will miss out on the planned cut on electricity prices, considering that it will benefit domestic consumers who use more than 100 kilowatt-hours (kWh) per month and do not enjoy the State subsidy that currently benefits those who consume less than 100 units monthly. This time round, the government says it has figured out the cause of the problem of the ever-rising power bills and has a solution for it.

This follows recommendations of the Presidential Task Force on Review of Power Purchase Agreements (PPAs) that the country’s sole electricity distributor, Kenya Power, has with different electricity producers.

Interior Cabinet Secretary Fred Matiang’i got to work last week, announcing a raft of measures to reform the firm as well as evaluating ways of tackling the issue of PPAs, in what could see power producers take a haircut.

The agreements are said to be heavily skewed in favour of the independent power producers (IPPs), with Kenya Power sometimes having to pay them even when they have not fed a unit of electricity to the national power grid.

“We have taken certain tough decisions, especially in relation to the PPAs. Effective today, we have suspended any negotiation on any new PPAs. We are going to deal with (those) that we have in place,” Mr Matiang’i said.

“We are going to do a forensic audit on systems and procedures at KPLC.”

But will the IPPs play ball and agree to renegotiate their contracts?

Victor Ogalo, head of policy research and public-private dialogues at the Kenya Private Sector Alliance (Kepsa) said terminating or forcefully reviewing the contracts could be costly for the country.

“A number of these contracts are guarded by laws that are outside this country. This is such that should there be any breach of contract, it could be costly for us,” he said.

“Internationally bound contracts can be costly as we have seen in the past.” He said the task force did a good thing by recommending that the expiring contracts should not be renewed and the existing contracts be reviewed within the law.

“The risk we run should we try to stop them when the contracts are still active is that we may have to pay those people heftily,” said Mr Ogalo.

Restructuring Kenya Power, he said, offers numerous opportunities for bringing down the cost of electricity.

“We all want cheaper power. In addition to reviewing the PPAs, there are other avenues to reduce the cost of power’” he said.

“If you think about the company’s bloated workforce, the inconsistent billing, especially for power consumers on post-pay, much of which could be guesswork, as well as the high level of electricity system losses, there is room to cut the cost of power.”

Ogola further said there is need to look into why State-owned power producer KenGen offers fairly low rates for electricity sold to Kenya Power.

KenGen sells electricity to Kenya Power at a wholesale price of about Sh7 per kWh, while some of the IPPs sell the same at about Sh10.

Companies that use heavy fuel oil to generate electricity, on the other hand, sell a unit of power at varying rates, with one firm being paid Sh173 per kWh, according to details provided by Kenya Power in its annual report for the year to June 2020. The rates at which IPPs sell to Kenya Power are before taxes and levies are loaded, bringing the cost of power to about Sh24 per unit, mainly blamed on thermal producers.

“KenGen, the largest power producer, is paid a price we would all want. The company is paid around Sh6 per kilowatt-hour. The amounts paid to IPPs differ by big margins,” said Ogalo.

“Why would one producer be paid Sh6 and another Sh175? We do not understand why there is no framework for the pricing of electricity for power producers.

“In normal market systems, things do not work like that, and it might mean that there are cartels within Kenya Power who are negotiating this contract at a higher price.”

The difference between what KenGen is paid and what the other producers are paid has been the subject of a probe by Parliament. The National Assembly’s committee on energy recently met with electricity sector players in a bid to clear the air on the issue. The committee took up the matter following a query by Garissa Township MP Aden Duale in June to the Energy ministry, which the MPs said was not answered satisfactorily.

In one of the meetings with industry stakeholders, the committee heard that some of the IPPs rode on having delivered major power projects in other markets globally, giving them an edge in negotiations with Kenya Power.

Kenya Tea Development Agency (KTDA) Power Company General Manager Japheth Bulali said the IPPs, many of them international firms, have huge expertise in negotiating favourable contracts.

“The foreign companies have done these projects over the years in many countries and acquired a lot of experience that helps them define a contract in such a manner that they are insulated, and the moment you sign the contract, some of the clauses, including the exit clauses are fairly punitive,” he said.

Costly thermal plants

A senior Energy ministry official, who did not want to be named, said renegotiating the PPAs would be a tough and lengthy process. It would also involve other players such as the IPPs’ lenders. While they have no connections with Kenya Power, IPPs get loans based on the PPAs with the power distributor.

“Power producers negotiate for loans based on the PPAs, and this would mean that for the contract to be reviewed, their lenders would have to agree to restructure the loans,” said the ministry official.

The official said the could have been done quietly since they are commercial issues. The government tried an almost similar route in 2016, when it set up another task force to review the contracts of IPPs with Kenya Power, with the heavy focus then being those operating thermal plants.

The task force was expected to give recommendations on modifying or terminating the agreements.

It reported back that it would be too costly to terminate the contracts and recommended that the Energy ministry leave them to lapse and not renew them.