New policy promises even higher power bills

The government has signed off a new energy policy that allows power producers to pass on to consumers all losses arising from their foreign currency-denominated transactions in a move that promises to add impetus to the recent escalation in electricity bills countrywide.

The new billing formula ticked off by the energy sector regulator in July last year plugs every electricity consumer’s costs to the turbulent world of currency markets where the shilling has ceded a lot of ground in the past 24 months.

Under the deal, electricity generating companies have a set exchange rate and are allowed to pass on to consumers any losses arising from a weakening of the Kenya shilling beyond the point.

That exchange rate threshold is currently set at Sh64 to the US dollar for the next three years and with the shilling priced at Sh76.04 to the dollar, Kenyan consumers are taking in a whopping Sh11.12 in exchange rate losses passed on by the power producers.

The deal — a major win for power companies — means that consumers stand exposed to huge volatility in their power bills especially in times of major economic downturns or political upheavals such the January 2008 electoral dispute when the exchange rate plummeted from a high of Sh80 to the dollar from Sh64 in just a couple of months.

The Energy Regulatory Commission (ERC) has in the past allowed power companies to recover from consumers currency exchange losses based on fluctuations of the Kenya shilling to the dollar in any given year but the new formula allows them to recover foreign exchange losses arising from transactions done in all other foreign currencies including the Japanese Yen and the Euro.

ERC fixed—for the next three years — the applicable Kenya shilling exchange rate to the dollar at Sh64.92, Sh130.07 for the Sterling pound, Sh100.79 for the Euro and Sh64.04 for the Japanese Yen.

The immediate effect of this change that was magnified by a larger than usual purchase of diesel-powered electricity generation equipment last year has been an almost threefold increase in the foreign exchange adjustment (FERFA) charge on consumers’ power bills since July 2008 when the new formula came into effect.

It also explains why the recent surge in power bills overshot ERC’s conservative estimates by wide margins.

The ERC had promised electricity consumers that power bills would increase by just about 24 per cent when the new tariffs came into effect only for consumers to see a near doubling of their bills in 18 months.

Last year, the Kenya Power and Lighting Company (KPLC) passed on to consumers foreign exchange losses of Sh2.3 billion, up from Sh568 million in 2008.

The money was shared by KPLC, KenGen and other smaller power generating companies that produce about one fifth of the country’s total electricity demand.

KenGen, Kenya’s biggest power producer, reported that foreign exchange losses shot up by 278.6 per cent last year to Sh5.3 billion from Sh1.4 billion in 2008.

A fraction of this loss - which was unrealised as at the end of the year - will however remain in the firm’s reserve account to be passed on to consumers in future.