Higher power bills loom in review of retail tariffs
Kaburu Mwirichia, director-general, Energy Regulatory Commission. File
Electricity distributor Kenya Power is seeking a 25 per cent upward adjustment of consumer power tariffs, signaling a steep rise in the cost of energy in the next couple of months.
People familiar with the application that is before the Energy Regulatory Commission (ERC) said the proposed adjustments could push monthly consumer electricity bills up by an average of Sh400, adding impetus to inflation pressure in the economy.
The new tariffs are expected to hit low- and middle-income households that consume between 50 and 150 units of power per month hardest.
Kenya Power is seeking to increase the tariff for the lowest segment of the consumer market by up to 22 per cent and raise the charge for the middle - and high-end residential consumers by an average of 25.5 per cent.
The new tariffs that could come into force as early as mid next month risk adding fresh force to the rate of inflation, which is already running at 12.95 per cent driven by the rapid rise in food and fuel prices since January.
Energy minister Kiraitu Murungi is said to have advised a temporary freeze in the review until prices of basic commodities have stabilised, fearing public anger against a further increase in the cost of living.
The proposed changes are however critical to Kenya Power’s future financial health that is hinged on proper management of operational costs and ability to pay for the expected rise in bulk power purchase and transmission costs.
The power firm is seeking the ERC’s authority to increase the monthly fixed charge — meant to recover costs related to meter reading, billing and accounting – from Sh120 to Sh160 and to increase to Sh3.70 the charge per kilowatt hour (kwh) on domestic consumers for the first 50 units up from the current rate of Sh2 per kilowatt hour.
Kenya Power also levies every consumer a 12 per cent value added tax (VAT) charge, and a 5 per cent rural electrification levy.
If allowed, consumer tariffs adjustment could wipe out the State subsidy, in place since the current tariffs came into force, to help cushion low income households from the full impact of energy cost inflation.
Under the proposed tariff regime, households consuming between 51 units and 1,500 units will pay Sh11.79 per Kwh from Sh8.10 per Kwh while those consuming above 1,500 units will pay Sh22 per unit from Sh18.75.
This means that consumers who this month paid about Sh633 for 50 units of power will add an average of Sh140 to their monthly bill, reflecting an increment of 22 per cent while middle income homes that consume about 150 units could see their monthly bill rise from Sh2373 to Sh2980 or 25.5 per cent increase.
Retail electricity tariffs are reviewed every three years — save for periodic adjustments on the fuel cost, foreign exchange and inflation that are passed on to the end user and have a neutral impact on Kenya Power’s revenue.
The power distributor is seeking to increase the bills for industrial consumers by between eight and 12 per cent in what could hurt the competitiveness of local industries in a regional market where pricing remains a key driver market share growth.
On Tuesday, the Energy Regulatory Commission (ERC) said the power firm deserves an upward review of retail tariffs but the application had not been approved.
“Higher tariffs should be expected if one considers the additional power plants that have come into service since the last review in 2008 and the new plants that will come on board in the next three years,” said Kaburu Mwirichia, the ERC director general. “We will be ready with new tariffs by 30th (Thursday) and expect them to come into force soon,” he said.
The review comes at a time when electricity prices have risen to the highest level in 17 months buoyed by recent fuel cost adjustments — an item on the bills linked to the amount of electricity generated from fossil fuel.
The fuel cost charge, whose revenue Kenya Power passes on to the electricity generators such as KenGen, Aggreko and IberAfrica, increased this month to Sh7.15 from Sh4.19 in December. Kenya Power does not benefit from these adjustments making the tariff review critical to its future profitability. Kenya Power’s profits could rise by up to 50 per cent of 2010’s this year under the new tariffs echoing the 64 per cent jump in profits realised in 2009 after review of tariffs in 2008.
The firm’s net profits stood at Sh3.7 billion in the year to June 2010 compared to Sh3.2 billion a year earlier but this could slowdown because of rising capital expenditure should the proposed tariff increments be frozen.
“Overall, we view the bid to suspend the review process as slightly negative for Kenya Power,” says Renaissance Capital in a brief to investors.
Kenya Power spent Sh20.5 billion on electricity producers in the year to June last year up from Sh18.7 billion in 2009, but this cost is expected to increase in the next three years as the utility firm buys more electricity, especially from private producers whose bulk tariffs are higher than State owned KenGen’s.
Kenya will add between 1913 megawatts and 2213 to the national grid in the next three years with KenGen accounting for 500 megawatts or 30 per cent of the new supply.
Kenya Power pays KenGen at the rate of Sh3 per unit of power based on the fact that the bulk of its power comes from the cheaper hydro sources while private producers are paid at the rate of more than Sh6 per unit.
Still, Kenya Power must spend more than Sh22 billion in the next four years to reinforce and expand its transmission system. But the government is not keen on the review for now, fearing a backlash from consumers faced with rising food, transport and energy expenses.
Within government, the proposal is that Kenya Power should in the short-term rely on organic growth of its revenues (a widening of customer base) to meet the additional costs – a position that is expected to meet stiff resistance from the company’s executives worried by the fact that the operation costs are ring faster than sales.
The push for higher retail charges is likely to spark a replay of the power tariffs war that pitted Kenya Power, the power producers and the government five years ago. It all began with a pricing tussle between Kenya Power and KenGen that hinged on the refusal by the power distributor to pay higher bulk purchase tariffs upon the expiry of an agreement to buy power at a discounted rate in July, 2006.
