Rising demand reverses KPLC’s power tariff cuts

Monthly demand for electricity rose by 11 per cent in June compared to January as economic activity picked up from a two-year slump, forcing the country to turn to expensive thermal power to ease supply pressure.

Kenya Power and Lighting Company (KPLC) said it had been forced to retain much of the geothermal power supply it brought to the national grid during last year’s drought, making a reduction of the consumer tariffs impossible despite increased supply of cheaper hydro-power with good rains.

KPLC sold 589 million units of electricity to consumers in July, compared to 527 in February on increased demand from industrialists.

A high demand for electricity usually reflects the level of economic activity and policy makers said the latest industry data is a pointer to the fact that Kenya is on course to realising the targeted 4.5 per cent annual rate of growth.

“It suggests that more equipment is being plugged to the national grid. And that’s a pointer that people are making new investments,” said Robert Bunyi, a financial analyst at Mavuno Capital.
Though many Kenyans will find relief in the fact that the economy is on a steady recovery path, they must as well contend with rising demand for power reversing the steady fall in electricity tariffs that started in March as the country phased out some of the expensive thermal power generators.

KPLC has termed the growth in power consumption normal and in line with economic activity.

“The growth is normal. But there has been an increase in the use of fuel generators to meet new demand,” said Mr Joseph Njoroge, the managing director of KPLC.

He said declining rainfall in parts of the country has also reduced KenGen’s ability to generate more hydro-power to meet the new demand, leaving thermal power as the best alternative.

Data from KPLC indicates that demand for power increased from 566 million units in June to 589 million KWhs last month, reflecting a four per cent increase.

That level of demand saw KenGen and the Independent Power Producers (IPPs) such as Aggeko and Tsavo step up their thermal supply by 11 million KWhs to 174 million KWhs.

The increased uptake of thermal electricity is the reason KPLC has put consumers on notice that the fuel cost adjustment —- an item on the power bills linked to the amount of electricity generated from fossil fuels – for bills to be settled next month will rise to Sh3.49 from Sh3.18 — a 10 per cent increase.

The higher bills will disappoint the 1.2 million consumers who had hoped for further price cuts with the recent reduction in the amount of thermal power supplied by Aggreko under the emergency power contracts signed last year.

Industry statistics show that instead of dropping with the recent retirement of one of its generators, Aggreko’s supply of the power to the national grid from its Embakasi unit more than doubled to 10.6 million from 4.6 million KWh in June.

The reversal in the direction of power prices is also expected to raise concern among industrialists, who have been complaining about expensive electricity, saying it hurts their competitiveness in the regional market where pricing is the key driver of penetrating new markets or increasing presence.

Mr Njoroge is expecting a monthly increase in demand of between three and four per cent for the remaining part of the year, signaling additional supply side pressure and leaving little room for further cuts in electricity prices.

At Sh3.49. though, the fuel cost charge is still less than half the record Sh7.83 it hit in January.

Poor weather that depleted water in the hydro dams prompted the government to turn to the more expensive diesel-driven generators to meet the country’s electricity needs, a move that pushed power bills up by 60 per cent in the year to January.

KPLC says that the bulk of the demand is coming from industrial and commercial customers, who account for about 70 per cent of its revenues.

This is a signal of increased production on the factory floors after cutbacks in 2009 that led to widespread freeze in employment and payroll cuts.

Strong signals of the underlying activity have already been seen in robust half-year performance in all segments of the economy including cement makers, beverage manufacturers and agro based firms that have announced double digit profits growth.

Kenya’s economy took a beating in 2008 - that saw growth plummet to 1.7 per cent growth from the previous year’s 7.1 per cent as the country grappled with effects of post election violence, the global financial crisis and failed rains that battered agriculture, leaving millions of Kenyans hungry and with no money to buy consumer goods.

Green shoots of recovery have also been evident in key agriculture, financial, tourism sectors and the commodities markets.

Business leaders said optimism has helped remove cost cutting, the freeze in capital spending and restructuring from their radar screens in favour of innovation and expansion into regional markets - a move that is ultimately spurring demand for power.

While this new demand offers KPLC the potential to grow its revenue base, it also bears the risk of causing a severe supply shortage that may ultimately pull back growth.

Recent growth in demand has reduced the reserve margin — the gap between peak demand and what is available — to below 10 per cent compared to the optimum limit of 15 per cent.
Policy makers have identified supply and cost of power as one of the biggest challenges Kenya will face in the coming years.

The government has allocated Sh34.1 billion this year for construction of new power plants and reinforcement of the country’s transmission system, which loses a significant amount of power.