Diesel power generators stuck with expensive stocks

What you need to know:

The Energy Regulatory Commission requires that all power generators that supply electricity to the national grid must store at least three months equivalent of fuel supplies to avoid stock-outs.
But the injection of 280MW to the national grid has seen electricity distributor Kenya Power reduce its reliance on the expensive diesel-generated energy, leaving the independent power producers (IPPs) in a fix.
The heavy fuel used to generate power cannot be sold to motorists, limiting the disposal options for the IPPs at a time of rapidly falling international oil prices.

The injection of geothermal power into the national grid has left diesel power generators with stockpiles of fuel that they are unable to dispose of, leaving the energy sector regulator in a dilemma on how to compensate the affected firms.

The Energy Regulatory Commission (ERC) requires that all power generators that supply electricity to the national grid must store at least three months equivalent of fuel supplies to avoid stock-outs.

But the injection of 280MW to the national grid has seen electricity distributor Kenya Power reduce its reliance on the expensive diesel-generated energy, leaving the independent power producers (IPPs) in a fix.

“The fuel held by IPPs could take them 12 to 13 months to consume,” said Energy and Petroleum secretary Davis Chirchir.

The heavy fuel used to generate power cannot be sold to motorists, limiting the disposal options for the IPPs at a time of rapidly falling international oil prices.

The only possible buyers of the fuel are cement companies who use diesel to fuel their furnaces, but even these have shifted to using coal, which is a cheaper source of power.

The ERC director- general Joe Ng’ang’a says the regulatory body could be forced to “review” the price at which Kenya Power buys electricity from the IPPs, which could ultimately have an effect on consumers’ bills.

READ: Geothermal overtakes hydro power for first time

In a letter written by IPPs to the energy regulatory commission, the thermal power producers are calling on the government to help them find ways of managing the situation.

“We got the request which was sent to ERC and copied to the ministry,” said Energy principal secretary Joseph Njoroge in an interview. “Their concerns are genuine,” he added.

Mr Ng’ang’a says the IPPs main worry is that they are stuck with expensive fuel that will be even harder to dispose as oil prices continue to fall.

However, he didn’t provide figures on the quantity and worth of stock held by the IPPs. ERC says it will hold a meeting with Kenya Power and the IPPs to address the concern.

The energy regulator has not yet prescribed a solution on the matter, but says the issues at hand are those pertaining to the holding stock and power purchase agreements (PPAs) signed with the diesel power generators.

“Among the options (to be considered) is re-looking at PPAs Kenya Power has with thermal IPPs. Some of the PPAs were made to suit the demands at the time and may not work in the changing environment,” says Mr Ng’ang’a.

READ: Why geothermal has failed to cut electricity prices

IPPs that cause disruption in generation by not meeting specific requirements in the agreement, such as specified fuel stocks, are slapped with huge penalties.

The contribution of thermal energy to the national grid has gone down from 37 per cent in August last year to 10 per cent in December.

As the country maintains its tempo towards achieving 5,000MW of power, issues like quantities of diesel stocks held by IPPs will need to be adjusted, the ERC argues.

ERC may choose to monitor the fuel stocks imported by IPPs and advise on a situational basis.

It is not immediately clear if ERC’s decision to review PPAs will result in a hike in energy costs to cushion the IPPs.

The energy charge element in consumers’ bills refers to fuel cost IPPs incur in the course of generation and is settled directly by electricity consumers. IPPs do not make a profit from energy charges.

If the energy charge is raised, the ripple effect will be an increase in the cost of electricity to consumers.

IPPs whose contracts are about to expire can also sell their stock to other generators to salvage the situation.

Thermal IPPs sell their fuel to Kenya Power at Sh25.23. Kenya Power gets hydro-generated power from KenGen at Sh3.10. Geothermal costs between Sh7 and Sh8 per unit.

Kenya Power uses a mix of hydro and geothermal. Thermal power, although expensive, offers a supply cushion during peak demand. Kenya Power’s uptake system gives preference to the cheapest power available.

“We got the request which was sent to ERC and copied to the ministry...Their concerns are genuine.”