Power connection cost to double as subsidy withdrawn

Consumers will have to pay more to get connected to the national electricity grid following Treasury’s decision to end a multi-billion-shilling subsidy that has kept charges at half the true cost of the service.

Treasury secretary Henry Rotich told the Business Daily that the government had withdrawn billions in support to the power distributor, signalling a possible doubling of the connection fees.

“We have not set aside any money for the Kenya Power subsidy in the 2014/15 financial year,” said Mr Rotich. “We were not going to finance this service on a sustainable basis.”

Electricity distributor Kenya Power had been bearing the additional cost of connecions, but last year got a partial relief when Treasury introduced a Sh2.7 billion subsidy to prevent a hike in the connectivity fee from Sh35,000 to at least Sh75,000.

READ: State keeps power connection subsidy at Sh35,000

Kenya Power managing director Ben Chumo said he remained “optimistic” they would still receive more funds and finalise the pending connections.

“The government will find a way of securing the funds maybe through savings or from external sources,” Mr Chumo told the Business Daily in a telephone interview.

The power distributor last week said it had no means to finance the extra connection costs, leaving prospective electricity consumers to pay for the service at the market rate.

That is despite Mr Rotich’s position that Kenya Power had promised to generate its own funds to support the programme in the long term.

“When seeking the Treasury’s help with the subsidy, Kenya Power indicated that it would enable them sustain the project as they generate more money internally and from other sources to continue funding rural electricity connections at Sh35,000,” the minister said, adding that “if they do not, then connection fees will rise to Sh75,000.”

A senior Kenya Power official who did not want to be quoted told the Business Daily that it costs as much Sh100,000 to connect one new customer in sparsely populated rural areas and that the company could no longer absorb such costs.

One reason for this is that many new applicants live far from existing power lines or a transformer, necessitating the use of extra materials such as cabling and poles to connect them.

“When the government stepped in to help, they did so on the assumption that the cost is a flat rate at Sh35,000 for every new customer,” the source said.

“But this is not the case and when they gave us the Sh2.7 billion it was exhausted in no time hence the realisation that the programme is not sustainable in the long term."

Kenya Power had 2.33 million customers at the end of June 2013 having grown 14.7 per cent from 2.03 million during a similar period the previous year.

READ: Kenya Power holding Sh1.1bn for unconnected customers

A steep increase in connectivity charges is expected to slow down new connections, an eventuality both the government and Kenya Power will have to grapple with.

In its 2013 annual report, Kenya Power notes that a momentary increment in connectivity charges in the previous financial year (before the government intervened) led to a slight dip in the number of new customers.

“Among our notable achievements was connecting 292,337 additional customers, in line with the company’s business growth strategy,” the report states, adding that “the rate of connectivity was affected by an upward review of connection charges commensurate with increased cost of materials and operations.”

Kenya Power, whose net profit in the year to June 2013 stood at Sh4.35 billion, has maintained that it cannot finance the subsidy programme itself due to higher operational costs.

The power distributor says that other than being financially incapable of supporting the subsidy programme, it has expensive commitments such as the upgrade of the national grid at Sh52 billion.

Mr Chumo recently told Parliament that the company had identified 8,000 single phase applicants on whom it intended to spend up to Sh532 million, highlighting his investment plans.

The company argues that it “never took the subsidy plan into consideration as it formulated the new electricity tariffs that came into effect last December.”

This leaves the French Development Agency (AFD) loan plan popularly known as Stima Loan as the  only possible source of relief for new customers once the new charges come into force.

Upon completion of a Sh495 million pilot with Kenya Power in 2010, AFD last year advanced additional Sh3.3 billion loan to the power distributor to finance connections of at least 300,000 new households.

“Aware that some potential customers face challenges in raising funds to pay for new connections, the company has also been collaborating with various partners to avail credit to potential customers who require financing for this purpose,” Kenya Power says in its annual report.

The AFD cash, which is disbursed through the government and put in a revolving fund, is advanced as loans to new customers who cannot afford upfront payment of the connection charges.

With the Stima Loan facility, new customers pay at least 20 per cent of the connection fee — up to a maximum of Sh100,000 — and they are loaned out the balance.

The loan is repayable over a period of 24 months, including a one-off management fee of two per cent, all of which are loaded onto monthly electricity bills.

Energy secretary Davis Chirchir recently said that the government was looking to partner with commercial lenders to offer soft loans to prospective electricity clients. That promise is yet to materialise.