Proposed law seeks to end Kenya Power market monopoly

Kenya Power is likely to lose its stranglehold on electricity distribution and retail if a new Bill seeking to open the business to private utility providers is passed into law.

The Bill, currently with the Commission for the Implementation of the Constitution (CIC) for review ahead of its tabling in Parliament, proposes the licensing of other electricity distributors and retailers, promising consumers choice and better quality of service.

Licensed distributors will build supply power lines from sub-stations to homes but another entity (a retailer) will sell, meter and bill customers, according to the proposed law.

The retailers will buy power from different sources and pay the distribution company a fee for using their network to connect customers.

The Energy Bill, 2015 says that customers will only turn to a power distributor for supply if there is no registered retailer in their locality or if they require medium to high voltage power.

“A person requiring supply of electrical energy shall apply to the duly authorised retailer, but where there is no such retailer, to the distribution licensee,” the Bill says.

The changes are meant to create room for new players in the electricity sub-sector where Kenya Power continues to operate as a monopoly.

The Bill also provides for sector regulators to set the minimum capital required to enter the power distribution and retail business. The plan is to restrict retail licensees to a particular area or areas stated in the licence.

It is not clear from the Bill whether Kenya Power will be allowed to continue as a player in the retail market although the utility firm is expected to remain the biggest distributor in the new dispensation given its extensive distribution network.

If Kenya Power’s business is split between distribution and retail, two separate entities would be created to handle the different segments as was previously done with the separation of high voltage transmission which went to the Kenya Electricity Transmission Company (Ketraco) from distribution and retail, which remained with Kenya Power.

Such unbundling, however, exposes the listed company to a possible loss of a chunk of its revenues associated with the retail business.

As a retailer, Kenya Power has recently taken advantage of an increase in tariffs to grow its profits. The utility company’s net profit for the six months to December 2014 rose 38.5 per cent to Sh4.17 billion.

READ: Higher tariffs lift Kenya Power profit 38pc

Its sales grew 40 per cent to Sh37.6 billion despite the units of electricity consumed by households and businesses going up by a marginal 5.5 per cent — meaning the higher earnings were driven by the increase in power tariffs.

More recently, the positive financial results have seen Kenya Power continue to outperform other energy stocks at the Nairobi Securities Exchange, driven by sustained demand from foreign investors.

Kenya Power will in the new dispensation also have to compete with new players in the distribution business. The Bill proposes that different players be allowed to build distribution lines in specific areas and sell power to the retailers.

Currently, only 3.15 million homes, representing less than 40 per cent of the total households, are connected to the power grid, highlighting the potential market in the distribution and retail segment of the business.

Splitting Kenya Power into two business lines should also allow the company to concentrate on upgrading its ageing network which has been blamed for the constant power outages.

It is hoped that such upgrades, together with newly constructed distribution systems, will bring on board enough capacity to handle the 5,000 megawatts expected to be on the grid by 2017.

In June 2013, the National Assembly passed a motion to liberalise electricity distribution, paving the way for the Bill which seeks to end Kenya Power’s monopoly of over 50 years.

Power generation is already liberalised, exposing government-owned KenGen to competition from independent power producers (IPPs) such as Mumias Sugar, Aggreko and a host of upcoming producers of solar, wind and steam power.

The Bill creates an Energy Regulatory Authority, which will replace the Energy Regulatory Commission (ERC), with the regulatory mandate over the entire energy sector. If the Bill becomes law, the authority will set tariff guidelines that retailers will use to set prices.

“The tariff structure and terms for the supply of electrical energy to consumers shall be in accordance with principles prescribed by the authority,” the Bill says.

Countries such as Australia, the United Kingdom and New Zealand are already operating unbundled electricity markets where power generation, distribution and retail functions are separate.

The UK for instance has multiple retailers operating within the same areas, all using the same line. This means that a customer can switch between the different retailers depending on pricing.

The distributor companies only maintain the infrastructure and are responsible for fixing faults and repairing damaged electricity lines.

Kenyan consumers will, however, not have such a choice as only one company will be allowed to operate in a particular area and own the metres of its customers.