Kenya Power gets Sh7bn subsidy to slash consumer bills by 15pcThursday June 02 2022
The Treasury has offered Kenya Power a Sh7.05 billion subsidy to allow the utility cut consumer electricity bills by a further 15 percent without hurting its cash flows.
The Budget Committee of the National Assembly revealed the multibillion-shilling subsidy in a report to lawmakers after independent power producers (IPPs) resisted the push to cut their tariffs and allow Kenya Power to lower consumer bills.
Kenya Power in January cut retail tariffs by 15 percent, which was hinged on the firm lowering system losses -- the share of electricity bought from generators such as KenGen that does not reach homes and businesses due to theft and leakages from an aging network.
The State promised a similar cut in a plan based on the review of power purchase agreements (PPAs) after a task force appointed by President Uhuru Kenyatta found that there was a huge disparity between the tariffs charged by main power producer KenGen and private power generators.
The second cut was scheduled for April 1, but the IPPs, which are owned by powerful institutions like the World Bank, opposed a unilateral push to lower the cost at which they sell electricity to Kenya Power.
Now, the State has opted to offer Kenya Power subsidies in the quest to lower bills and cushion consumers struggling with rising prices of essential items such as food and ease public anger over the high cost of living.
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Kenya’s inflation hit a 27-month high in May at 7.1 percent, squeezing household budgets and demand for goods and services.
“To shield KPLC from the effects of the electricity price reduction prior to the implementation of this second phase, the company has been allocated Sh7.05 billion in the proposed budget for 2022/23,” the Budget and Appropriations committee said.
“There is slow progress in implementing the recommendations of the Presidential Taskforce Report on the review of the power purchasing agreements (PPAs) to reduce electricity prices by 33 percent.”
The fear of a legal tussle with powerful foreign investors forced the State to retreat and opt for a negotiated deal with the IPPs.
OrPower 4 Inc, which files disclosures at the US Securities Exchange and has the largest private geothermal operator in Kenya, says the government has instead decided to review new power purchase deals rather than renegotiate the old ones.
The listed power utility was offered Sh9.05 billion to ease losses from the first cut in January, pushing the State subsidies to Sh16.1 billion in the year to December.
Kenya Power’s electricity sales for the year to June last year stood at Sh125.8 billion, putting a 30 percent cut at Sh37.5 billion.
This means that the State subsidy is equivalent to 43 percent of the expected revenue losses.
Lower electricity prices are meant to boost economic growth by making energy costs competitive compared with other African nations such as Ethiopia, South Africa and Egypt.
The Kenyan government has been trying to boost foreign investment in the manufacturing sector in recent years.
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The 15 percent cut implemented in January saw the cost of buying 200 units of electricity drop from Sh5,185 in December to Sh4,373 in February.
The State is aiming for similar cuts in phase two of the review.
Electricity consumers often complain of steep bills, which are partially due to idle capacity charges that compensate power generators for electricity that is generated but never used.
Under a typical power purchase agreement, a power producer gets paid for any electricity produced, even if it is impossible for Kenya Power to sell it to consumers.
The cost of power is a key determinant of new investments.
Electricity prices have nearly doubled since President Kenyatta rose to power in 2013, with 50 units rising from Sh508 in July 2013 to Sh945 in December before falling to Sh769 in February.
Kenya Power bought 46 percent or Sh41.1 billion of its electricity from State-controlled KenGen, with other top producers being wind plant —Lake Turkana Wind Power — and US-based geothermal firm, OrPower 4 Inc.
More than half of Kenya Power’s Sh89.1 billion power purchase costs are capacity charges paid to power producers.
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The IPPs opposed the reduction, arguing that Kenya has no unilateral right to alter the contracted capacity and payments and the State has a duty to protect PPAs — which are inked over a period of 20 years.
They reckoned that they spent billions of shillings in building power plants through a combination of debt and shareholder funds that were sourced on the strength of the PPAs or wholesale electricity tariffs.