Kenya Power on the spot over rising electricity cost

Electricity distributor Kenya Power has come under scrutiny from the energy sector watchdog for making operational decisions that have significantly increased the cost of power to consumers in the past two months.

The Energy Regulatory Commission (ERC) says Kenya Power’s decision to increase the intake of expensive diesel-fired electricity to the national grid is negating its promise to keep power costs down.

In a letter to Kenya Power, the ERC says that heavy uptake of thermal electricity has raised the fuel cost levy for August power bills to the highest level this year and wants the power firm to revert to a mix that will stop the cost surge.

“Cheaper hydro-power generation has not been aggressively pursued despite fairly good water levels,” the ERC says, adding that it will be watching the power distributor closely “to avoid defaulting on our commitment to keep power costs down.”

READ: Electricity users to pay more as levies hit record highs

Reducing the cost of energy has been a key plank of President Uhuru Kenyatta’s economic agenda that is aimed at making locally produced goods competitive in local and foreign markets as well as slowing down inflation.

Kenya Power has defended itself saying it bought thermal electricity from Triumph Power’s 83-megawatt plant in Athi River, which was on a mandatory reliability test-run after becoming operational last month. The 30-day test-run ended on August 3.

“We also enhanced thermal generation in Nairobi during the GES to maintain reasonable voltages at various sub-stations and ensure reliable supply,” Kenya Power managing director Ben Chumo said of the three day summit that was headlined by US President Barack Obama last month.

The ERC receives monthly data from Kenya Power showing the cost and units of electricity it purchased from power producers and sold to consumers.

The energy regulator uses data from the previous month to guide its next review of fuel cost levy, inflation charge and forex adjustments in monthly power bills.

Kenya Power also argues that it had limited options in its sourcing of electricity after several geothermal plants in Olkaria shut down last month for maintenance and others broke down.

This saw the utility firm turn to expensive thermal generators, at a time when fuel prices had risen steadily as the shilling weakened against the US dollar.

The ERC’s letter suggests that Kenya Power may have deliberately opted to take in more of the expensive thermal power to the detriment of consumers despite the availability of cheaper hydro-power in the market.

Thermal power is mainly generated by independent power producers (IPPs) that sell it to the distributor at markedly high prices, besides getting full reimbursement for costs incurred in fuelling their generators.

Kenya has in the past couple of years raced to increase its output of renewable and cheaper electricity, adding at least 280 megawatts of geothermal power to the grid – a development that has helped push the fuel cost element in power bills to the lowest levels in a decade.

Increased uptake of the cheaper geothermal power on the national grid saw the ERC pledge in April to maintain the fuel surcharge at between Sh2 and Sh3 per unit to stabilise costs of domestic consumers and enable manufacturers monitor their cost of production — a critical element for stability of commodity prices.

But the levy has increased for the second month in a row, hitting a nine-month high of Sh3.11 per unit this month.

The levy – linked to the amount of power generated from thermal sources and supplied to the national grid – takes up the largest share of variable costs in power bills. Electricity prices have a direct bearing on inflation, which stood at 6.62 per cent last month, a few points shy of the government’s preferred ceiling of 7.5 per cent.

Thermal power purchased by consumers last month jumped to 150.9 million units from 115.6 million in June and 106.2 million in May, explaining the cause of rising power bills and the ERC’s concern.

The Kenya Electricity Generating Company (KenGen) sells its geothermal electricity to Kenya Power at Sh7 per unit ($0.07) – more than half what diesel-run generators charge at Sh19.2 per unit.

But the ERC, in a meeting held on July 14, directed Kenya Power and KenGen to mitigate a further rise in fuel cost levy by increasing hydro-power generation, which is the cheapest energy source at Sh3 per unit.

“The Masinga Dam (KenGen’s main reservoir) is 79 per cent full which is fairly good to sustain generation until the next rainy season,” said ERC director-general Joe Ng’ang’a.

The two state-backed agencies heeded the advice and enhanced hydro-power generation from July 25 for dispatch to the grid, raising questions why it had to take the ERC’s intervention for them to act. Records indicate hydro-power purchased last month grew to 305 million units from 297 million in June while geothermal energy shrunk to 353 million units from 361.7 million.

To boost scrutiny, the ERC is moving to automate its systems to enable it track power purchase, generation and sales to consumers in real-time.

“We don’t want to be waiting for data every month from Kenya Power to make decisions thereafter based on the explanations we get,” said Mr Ng’ang’a, adding that some of KenGen’s shutdown of plants were unplanned.

KenGen’s managing director Albert Mugo did not respond to our calls and queries on the subject.

Asked why the ERC approved the fuel levy increases Mr Ng’ang’a said “the agency had no choice but to accept the explanation Kenya Power gave”, exposing the shortcomings in the current arrangement where the ERC acts in hindsight.

Higher energy costs, especially for commercial and industrial consumers, often push up commodity prices and blunt the competitiveness of manufacturers in foreign markets.

It is also a critical competitive market factor, which investors consider before setting up operations in any country.

Kenya is seeking to attract Sh150 billion annually in foreign capital inflows for jobs creation and growth with the government betting on low cost of doing business and elimination of red tape.

At an average of Sh15 per unit, electricity tariffs for manufacturers are still high with costs eating into their margins, according to the Kenya Association of Manufacturers.

The ERC said there were plans to take away Kenya Power’s role of buying power and award it to an independent player for the utility firm to concentrate on fixing its ageing infrastructure for efficient distribution and supply.

Mr Ng’ang’a said that, for instance, there have been situations where KenGen has had sufficient hydro-power only for Kenya Power to fail to evacuate it in full due to constraints in its ageing infrastructure, condemning consumers to higher bills.

“Ultimately this will be resolved by having an independent system operator who will be in charge of buying power from the cheapest source without constraints,” said the director-general.

In the arrangement, which will take effect with the enactment of the Energy Bill, the independent firm will shop around for cheaper power including from neighbouring power-rich Ethiopia for sale to consumers at expected lower rates.

Kenya Power’s scope would be reduced to distribution and infrastructure maintenance, a proposal modelled on Britain. The decision is likely to shrink the bottom line of the Nairobi Securities Exchange-listed utility.

“The weakness of having Kenya Power handling the role is that someone may not be necessarily fair to whom they decide to buy power from,” said Mr Ng’ang’a.