Companies

Kenya Power risks losing Sh16bn in rural electrification

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Kenya Power chief executive Bernard Ngugi. FILE PHOTO | NMG

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Summary

  • The debt, disclosed for the year ended June 2020, had risen from Sh11.9 billion a year before.
  • The receivables have been accumulating over the years and are part of a larger amount that the electricity distributor has been unable to collect from the government.

Kenya Power #ticker:KPLC risks losing Sh16.5 billion the government owes it under the rural electrification scheme, the Auditor-General Nancy Gathungu has warned.

The debt, disclosed for the year ended June 2020, had risen from Sh11.9 billion a year before.

The receivables have been accumulating over the years and are part of a larger amount that the electricity distributor has been unable to collect from the government.

“This balance, which relates to management of the Rural Electrification Scheme on behalf of the government, is long outstanding and has accumulated over the years,” the Auditor-General warned in her report on Kenya Power’s financial statements.

“Further, it is not clear why it has taken a significantly long period to recover the outstanding amounts which are at risk of becoming unrecoverable and impaired over time.”

The rural electrification scheme was established in 1973 by the government as a partnership with the Nairobi Securities Exchange-listed utility firm with the objective of extending electricity to the sub-economic zones.

To intensify the expansion of the underdeveloped regions, the government subsequently created the Rural Electrification Authority (REA), now Rural Electrification and Renewable Energy Commission (Rerec).

Kenya Power, however, continues to operate and maintain the whole network, in addition to implementing projects for Rerec on contract basis.

The electricity distributor is entitled to retain revenues generated from customers to cover maintenance costs incurred by the company.

Kenya Power also continues to invoice the government for the expenditure incurred to complete projects but the State has been defaulting.

“In addition, the company is petitioning the government to release funds owed to Kenya Power for the management, operations and maintenance of the rural electrification scheme (RES) network. Capital expenditure has been restricted to critical projects,” the firm says in its latest annual report.

Besides carrying the burden of connecting rural areas, the utility firm is also suffering as power supplied to government departments and agencies go unpaid.

The National Treasury is among the government departments that have not paid a total of Sh3.1 billion worth of electricity bills.

The government, which has a controlling 50 percent stake in Kenya Power, has initiated several measures aimed at easing cash flows at the company which made a Sh939.4 million net loss in the year ended June 2020.

“Through a letter dated 30 June 2020, the company successfully petitioned the government to grant moratorium for payment of principal and interest on government on-lent loans amounting to Sh5.7 billion until July 2021 and waive any penalties arising from the deferment of these payments for a period of one year,” the company says in the report.

The government is also reviewing the firm’s commercial facilities with the aim of retiring expensive ones through engagement on favourable terms with international development financiers.

“The strategy of the company is to pursue restructuring of short-term commercial facilities (overdrafts) into medium-term facility,” Kenya Power said.

“Towards this objective, the company has managed to obtain bank term loans amounting to Sh6.7 billion terming (lengthening the maturity of) a bigger portion of the existing bank overdraft position.”

Kenya Power is also seeking to lower fixed charges in contracts signed with electricity generating companies, a move that will boost its financial performance and potentially slow down inflation of power bills.

Capacity charges, paid to power producers and recovered from consumers, are meant to help the companies to earn a return on their capital investment which runs into billions of shillings.

Kenya power paid capacity charges totalling Sh47.4 billion, representing more than half of the company’s cost of sales of Sh87.4 billion.

The special charges have recently become a greater burden for Kenya Power because the monopoly had signed contracts that have resulted in surplus generation, leaving it to pay the power generators regardless.

The economic impact of the Covid-19 pandemic has made it harder to shrink the surplus capacity, with the electricity distributor continuing to pay the fixed charges.

Electricity sales in the year ended June 2020 grew by a marginal 0.7 percent to 4,196 Gigawatt hours (GWh) compared to 4,176GWh the year before.

Kenya Power now plans to eliminate the surplus capacity by ditching the government’s ambitious long-term aim of delivering 5,000MW that was based on rosy projections of demand growth.

“Management indicated that plans are underway to align the commercial operation dates of the PPAs in the pipeline with the company’s medium-term power demand such that there is no excess power generation,” the Auditor-General said.

“However, until these strategies are implemented, the company will continue bearing the high fixed capacity charges.”

Power purchase agreements in Kenya typically last for 20 years, indicating the difficulty of getting out of the surplus capacity trap.

One of the recent major plants to be added to the national grid is the 310MW Lake Turkana Wind Power.