Power prices fall Sh4 a unit on weak dollar, fuel cuts

The skyline of Nairobi CBD on June 23, 2021. Kenya targets an inflation rate of between 2.5 percent and 7.5 percent in the medium term.

Photo credit: File| Nation Media Group

Consumers are this month paying Sh4.07 less per unit of electricity compared to December last year in the wake of reduced foreign exchange and fuel adjustment surcharges, easing inflationary pressure.

A unit of power is retailing at Sh29 down from Sh33 in the same period last year, combined with reduced food and fuel prices to cut inflation to a multi-year low of 2.8 percent in November.

The drop is attributed to a Sh2.16 per kilowatt hour (kWh) fall in the monthly forex charge—which is linked to the foreign currency expenses by Kenya Power and electricity generators.

Others include the Sh1.5 cut per unit on the consumption tariff and another Sh0.41 on fuel adjustment costs— a variable element that goes up and comes down depending on the diesel used in thermal power plants and its cost.

With households and businesses consuming about 1.2 billion kWh of power monthly, consumers will save an estimated Sh4.6 billion from their electricity bills compared to December last year.

This is a departure from an earlier trend in which power prices have surged amid concerns it was making the country uncompetitive in the battle for foreign investors.

During last week’s prices review, the Energy and Petroleum Regulatory Authority (Epra) cut the foreign exchange rate fluctuation adjustment by more than two-thirds to Sh1.01 per unit for December bills.

This represents 68 percent compared to a forex adjustment of Sh3.17 per unit in December last year.

The Kenyan shilling, which had been on a free fall for months, sunk to a low of Sh164 against the US dollar in February this year.

It has since strengthened against the greenback to retail at Sh129, lowering monthly bills on reduced pressure on foreign currency obligations in the power sectors such as payment of loans dominated in hard currency.

A combination of factors is behind the stronger shilling.

Kenya early in the year bought back its $2 billion Eurobond, dismissing any risk the country would default in what has partly fueled the weakening of the local currency against the dollar.

Falling hard currency reserves, a steep weakening of the local currency and revenue challenges have raised questions about Kenya’s ability to pay off the bond, which matures in June.

The Central Bank of Kenya (CBK) has also been buying and selling dollars on the foreign exchange market to curb volatility. An oil supply deal with three Gulf firms has helped to relieve pressure on the local currency.

The deal with Saudi Aramco, Abu Dhabi National Oil Company and Emirates National Oil Company was initially agreed upon in March last year and was extended beyond this month for an unknown period.

Supplies from the three firms allowed Kenya to switch from the previous petroleum procurement system, which relied on an open tender in which local companies bid to import oil every month.

The arrangement with the Gulf firms comes with 180-day credit terms, allowing the country to build up dollars for the purchase over time rather than requiring about $500 million monthly to pay for imports.

The government reckons that the agreement has also helped reduce pump prices for consumers. A litre of diesel is now retailing at Sh165 a litre in Nairobi from Sh196.57 a litre in January on lower import costs

The falling fuel prices and increased water volumes in major dams due to high rainfall since and the use of cheaper geothermal has also helped towards a cut in power tariffs on lower fuel adjustment costs.

According to official data from the Kenya National Bureau of Statistics (KNBS), 200 units of electricity were selling for an average of Sh5,713.16 last month, marking a decline of 13.7 percent from Sh6,620.68 in November 2023.

The lower cost of power has been a major driver in a significant drop in inflation, coupled with reduced food prices, especially for staples such as maize. Inflation dropped to 2.8 percent last month, according to KNBS. This is a sharp drop from an inflation rate of 6.8 percent during the same month last year.

Kenya targets an inflation rate of between 2.5 percent and 7.5 percent in the medium term.

This has allowed the CBK to lower its benchmark lending rate, setting the stage for commercial banks to cut the costly charges for loans.

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