Kenya Power has made a financial decision to be paying penalties for late payment to electricity suppliers rather than tapping foreign currency loans to settle invoices on time.
The electricity distributor, which pays out millions of shillings annually for flouting credit periods for settling suppliers such as Kenya Electricity Generating Company (KenGen), says penalties are cheaper when compared with the cost of borrowing dollars to escape these fines.
The financial decision, disclosed in the latest annual report, has seen Kenya Power continue paying penalties for late payment of foreign currency-denominated electricity supplies.
“If KPLC was to make payment of all outstanding obligations within the credit period, it would have to borrow funds thus incurring a financing cost at the market rate that is much higher than the charges incurred,” says the utility fund in the report for the financial year ended June 2024.
In the period under review, Kenya Power paid Sh981.8 million as penalties, adding to the Sh1.12 billion paid a year earlier. The interest on late payment of invoices is aimed at compensating power suppliers for payments made outside the agreed credit period as provided for in the power purchase agreements.
For instance, Kenya Power’s main supplier, KenGen, starts charging interest on invoices that remain unpaid beyond 40 days after sending the bill and the utility firm acknowledging the document.
The firm closed the review period owing power suppliers Sh43.47 billion, marking a drop from Sh66.88 billion after it made Sh24.4 billion payments on the back of reduced difficulty in accessing dollars. Some Sh10 billion remained outstanding for over three months while Sh7.37 billion had remained unpaid for between 61 and 90 days.
The firm’s position on settling invoices means that Kenya Power will continue incurring penalties on overdue invoices, given that about 60 percent of PPAs are denominated in foreign currencies.
The utility firm’s demand for dollars is further exacerbated by the fact that about 90 percent of its Sh98.5 billion loans are in foreign currency, making it susceptible to movements in local currency.
The foreign currency-denominated PPAs and debts forces it to go to the foreign currency market to seek dollars to clear suppliers and debts.
“This currency mismatch results in a high foreign currency impact on the business especially in periods of high rate volatility like experienced over the past two years,” said the firm.
Apart from struggles in getting dollars from the market at a good rate, Kenya Power’s persistent negative working capital has seen it accumulate overdue obligations. The negative working capital has, however been improving, closing the year under review at negative Sh27.48 billion from negative Sh51.2 billion a year earlier and negative Sh74.84 billion in June 2020.
In the year under review, Kenya Power paid Sh24.4 billion over and above the annual invoice total, with Sh18.3 billion going to independent power producers, Sh5.2 billion (KenGen) and Sh0.9 billion (Kenya Electricity Transmission Company Limited) as the shortage of dollars in the market eased.
The firm said the Sh24.4 billion payments were made in a deliberate effort to reduce the overdue amounts that lead to penalty charges, especially when dollar shortages hit the market.
For instance, the firm said that the “acute shortage” of foreign currency in the market over the past two years had driven up the outstanding obligations because it could not find dollars. Kenya Power says its management engaged power generators to accept payment in Kenya shilling equivalent to their foreign currency bills but the uptake was low.
