How to mitigate forex risk in electricity bills


Kenya Power sells electricity in local currency, but buys the same from the IPPs in hard currencies, like the dollar. PHOTO | SHUTTERSTOCK

Recent revelations that independent power producers (IPPs) were selling electricity to Kenya Power at exorbitant prices sparked an uproar among electricity consumers who bear the brunt of escalating prices.

Whereas the outcry seems to have subsided, it's bound to resurface sooner or later, given our electricity sector’s dollarisation level.

The history of Kenya's electricity generation sources reveals a shift towards private sector engagement in infrastructure funding from the mid-1990s.

The Electric Power Act of 1997 played a pivotal role in liberalising the power generation industry. This led to the emergence of IPPs, with the first, Iberafrica Power, established in 1997.

According to the 2022 Kenya Power Annual Financial Reports, IPPs supplied about 40 percent of the total power purchased by the electricity distributor, with the rest coming from KenGen.

The report, however, highlighted a disproportionately high amount in payments to IPPs relative to KenGen, which could be attributed to the nature of the underlying Power Purchase Agreements (PPAs), which present different forex (FX) risks and costs.

A typical electricity bill has, among other charges, the consumption rate, fuel charges, and forex adjustments.

The power utility says, “The foreign exchange component is related to the fluctuation of hard currencies against the Kenyan shilling for expenditure denominated in these currencies related to the power sector.”

This charge amounts to about 10 percent of the average bill from recent itemised power bills. The main contributors to these costs are the long-term PPAs between generating companies and Kenya Power.

Kenya Power sells electricity in local currency, but buys the same from the IPPs in hard currencies, like the dollar.

As the shilling depreciates against hard currencies, the firm is forced to adjust its consumer prices accordingly to pay for the power purchased in hard currency.

The Energy Act of 2006 allowed Kenya Power and KenGen to transfer the forex fluctuation cost to consumers. The aim is to make electricity production and distribution sustainable.

Kenya Power and KenGen’s borrowing in hard currencies is another FX risk and cost source. The 2006 Energy Act also enabled Kenya Power to pass FX adjustments cost to consumers as well as allowing both Kenya Power and KenGen to pass FX cost emanating from foreign currency borrowing costs, for example, an increase in interest payments due to shilling depreciation.

As of 2022, about 83 percent of Kenya Power’s debt was in hard currencies, with KenGen’s being over 90 percent.

While FX adjustments are estimated to constitute about 10 percent of the total bill, it is most likely higher than that.

Fuel energy charges constitute about 35 percent of the overall electricity bill. This charge is described as “the money used for generating electricity from thermal power plants.

It varies monthly depending on the quantity of thermal generation and the cost of fuel.” It’s a cost passed on directly to the consumer.

Given that Kenya is a net importer of diesel, there is an implicit FX risk and cost captured under energy charges.

Kenya’s electricity value chain is thus exposed to a significant FX risk. Hence, consumers risk increasing electricity prices should the shilling continue to weaken.

One of the most effective ways to mitigate or reduce the risk is by encouraging IPPs to acquire capital locally and issue PPAs in local currency.

Another step is to decrease the hard currency debt on Kenya Power and KenGen's books; however, this is not an obvious solution considering that some debts are concessional.

Kiio is a consultant in the renewable energy investment sector and Mokaya is an e-mobility champion.

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