ERC’s new power tariffs to hit industrial users hardest

Industrial consumers will incur the highest increase in the cost of electricity starting next month when the new tariffs that the regulator announced last week come into force.

The Energy Regulatory Commission (ERC) has published a Kenya Gazette notice showing that key segments of electricity billing such as consumption and fixed charges will rise gradually before stabilising in July 2015.

The regulator has also introduced new charges in the billing structure, signalling a further increase in the cost of electricity.

The rise in consumption and fixed charges coupled with the introduction of Water Levy and Security Support Facility charges in the billings are expected to push up the overall cost of power by more than 25 per cent with far reaching effect on the pricing of industrial goods and services.

The resulting general increase in the prices of goods and services points to yet another surge in inflationary pressure after the September round associated with the introduction of value added tax (VAT) on a large number of consumer goods that were previously exempted from the charge.

ERC says in the notice that the water levy will be paid to the Water Resource Management Authority (WRMA) and is linked to hydro-electric power production of at least one megawatt (MW).

The Security Support Facility will be in place until a total €42.6 million (Sh5 billion) is collected to guarantee Kenya Power’s off-take of electricity from the 300 MW Lake Turkana Wind Power project. High cost of power means higher production costs for industrial producers that are passed on to consumers in the form of highly priced goods and services that drive inflation locally and hurt the competitiveness
of Kenyan goods in foreign markets where they compete against subsidised producers such as Egypt and South Africa.

ERC says in the notice published on Friday that industrial consumers supplied with power at 11,000 volts will pay consumption charge at the rate of Sh7.5 per kilowatt hour (kwh) beginning next month up from the current Sh4.73 per unit. That charge will increase further to Sh8.25 per kwh in July 2014 before stabilising at Sh8 in July 2015.

The fixed charge for this category of consumers – payable monthly regardless of consumption — is also set to rise from Sh2,500 to Sh4,500 beginning next month where it will stay until July 2015.

Beginning July 2014, the fixed charge for domestic consumers will rise to Sh150 per month up from the current price of Sh120. The non-industrial consumers will also shoulder a heavier consumption charge of Sh2.5 for the first 50 Kwh from the current Sh2.

Those consuming between 50 and 1,500 units will pay Sh11.62 per kwh from the current Sh8.1 beginning next month, a charge that will rise to Sh13.68 in July 2014 before dropping marginally to Sh12.75 in July 2015.

The new tariffs mean that households and commercial firms will see their actual power bills rise by about 26 per cent at the end of the tariff review period in July 2015, assuming there are only marginal changes in variable billing segments such as inflation and forex adjustments.

Households consuming 200 Kwh of electricity per month will pay about Sh4,083 in December and Sh4,325 in July 2015 up from the current Sh3,414.

Industrial firms supplied with power at 11,000 volts and consuming 100,000 units will pay Sh1.6 million in December and Sh1.7 million in July 2015 compared to the current Sh1.3 million.

ERC last week braved the cost-driving changes it had made in the billing structure with a prediction that the variable billing factors such as forex, inflation, and fuel charges are expected to almost disappear in the near term, easing overall billing for consumers.

The regulator said at a Press briefing last Wednesday that a lower weighting of the variable factors would be achieved through a reduction in the supply of expensive thermal power and a review of the benchmark foreign exchange rate from the previous 64.9 units to the dollar to 84.9.

Acting ERC director general Fredrick Nyang’ said he expected the overall retail power charges to drop from an average of Sh15.51 per Kwh in the current financial year to Sh13.44 in 2014/15 before further receding to Sh12.26 in 2015/16 without providing the actual tariff breakdown now available in the gazette notice.

The variables ERC is betting on to stay stable are, however, highly volatile and dependent on local and external factors, none of which ERC can control.

The new tariffs mark the end of Kenya Power’s long-running quest to increase its revenue volumes and are expected to earn the power distributor at least Sh7 billion in additional revenue.

Higher revenues and the expected rise in Kenya Power’s profitability should relieve the pain of shareholders whose investment in the firm lost 14 per cent of its value in the past 12 months to trade at Sh15.

A larger revenue base will also enable the utility firm to see through the Sh80 billion upgrade and expansion programme in the medium term besides improving its overall financial performance.

Kenya Power announced a 5.7 per cent drop in net profit for the year ended June and failed to declare a dividend for the first time since 2004.
The company’s net profit for the period was Sh4.3 billion compared to Sh4.6 billion a year earlier.

Kenya Power’s bid to have the tariffs increased from March 1 this year was put off following a similar freeze in 2011 as the newly-elected government fought to protect the economy from rising inflationary pressure. Power tariffs were last reviewed in 2008.

Inflation

Electricity is key ingredient of the consumer price index and its higher weighting portends an increase in inflation pressure in the medium term.

Inflation stood at 7.76 per cent last month, having dropped marginally from a high of 8.29 per cent in September.

The government recently implemented the 1.5 per cent Railway Development Levy on all imports and scrapped Value Added Tax exemptions on more than 400 items to boost revenue collection – sparking a wave of inflation in September.

Higher electricity bills would in the short term erode the country’s ability to attract and retain manufacturing interests, benefiting rival low-cost manufacturing bases in Africa and Asia.

[email protected]