How Kenya Power can regain an enviable financial muscle

Commercial and industrial solar market has taken off across sub-Saharan Africa over the past five years. In Kenya, it is the fastest-growing segment today with roughly 50MW installed by end of 2020.

In addition to a myriad of technical and operational inefficiencies, Kenya Power has come under public fire for poor governance, mismanagement and excessive issuance of power purchase agreements.

The cost of idle capacity under take-or-pay contracts passes through to customers as high tariffs, driving consumers toward green solutions.

Private solar companies have aggressively grown awareness in addition to financing from DFIs, investors, and local banks, which is more readily available. As such, a competitive solar market has emerged virtually unsubsidised and without direct incentivisation.

Given KP’s staggering debt bill (standing at Sh118.73 billion last June), the utility is now scrambling to increase revenues and cut expenditures.

Utilities defensively guarding sales in the face of growing customer-side solar markets has been a knee-jerk reaction since green markets began taking off in the 1970s. In fact, this is largely what held solar markets at bay until widespread net metering rollouts in the US (starting in California) and feed-in-tariff rollouts in Europe (starting in Germany).

Today, net metering is available in some form in over 44 states in America and the feed-in-tariff is standard across Europe, with utilities even acting as proponents for solar expansion.

Experience in mature electricity markets shows that the advent of distributed resources is an opportunity not to double down on a slim bracket of existing customers, but rather to (re)orient the power sector around what matters most for business: System efficiency, demand growth, and avoiding unnecessary costs. What could this look like for Kenya?

Aside from the obvious issues of governance and financial mismanagement, let us look at three key areas of KP’s business model that are overdue for redesign especially as commercial solar systems take off.

System efficiency: Right now, KP, like most “wires only” utilities, is rewarded based on how many kWh it can sell rather than how well it meets customer service needs.

As a result, investments in efficiency are limited, and system losses – both commercial and technical - are steadily on the rise. Quality and reliability are key to growing industrial demand.

So, incentives for the utility to improve service (rather than sales) would drive industrial demand and grow the customer base. While there is a cap on losses for Kenya Power, it is not enforced by the regulator and in fact is being revised upward rather than downward to alleviate penalties owed.

Demand growth: Kenya is in a situation where generation has overshot existing demand. Meanwhile sectors such as agriculture are hindered from growth by unreliable power.

Improved system efficiency would allow the utility to tap into latent demand of such sectors, recouping on those hefty generation investments, and increasing the revenue base beyond a small pool of existing commercial customers.

As agricultural value chains become more urbanised and consumer driven, with a greater emphasis on quality and food safety, many new growth opportunities are developing, especially for SMEs, which could spell an expanded customer base for the utility.

Avoided costs: With high-quality service, and a larger commercial and industrial customer based secured, the utility will then find that a healthy customer-side generation segment can be a blessing in disguise.

Most customers opting for solar in Kenya are not going completely off-grid, they are doing grid-tied systems with no storage.

This suggests that, rather than defecting from the grid entirely, businesses are trying to avoid the high day-time penalty charges enforced due to grid congestion.

If these customers are willing to go offline at a time when congestion is high, then KP could see this segment as an important mechanism to help it avoid expensive distribution infrastructure expansion.

In fact, rather than safeguard against defection, many utilities now leverage customer self-generation, even using its gains to finance net metering or Feed-in-Tariff policies. A healthy dose of customer self-generation also abates the need for future generation investment, again cutting utility expenditures.

Rather than resisting change, this is a crucial time to lean into the much larger latent market opportunities that exist by evolving the utility business model.

Dr Rebekah G. Shirley, director of research, WRI Africa