How power tariff duel hits economy investmentsWednesday August 31 2022
In January, Kenya issued a gazette notice that effected the reduction in electricity tariffs as had been earlier promised by President Uhuru Kenyatta. Effective January 1, 2022, domestic consumers have been paying Sh7.7 per unit, from Sh10.
Those who consume more than 100kwH but less than 15,000kWh are now paying Sh12.60 per unit, down from Sh15.8. Commercial and industrial consumers of more than 15,000 monthly units are paying Sh8.7 per unit from Sh12.
Additionally, manufacturers are now paying an incentivised rate of Sh4.35 per unit during off-peak hours. Of course, these moves are populist and may turn off future private sector investments in the sector.
Broadly, private sector investments into the energy sector are underpinned by Power Purchase Agreements (PPAs), which, by definition, are the primary contract between an "offtaker" (often a State-owned electricity utility, in jurisdictions where the power sector is largely State operated such as Kenya) and a privately-owned power producer.
In PPAs, the wholesale offtake tariffs are typically set with a view of longterm revenue generation and most PPAs are for around 20 years. Essentially, investors in energy projects peg their investment decisions on projected cash flows and hurdle rate returns over the life of the contract.
And given that the tariffs are determined based on the prescribed feed-in tariff by the government or through open and transparent procurement, this tariff review has proved to be a hard sell to PPAs.
In Kenya today, power generation is dominated by the State-owned KenGen and independent power producers (IPPs). State-owned Kenya Power, the sole distributor of electricity in the country, is the only off-taker of power.
In 2021, KenGen supplied 70 percent of electricity to the national grid while the 21 active IPPs accounted for the balance.
Additionally, KenGen’s supply tariffs to Kenya Power are much lower than the IPPs. In 2021, Kenya Power’s off-take tariff from KenGen was Sh4,872.9 per Gigawatt hour (GWh); while from IPPs was Sh13,122.3 per GWh.
This difference in off-take tariffs is due to a number of factors, key among them KenGen, being State-owned, enjoying concessionary financing mechanism; KenGen’s power plants are mainly focused on renewable sources and, hence, lower generation costs; and, most of KenGen’s power generation asset, especially hydro-generation assets, have been fully paid down and are able to charge lower tariffs.
The directive by President Uhuru Kenyatta now means ongoing/incomplete negotiations with IPPs whose projects had been procured under the Feed-in Tariff Policy are to be cancelled, which maybe negative for the sector.
According to a presidential task force report on review of PPAs , at risk of cancellation are a total 92 projects capable of generating 2,345.07MW (the equivalent of 58 percent of current installed capacity) that were unsigned as at March 2021.
Out of the 92 projects, 58 were awaiting PPA renegotiation while 28 projects were under negotiation with no commitment. The cancellation of these projects will bend an otherwise policy straight-line that has been a strong magnet for investments into the sector since the early 2000s. I would rather the government re-negotiate PPA terms downwards than entirely cancel the projects.
The tariff revision may also be negative for Kenya Power. Based on Kenya Power sales figures of Sh125.9bn in 2021, the 15 percent reduction in the cost of power is equivalent to approximately Sh18.8bn. This coupled with a further 15 percent reduction in the first quarter of 2022 could widen the utility’s fiscal hole.
The take-or-pay plans will also exacerbate Kenya Power’s situation. Under these purchase agreements, a power producer gets paid for any electricity produced, even if Kenya Power is unable to sell it to consumers (especially during overproduction).
In summary, Kenya needs IPPs. A study conducted by the World Bank dubbed “Independent Power Projects in sub-Saharan Africa — Lessons from Five Key Countries” inferred that IPPs are essential to the electrification of sub-Saharan Africa.
They help to improve energy mix and provide diversification on sources of energy like geothermal, solar and wind. The public sector alone cannot fill the large funding gap that holds back investments in new power projects.