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Will Uhuru deliver cheap power gift?

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Kenya Power workers repair a power supply line. FILE PHOTO | NMG

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Summary

  • If this pledge is honoured, it will be a game-changer, especially for the manufacturing sector. Power prices are a big drag on costs for industrial consumers. It will be a major boost for our manufacturing sector’s competitiveness.
  • A key area where the implementation of the committee of the task force is counting on making major savings is in bringing down the prices of fuel used by the merchants.

Will President Uhuru Kenyatta deliver on his promise of giving the electricity consumer a Christmas gift of a 30 percent reduction on the tariff? If you have forgotten, this is the promise the President made as he received the report of the John Ngumi-led presidential task force on the review of power purchase agreements in September.

The origin of the promise was a pledge which the task force itself made while presenting its report to the President. This is what the task force says in its report: “We will reduce consumer tariffs from an average of Sh24 per kilowatt hour to Sh16 per kilowatt-hour within four months following submission of this report.”

If this pledge is honoured, it will be a game-changer, especially for the manufacturing sector. Power prices are a big drag on costs for industrial consumers. It will be a major boost for our manufacturing sector’s competitiveness.

Can the pledge be delivered within the set time frame? Let’s wait and see. But from what I gather from the insiders driving the negotiations with independent power producers, it seems to me that the mood in there is that of cautious optimism.

I have learnt that more than a dozen independent power producers have agreed to make concessions. It seems to me that there is a great deal of goodwill from both sides. And, it is not as if the merchants have suddenly become benevolent.

The way I see it, what has put the government in a stronger bargaining position than the merchant plants are the findings and revelations that came out of detailed analysis and audits that the task force conducted on performance by the merchants against the provisions of the power purchase agreements.

Conducted by a team comprising of economists, lawyers, and corporate finance experts, the analysis concluded that major savings on what the consumer pays in capacity charges could be achieved by pursuing thermal plants for what the experts saw as clear breaches on undertakings stipulated in the power purchase agreements.

The analysis mainly of audited financial models attached to respective power purchase agreements revealed that the merchants had engaged in blatant misrepresentation of project costs thereby forcing Kenya Power to agree to high capacity charges.

Secondly, that they had failed to meet cash to equity contribution thresholds stated in the agreements. Thirdly, that the merchants had failed to operate the plants as per the agreements in respect of fuel purchases.

A key area where the implementation of the committee of the task force is counting on making major savings is in bringing down the prices of fuel used by the merchants. One of the interesting findings of the analysis is that there were huge variations in fuel prices among merchant plants.

This finding is especially baffling because the price of heavy fuel oil is indexed on the Platt and therefore open and transparent, meaning that the differences in price should only be on transport costs.

Clearly, these merchant plants have been buying fuel at way beyond the market price and then passing those high prices to the electricity consumer.

I also guess that the team is counting on making major savings from renegotiating capacity and deemed generation charges by big merchants such as Lake Turkana Wind Power.

The analysis revealed that while capacity charges to this company were negotiated on the assumption it would dispatch 300MW, the current performance showed that the merchant plant was dispatching power at an annual average of only 150MW.

We only have weeks to see whether the team will achieve President Kenyatta’s Christmas gift pledge. Even if it does not happen, we must be happy that the reforms have put us on an irreversible path to putting cheap power to the consumer as the core policy objective in the electricity sector.

How can they tell us that we have more power in this country than Kenya Power can take in a context where millions of citizens still cook in smoky open fires?