Power policy in Kenya: Did we blow the fuse?

Kenya’s economic prospects have turned ugly. Dozens of comments and diagnostics on public finances gauge not just how low we have plummeted but also the end of silence by Kenyan experts on public affairs.

The bonfire of debates will not easily be quenched with bureaucratic niceties.

Making a beeline to foreign experts including International Monetary Fund (IMF) and World Bank will take us straight into the humiliating policy traps and economic fallacies of the Washington consensus that derailed many African countries in the last century.

On the contrary, overwhelming proof — China, India, Malaysia, Singapore etc — demonstrates emerging economies that rejected the path and created their transformative ladders to growth raised their prospects to rival the First World. Better to ponder unprecedented economic shock treatment for Kenya since contraction and expanded poverty render this outsider-driven strategy empty.

Austerity defies demand and supply sides weakening simultaneously. As usual, it yields crumbs of development from the eating troughs where cold free-market fundamentalism meets our smug operators waiting to eat without mercy. It hands a disheartening invoice for the festivity, payable by future generations of taxpayers, debts they’ll repay without counterpart inter-generational economic benefits of output and employment. But I digress.

This piece reminds us the Big Lie is prevalent in microeconomic distortions in many sectors of our economy as well. The stakes are high, extremely high. For the same reasons we pick faulty priorities, our looming economic disasters are also mirrored in plans designed by smug operators who have not learned much from their mistakes.

Take the ongoing wrangles of Kenya Power and power generators — notably KenGen and Independent Power Producers (IPPs) holding Power Purchase Agreements (PPAs), which were foisted on Kenyans in the 1990s through the Energy Sector Recovery Programme of the World Bank.

The debate so far reveals not just a few shortcomings of past policies, but the entire philosophy behind the energy sector is wrong.

It also reveals Kenya as a country manipulated by generators so that its electricity consumers, taxpayers, and the regulator see Kenya Power as a veil through which stratospherically high electricity prices are extracted on production and take-or-pay basis for electricity. I hope the task force appointed will not sink Kenya Power to swim deeper in red ink when consumer demand doesn’t take all the power generated.

The part of generation taken-and-unconsumed is billed as ‘capacity charges’ that Kenya Power recovers from consumers and pays producers. At 54 percent (Sh47.4 billion) of Kenya Power’s total sales of Sh 97.8 billion, for the year ended June 2020, the charges take more than half of total sales.

It reminds me of the era of exchange controls where we paid stiff shilling prices for dollars in the black market. Except that electricity isn’t dollars. Electricity is the essential horizontal and vertical glue for modern economies to grow, compete, trade, drive jobs and services for families in every sector. Kenya’s scenario has the country held in a chokehold by generators. These hopes are dashed.

In the meantime, the sectors look for substitutes to the high-priced electricity by bypassing Kenya Power and connecting affordable sources such as solar power, discrediting the current model.

Since electricity is a system, not the US dollar, how did we get here? In the World Bank programme, the then Kenya Power and Lighting Company with decades of profits and profitability behind it was unbundled from an integrated colossus to create the tripartite segments: power generation, transmission and distribution, and partially privatise it from 1996.

It became Kenya Power — the distribution segment with 51 percent government shareholding — at the behest of World Bank loan terms. Few can quibble with the segmentation, which is standard for modern energy sectors. But if the outcome was a system that depends on offering incentives to investors through extremely high prices and tax exemptions for the electricity generation segment, it isn’t workable or sustainable, pragmatically, or politically.

Even worse, through the Last-Mile Connectivity project, we extended the high-priced power to remote locations looking to expend the excess supply, without a social programme cognizant of the even lower affordability in rural areas.

So, if the question of unbundling was designed as a path to charge consumers and Kenya taxpayers for excess, expensive energy through the stripped-down Kenya Power, we have a profound problem that shackles the economy for the long haul. A superior strategy would be to fight for affordable electricity, that’s decrease prices to fuel demand and economic growth, rather than prioritise the profit margins of electricity generators. You be the judge.

The crux of the issues is bulk-supply tariffs. They can be characterised as support prices whose emerging surplus of power generation capacity that rises well above demand should have been predicted from economic theory.

The surplus is normally paid by the government and warehoused for social purposes — think of cheese, milk, and other agricultural products in the US. In our case, it is passed on to consumers as capacity charges. Surprisingly, the government beefed up this support, granting electricity generators generous tax exemptions under flimsy arguments that they needed to pay their loans and dividends to shareholders.