Ideas & Debate

Why power companies are struggling in Africa

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While liberalising the power sector has advantages, it also calls for a robust institutional framework and State interventions to plug any gaps.

PART 2

Having concluded in Part 1 of this two-part series that the power sector challenges are like a tangled ball of wool, we take a closer look at some of the pieces of the puzzle.

One controversial point that has emerged is around the level of State support that Kenya Power is entitled to. In April, there was Press coverage on a statement by the Ministry of Energy to the effect that it would safeguard Kenya Power from losing customers through direct sales by KenGen.

The reason cited was that such customers might prove useful in taking up demand of electricity that the utility has committed to purchase from the independent power producers (IPPs).

In sharp contrast, in his Labour Day speech, Ugandan President Yoweri Museveni announced that for industrial parks, the power would bypass Umeme, the main electricity distribution company to be transmitted directly from the generator to the industrial parks.

It is interesting to see such divergent approaches to dealing with a struggling power utility – one being to support it by ringfencing some of its business and the other cutting it off to a greater degree and thus shielding consumers from its inefficiencies.

It is important to realise that when a government reduces support for a power utility, the impact is not felt by a juridical person but by flesh and blood persons. A good case is the proposed reduction by the Kenyan government in its budgetary allocation for subsidised connections by 87 percent, which shall impact the Last Mile Connectivity.

And while the government inevitably has to tighten its belt in many respects, this move may put connectivity costs out of reach for the vulnerable.

Another important constituent in the case of the Kenyan power utility is its staff. Despite the noble intention of implementing fiscal discipline through a headcount reduction, it has been compelled to drop its workers layoff plan due to a strike threat issued by the Kenya Electrical Trades and Allied Workers Union. Again, balancing between commercial interests and social responsibility is a tougher challenge for a power utility given its inescapable public interest. Other costs which are difficult to hedge against include foreign exchange fluctuation given the level of exposure in the utility company’s borrowing as well as the power purchase balances owed to IPPs.

Further, Press reports indicate that businesses that incur financial losses due to power blackouts will soon be compensated by utility company if proposed regulations are adopted, a move which does not bode well for the utility’s unwieldy cost structure.

Given the struggle in making headway on the cost reduction front, an electricity distributor can choose to focus on growth of revenue. However,given the vitriolic resistance of the Kenyan public to proposed increases in the cost of electricity, raising prices has not been a viable option.

If prices must be held constant, one way to improve turnover is to recruit new customers while retaining existing ones.

To woo large industrial customers the Energy and Petroleum Regulatory Authority (Epra) approved a low power tariff of Sh5 per kilowatt-hour for factories established in the Special Economic Zone in Olkaria-Kedong in Naivasha, which is approximately half the usual peak hour rate for manufacturers.

Incentives notwithstanding, for some large industrial/commercial electricity consumers, the most financially savvy option has been to generate their own power.

It is only a matter of time before industries and institutions start selling power to each other by entering into corporate PPAs, now that there is a legal framework for a more liberalised energy sector.

Alternative sources of electrical power therefore represent a threat to the power utility’s business, which may not be offset by inducements offered to the market.

The twin problem of runaway costs and erosion of the customer base has the follow-on consequence of unserviceable debt. At present, the power utility company has issued an EOI to re-finance a staggering bank debt of Sh53 billion, which represents half of its total outstanding borrowing.

It is not surprising to see that power utilities are often beset by similar troubles. Eskom Holdings which is South Africa’s State power utility is saddled with debt estimated at US$ 32 billion and it reportedly continues to struggle to meet payments even with the help of State bailouts. In April 2021, Eskom disposed of some of its non-core assets, including two buildings, to raise capital and reduce its mounting debt.

Nigeria is hardly the poster child for stable or sufficient supply of electricity but the path it has taken may have some learnings for us.

The Power Holding Company of Nigeria (PHCN) was privatised and unbundled in 2013, resulting in a number of electricity distribution companies (DISCOs) and generating companies (GENCOs). Shares in the GENCOs and DISCOs were sold to private investors as clean companies without any prior liabilities and the sale proceeds were applied towards severance packages for unionised workers.

While liberalising the power sector has advantages, it also calls for a robust institutional framework and State interventions to plug any gaps. Power utilities must also develop innovative ways of improving their earnings, including monetisation of their data which is something that Kenya Power is exploring.

Nyabira is a partner and head of the projects, energy and Restructuring practice of DLA Piper Africa, IKM Advocates and Muigai is a Director within the same team.