New tariff creates room for small power generators

KPLC workers installing transformers. The ERC is working on guidelines that will allow use of the power distributors’ network. Photo/FILE
KPLC workers installing transformers. The ERC is working on guidelines that will allow use of the power distributors’ network. Photo/FILE 

The energy sector regulator is working on a power distribution tariff that will see small generators use the Kenya Power and Lighting Company network to transport electricity.

Among the beneficiaries of the plan will be industrialists who have, for years, held back plans to produce own electricity because of the supply constraints.

The Energy Regulatory Commission (ERC) has commissioned a study “to come up with numbers that will facilitate introduction of wheeling tariff,” said Mr Kaburu Mwirichia, the ERC director general.

Technically known as the wheeling tariff, the guidelines cover dispute resolution mechanism between the producer and the KPLC and is expected to motivate firms to go into generation as a way of cutting costs and diversifying revenue streams.

Industrialists, through the Kenya Association of Manufacturers (Kam), have continually complained about high power bills, saying such overheads have affected their competitiveness in the region.

Manufacturers say that energy costs account for up to 40 per cent of their production expenses, making it crucial for firms that are energy-intensive to come up with ways to tame rising costs.

The ERC study will capture economics of wheeling tariffs for projects that generate between 500 kilowatts and 20MW and involve the power distributor.

The ERC chief said the regulator would come up with the guidelines “as soon as possible.”

Companies including tea factories have shied away from going into power production because the law restricts transportation.

A number of firms have applied to generate power for their own use but the lack of a distribution policy has put brakes on their plans.

They include Kaluworks, Kenya Petroleum Refineries. Bidco Oil Refineries Unilever Kenya Tea, Athi River Mining and East African Portland Cement.

However, some of these have power plants within their factories and will not be affected by the distribution rules.

Firms generating power away from their plants sell at lower rates to KPLC and buy at the point of use at a higher cost, an arrangement that ERC says has discouraged companies from electricity generation.

The wheeling guidelines is expected to encourage firms producing power for own use and sale of surplus, which will help the country to boost its supplies at a time demand is running ahead of supply.

Kenya risks a shortfall to feed its growing economy considering that the reserve margin — the gap between peak demand and supply — has shrunk to below 10 per cent compared to the minimum 15 per cent.

Policy makers have identified supply and cost of power as some of the biggest challenges the government will face in coming years.

Entities that plan to produce 5MW of electricity for own use 30 kilometres away from the generation point sells to KPLC that has the capacity to transport and then buy at a higher price, knocking off economic gains of such a project.

“We had a case of a dairy company that has 20,000 cattle 60 kilometre from Nairobi where its factory is located. They wanted to produce biogas electricity but would have to sell it to KPLC at Sh4 and buy it in Nairobi at Sh10. It did not make sense,” said Joseph Njuguna of Energy Track Associates, an energy consultancy.

The absence of a wheeling tariff has been a major drawback to companies that want to improve their energy efficiency by switching to renewable sources.

More competitive

Kam says in a research that investment in renewable energy has a payback of one to two years and up to eight years for solar energy, making them cost effective for companies that want to cut down production costs.

The new tariff will mean that companies turn to cheaper power to make their products and services more competitive.

It will also create opportunities for companies to earn from the carbon credits market that awards use of renewable energy.