The shilling-denominated tariff regime promises a lower cost burden on consumers as the forex cost in power bills drop.
Currently, private investors in Kenya finance large power projects in US dollars.
Because tariffs are fixed in dollars, shilling fluctuations often present a repayment risk to Kenya Power.
Kenya could soon start fixing wholesale prices of electricity offered to power producers in shillings following completion of a study aimed at reducing consumers’ exposure to foreign currency volatility.
The shilling-denominated tariff regime promises a lower cost burden for homes and businesses as the forex cost in power bills drops.
Currently, private investors in Kenya finance large power projects in US dollars, mostly loans, restricting their electricity charges to dollars.
Electricity distributor Kenya Power’s #ticker:KPLC power purchase agreements (PPAs) with electricity producers come with fixed tariffs that are denominated in US dollars.
“The goal is to lower forex cost in consumer power bills and encourage increased local funding of power projects among banks and fund managers,” Energy principal secretary Joseph Njoroge said a stakeholders meeting on Tuesday.
Fluctuations
Because tariffs are fixed in dollars, shilling fluctuations often present a repayment risk to Kenya Power which buys power from producers in dollar-denominated tariffs for onward sale to homes and businesses that pay in shillings.
This presents a mismatch that results in the utility firm passing on the risk to consumers through the forex adjustment levy in their monthly power bills.
The study by the ministry suggests that tariffs for small projects (under 10 megawatts) should be fully denominated in local currency while projects above 10 MW should be partially priced in hard currency.
India and South Africa have successfully adopted local currency-denominated bulk tariffs for renewable energy projects.
On the other hand, Tanzania in 2008 unsuccessfully transitioned to local currency priced tariffs but reverted to the dollar denominated regime in 2014.
Tanzania flopped due to “market perceptions around off-taker creditworthiness, as well as lack of depth in the domestic capital markets.”
