Power Company’s Quest for Higher Tariffs Dims Hopes for Lower Prices

Business Daily (Nairobi)

Zeddy Sambu

17 June 2011

Power projects

KenGen projects completed in the past three years include hydro-power plants like the Kiambere upgrade (20MW), Olkaria Unit III (35 MW) Tana re-development (20MW), Sondu Miriu (60MW), Kipevu II thermal (120MW) and Wind 5.6 MW.

Those planned include Kindaruma (35MW), Ol Karia I and IV (280MW), the Muhoroni thermal plant (80MW). Coal plant joint ventures (JVs) got site investigation 300MW.

Among the items in your electricity bill is value added tax at 16per cent charged to a fixed charge, demand charge, foreign exchange fluctuation adjustment, fuel cost and taxable value of electrical energy consumed in a manner required by the Government.

The Kenya Power and Lighting Company also collects levies for the Rural Electrification Programme charged at 5per cent of revenue from Unit sales while the ERC levy is billed at 3 Kenya cents/kWh.

Whichever way one looks at it, the impending review of consumer electricity tariffs puts the country in the legendary unenviable position between the rock and a hard place. The review, which must be done by the beginning of July, has come at a time when the economy – for factors that are largely out of control of local policy makers – is facing the challenge of high consumer goods prices that have pushed inflation to double digits level from a low of less than four per cent late last year.

But the Energy minister Kiraitu Murungi, among other stakeholders has taken a strong position against any prospects of reviewing the power tariffs upwards before the end of June.

Power producers and the off taker have indicated that they will push for review of bulk supply tariffs during this year’s review.

For the Kenya Power and Lighting Company’s (KPLC), a review on the retail prices will enable it to pay for the new bulk supplier costs from additional revenues to its current level of earnings.

The Energy Regulatory Commission (ERC) agrees that there are solid grounds for review of the tariffs that were last adjusted in 2007.

However, economic grounds alone will not suffice in this situation where real livelihoods and the stability of the entire country are at stake. Any solution therefore must carefully weigh these options.

The commission’s director general Kaburu Mwirichia says failure to adjust the rates bears the risk of significantly cutting back the power transmission monopoly’s profitability or pushing it to the loss-making zone – leaving it without the money to expand its reach and upgrade its transmission systems to a level that can support the current dynamic growth with annual demand at eight per cent .

A freeze in electricity tariffs as proposed by Mr Murungi means that KPLC must absorb the additional power purchase and transmission costs and risk a slowdown in its profits.

Electricity tariffs

The minister’s differences with KPLC on tariff adjustments are also expected to put the independence of the regulator to test even though the regulator has always insisted that its decisions are independent of the Energy ministry.

On Thursday, ERC confirmed that the power supplier has asked it to set new prices from next month.

“We have a request from KPLC and we are looking into it. We have also received the sentiments of major stakeholders. July 1 is part of our policy for review,” said Mr Mwirichia. He spoke after Mr Murungi announced recently the Energy ministry would back efforts to suspend the review to help ease the pain of inflation on consumers, whose purchasing power has been deeply eroded in the past three months with the steep rise in the prices for basic commodities.

But the regulator, who must approve all bulk and retail tariffs – as provided for in energy sector regulations – reckons that the power firm deserves an upward review of retail tariffs. The power off taker and the power generators initiate Power Purchasing Agreements, which are then submitted to the ERC for approval.

“The utilities and the ERC have to be sensitive to the rising cost of living but KPLC must generate enough revenue to meet commitments and make a reasonable profit,” Mr Mwirichia told the Business Daily on the phone.

High living costs have fanned discontent among Kenyans and sparked waves of protests as runaway inflation continues to bite. “The target for the exercise is a price review. But they have to be fair and properly structured. We will look at projects that have come on stream and those that are planned for the next three years ,” he added.

Retail electricity tariffs are reviewed every three years – save for periodic adjustments on fuel cost, foreign exchange and inflation that are passed on to the end user and have a neutral impact on KPLC’s revenue.

“The policy is to review tariffs every three years and that will be the end of June,” said Mr Mwirichia. KPLC said last week it would seek a review of retail tariffs to help it manage operational costs and give it the financial strength to absorb the expected rise in bulk power purchase and transmission costs.

“We are studying proposals by the KPLC,” added Mr Mwirichia.

Aging power infrastructure contributes to the frequent power outages that frustrate industry and household consumers.

Additional revenue

Failure to compensate KPLC and the power generators has resulted in the present lag in investments that does not match demand leading to shortages. Power consumption in Kenya grows at about eight per cent annually. During the last review in 2008, tariffs went up by 21 per cent. Energy costs are already perceived to be high prompting some manufacturers to consider relocating to other countries where the cost power is cheaper.

Electricity prices rose to a 15 month high last month driven by the rising fuel cost adjustment – an item on the bills linked to the amount of power generated from fuel.

The fuel cost charge collected – which KPLC transfers to the power generating companies such as KenGen, Aggreko, Iberafrica and Tsavo Power Company — increased this month to Sh7.11 from Sh6.15 last month and Sh5.73 in April. In May, inflation increased by seven per cent from 12.05 per cent to 12.95 per cent on the back of high cost of commodities.

The KPLC currently charges domestic consumers Sh2 a kilowatt hour (Kwh) for the first 50 units, Sh8.10 a Kwh for consumption of between 51 units and 1,500 units and Sh18.75 for units above 1,500 units. It also levies every consumer a fixed charge of Sh120 a month and other items such as value added tax, fuel cost, and foreign exchange, ERC levy and Rural Electrification Authority Fund.

But the power supplier does not benefit from the rise in electricity costs making the fight for tariff review critical to its future profitability. This is because generation costs account for about two-thirds of the (review) prices, while transmission costs is about five per cent.

The power firm spent Sh20.5 billion on power generating firms in the year to June up from Sh18.7 billion in 2009, but the bill is expected to increase in the next three years as KPLC buys more power, especially from private firms that ask for higher charges compared to the state-owned KenGen.

Kenya Power and Lighting Company pays KenGen nearly Sh3 a unit of power given that the bulk of its electricity comes from the cheaper hydro power sources while its pays the private investors more than Sh6 a unit.

Still, KPLC must spend more than Sh22 billion over the next four years to reinforce and expand its transmission system and is expected to raise additional revenues from the new higher tariffs. KenGen – the public power generator with 53 per cent share of the market urges that the review must be transparent.

“We have got about 20 items to be reviewed with the retail tariffs review. They range from changes to charges based on kilowatt-hour as well as the distribution of hydrology risk ,” said Mr Eddy Njoroge, KenGen’s managing director.

He added: “If we do not have enough revenues, we will opt for the avoided cost, which includes failed maintenance on plants and transmission network. If we hold any increase that is necessary, we will pay the consequences including reliance on emergency power.”

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