Electricity prices could skyrocket because the government has to raise revenue to pay the latest set of independent power producers to join the national grid.
The Weekly Review has seen a letter from the Energy and Petroleum Regulatory Authority (Epra) directing Kenya Power to submit a tariff application.
The October 3 Epra letter from Director-General Daniel Kiptoo reads: “You are directed to submit a retail tariff application by October 31, 2022 to consider revenue requirements of the commissioned power plants, expected plants to be commissioned within the tariff control period, Ketraco’s system wheeling arrangements, Kenya Power operations maintenance costs and the cost of operating and maintaining the Rural Electrification Scheme.”
From correspondence, the biggest pressure on tariff is attributable to operations of the recently commissioned Independent Power Producers (IPPs) that include Selenkei and Cedate power stations, Malindi Solar, Kipeto Solar, Olkaria V and Kianthumbi Power.
In response to the letter, Kenya Power has presented the regulator with a tariff review application. The non-fuel component of the tariff will go up from Sh16.95 per unit by 12.3 per cent in 2022/23, 11.3 per cent in 2023/2024, 7.15 per cent in 2024/25 and 5.86 in 2025/26.
The single largest component of the proposed tariff will be invoices for capacity charges to the new IPPs. The last time Kenya Power made an electricity tariffs application was 2018.
The current rate that reduced the 2018 tariff level by 15 per cent was approved by Epra on January 7, in line with the recommendations of the Presidential Task Force on Review of IPP Power Purchase Agreements that was chaired by investment banker- John Ngumi. The lower tariff is to lapse by December.
Under the IPP model followed by Kenya, every merchant power plant that comes on board brings its revenue requirements.
This means Kenya Power must apply for a tariff increase whenever a new plant comes into operation. Since the government has signed many IPP agreements within a very short period, the system has witnessed an unsustainable build-up in payments for unused electricity.
Power agreements have “take or pay clauses” that prescribe capacity charges. This means the off-taker is under obligation to pay the merchants even where the power they have produced has not been consumed.
With the economy in the middle of a cost of living crisis, the prospect of a steep rise in electricity tariffs is something the Kenya Kwanza administration will find politically unpalatable.
Yet the reality is that short of a renegotiation of power purchase agreements or an overhaul of the IPP model adopted, an upward adjustment of tariffs in the coming months would be inevitable.
Clearly, the administration of President William Ruto will be walking a tightrope because a tariff increase will be viewed as reversing the low electricity regime that the Uhuru Kenyatta administration pursued relentlessly.
Will the new administration open another round of negotiations with IPPs? What happened to the talk about a moratorium on new IPPs?
Without a doubt, the plan to increase electricity tariffs – and the exit from the board of Kenya Power of a team that has been championing the cause of renegotiation – is bound to reignite the debate about power purchase agreements and how they have subjected consumers to a regime of high tariffs.
Kenya Power Board chairperson Vivian Yeda and member Yida Kemoli who were kicked out by Treasury Cabinet Secretary Njuguna Ndung’u this week were part of the team that has been pushing the case for renegotiation.
Their ejection – and of other KPLC Board members – is interpreted as a sign that the political support for IPP renegotiation is on the wane.
Opinion is divided as to whether the reforms in the electricity sector, which Mr Kenyatta’s regime attempted to implement, made a difference.
However, the unanimous view is that the report detailed and exposed the activities of corrupt cartels that have captured Kenya Power’s supply chain.
The shake-up started with the naming of the task force on negotiation of purchase agreements followed by the appointment of a reform-committed board at Kenya Power and the removal from office of a long serving insider and chief executive officer.
Lastly, there was a shake-up at the Ministry of Energy whose highlight was the exit from Nyayo House of Cabinet Secretary Charles Keter and Principal Secretary Joseph Njoroge.
The Ngumi-led task force shone light on the dark corners in the electricity sector, elevating the quality of public discussion and understanding of the extent of the rot and corruption.
Perhaps its most significant finding was graphically described as policymaking in the energy sector. It through the years followed a regime that elevated promotion of the interest and investment of merchant power plants above delivery of affordable power to citizens.
The best proof about how policy has made IPPs wealthy at the expense of the consumer, is a narrative in the task force report about the infamous gazette notice of April 19, 2016.
The report shows how the government – out of the blue – published a gazette notice that offered huge benefits and concessions to IPPs at the expense of Kenya Power and the consumer.
First, it lowered the minimum heavy fuel stock levels IPP plants could hold.
Secondly, the notice allowed merchant plants to operate outside the merit order.
According to the report, the working capital released was worth $3 million to $7 million.
Thirdly, the infamous gazette notice gave IPPs the chance to run their equipment longer than the availability thresholds stipulated in the agreements with Kenya Power.
They could run the machines even when there was no demand for the power, continuing to load the cost of generation to the consumer.
Power purchase agreements are negotiated opaquely because Kenya doesn’t have a system of auctioning them. Because most are unsolicited deals, the air in the electricity sector is rife with rumours and sensational claims about how most merchant plants are owned by influential elites.
Under the conditions of the current programme with the International Monetary Fund, Kenya must publish the names of beneficial owners of companies which it contracts. How about starting with publishing beneficial ownership of IPPs?
