Kenya is making another bid to stop billing for wholesale power in US dollars and euros in an effort to lower electricity prices for homes and ease Kenya Power’s foreign exchange losses.
Energy consumers in the country often complain of high electricity charges, with some of the costs being attributed to idle capacity charges to compensate independent power producers (IPPs) for electricity generated but ultimately not used and their billing in dollars.
Now, President William Ruto’s government wants fresh talks between Kenya Power and the generators to end the dollar billing and possibly cut their rates.
A team set up by former president Uhuru Kenyatta in 2021 failed in its bid to review power purchase agreements (PPAs) being negotiated with the national distributor, Kenya Power, after generators opposed the move, terming their long-term contracts locked.
Energy Cabinet Secretary Opiyo Wandayi said that Kenya Power was exploring the possibility of opening talks with generators to start buying electricity in Kenya shillings.
Electricity consumers and Kenya Power were exposed to huge foreign exchange losses when the shilling experienced wild swings against the dollar and euro.
“It would be better if Kenya Power could renegotiate these contracts, not only to bring the tariffs down but also to explore the possibility of conversion of tariffs to Kenya shillings from US dollars and euros,” Mr Wandayi told the Business Daily.
“This is currently ongoing between Kenya Power, IPPs and KenGen, and it is being done within the law in order not to incur unnecessary contractual costs.”
He reckons that renegotiating the power purchase agreements by converting the tariffs to shillings, in addition to lowering them, presents a sustainable route to bringing down electricity bills.
This is as opposed to terminating the expensive contracts especially with IPPs which, the minister says, would cost taxpayers billions of shillings in compensation to generators for breach of contracts.
The push by the minister, who took office in August, mirrors the recommendation of the 2021 Presidential Taskforce on the Review of Power Purchase Agreements, led by investment banker John Ngumi.
IPPs, who have for long been blamed for the high cost of electricity in the country, have opposed the implementation of the taskforce’s report on grounds that the funds they invest to generate power are denominated in dollars.
They reckon that a switch in the denomination of PPAs with Kenya Power would leave them vulnerable to foreign exchange pressures when servicing loans.
Buying power in dollars has, however, seen Kenya Power take a major hit when the shilling weakens, expenses which are transmitted to monthly electricity bills for businesses and households.
Besides the fixed tariff in consumers’ bills, households and businesses pay a variable monthly foreign exchange surcharge that covers part of the generators’ losses from the weakening of the shilling against the dollar and the euro.
For example, the fluctuation of the shilling in the financial year ended June 2023 saw the near monopoly power distributor take a hit of Sh5.32 billion due to revaluation of power purchase obligations with the generators.
The Ngumi taskforce in 2021 identified pricing of wholesale power in foreign currency as one of the major reasons for the relatively high cost of power in Kenya due to exposure of the tariffs to fluctuation of shilling against the dollar and the euro.
Under a typical power purchase agreement, a power producer also gets paid for any electricity produced, even if it is impossible for Kenya Power to sell it to consumers because of reasons including excess production.
The Kenyatta-era taskforce found that there was a huge disparity between the tariffs charged by main power producer KenGen and IPPs.
KenGen’s prices were much lower than those of the IPPs. Kenya Power buys most of its electricity from State-controlled KenGen.
Former Energy Cabinet Secretary Davis Chirchir, however, said in July 2023 that conversion of the tariff in the PPA deals to shilling denominations was not feasible, citing a study done by stakeholders in the energy sector.
“On viability of introducing a policy that uses local currency denominated PPAs, or having a mix of local and foreign currency PPAs in renewable energy, the sector recently conducted a feasibility study on viability of the Kenya shilling-denominated PPAs and the study found that this option is not viable,” Mr Chirchir said at the time.
IPPs, whose power purchase agreements are typically for 20 years, have come under fire for costly deals with Kenya Power, which have kept electricity prices elevated and lowered Kenya’s competitiveness to investors.
Kenya Power in the year ended June 2023 paid electricity generators Sh117.04 billion, a growth of 21.89 percent over Sh96.02 billion the year before.
This comprised Sh71.48 billion to IPPs, while KenGen received Sh45.55 billion.
Lawmakers have for years pushed for a review of the PPAs that Kenya Power inked with IPPs.
“The National Assembly and the Senate have also deliberated on the same and made recommendations on the way forward. I am currently looking at the reports to see if there are any low-hanging fruits that I can pick as I provide a sustainable approach to the cost of electricity in the country,” Mr Wandayi said.
