ERC plans to strip Kenya Power of some functions

NAIROBI: The energy regulator has set the stage for the splitting of Kenya Power one more time in a move calculated to push expensive power generators off the national grid.

The development is being interpreted as a fresh attempt to reduce the influence that Kenya Power has on the energy sector.

The Energy Regulatory Commission (ERC) wants a new entity established to ensure only the cheapest energy available in the market ends up on distribution lines.

ERC Director General Joseph Ng’ang’a in an exclusive interview with Business Beat described the development as “inevitable”, arguing that it was necessary to reduce the conflict of interest that Kenya Power finds itself in.

“Decisions have to be made on what plants come in, and that can only be done by someone who has no interest whatsoever. A player like Kenya Power is already in the system and it would have interests in deciding,” Mr Ng’ang’a said.

“We want someone else to ensure retail tariffs follow an economic order of dispatch to be able to match demand and supply.”

ERC could not give a timeframe on when this will happen on the grounds that implementation depends on Parliament’s approval of the new law.

“This is an idea whose time has come. It is nothing personal. The breaking off of Telkom was eventually beneficial to the ICT industry and no one can say otherwise. But the final decision rests with Parliament,” Ng’ang’a said.

But in what is set to reignite turf wars, the regulator wants the role of deciding who contributes power to the grid handed to Kenya Electricity Transmission Company Limited (Ketraco) in the short term before the new entity develops into a fully fledged independent operator.

“We have looked at best practices, including how the National Grid Company in the UK works. We have also done several studies that have recommended this to us as best practice for the sector to serve consumers,” Ng’ang’a said.

Eventually, when all is in place, the regulator says the energy market will operate like “Gikomba”, with the new entity, which will be known as a system operator, being told by generators how much power there is, and at what cost.

The operator will ensure only the cheapest available plants come onto the grid.

“If the expensive operators don’t review their costs, then they will be wiped out of the market,” Ng’ang’a said, adding that players always resist a new entrant.

“They were reluctant to allow KenGen to come in, and at some point, even KenGen was reluctant to bring in the Geothermal Development Company. But as a regulator, we strive to ensure there is efficiency in the market.”

POWER DISTRIBUTOR

ERC insists it will ensure the implementation will not disadvantage the power distributor.

“We will try as much as possible to insulate Kenya Power. We would not want it to go down,” Ng’ang’a said.

The system operator will also operate a national control centre and other infrastructure established by the Government for the purposes of carrying out system operations.

However, the entity shall not be involved in the direct or indirect buying or selling of electrical energy.

The opening up of the market to Ethiopia and the East African Community will also increase the system operator’s scope. Counties are also expected to be power generators.

If implemented, this will become the fourth time a new entity is being hived off from Kenya Power, a trend that has rattled the utility company and opened a new battlefront with the regulator.

The mandate to generate power was taken away from Kenya Power in 1998 when Kenya Electricity Generating Company (KenGen) was formed.

This saw the firm, which was known then as the Kenya Power and Lighting Company (KPLC), remain with just transmission and distribution.

KenGen was then split to form the Geothermal Development Company (GDC), a 100 per cent State-owned company formed as a special purpose vehicle to fast track the development of geothermal resources in the country.

This split, which caused its fair share of rivalry, however, helped to take away the risky venture of prospecting for viable geothermal wells from KenGen after it was partly privatised.

Ten years down the line, Kenya Power was broken up again to form Ketraco, which is owned fully by the Government.

Ketraco was put in charge of developing high-voltage transmission infrastructure, taking the role away from Kenya Power.

This left Kenya Power with just the distribution role, which also entailed seeking and buying power from generators for distribution.

ERC, it appears, is not done. It is back one more time, this time to slice off the role of scouting for energy, which would just leave Kenya Power with one lean function — distribution.

This has already sent shivers through Kenya Power, which has started fighting the proposal.

Kenya Power Managing Director Ben Chumo argues that introducing an independent company to buy and manage electricity supply would inflate the cost of energy further.

Dr Chumo said power bills would go up as consumers bear the costs of setting up the independent entity to buy energy.

“If you look at your power bill, you will notice that 50 per cent consists of access costs and levies, rather than consumption,” he told journalists last week.

“If another player comes in, he will turn to consumers to finance operations.”

Consumers already pay levies for the upkeep of the Rural Electrification Authority (REA), Ketraco, Water Resource Management Authority (WARMA), plus a 13 per cent Value Added Tax.

But ERC says the new player will not be established until the market can support it.

“We have already communicated to the players that Ketraco will handle this role tentatively. This is also raising the same concerns of conflict of interest, but we are looking at the best alternative,” Ng’ang’a said.

PROPOSED LAW

According to the plan, captured in the new Energy Bill, the Independent System Operator (ISO) will operate as a middleman between the distributor, transmitter and generator.

ERC will have powers to appoint the ISO, which will be responsible for “matching consumer’s requirements or demand with electrical energy availability or supply, maintaining electric power system security and arranging for the dispatch process”.

The operator will also give directions, exercise supervision and control as may be required for ensuring the stability of network operations, and for achieving the maximum economy and efficiency in the operation of the electric power system.

The new bill vests the new player with the power to ensure optimal scheduling and dispatch of electrical energy and ancillary services throughout the country.

It shall also keep records of the quantity and quality of electrical energy supply on the national grid, as well as co-ordinate with other system operators of the countries whose electric power systems are interconnected with the Kenyan system to ensure efficient operations.

The power to make regulations for system operations will be vested in the Energy cabinet secretary.

The system operator may also levy and collect fees and charges from generating companies or any licensee engaged in electricity undertakings.

Every licensee, operator of a generating plant, sub-station, transmission or distribution system and any other person connected with the operation of the electric power system shall comply with the directions.

“All directions issued by the system operator to the operator ... shall be issued through the designated control centres of the respective licensees,” the proposed law reads in part.

If any licensee, generating entity or individuals fails to comply with the directions, they shall be liable to a penalty not exceeding Sh100,000 for every breach.

These proposals come at a time when KenGen and Kenya Power have been trading blame over who is behind the continued purchase of expensive energy.

ERC accused Kenya Power of making operational decisions that have significantly increased the cost of power to consumers in the past two months.

The distribution company is accused of having deliberately opted to take in more of the expensive thermal power to the detriment of consumers, despite the availability of cheaper hydropower in the market.

ERC was concerned that a heavy uptake of thermal electricity had raised the fuel cost levy for August power bills to the highest level this year, and asked the power firm to revert to a mix that would halt the price surge.

The regulator said Kenya Power had not aggressively pursued cheaper hydropower generation, despite fairly good water levels, going against the Government’s commitment to keep power costs down.

Kenya Power countered that it has limited options in sourcing of electricity after several geothermal plants in Olkaria shut down last month for maintenance, while others broke down.

The utility firm said this forced it to turn to expensive thermal generators at a time when fuel prices had risen steadily as the shilling weakened against the US dollar.

But KenGen CEO Albert Mugo last week said geothermal power plants were operating normally.

“All our power plants at Olkaria are fully operational, except one unit at Olkaria IV. The machine, which is out for routine maintenance, could be restored in the next four days. Just like a vehicle, power generating turbines need normal mechanical repairs,” Mr Mugo said.

“We are also making up for the temporary reduction in geothermal output by scaling up the contribution from hydro sources.”

RISING COSTS

Rising costs of energy are likely to push up the cost of living by double digits.

Already, in its latest monthly fuel price review, ERC raised pump prices to the highest level yet this year.

Motorists are this month paying Sh4.06 more per litre of petrol after the latest review pushed petrol prices above the Sh100-mark after months of lows following a fall in international crude oil prices.

Parts of the costs were a result of the new road maintenance levy. Motorists in Nairobi are now paying Sh102.65 per litre of petrol, while their peers in Mandera will pay Sh116.46.

To counter this price surge, the regulator has increased its scrutiny on factors that are in the country’s control in keeping energy prices low, hence the spat with Kenya Power.

ERC is also licensing other players to reduce the market dominance of Kenya Power, which has been seen as a monopoly.

Power Hive landed a licence to distribute solar energy to 100 villages in Nyamira and Kisii counties, a model that the regulator says could be replicated in other far-flung parts of the country.

It is will also place a new kid in an energy sector where companies have in the past been at loggerheads in charting their own paths, creating what insiders have termed ‘sibling rivalry’.

pwafula@standardmedia.co.ke