Tariff discount deal to hurt Kenya Power earnings longer

Kenya power technicians installing a transformer at Ibutuka village in Mbeere North, Embu County. [Murithi Mugo, Standard]

Kenya Power will this year continue to feel the impact of the electricity tariff reduction that brought down the cost of electricity by 15 per cent last year.

The tariff was supposed to be in place between January and December 2022, but the utility firm says it is still in place as it awaits the completion of the tariff review, which is ongoing.

The firm explained that following discussions with the Energy Ministry and the Energy and Petroleum Regulatory Authority (Epra), it was agreed that it continues billing consumers using the "15 per cent tariff' until the regulator publishes a new tariff.

Epra is considering a tariff application made by Kenya Power in November, which could be in place by April 1. The 15 per cent reduction in the cost of electricity cost the company around Sh26 billion in revenue losses throughout last year. It was one of the major factors that led to Kenya Power reporting a Sh1.14 billion net loss in the six months to December 2022.

"The 15 per cent was to end in December, but because there was a tariff review process going on, there were discussions with the regulator and policy level thought it would be wise to have one tariff review rather than removing the 15 per cent in January and two months down the line doing a tariff review," explained Kenya Power

"While we carry that burden right now, we expect that the tariff will be approved and gazetted, and we will be able to recoup the costs that we have incurred."

This impact of the power cut will further be seen in the company's financial results for the year to June 2023.

Over the period, Kenya Power will bear the impact of the tariff cut on its own, unlike in 2022 when the National Treasury committed to absorbing about half of the revenue loss that the company was to experience.

Its sister agencies within the Ministry of Energy - KenGen, Kenya Electricity Transmission Company (Ketraco) and the Geothermal Development Company (GDC) - had also committed to helping the company meet the revenue shortfall that would be occasioned by the tariff cut.

In the deal brokered by the Energy Ministry, Kenya Power would through internal cost-saving measures contribute about Sh8 billion, while the three other firms would contribute Sh4.35 billion, bringing the total contribution by the parastatals to Sh12.2 billion over the period that the tariff was in place.

KenGen was expected to contribute Sh3.5 billion, GDC (Sh346 million) and Ketraco (Sh500 million).

The firms committed to honouring the agreement but were yet to make good their commitment as of the end of last year.

Treasury would pay the difference of Sh14.1 billion, which together with the Sh12.2 billion from the power sector agencies would cover the Sh26.3 billion revenue shortfall.

The Treasury paid Sh7.05 billion over the half to June 2022 and is expected to clear the 50 per cent balance. Kenya Power said the Sh1.14 billion loss over the six months to December 2022 was largely on the 15 per cent electricity tariff cut and not an indicator that it is unable to see through the reforms that it has been undertaking.

Weak shilling

The loss over the half year is in comparison to a net profit of Sh3.82 billion it made over a similar half to December 2021.

Performance was also affected by the weak shilling that led to foreign exchange losses but Kenya Power officials contend that "the single biggest impact" came from the 15 per cent reduction in the power tariff.

The firm, when it published its results last week, said the half-year performance "is attributable to increased foreign exchange losses, and the implementation of the 15 per cent reduction of the end user electricity tariff as recommended by the Government in January 2022."

While still charging at the discounted 15 per cent rate, the electricity retailer noted that power costs had gone up towards the end of last year on account of a weaker shilling and the high usage of thermal power. This, in turn, led to higher foreign exchange and fuel cost adjustments, which consumers pay to compensate power sector players in case of a weak shilling and the cost of fuel oil whenever it is used in power generation.

The country has increasingly relied on thermal power plants owing to a prolonged drought. Imports from Ethiopia are, however, expected to reduce heavy reliance on thermal power plants.

Kenya Power started importing from Ethiopia late last year and says the impact is evident in the decline in the fuel cost charge (FCC) component of the power bill. FCC came down from a high of Sh7.18 per unit of power in January to Sh6.59 in February.

This is a pass-through cost that compensates thermal power producers for costs incurred in acquiring the heavy fuel oil used in power generation. "Before Ethiopia came on board, thermal use was heavy and, in turn, the fuel cost was high. But in January and February, the use of thermal has gone down, displaced by the power bought from Ethiopia," said a Kenya Power official.

"The capacity from Ethiopia has cushioned the country. If it were not for this capacity, we would be in power rationing."

Kenya Power is importing 200 megawatts (MW) during the daily peak period from Ethiopia and plans to scale this up to 400MW.

While electricity costs are generally expected to go up beginning next month when Epra unveils the new tariff, Kenya Power says it is undertaking steps that could result in lowering the cost of power.

These include stepping up the purchase of power from Ethiopia to the 400MW stipulated in the Power Purchase Agreement (PPA) with Ethiopia Electric Power.

While there has not been progress in the review of PPAs with Independent Power Producers (IPPs) in line with the recommendation of the Presidential Task Force on Review of PPAs, Kenya Power is internally initiating a similar process that it said could yield some reduction in tariffs.

"Internally, we are looking at whether there can be a mutual agreement among the parties. The dynamics have changed since the time the agreements were signed," said the official.