High power bills dampen economic prospects

Kenya: It is hard to understand Kenya Power’s decision to increase the cost of electricity at a time it was expected to reduce it following KenGen’s addition of 140 megawatts to the national grid from the Olkaria geothermal project.

Few analysts buy the electricity distributor’s explanation that it increased the cost due to marginal but steady rise in the rate of inflation. It is not lost on economic savants that the cost of living went up on the back of a double digit increase in the cost of electricity which rose by 10.67 per cent pushing up the housing, water, gas and other fuels index by 0.57 per cent.

The electricity cost increases mean that consumers are already paying 48 cents per unit beginning last month and will continue to do so until end of this year compared to 30 cents per unit they were paying in the January to June period this year.

The distributor also increased foreign exchange fluctuations adjustment to 30 cents per unit for readings taken in July up from 28 cents in June. Inexplicably, the higher costs have been imposed despite earlier promises electricity costs will come down as soon as Olkaria’s 280 MW project is commissioned. Only Kenya Power can explain why it was in a hurry to impose the higher cost when KenGen is promising to bring the other 140 megawatt Olkaria project on board by end of this year.

It is intriguing that the increases came at the very time Mr Albert Mugo, KenGen CEO, was assuring Kenyans that they “should expect to see the cost of electricity starting to decline in the coming months as geothermal gradually replaces the expensive thermal power”.

Fair to Kenya Power

Kenya Power’s decision, at the very least, raises doubts about the wisdom of separating power generation, transmission and distribution. Be that as it may. Moving forward, Kenya Power’s failure to lower costs in line with the lower prices they will be paying for thermal power should persuade the Government — through Parliament — to take a second look at the distributor to ensure it does not misuse its monopoly.

Evidence on the ground—especially from the developed countries—suggest that the most effective way of ensuring this does not happen is by licensing more distributors.

The case for more distributors is buttressed by the realisation that although Kenya Power retained the fuel cost charge at Sh7.22 per unit of electricity it has been agitating for substantially higher cost increases which the Energy Regulatory Authority has consistently rejected.

It may be logical to conclude that it increased the costs because it could as it has a free hand in adjusting inflation and foreign exchange rates. But to be fair to Kenya Power, the owners of thermal power plants must be exerting enormous pressure to retain their hold on the industry. Licensing other distributors could prove to be the most effective way of neutralising their power which they have wielded for almost two decades despite coming in as emergency power suppliers. This suggests that the pioneer independent power producers (IPPs) recouped their initial investments before the turn of this century when they were supposed to exit the scene.

Whereas it is true the cost of building the required infrastructure would be huge it would not be prohibitive for the new distributors that can access long-term funding from the local, regional and international markets. What the new players require is an innovative legal and regulatory framework offering reasonable profits in return for competitive services.

The multiplier effect of lower and more reasonable electricity costs would be so huge that the government should step up its efforts to tap the 10,000 MW unrealised potential under the ground along the Great Rift Valley. The current government should move quickly to build on the foundation laid by its predecessors who set up the Geothermal Development Authority (GDC).

Geothermal power

The new company has already proved itself as it has cut the cost of drilling by half by using its own rigs and personnel—something that naysayers who were benefiting from the previous lopsided arrangements had argued could not be done. The difficulties Ethiopia seems to be experiencing in meeting its obligation to supply northern Kenya with electricity as par its agreement with the government should spur the Energy Ministry to move faster to make Kenya self-sufficient in this key area.

Luckily, President Uhuru Kenyatta has the experience gained at the Treasury when he was Finance Minister and raised billions of shillings from the local market to finance infrastructure projects.

There is reason to believe Kenyans would once again vote with their wallets if they were offered an attractive opportunity to finance geothermal power generation. The bond would be particularly attractive if they were guaranteed by the government.

Recent experience with the Eurobond which was massively oversubscribed also lends credence to the argument that money should not be an excuse for failure to utilise this God-given source of energy that is not only cheap but also clean.

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