Kenya is making another bid to stop bulk energy billing in US dollars and euros in a bid to lower electricity prices for households and mitigate Kenya Power’s foreign exchange losses.
The country’s energy consumers often complain about high electricity tariffs, with some costs attributed to idle capacity charges to compensate independent power producers (IPPs) for electricity generated but not ultimately used and billed in dollars.
Now President William Ruto’s government wants new talks between Kenya Power and generator companies to end the dollar bill and possibly lower their prices.
A team set up by former President Uhuru Kenyatta in 2021 failed in its attempt to review power purchase agreements being negotiated with the national distributor, Kenya Power, after generators opposed the move and closed their long-term contracts.
Cabinet Minister for Energy, Opio Wandaye, said Kenya Power is exploring the possibility of opening talks with generators to start purchasing electricity in Kenyan shillings.
Electricity consumers and Kenya Power Company suffered huge foreign exchange losses when the shilling witnessed sharp fluctuations against the dollar and euro.
“It would be better if Kenya Power could renegotiate these contracts, not only to reduce tariffs but also to explore the possibility of converting tariffs to Kenyan shillings from the US dollar and euro,” Wandai said. Daily chores.
“This is currently ongoing between Kenya Power, the IPPs and KenGen, and is being done within the law so that unnecessary contractual costs are not incurred.”
He believes that renegotiating power purchase agreements by converting tariffs to shillings, as well as lowering them, represents a sustainable path to reducing electricity bills.
This is in contrast to terminating expensive contracts, especially with independent power producers, which, the minister says, will cost taxpayers billions of shillings in compensation to electricity generators for breach of contracts.
The campaign of the secretary, who took office in August, mirrors the recommendation of the 2021 Presidential Task Force on Reviewing Power Purchase Agreements, led by investment banker John Najomi.
Independent power producers, which have long been blamed for the country’s high electricity costs, have opposed implementation of the task force’s report on the grounds that the money they invest to generate power is denominated in dollars.
They believe that a shift in the category of PPAs with Kenya Power would leave them vulnerable to foreign exchange pressures when servicing loans.
However, purchasing power in dollars has seen Kenya Power hit hard when the shilling weakens, as expenses are transferred to monthly electricity bills for businesses and households.
In addition to the fixed tariff in consumer bills, families and companies pay additional monthly variable fees on foreign exchange that cover part of the generators’ losses as a result of the weak value of the shilling against the dollar and the euro.
For example, shilling volatility in the financial year ending June 2023 saw the near-monopoly power distributor take a hit of Sh5.32 billion due to the revaluation of its power purchase obligations with generators.
The Ngumi Task Force in 2021 identified foreign currency wholesale power pricing as one of the main reasons for the relatively high cost of power in Kenya due to the exposure of tariffs to fluctuations of the shilling against the dollar and euro.
Under a typical PPA, the power producer also gets paid for any electricity produced, even if it is impossible for Kenya Power to sell to consumers for reasons including overproduction.
The task force under Kenyatta found that there was a significant discrepancy between the tariffs imposed by major energy producer KenGen and the IPP.
KenGen’s prices were significantly lower than those of independent power producers. Kenya Power buys most of its electricity from state-controlled KenGen.
However, former Cabinet Minister for Energy, Davis Churcher, said in July 2023 that converting tariffs in PPAs to shilling denominations was not possible, citing a study by energy sector stakeholders.
“With regard to the feasibility of introducing a policy that uses local currency PPAs, or having a mix of local and foreign currency PPAs in the renewable energy space, the sector recently conducted a feasibility study on the feasibility of Kenyan Shilling denominated PPAs, and the study found that this That time: “Option not viable.”
Independent power producers, whose PPAs are typically for 20 years, have come under fire for costly deals with Kenya Power, which have kept electricity prices high and reduced Kenya’s competitiveness to investors.
In the year ending June 2023, Kenya Power paid out Sh117.04 billion to electricity generators, a growth of 21.89 per cent compared to Sh96.02 billion in the previous year.
This included Sh71.48 billion to independent power buyers, while KenGen received Sh45.55 billion.
Lawmakers have pushed for years for a review of the power purchase agreements Kenya Power has signed with independent power producers.
“The National Assembly and Senate have also discussed the same and made recommendations on how to move forward. I am currently looking at the reports to see if there are any low-hanging fruit I can pick as I present a sustainable approach to the cost of electricity in the country,” Mr Wandaye said.