The Treasury has offered Kenya Power a grant of 7.05 billion shillings to enable the utility to reduce consumers’ electricity bills by an additional 15% without hurting its cash flow.
The National Assembly Budget Committee revealed the multi-billion shilling subsidy in a report to lawmakers after Independent Power Producers (IPPs) resisted pressure to cut their tariffs and allow Kenya Power to cut consumer bills.
In January, Kenya Power slashed retail tariffs by 15%, which was based on the company reducing system losses – the share of electricity purchased from generators such as KenGen that does not reach homes. and businesses due to thefts and leaks from an aging network.
The state promised a similar cut in a plan based on revising power purchase agreements (PPAs) after a task force appointed by President Uhuru Kenyatta found there was a huge disparity between the tariffs charged by the main electricity producer KenGen and private electricity producers.
The second cut was scheduled for April 1, but the IPPs, which are owned by powerful institutions like the World Bank, resisted unilateral pressure to reduce the cost at which they sell electricity to Kenya Power.
Today the state opted to offer subsidies to Kenya Power in a bid to reduce bills and protect consumers struggling with rising prices of essentials such as food and assuage the anger of the public in the face of the high cost of living.
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Inflation in Kenya hit a 27-month high in May at 7.1%, squeezing household budgets and demand for goods and services.
“To protect KPLC from the effects of the reduction in the price of electricity before the implementation of this second phase, the company has been allocated 7.05 billion shillings in the proposed budget for 2022/23,” said the budget and appropriations committee.
“The implementation of the recommendations of the report of the Presidential Task Force on the Review of the Power Purchase Agreements (PPA) to reduce electricity prices by 33% is progressing slowly.
Fear of a legal tussle with powerful foreign investors forced the state to retreat and opt for a negotiated deal with the IPPs.
OrPower 4 Inc, which files statements on the US Stock Exchange and owns the largest private geothermal operator in Kenya, says the government has instead decided to review new power purchase agreements rather than renegotiate the elders.
The listed power utility was offered 9.05 billion shillings to mitigate losses from the first cut in January, pushing state subsidies to 16.1 billion shillings in December.
Kenya Power’s electricity sales for the year to June last year were 125.8 billion shillings, down 30% to 37.5 billion shillings.
This means that the state subsidy is equivalent to 43% of the expected revenue loss.
Lower electricity prices aim to boost economic growth by making energy costs competitive with other African countries such as Ethiopia, South Africa and Egypt.
The Kenyan government has tried to stimulate foreign investment in the manufacturing sector in recent years.
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The 15% reduction implemented in January saw the cost of purchasing 200 units of electricity drop from 5,185 shillings in December to 4,373 shillings in February.
The state is aiming for similar reductions in phase two of the review.
Electricity consumers often complain about high bills, which is partly due to unused capacity charges that compensate power producers for electricity produced but never used.
Under a typical power purchase agreement, a power producer is paid for any electricity produced, even if it is impossible for Kenya Power to sell it to consumers.
The cost of electricity is a key determinant of new investments.
Electricity prices have almost doubled since President Kenyatta came to power in 2013, with 50 units rising from 508 shillings in July 2013 to 945 shillings in December before falling to 769 shillings in February.
Kenya Power has bought 46% or 41.1 billion shillings of its electricity from KenGen, a state-controlled company, with the other major producers being the wind power plant — Lake Turkana Wind Power — and the US-based geothermal company , OrPower 4 Inc.
More than half of Kenya Power’s 89.1 billion shillings electricity purchase costs are capacity charges paid to power generators.
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IPPs opposed the reduction, arguing that Kenya does not have the unilateral right to change contractual capacity and payments and that the state has a duty to protect PPAs – which are signed over a 20-year period. .
They estimated that they had spent billions of shillings building power stations through a combination of debt and shareholder funds that came from the strength of PPAs or wholesale electricity tariffs.