Kenya’s Power Sector – Is it Time for Increased Private Participation?


Reliable and cost-effective access to electricity is a significant pillar to achieving economic prosperity and as such, the government of Kenya intends to achieve universal access to electricity by 2022. In February 2018, approximately 75% of Kenyans had access to electricity; about 64% were connected to the grid and 11% were utilising off-grid sources. However, due to the unreliability of off-grid sources, the government is still striving towards 100% grid access. In recent years, there has been a deliberate focus on power generation and last-mile distribution. The government intends to invest more in transmission infrastructure whilst at the same time lowering the cost of electricity for consumers. Currently, Kenya’s electricity retail tariff stands at approximately US 15 cents per kilowatt hour, which is relatively high compared to other African countries like Zambia, South Africa and Ethiopia which have electricity retail tariffs of US 9 cents per kilowatt hour. One of the factors impacting retail tariffs has been the absence of a review over the last few years despite the addition of significant generation capacity from various renewable energy projects like the Lake Turkana Wind Power Plant, Garissa Solar Power Plant and the Olkaria V Geotherman Power Plant. The power generated by these projects has lower generation tariffs and therefore, a review of the retail tariffs may help to reduce the cost of electricity for consumers particularly as some of the more expensive thermal capacity is decommissioned and consumption projected to increase. In addition to high retail tariffs, pass-through costs have also been high, driven by high fuel prices. With the recent decline in global oil prices, however, we expect that these pass-through costs will reduce at least with regard to the power that is generated by thermal power plants which is still utilised for grid stability. As cheaper renewable and geothermal energy makes more of a contribution to the national grid, we expect that the current dispatch merit order will favour cheaper sources of power - to the extent that it can ensure grid stability. Even so, Kenya Power has pushed the Energy and Petroleum Regulatory Authority to increase retail tariffs over the last three years. This is not surprising, given the company’s recent decline in financial performance. The monopoly off-taker has seen its net profit decline from KES 3.27 billion in 2018 to KES 262 million in 2019 on the back of increased investments in distribution and accompanying debt financing. A continuous decline in performance may raise concerns amongst stakeholders about the creditworthiness of the company, and may further impact fundraising for new projects by independent power producers seeking to supply Kenya Power. The Energy Act (2019) raised the prospect of further unbundling distribution not only for the private sector but also for county governments in anticipation of improved service delivery and more favourable retail tariffs. For Kenya Power, the Act provided opportunities to outsource and earn revenue from its network without the burden of maintenance. Full unbundling of distribution to the private sector may in fact open up Kenya Power to competition in cases where parallel distribution networks are set up alongside its own. This may serve to exacerbate a decline in performance that is already worrisome for the company’s shareholders, the largest of whom is Kenya’s national government. There is an additional risk of Kenya Power retaining assets and investments that are redundant without having fully paid for them. Unbundling to the county governments could be hindered by the lack of capacity to deliver power to consumers, both from a financial and a technical perspective. To earn the confidence of consumers, the counties would need to distribute power far better than their efforts to manage water utilities would otherwise suggest.

"Electricity is the glue that keeps the economy together. Therefore, policies should be implemented that encourage rather than discourage investment in Kenya’s power generation and distribution, and at the same time make it easier for consumers nationwide to utilise more of it."

Rethinking distribution For these and other reasons, the time is now to rethink the power distribution model in Kenya. Private sector competition is conditional on improved service delivery in exchange for a fair return on investment and affordable tariffs for the consumer. Furthermore, to ensure Kenya Power’s performance is not adversely impacted and its investments do not go to waste, a model that transitions Kenya Power to an asset owner offering network concessions to the private sector at the outset may be the best approach to unbundling and privatising distribution. With strict KPIs, we should then expect the private sector to begin to expand and improve the grid with their own investments over time. Grid modernisation is critical to reducing interruptions in power supply, power losses and the consequent overall cost of electricity. Kenya will also need an independent and efficient system to ensure seamless coordination and operation, essential to attracting future investments in the sector. Downstream the roll out of smart metering should be expedited to assist with revenue assurance. One of the main pull factors for investors thus far has been Kenya’s friendly tax regime for investors in the power sector. However, the newly enacted Tax Amendment Act 2020 removes tax exemption on supplies imported and purchased locally for use in the construction of power generating plants. The exemption is likely to discourage future investments since it will affect ongoing projects and those that were about to commence, which had already been granted VAT exemption. In addition, the Act has removed the VAT exemption for geothermal exploration, which is likely to cause a slow-down in geothermal development in Kenya. On the consumer side, the removal of the 30% tax rebate on electricity costs for manufacturing companies, barely a year after it was introduced. The removal of the rebate will lead to increased electricity costs, already a major cost component for most manufacturers, and possibly instigate a decline in electricity consumption and production that could negatively impact consumers.

Electricity is critical to the development of an emerging economy like Kenya’s. Whilst managing its fiscal priorities, the government should pay close attention to the power sector. Electricity is the glue that keeps the economy together. Therefore, policies should be implemented that encourage rather than discourage investment in Kenya’s power generation and distribution, and at the same time make it easier for consumers nationwide to utilise more of it.

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