For cheap power, change model

 

Kenya Power has yet again reported losses in the latest financial results published last week. Well, I won’t dwell too much on the details, lest I sound like a broken record.

Still, the publication of the utility company’s financial results, is a good time to discuss policy failures in the broader electricity sector that continue to consign the consumer to a regime of consistently rising prices.

Kenya Power’s problems basically start with the unwillingness by the government to take difficult decisions to reform and streamline the electricity sector.

When electricity consumer prices go up, or whenever we experience frequent outages, the public outrage is directed at this single off-taker. Nobody seems to know what needs to be done differently.

Yet what we have now is a confused combination of a regulated and deregulated marketplace.

We must accept that the existing model for calculating pricing is totally broken. How can you expect a company to operate profitably when both the price at which it buys its raw material and the price at which it sells to retailers is controlled by some lazy bureaucrats sitting on armchairs in a government offices?

Headed nowhere

Make no mistake: I am not making excuses for the years of corruption and mismanagement we have seen at Kenya Power. I merely question the economic model and policy failures that touch on the broader electricity industry. Until we change the model and confront the shortcomings in the broader regulation of the electricity sector, we are headed nowhere.

We must, for instance, address the case for restoring a balance in the sharing of investment risks and profits between industry players, mismatches in the setting of wholesale and retailer prices, regular updating of the least-cost power development plan and automatic and prompt reimbursement by the government of costs for services that have to be extended to the public at subsidised prices.

A sustainable revival of the financial fortunes of Kenya Power will not happen if you don’t change the broken model — not even if you give the job to experts from Mars or even a committee of arch-angles. This is a lopsided financial and pricing model that rewards electricity producers but gives little incentives to the transmission and distribution side of the equation.

Create artificial demand

When you give incentives to players in such a lopsided manner, you create artificial demand for investment on one side of the sector. This investment — both public and private — in electricity distribution and transmission has been growing half as quickly as that in the generation side of the business.

Ever asked yourself why the queue of merchants interested in investing in power plants grows longer by the day?

Basically, the logic the government employs runs as follows: License as many merchant power plants as they come and leave it to the consumer to absorb the cost of market distortions that might arise through periodic tariff applications by Kenya Power. Chopped logic and unworkable economics, if you ask me.

This model explains the artificial demand for power purchase agreements and licences that we have today.  Some 34 power purchase agreements have been signed and issued to merchant power plants. Three — Malindi Solar (40 Mw), Eldosol Solar (40 megawatts) , Solenkei Solar (40MW) and Kipeto Wind (100MW) — are ready to roll, having served Kenya Power with commercial operation dates.

In the circumstances, Kenya Power has predictably responded by lodging an application for tariff increases with the Energy and Petroleum Regulatory Authority (Epra). These were factored in the power purchase agreements. It begs the question: If this latest tariff application is not approved, where will Kenya Power get the revenues to pay for the power which the new merchants will pump into the grid?

Mark you, these are ‘take or pay’ agreements that oblige you to pay the merchants an animal called ‘capacity charges’ in the case of thermal plants and ‘deemed energy costs’ for wind and solar power — whether you take the power or not.

Ponder this: Consumer electricity prices are State-controlled through Epra. So are producer prices by the industry regulator. Feed-in tariffs for solar and wind energy are administratively determined by the Ministry of Energy and Epra.

Therefore, when it comes power purchase agreements with the merchants, Kenya Power is only invited at the end of the tail, forced to negotiate prices with politically connected merchants who, invariably, have friends in high places.

We have a pricing regime where the off-taker is left in the middle to burn the candle from both ends: On one end, the price of the raw material it uses is controlled by the government. Without a complete overhaul of the system of regulating and setting of wholesale prices of power, we will never get cheap electricity. BY DAILY NATION