Steel billionaire Narendra Raval has revealed how Kenya Power gave him a Sh2.8 billion quote to connect electricity to one of his clinker factories in Emali.
At first the billionaire thought the utility company was joking. But when he realised that he would not get electricity without parting with the money, Mr Raval, says he sat down to do the math and it did not add up.
There was no value for money.
He says he realised it would cost him a fraction of the cost to build his own power plant in Emali, that besides reliability and independence, would also give him cheaper power at the end of the month compared to Kenya Power bills. He made up his mind to build his own power generating plant.
“I now produce 28 megawatts of power and I plan to generate my own power in all my other factories to ensure that we are self-reliant,” Mr Raval, who is the chairman of Devki Group of Companies, said in an interview with the Nation.
He says Kenya Power lost a chance to supply him with electricity for the next six decades, the lifetime of the clinker mine.
“Kenya Power now loses revenues of about Sh200 million a month because of that decision,” he says adding that the current high cost of buying power from the utility company makes locally produced goods uncompetitive in the global market.
Currently, Kenya Power charges businesses about Sh19 for every unit of electricity. This is three and a half times the actual price of generating power.
KenGen supplies power at Sh5.46 per kilowatt-hour. But Kenya Power has been known to buy more expensive power from independent power producers.
A secret Cabinet memo prepared by Treasury Secretary Ukur Yatani on the troubles at Kenya Power shows that the average cost of electricity, even after factoring in the prices of expensive diesel generators is Sh8.11 per unit.
But Kenya Power sells it at more than double this price to consumers, in a major rip off. Still, the company is sinking deeper into the red.
The expensive power has seen major industries and companies in the agricultural and manufacturing sectors opt to generate their own power.
The Devki Group is now one of the biggest cement and steel producers in East Africa, and the decision to start manufacturing power from waste and coal for its factories is set to deny Kenya Power billions of shillings in revenues.
Mr Raval has so far invested nearly Sh40 billion in the clinker-producing factory at Emali, which he says has made Kenya self-sufficient on clinker, one of the most important raw materials in cement production. This has helped push down the ex-factory price of cement from Sh720 five years ago to Sh530 at the moment.
Cheaper solar
Total Kenya has shifted 107 service stations to solar, making it one of the biggest firms to reduce over reliance on Kenya Power to a cheaper and more reliable bet.
Total Kenya installed 3,390 solar panels for the 107 stations and is planning move an additional 41 stations next year to solar.
Café Deli owner Obado Obadoh revealed that he saves Sh140,000 a month by using solar power.
Through the Energy Act 2019, Parliament approved net metering, which allows customers connected to the national grid, but also in possession of their own solar grids, to pay less for their power, but the energy supplier has watered down any relief this could bring for consumers.
With net metering, more people are likely to put up solar units, which would guarantee them cheaper power. If, say, your electricity bill is Sh1,000, and your solar grid has generated enough energy to push back Sh800 to the grid, then you would only pay Sh200 in power bills.
“Kenya Power has realised that their top 54 per cent of clients, who are the big industries and multinationals like Bidco and Two Rivers are switching to solar. This has left them at a tricky position where they have had to review regulations such as the net metering policy,” said Evans Magembe, an engineer with over 15 years experience in the energy sector.
Mr Magembe says if the power utility firm does not fix its electricity costs or switch to cheaper sources of energy, then they will be put out of the game.
This comes at a time when the company is in a deep financial crisis and is unable to meet its obligations, as it walks down the dangerous path to insolvency. The monopoly has fallen from a profitable entity that raked in over Sh130 billion in revenues to a loss-making business that is burning all the cash and can now only survive with a bailout from taxpayers.
It currently depends on overdrafts to pay salaries and finance working capital.
“Kenya Power is facing serious financial challenges and is unable to meet her current obligations to suppliers, lenders and shareholders,” CS Yatani says in a memo advising the Cabinet on what must be done to rescue the company from imminent collapse.
The Kenya Power building along Aga Khan Walk, Nairobi. Cash flow constraints have forced the power distributor to resort to expensive bank overdrafts.
The company first slipped into loss-making territory in the year ended June 2020 where it reported a Sh2.98 billion loss. It has remained in the red since then, ending a 17-year profitability run.
The Treasury document notes that over the past five years, Kenya Power has experienced a general decline in financial performance driven by increasing costs and constrained growth in demand.
But it points the biggest finger to the take or pay pricing model for the power purchase agreements (PPAs) signed with independent power producers (IPPs).
These agreements have become a huge burden to the power utility given that they have resulted in fixed capacity charges that become unfavourable to Kenya Power as the off taker irrespective of cheaper alternative source of electricity from KenGen.
Whereas KenGen gives Kenya Power 71.7 per cent of all the energy it distributes, its costs are proportionate to 48.3 per cent. On the contrary, the IPPs — who only supply 26.5 per cent of power — account for 47.6 per cent of the costs, in a major rip off for power consumers.
Treasury has also raised concerns over the huge finance costs and debt portfolio that are drowning the company.
“The huge debt portfolio was contracted to finance the heavy investments in expansion and reinforcement of the transmission and distribution network in readiness for a massive increase in electricity generation under the 5000+ MW projects,” the document says.
Cash flow constraints
But the investments are far from paying off since the anticipated ‘massive increase’ did not materialise in time. And now the company is choking under the weight of debt.
By June 2020, the debt stock was Sh107 billion together with annual debt service obligations of about Sh24 billion per year.
Treasury adds that further to this, there are high finance costs as a result of continued use of commercial facilities, especially bank overdrafts, to finance the company’s operations.
The cash flow constraints have exposed Kenya Power to negative working capital forcing it to resort to expensive bank overdrafts.
“The continued investments in the transmission and distribution infrastructure without commensurate electricity growth in demand have resulted in underutilised grid assets,” Mr Yatani says in his brief to Cabinet.
He notes that these challenges coupled with accumulated accounts receivables have continued to erode the company’s financial health such that it is unable to settle obligations as they fall due. The company has been in deep trouble since June last year where it reported a negative working capital of Sh75 billion.
A negative working capital refers to a scenario where a company has more maturing short-term debt than the cash it requires to settle them. If this cycle persists for long, a company cannot pay salaries, suppliers and creditors, which puts it up for auction.
Already, Kenya Power has been unable to pay electricity generator KenGen billions of shillings. As at January 2021, Kenya Power had outstanding obligations of Sh47.67 billion. Of this, it owed KenGen Sh14.8 billion, IPPs (Sh12 billion), imports (Sh297 million) and Kenya Electricity Transmission Company (Sh5.2 billion).
Growing debt
The firm owed the Rural Electrification Levy of Sh9.2 billion and the amount of money it owed other supplies had risen to Sh5.9 billion. The debt to KenGen has since swelled to over Sh24 billion.
In a bid to stay afloat, Kenya Power recently invited local and international banks to offer it new cheaper loans that will be used to retire some of its Sh55 billion worth of commercial debt.
Delays in payment of electricity bills by consumers, including government ministries, departments and agencies as well as county government have complicated the fortunes of the firm that employs more than 10,500 Kenyans.
The other devil is system losses, especially commercial losses resulting from illegal electricity connections and non-inspection of prepaid meters. There are also technical losses due to underutilised grid assets. Its total system losses are estimated at 23.7 per cent, against allowed system losses of 14.9 per cent.
Kenya Power is a majority State-owned electric power distributor and problems at the company have dire consequences on the economy given the importance of energy in running industries, companies and homes.
The Kenyan government currently has a controlling stake of 50.1 per cent, with private investors holding 49.9 per cent stake.
In its recommendation, the Treasury wants the Cabinet to approve a review of all power purchase agreements between Kenya Power and all electricity generators, signed and in operation or about to be commissioned and where applicable, renegotiate.
“At any given time, Kenya Power to evacuate 100 per cent of electricity generated by KenGen prior to bringing on board other generators,” the memorandum recommends.
It also wants the firm to undertake specially permitted procurement for the purchase of transformers, meters, cables, poles, towers, and transmission technology monitoring systems for the financial years 2020/2021 and 2021/2022. BY DAILY NATION