01/03/2023
KENYA POWER reported a NET LOSS OF SH1.1 BILLION for the half year ended December, down from a net profit of Sh3.82 billion in the preceding period. The loss is attributed to increased foreign exchange losses and the implementation of a 15 percent reduction of power tariffs as recommended by the Government in January 2022. Operating costs rose from Sh19.1 billion to Sh21.7 billion due to increased foreign exchange losses arising from the revaluation of outstanding payments to power generators. Revenue from contracts with customers increased from Sh83.57 billion to Sh86.67 billion, while the cost of sales increased from Sh55.3 billion to Sh66.1 billion, resulting in a gross margin fall by 27 percent to Sh20.6 billion from Sh28.3 billion. Non-fuel power purchase costs increased from Sh40.5 billion to Sh43.9 billion, while fuel costs increased from Sh10.87 billion to Sh15.08 billion.
Government in January 2022 pushed Kenya Power to reduce tariffs by 15%. The power tariffs reduction, which had a cost implication of more than Sh26 billion, was to last for a full year until December 2022.
Kenya Power was to compensate Sh14 billions of this loss through government subsidy and has so far been reimbursed Sh7 billion in subsidy by the government and is yet to receive the remaining Sh7 billion. The balance of Sh12 billion was to be recovered through renegotiation of power purchase agreements with independent power producers and improving internal efficiencies which has not been implemented.
Comparing the financial performance of the company in second half 2021/22 and first half 2022/23, there were both positive and negative changes. The revenue from contracts with customers increased by Kes. 12,879 million, and the cost of sales increased by Kes. 6,177 million, resulting in a positive change in gross margin. However, other income decreased by Kes. 3,516 million, indicating a negative change. Transmission and distribution costs increased by Kes. 2,734 million, while finance costs increased by Kes. 1,481 million, and there was a decrease in interest income. These changes led to a decrease in profit before tax by Kes. 1,053 million, income tax expense/credit increased by Kes. 219 million, and profit for the period decreased by Kes. 834 million. Despite the negative changes, the operating profit increased by Kes. 452 million, indicating a positive change in the company's profitability.
Kenya Power's financial performance was negatively impacted by an increase in foreign exchange losses and a 15 percent reduction in end-user electricity tariff. Kenya Power relies heavily on power generating companies who include Independent Power Producers who supply close to one-third of KPLC capacity, KenGen and GDC. These power generators have Power Purchase Agreements negotiated in USD to protect themselves from local currency depreciation. The local currency lost value against the dollar from Sh117.96 to Sh123.37 between July and December 2022, resulting in Kenya Power revaluing outstanding payments to power generators and incurring a loss of Sh2.7 billion between June and December 2022.
But it is payments to power generating companies that seriously dented KPLC performance. Despite revenues from contract with customers increasing by Sh7 billions, and KPLC receiving Sh6.8 billion in other incomes, cost of sales increased to Sh66 billion up from Sh55 billion in a similar period last year. When KPLC agreed to 15% power reduction, ministry of energy and EPRA committed to also negotiate with power generators to review their invoices downwards by at least 15%. This never happened. KenGen board of directors had in 2022 agreed to contribute an amount of Sh3.5 billion through fair reduction of invoices. But as reported by the auditor general, they never released this amount but rather overstated their revenues. Other government owned power players that were to discount billings are KETRACO and GDC.
In 2021, Former President Uhuru Kenyatta, appointed a taskforce to review power purchase agreements (PPAs) that Kenya Power and Lighting Company Limited (KPLC) had entered into. The taskforce proposed several changes to reform the regime on PPAs after identifying that PPAs with Independent Power Producers (IPPs) were contributing to poor financial performance and high electricity costs for consumers.
The report recommended negotiating a reduction in PPA tariffs with IPPs, cancelling all unsigned PPAs, and aligning new PPAs with the Least Cost Power Development Plan (LCPDP) as revised per Taskforce recommendations. In addition, the report recommended reforms at KPLC, due diligence, and contract management frameworks for PPA procurement, and one and five-year rolling demand and generation forecasts and associated models.
KPLC was also recommended to institute standard PPAs and proposed government Letters of Support. A forensic audit was recommended for all PPAs’ procurement and monitoring and for system losses arising from heavy fuel oils.
This if actioned, was to improve financial performance, reduce electricity costs for consumers, and increase transparency in procurement and monitoring, but as at December 2022, very little if any negotiations had happened.
HOW AND WHEN DID WE START ENGAGING IPPS? In the early 1990s, Kenya relied heavily on public financing for power generation. To address the growing demand for electricity and insufficient funds, the World Bank and IMF encouraged private sector participation in infrastructure, leading to the introduction of Independent Power Producers (IPPs) in Kenya. The IPPs were introduced in 1997 through the Electric Power Act to plug the power generation gap caused by low hydrology and underinvestment in electricity generation by the state.
In the early days of IPPs in Kenya, the government contracted Ibeafrica, a 56 MW Heavy Fuel Oil plant in Nairobi, and a 40 MW barge-mounted gas-fired power plant called Westmont in Kipevu. These were the first emergency interim IPPs contracted by the government to help plug the power generation gap resulting from low hydrology and years of underinvestment in electricity generation by the state.
Ibeafrica's power purchase agreement (PPA) was restructured and extended after its initial seven-year contract, while Westmont was retired in 2004. These early IPPs were crucial in helping to meet Kenya's growing demand for electricity, which was necessary to support the country's economic growth.
Today, IPPs continue to play a vital role in Kenya's electricity sector. A third of power volumes purchased by the Kenya Power and Lighting Company (KPLC) in 2022 came from IPPs. IPPs have also invested in diverse sources of energy like geothermal, solar, and wind to improve the energy mix and overall security of the country's power supply. This diversification has helped to address the country's over-reliance on hydropower, which had resulted in power rationing during periods of drought. But it is their pricing that is the issue. In 2022, Kenya bought electricity from different IPPs at an average cost of Sh15.8 per unit, against KenGen cost of Sh6.12 per KwH. But, it's important to know that the cost of electricity from different sources was not the same as shown below:
• Cogeneration : Energy Purchased : GWh=0.4 Costing= Sh4.383 million
• Geothermal : Energy Purchased : GWh=976 Costing= Sh11.74 billion
• Imported : Energy Purchased : GWh=337 Costing= 3.886 billion
• REREC : Energy Purchased : GWh=82 Costing= Sh513.447 million
• Small Hydro : Energy Purchased : GWh=137.7 Costing= Sh1.768 billion
• Solar : Energy Purchased : GWh=142.05 Costing= Sh2.015 billion
• Thermal : Energy Purchased : GWh=998 Costing= Sh.28.252 billion
• Wind : Energy Purchased : GWh=1999 Costing= Sh23.024 billion
The cost of power from different sources varied significantly, with thermal power being the most expensive, costing Sh28.36 per unit. In contrast, cogeneration was the cheapest, costing Sh10.96 per unit. Geothermal, imported, REREC, small hydro, solar, and wind power cost Sh12.03, Sh11.51, Sh6.25, Sh12.84, Sh14.05, and Sh11.52 per unit, respectively. This expensive thermal electricity is a big concern, especially when compared to cheaper and cleaner sources of energy like wind, solar, and geothermal. These sources of energy are better in the long run since they need less maintenance, have lower fuel costs, and don't harm the environment as much.
IN ORDER TO REGAIN PROFITABILITY, KPLC cannot simply rely on increasing power tariffs as a quick fix, as this would not be a sustainable solution. Instead, the company must focus on reducing its costs significantly by taking two key steps.
Firstly, it should review its Power Purchase Agreements (PPAs) with Independent Power Producers (IPPs) and renegotiate them to match the rates paid to KenGen, which is currently at Sh.6.12 or the prevailing market rates and take up 100% installed capacity at KenGen. This will help KPLC to save costs and improve its financial position.
Secondly, KPLC must take steps to improve the efficiency of its internal systems in order to reduce costs further. This can be achieved by streamlining its workforce, optimizing the use of resources, and maximizing the utilization of its assets. By doing so, the company can achieve greater productivity, minimize waste, and reduce operational costs.
It is important to note that these steps are essential for KPLC to remain competitive in the market and ensure its long-term viability. Failure to take action could result in a further decline in profitability and ultimately, the sustainability of the company. Therefore, it is imperative that KPLC takes decisive action to address its challenges and secure its future in the energy sector.
UPDATE: The Cabinet of Kenya has approved the lifting of the moratorium on Power Purchase Agreements (PPAs) to enhance the nation's energy security amid prolonged drought. This will open up the energy sector for continued investments and the transparent engagement of independent power producers, in line with the Renewable Energy Auction Policy. The new framework will enable the State to procure clean energy at market-reflective prices, giving consumers the benefit of pricing competition. In addition, the Cabinet has approved the implementation of the 40 MW Olkaria power project to further support the national endeavour towards energy security as a catalyst for economic development.
