Electricity consumers in Kenya are paying heavily for the weakening shilling, according to the latest review of Power Purchase Agreements (PPAs).
Kenya is paying Ksh.31 more per dollar based on a report by a presidential task force that was appointed to look into power deals between Kenya Power and Independent Power Producers (IPPs).
”Most of the PPAs executed between the off-taker and IPPs in the country are denominated in foreign currency,” the detailed report reads in part.
According to the Taskforce Report, IPPS accounted for 47 percent of power procurements cost in Financial Year 2020, but only accounted for 25 percent of power volumes, whilst KenGen accounted for 48 percent of costs and 72 percent of volumes.
This has left the Kenyan government to bear the responsibility to make dollars or euros available, while the off-taker covers any exchange rate fluctuation risks as well as inflation, bypassing the additional cost to the consumer.
For instance, Tsavo Power signed a dollar-denominated power agreement with Kenya Power in 2001. The currency was trading at Ksh.72. Today, the dollar is trading at a high of Ksh.111, Sh29 more.
The deal between the two companies, however, expired last month, The Star reported.
Rabai Power on other hand is now earning at least Ksh.22.40 more per dollar for the deal signed in May 2010 when the US dollar was trading at Ksh.107.63.
The contract which expires in May 2030 means the power producer is likely to reap more as the shilling slides further against the US dollar. The shilling was trading at Ksh.111 on Monday.
Thika Melec Power Plant is another IPP that continues to reap heavily from the shilling fluctuation.
According to the report, the Euro-denominated power purchase deal was signed in 2014 when the currency was trading at 110.17.
On October 21, the Kenyan Shilling dropped to a ten-month all-time low against the US Dolar when it crossed the Ksh.111 mark, according to the data by Metropol Harvest.
The shilling once traded this low back in December 2020.
The weakening of the shilling can mainly be attributed to increased dollar demand from the energy sector importers.
A weaker shilling means importers spend more to bring in goods such as petroleum products and raw materials for factories, a development which may result in price increases for consumers in a net import economy.
For instance, oil imports will be slightly more expensive even while holding prevailing international crude prices at constant.
The report comes on the back of Energy Ministry’s defence over its plan to reduce the cost of energy consumption from the Kenya Power to cushion Kenyans from high cost of living.
“Our focus will be to deliver on the reduction of tariff by 33 percent by 23rd of December 2021 and to review and renegotiate the terms of Power Purchase Agreement (PPA),” said Energy Cabinet Secretary Monica Juma.
She spoke while in a meeting with members of the Kenya Editors Guild, to enlighten them on the strategies the Ministry of Energy is undertaking to revamp the sector.
According to CS Monica, the reforms will also reduce tariffs for industries and domestic consumers while protecting the environment.
The government and KPLC will be discussing with respective IPPs on the concerns seeking to renegotiate or terminate PPAs found to have material breaches, noting that a number of IPPs and stakeholders have already approached the Ministry and expressed interest in discussions.
At the same time, Monica stated that recommendations can only be achieved when organizational structure, procurement, management of systems and technical losses, governance and financial restructuring reforms are undertaken at KPLC.
