PERFORMANCE

Kenya trails Uganda, Tanzania in energy regulatory index

The country is ranked fifth in Africa's electricity regulatory space

In Summary

•Uganda has for the third time in a row emerged as the top performer.

•Tanzania is third in the survey by African Development Bank.

Kenya Power technicians work on a live line during the relocation of power lines to pave way for construction of the Nairobi Expressway/CHARLENE MALWA
Kenya Power technicians work on a live line during the relocation of power lines to pave way for construction of the Nairobi Expressway/CHARLENE MALWA

Kenya is fifth among African countries with well-developed electricity regulatory frameworks, the Electricity Regulatory Index Report(ERI 2020) published by the African Development Bank indicates.

It trails its East Africa peers of Uganda, which has for the third time in a row emerged as the top performer, and Tanzania which is thirds.

Other countries ahead of Kenya are Namibia in second position and Zambia which comes in fourth.

These are the top countries with regulators that have the authority to exert the necessary oversight on the energy sector.

However, the overall electricity regulatory frameworks of African countries is poorly developed, and most countries experience major regulatory weaknesses, the report notes.

The ERI, a flagship report of the African Development Bank, is a composite index which measures the level of development of electricity sector regulatory frameworks in African countries against international standards and best practice.

The African Development Bank has been at the forefront of efforts to mainstream electricity sector regulation issues in Africa.

"We recognize the importance of establishing robust legal and regulatory frameworks to support the financial sustainability of the sector and attract private sector investment,” said Dr. Kevin Kariuki, Vice President, Power, Energy, Climate and Green Growth, at the African Development Bank.

The index ERI consists of three sub-indices; the regulatory governance index which assesses how well the regulatory framework supports electricity sector reform, promotes efficiency, and meets desired economic, financial, environmental, and social objectives.

It is concerned with the existence and content of electricity regulations.

The second one is the regulatory substance index which assesses how well the regulatory framework is implemented in practice.

The third index is regulatory outcome which assesses the outcomes of regulatory processes from the perspective of regulated entities and power consumers.

It offers insights into how the actions of regulators have affected the performance of the sector.

Findings

Majority (69%) of the countries surveyed,including Kenya, have regulatory mechanisms in place to facilitate electricity access.

In 21 of the 36 countries surveyed, it was found that the utility is not involved in funding rural electrification. Rather the government, NGO’s and consumers do this.

In 90 per cent of the countries surveyed, the executive holds the power to appoint board members and heads of regulatory institutions who report to them, the likes of Kenya's power producer KenGen and Kenya Power and EPRA(Energy and Petroleum Regulatory Authority).

“This removes the core of the decision-making independence from regulators, who are subjected to subtle and direct political pressure to skew key regulatory decisions towards the political inclination of the government in power,” te report notes.

While most countries have legislations to deal with conflict of interest for commissioners and heads of the regulatory institutions while in office, few have adequate mechanisms to regulate situations where such personnel move to regulated entities right after their term of office as regulators, the survey indicates.

This raises ethical issues and affects the integrity of regulatory decisions.

Political authorities were found to have significant influence on the finances of regulatory authorities.

In many instances, some of the laws that established the regulatory institution do not clearly indicate sources of funds for the institution.

The independence of the regulator is desirable only to the extent that the regulator is accountable to stakeholders.

Only five countries have specialized bodies that can adjudicate over regulatory issues brought by aggrieved regulated entities, the survey reveals.

Regulatory development in tariff frameworks and processes is weak, it nptes, with about 53 per cent of the regulators surveyed still operate without a well-documented tariff methodology.

Of those who have tariff methodologies, many of these methodologies do not have procedures and schedules for reviewing tariffs, indexation and automatic tariff adjustment mechanisms.

 In 30 of the 36 countries surveyed, regulators confirmed that tariffs are not cost-reflective, with utilities receiving government subsidies and deferring required investments in the network.

Quality of service (QoS) regulatory frameworks are weak. Twenty (or 55%) of the countries surveyed have not developed any country-level QoS regulations, the report notes.

The utility companies have generally been left to use their discretion on limits of indices.

Neither incentives nor penalties are being implemented to drive the utilities to ensure adequate supply reliability, a move that has also failed in Kenya where Kenya Power enjoys monopoly.

Only nine of the 36 countries surveyed obtained an above average score for developing energy efficiency. This shows the low level of development of regulations in this area.

Wale Shonibare, Director for Energy Financial Solutions, Policy and Regulations, at the African Development Bank, notes that Covid-19 related restrictions had increased residential electricity demand and decreased industrial commercial demand.

The case in Kenya where Kenya Power has issued a profit warning with its full year earnings expected to drop by at least 25 percent, a sixteen year low performance.

It attributes this to the impact of the Covid-19 restrictions which has led to a major drop in industrial and commercial power demand.

Its net profits is expected  to go below the Sh262 million it posted in the year ended June 2019, after a 92 per cent drop from Sh3.3 billion the previous year.

The Covid-19 pandemic has adversely affected our business operations leading to slow growth in electricity sales and an increase in financing costs resulting in reduced earnings,” Company Secretary Imelda Bore said in a recent notice.

The industrial sector accounts for about 70 per cent of Kenya Power unit sales.

Other utility firms are also facing similar predicaments, according to AfDB. This had resulted in shortfalls in the projected revenues of utilities.

“To address these challenges, regulators will be required to play an even more critical and central role post-Covid, to ensure that the sector recovers with minimal and controlled impact on consumers and utilities,” Shonibare said.

Koffi Klousseh, Director of Project Development at Africa50, has termed the index as a great tool for assessing the readiness of the electricity sector for private sector investments.

Ziria Tibalwa Waako, CEO of Uganda’s Electricity Regulatory Authority said: “Regulation is a catch-up game. If there are gaps, be happy to review your process and methodology.”

Foibe Namene, CEO of Namibia’s Electricity Control Board said: “Regulatory independence is a balancing act between multiple stakeholders while maintaining high level of integrity in the regulatory processes and actions.”

Peter Twesigye, Head of Electricity Regulation Programme, Power Futures Lab, at the University of Cape Town has urged regulators to support utilities through tariffs , to finance investments in the backbone feeders with outage management systems that will enable them to monitor reliability and the quality of power on these feeders.