REFORMS

Kenya Power to pay for power purchase and loans using foreign currency

Forex risks are usually passed on to consumers, pushing up the cost of electricity

In Summary
  • The country is paying Sh31 more per dollar for a deal entered when the US currency was trading at Sh72 in 2001. 
  • Consumers are currently paying Sh1.36 per kilowatt as a Foreign Exchange Rate Fluctuation Adjustment fee
The Kenya Power logo.
The Kenya Power logo.
Image: FILE

Kenya Power will going forward pay for its international obligations and some of its power purchases in hard currency.

These include payment to Independent Power Producers (IPPs) and the firm's foreign debts. It will open a forex account with the National Treasury for the transactions.

The move is expected to cushion the power utility firm against high forex exchange risks usually passed on to consumers, pushing up the cost of electricity. 

Kenya Power board chairperson Vivienne Yeda told an investor briefing on Tuesday that the current power purchase deals exposed the company and clients to unhedged and unmitigated forex exchange risks without corresponding adjustment in price. 

"We have always been at the mercy of strong international currencies. The forex account will help us cut this cost,"Yeda said. 

This comes on the backdrop of a recent report by a presidential task force looking into power purchase deals with IPPs that showed Kenya pays Sh31 more per dollar for a deal entered when the US currency was trading at Sh72 in 2001. 

The John Ngumi led team said the government shoulders the responsibility of availing the dollars or euros, while Kenya Power covers any exchange rate fluctuation risks as well as inflation by passing 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 Sh72. Today, the dollar is trading at a high of Sh111, Sh29 more. 

The deal between the two companies, however, expired last month.

Rabai Power on other hand is now earning at least Sh22.40 more per dollar for the deal signed in May 2010 when the US dollar was trading at 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 Sh111 on Monday.

Thika Melec Power Plant is another IPP that continues to reap heavily from the shilling fluctuation. 

Last year, the power distributor paid Sh93.9 billion to IPPs with almost 75 per cent of them denominated in the US dollar, followed by Japanese Yen and Euros. 

Apart from IPPs, Kenya Power incurs huge costs when repaying external debt. Its total debt as at end of last June stood at Sh118.73 billion, made up of Sh65.96 billion commercial debt and Sh53.26 billion on-lent debt.

About 77.3 per cent or Sh51.02 billion of the commercial loans are dollar-denominated, making the level of repayment costs susceptible to currency fluctuations.

In 2018, the Ministry of Energy sanctioned a study to look at possibilities of shilling denominated power purchase deals with the aim of drastically cutting electricity prices in the country. 

The contractor - GuarantCo said the use of local currency financing could lead to productive recycling of savings within a country rather than increasing the country’s external debt burden.

Consumers are currently paying Sh1.36 per kilowatt as Foreign Exchange Rate Fluctuation Adjustment fee up from Sh0.83 charged 10 years ago when the shilling was trading at Sh75.26.

More forex volatility pinch is felt through the fuel cost charge which is from now in the range of Sh3.80.