- The cost of electricity has risen by over 70% in the last decade
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About 40% of the consumer tariff are taxes and levies.
Can the cost of electricity come down? What needs to be done to bring the costs down fast?
These are the most prevalent questions in the minds of all stakeholders in Kenya’s electricity sector. But even more fundamentally, how did we get here?
It is worth noting that all stakeholders in the electricity value chain, from the government players to the IPPs, see the reduction of electricity costs as a possibility and a positive catalyst for economic growth to the benefit of all electricity consumers.
However, in order to realize this, whether in the short term or in the long term, critical considerations and concessions will have to be made.
According to Kenya Private Sector Alliance, the cost of electricity has risen by over 70 per cent in the last decade, a scenario that has eroded Kenya’s competitiveness.
Some of the reasons for the high cost of electricity include operational inefficiencies from Kenya Power, high transmission losses, inadequate grid infrastructure, high taxes and levies and reduced ease of doing business for generators among others.
All these inefficiencies translate to an increase in the cost of electricity. So how do we bring the cost of power down, and if possible, fast?
In the short term, the foremost action, a low-hanging fruit, that should be considered, is the reduction of taxes and levies on electricity, a move that lies entirely with the government.
Considerations should be made to reduce the taxes and levies loaded onto inputs to power generation as well as the unit sales to customers (such as VAT).
It is unfortunate that this is an aspect of high-power costs that are rarely brought to the fore. About 40 per cent of the consumer tariff are taxes and levies.
Averagely, power is sold to Kenya Power at Sh9 per unit but is eventually billed to the domestic consumer at Sh25 per unit. If concessions are made on taxes and levies on energy sold, and inefficiencies at KPLC addressed urgently then consumers will enjoy cheaper electricity, fast.
These need no negotiations and are in the state’s power to achieve immediately.
In the medium term, discussions with generators (public and private), within the contractual framework, on what can be done to achieve lower generation costs in the short-medium and long-term should be had. These could include discussions around lowering the input costs and taxes related to generation.
The Presidential Taskforce on Review of PPA’s has promised to reduce the consumer tariffs, largely premised on recovery from malpractices.
On malpractices, it is important that any wrongdoing by generators (public and private) and the utility is not only flagged but also reprimanded and responsible parties brought to book.
The sector must be underpinned by integrity akin to Caesar’s wife. All efforts in this regard must be fully supported.
There are inefficiencies and insufficiencies in power transmission that result in significant technical losses and underserved demand. Currently, technical losses are at 22.7 per cent against the global benchmark of 15 per cent.
These losses are already purchased electricity, which is still billed for in consumer tariffs. The recommendations of the Taskforce on reforms at KPLC such as the reorganization of the company, going systemically after the theft of power and other malpractices are very welcome.
The health and wellbeing of the KPLC is important for the sector. To be lauded is the significant investment in transmission capacity over the last decade.
The introduction of competitive bidding for generation sources of certain sizes is crucial in the medium and long term to allow for price discovery, certainty in the development of generation projects and increased transparency.
Auctions would be one way of dealing with the inefficiencies experienced by power project developers. Such auctions however need to be designed appropriately and held regularly in addition to being run by an independent body.
These auctions would allow for the shortening of the development period and cover many aspects of the development risk for investors and the state.
While there is no “real” excess capacity, the issue of demand must be addressed as a priority.
This is the elephant in the room and addressing it is the ultimate holy grail in electricity cost reduction. In 2020, total electricity demand decreased to 11,603 GWh from 11,620 GWh in 2019, with domestic demand falling to 8,796 GWh from 8,854 GWh in the same period.
Electricity sales to large and medium commercial categories declined by 3.6 per cent to 4,281 GWh. While this may partly be attributed to the effects of Covid 19, it lends credence to the greater crucible that is the Kenyan economy.
Increased electricity demand, is the axle through which the wheel of low electricity costs will revolve sustainably into the future. There are absolutely no shortcuts to this.
The power generation capacity and pipeline we currently have was envisioned in accordance with the Least Cost Power Development Plan (LCPDP).
However, a lot of the projects that orchestrated this planned supply, like the electric railway line, Konza city, Lapsset, local manufacturing industries, as was in Vision 2030, have either been delayed or were never realized. In the end, we have planned generation capacity which has to be paid for by a smaller pool of consumers.
It is because of this supply requirement that the government invited IPPs to help generate electricity. In the current power purchase agreements, supply risks are allocated to the IPP’s and KenGen while the demand risk is shouldered by the government and Kenya Power.
It is the government, through Kenya Power that is responsible and best placed to manage demand for the generated electricity.
The economy must be spurred to grow and continue to recover from the Covid 19 pandemic.
How do we increase the demand? By growing the GDP and the income per capita of the nation which particularly involves growing local manufacturing sector, investing in SME’s and agriculture among other micro and macro-economic initiatives.
In addition, it is important to channel the vast renewable energy potential to serve the demand part of the equation.
Innovative solutions like green hydrogen industries can easily be realized with the right actions and policies that can propel Kenya into being a green fuel exporter in the future. Once we grow the demand for power, power costs will be spread over a larger pool allowing for price efficiencies.
This is the most fundamental, most sustainable action that can reduce the cost of power in the long term. And it is possible.
The reduction of the high cost of electricity is not entirely a function of the generation cost but an amalgamation of issues which for sustainability reasons, must be looked at urgently, soberly and with a deeper wider lens.
If this is not strategically done, we may gain today, but lose in the foreseeable future.
Gideon Vincent Ombajo - Renewable Energy Engineer and Energy Efficiency Expert