ENERGY

Kenya Power's monopoly in electricity distribution must end

A seemingly obvious (though often contested) remedy is the introduction of market-based reforms

In Summary

• For far too long, Kenyans have bemoaned the high bills they have had no choice but pay to the monopolistic behemoth that KPLC is.

• To be honest, KPLC has, over the years, serially exhibited all the annoying traits typical of monopolies.

Kenya Power
Kenya Power

Lack of access to basic electricity services is still widespread in many developing countries, a 2017 World Bank report shows.

Overcoming this deficiency occupies a central place in today’s global development agenda as evidenced by the Sustainable Development Goal 7 on affordable and clean energy for all.

The principle objectives of any electricity system include improving the welfare and prosperity of citizens, efficiency, reasonable prices, sufficient capacity and sustainability.



Reform and restructuring of Kenya’s electricity subsector commenced in the 1990’s. The ‘model’ of privatisation and liberalisation has been spread in developing countries, principally through the IMF and the World Bank as conditions for loans.

The objective of the reforms was to separate the policy function from regulatory and commercial functions; and introduce arms length commercial relationship between the sector utilities i.e. separate the generating function from the transmission and distribution.



The enactment of the Electric Power Act, 1997 saw the unbundling of the then vertically integrated utility Kenya Power and Lighting Company into a public sector generation company (KenGen) and a transmission and distribution company KPLC.

This marked the entry of new players in the generation function, referred to as Independent Power Producers. All power generated was and is still sold to KPLC in bulk for transmission and distribution — each generating utility entered into a Purchasing Power Agreement with KPLC.



Even though the Electric Power Act of 1997 led to the liberalisation of the power generation aspect, it generally left the transmission and distribution under KPLC. It  is charged with the duty of transmitting power from the generating stations and distributing it to consumers, hence making it the only buyer of electricity power from the generating firms. It is a natural monopoly.



The Energy Act, 2006, replaced the previous Act, and opened up the functions currently being performed by Kenya Power. It paved the way for the entry of other players in transmission and distribution.

The Act established the Energy Regulatory Commission
, the Energy Tribunal
, the Rural Electrification Authority
 and network service providers. It defined a network service provider as “the person who engages in the activity of owning, controlling or operating a transmission or distribution system pursuant to a licence or permit granted under this Act”.

By virtue of this definition, the Act facilitated the entry of other players to compete with KPLC in the provision of design and construction of new distribution substations and lines, operation and maintenance of the electricity distribution networks, connection of new and existing customers to the grid and billing of customers.


It further defined a network user as “a person licensed to generate, transmit, distribute or supply electrical energy or a large retail consumer. Among the existing network users would be KPLC, KenGen, IberAfrica, Orpower4 and other generating utilities.

The Act facilitated the entry of other entities as network users which would create healthy competition and widen the scope of available competitively priced power.

It was envisaged then that the entry of more players in generation would lead to increased installed capacity, hence more system stability and reliability.

Consequently, this would create a healthy competition that would lead to reduced connection charges and hence connect more Kenyans to the grid — partly true.


Essentially a situation was foreseen where consumers could migrate from one service provider to another, as it is happening in the mobile phone sector.

The Energy Act of 2019 on the other hand, led to the creation of the Energy and Petroleum Regulatory Authority, whose function in part is to review the electricity market on a regular basis to enhance competition, improve efficiency, increase reliability and security of supply and improve distribution.


A distribution licence authorises the licensee to plan, build, operate and maintain the distribution system necessary for the conveyance of electrical energy from generating stations or plants either directly or through the transmission system.

Provided the distribution system may consist of the electric supply lines planned and built by the corporation or county government in addition to those planned and built by the licensee.



Beyond additional infrastructure investments, strategies are required to improve the performance of the power sector in generation, transmission, and distribution.


KENYA POWER'S ANNOYING TRAITS

For far too long, Kenyans have bemoaned the high bills they have had no choice but pay to the monopolistic behemoth that KPLC is. To be honest, KPLC has, over the years, serially exhibited all the annoying traits typical of monopolies.

Sources of underperformance include excess transmission and distribution losses, overstaffing costs, bill collection failure, and underpricing — more generally, financial obstacles — lack of human capital and deficient technical capacity.


A seemingly obvious (though often contested) remedy is the introduction of market-based reforms as spearheaded by the two pioneering countries, Chile and the United Kingdom, from the late 1970s onwards.

These reforms generally encompass private sector involvement, privatisation of market players, liberalisation of markets, or regulatory interventions such as changes in the pricing design.

Today, a large majority of developing countries have adopted such reforms, although selectively and by far not to the degree observed in the industrialised world.

Reforms have  often stagnated at an intermediate stage or are partly even reversed.

 The UK, for example, unbundled generation, transmission, distribution and retail, privatised the companies, and, later, created markets for wholesale electricity and for retail sales.

There are 12 licensed Distribution Network Operators (DNOs) in England and Wales, two in Scotland and one in Northern Ireland. They include GPU Power UK, Norweb and SEEBOARD Power Networks, and their size and number of customers varies.

DNOs hold regional licences for the provision of distribution network services and are regulated by the Office of Gas and Electricity Markets (Ofgem). They are under a statutory duty to connect any customer requiring electricity within a defined area, and to maintain that connection.



For Kenya, which has set its goals on boosting manufacturing as one of its Big Four priorities, the cost of electricity should be addressed as a matter of priority. The other pillars are affordable housing, food security and universal health. All the four would manifestly benefit from low electricity prices.



The role of the Energy and Petroleum Regulatory Authority is responsible for the economic and technical subsector and for this purpose, it has powers to propose to Energy Cabinet Secretary regulatory measures that may be necessary or expedient for the subsector.


Given the bottlenecks that KPLC suffers from — buying from many and selling to many with no competition to itself — the time is neigh for the opening of the electricity distribution market to competition.

All the legal instruments are already in place. Regulations that can be created or implemented to create a level playing field are many.

The potential pathways and transmission channels between reform interventions (within the context of improving access to electricity) are aplenty.
 The retail electricity market, as the key link between end users and the wider electricity system, plays a significant role throughout the power sector.

The re-design of the retail market in the post liberalisation era is necessary. The barriers to entry for new distributors should be reviewed given the high cost required for a new start-up.

Consumers must also be engaged. The nature of issues that impede engagement – such as complexity of the market and electricity tariffs, transaction costs, perceived barriers, and behavioural biases  can make remedial proposals, based on individual switching, less effective for the most disengaged consumers.

The  retail market design and regulations need to be rethought to enable innovation and deliver the de-carbonised, resilient, and affordable electricity that all consumers need.



New long-term retail electricity policies are necessary to create a market with low barriers to entry for would-be distributors and low barriers to switching for end users. In this way, competition is maximised, prices become efficient, and consumers are protected.
 As a result of the expected competition, focus among the service providers will be on quality and reliability, benefiting the consumer.

It is also expected that service providers will introduce into the market incentives on their tariff structures which generally will encourage energy conservation and more consciousness on the need for energy audits.


Availability and reliability of electrical energy is naturally expected to spur investments by manufacturing sector leading to economic growth and expansion of trade opportunities.



As EPRA is still a new institution, it is understandable, as is elsewhere, that developing regulatory capacity in the distribution of electricity can be fraught with difficulties.

Regulatory weaknesses, whether structural or transitory, have distributional consequences, but nevertheless, KPLC's monopoly in the distribution of electricity must be brought to an end.



Duncan Otieno Ogwang  is a petroleum and energy economist