26 February 2013

Kenya: Increased Power Tariffs Will Be a Death Knell for Industry?

It is so tragic that Kenya keeps going round in circles when it comes to power issues. Just when all presidential candidates have promised Kenyans lower Energy costs, Kenya Power and Lighting Company (KPLC) is once again knocking on the Energy Regulatory Commission (ERC)'s door with a proposal for power tariff increases.

ERC has subsequently sent invitations to stakeholders to discuss the same. KPLC has submitted an application for approval to the ERC for electricity energy tariff review to apply across all the consumer category specific tariffs.

ERC should not grant this review at this time, but should give KPLC some preconditions to meet before a review is considered most of which include fulfilling the promises of 2008. KPLC registers a lot of profits each year from revenue collected from consumers and yet projects to expand capacity are still stagnant.

Without sounding like a broken record industry consumes 60 percent of the power in Kenya and therefore the increase will disproportionately negatively affect industry and consumers of industrial products will bear the brunt of the resultant increase. So are we forever going to be involved in a vicious circle of power price increases?

The same issue of improving global competitiveness of our locally manufactured products always comes to mind when these power increases are mooted. It would be foolhardy to think that when Kenyan products are failing to compete at the current rates there would be any positive change if power tariffs are increased and yet we still continue to shoot ourselves in the foot.

When will it sink in the minds of anyone in authority in this country that the solution to our energy issues is not in the increase in tariffs but in expediting the completion of alternative energy resources as well as promoting more investment into the energy sector?

Like all businesses, KPLC's revenue growth should not come from price increases alone. KPLC power revenue requirement should come from organic growth in customer numbers and volume of sales and not from increasing electricity tariffs.

All the presidential aspirants have promised Kenyans cheaper power. It is not appropriate to consider raises at this point before the eventual winner of the Presidential race is voted in and has time to implement their ideas and proposals that would lead to a decrease in energy costs.

The planned increase would negatively affect Kenya's competitiveness. With the proposed tariff review to take effect from March 2013 (should KPLC be successful), at current fuel cost levels, average tariffs would increase by an average 40 percent. Given the centrality of power in production, which economy can afford 40 percent adjustments in prices willy nilly?

Already, industrial growth has been affected by the 2008 electricity tariff review. The manufacturing sector grew by a disappointing 3.3 percent in 2011 compared to 4.4 percent in 2010. This translates to a decline of 25 percent in industrial growth which mainly attributable to energy costs and other primary input costs.

If the increases sail through the country has to brace itself for a massive exodus of manufacturing companies to countries that have cheaper energy costs such as Ethiopia, Egypt, Tanzania and Uganda whose charges are USc 3/kw, USc5/kw, USc9/kw and USc 18.6 respectively compared to Kenya's current USc18.7/kw.

If KPLC's is allowed to increase costs, this shall rise to USc 28. Such a move would result in giant losses of jobs and ultimately increase in poverty levels, slow economic growth and negatively impact one of the goals of Vision 2030 of Kenya becoming an industrialized country.

The arguments presented by KPLC to support the application are without basis.

The last time electricity energy tariffs were reviewed was in the year 2008. The increase was granted on the understanding that KPLC wanted to embark on new projects that would result in system efficiency to avoid outage and to reduce system losses to no more than 15 percent. The promises of 2008 have not been fulfilled and they are projecting a gloomier picture of an even higher system loss and one wonders whether the power authority is operating in a globalised economy or are sitting on an island in an unknown world where issues of pragmatism and competency in managing resources do not exist.

Of the 13 projects KPLC argued for an adjustment of the tariff for in 2008, only five have been fully completed. The rest are all behind schedule. Therefore, additional revenue for the utility will mean there will be redundant capital as it can be noted projects do not come in as projected thus there is no need for paying for future projects now. KPLC needs to use the revenue from previous increase to complete these projects.

KPLC has gone to satellite reading from the previous way of reading meters by KPLC personnel. The introduction of prepaid metering has reduced the operational costs and helped in reducing bad debts and the utility still hold onto consumer deposits. The increase in fixed charges is thus not justifiable.

The tariff is based on long term marginal cost. From the planned projects, renewable sources of energy are taking up the bulk share both in the long term and short term plan which should translate to lower tariffs due to reduced fuel costs as the thermal power plants will be scaled down in the planned period. KPLC's proposal does not take account of this reduction in thermal power in the system.

In addition, the timing for tariff increase is wrong as the devolution process will take effect this year. Thus this should wait until the new dispensation takes place and the draft energy policy is finalized and gazetted to give guidelines on energy pricing and ownership of the utility services.

Sh8 billion earmarked for way leaves and other levies in the proposal by KPLC to ERC as anticipated payments to local authorities and Kenya Railway are presumptive and should not be factored in the tariff until the policy dictates. This matter should await the outcome of the energy policy currently under review.

For the period 2011-2016, the Non-Fuel Cost charges are increasing as fuel cost component reduces. This is indicative of KPLC trying to maintain the same level of revenues at current rate per unit of energy without passing the benefit of reduced fuel costs to the consumer. Moreover, KPLC does not plan to improve efficiencies in debt collection. KPLC is budgeting for increase in bad debts at the same time asking for a tariff increase!

The bad debt is projected by the company to even increase from Sh1.2 billion in 2013 to Sh1.4 billion in 2014. It is high time KPLC ups its game and desist from increasing power tariffs in response to its own inefficiencies. There is a limit to what consumers can take and that limit has been passed. The increase is just unacceptable to industry!

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