EAC reels from effects of long drought in higher power costs

Monday October 30 2017

A view of the reduced water levels at Masinga and Kamburu dams following failure of the short rains.

A view of the reduced water levels at Masinga and Kamburu dams following failure of the short rains. PHOTO FILE | NATION 

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This year’s prolonged drought has forced Kenya to increase energy generation from the expensive diesel-generated power plants, resulting in a higher cost of electricity.

Despite massive investments in geothermal plants, the continuing dependence on hydropower plants is exposing Kenya to unstable supply as insufficient rainfall has meant a drastic reduction of water levels at the Seven Forks Dam power complex.

This has seen the country resort to thermal generation, increasing the fuel cost component in power bills.
The situation is not so different in the other East African countries where dependence on hydropower generation continues to exert pressure on tariffs.
In Tanzania where total installed capacity stands 1,700 MW and less than 25 per cent of the population has access to electricity, the government has opposed any form of power tariff raises, plunging the Tanzania Electric Supply Company deeper into financial problems.

In Uganda, where installed capacity stands at about 600 MW, a tight regulation regime has meant that power tariffs remain largely predictable with quarterly reviews.

Thermal generation

The challenge of rising electricity bills for consumers and manufacturers in Kenya could worsen as Kenya Power seeks a review of tariffs, which it wants to be adjusted upwards to cover for rising operational costs that are impacting on its profitability.

The company has applied to the Electricity Regulatory Commission for a review of the tariffs that were last adjusted in 2013 and saw an increase of 13 per cent in power costs.

“Discussions are ongoing with the ERC and we are optimistic the tariffs will be adjusted in the power bills,” said Dr Ken Tarus, Kenya Power managing director.
But even as Kenya Power awaits the green light to increase tariffs from the industry regulator, electricity generation costs in Kenya have surged owing to a rise in thermal generation because of the decline in hydropower, which accounts for an average of 45 per cent of the energy generation mix.

The rising costs are affecting Kenya’s efforts to attract foreign direct investment and even prompting private companies to relocate to countries like Ethiopia, Egypt and South Africa.

Data from the Kenya Association of Manufacturers shows that industries in Kenya pay 15 US cents per kilowatt hour compared to Ethiopia’s 0.4 US cents and Egypt’s 0.6 US cents.

In Tanzania manufacturers pay 14 US cents, Uganda 12 US cents, and South Africa 0.9 US cents.

The high cost of electricity explains the decline in consumption by small industries while demand by large industries remains depressed.

In the 2016/2017 financial year, Kenya Power electricity sales to small industries declined by 4.8 per cent while sales to large industries increased by 2.3 per cent.

High cost of production

The rising cost is a major concern for traders and manufacturers who say that the cost of production has increased significantly as a result.

Industry lobby groups have complained to Kenya Power. However, a meeting that was scheduled between top Kenya Power management, the Kenya Private Sector Alliance and Kenya Association of Manufacturers last week was postponed until the Kenyan elections are concluded.

According to Kenya Power, lack of rain saw electricity generation from hydro in the 2016/17 financial year decline to 32.7 per cent of total generation compared to 38.5 per cent in the previous year to stand at 3,784 gigawatt hours (GWh) compared to 3.339 GWh in 2016.

Geothermal generation also declined from 46.9 per cent to 43.6 per cent to stand at 3,282 GWh from 3,542 GWh the previous year.

In the same period, generation from thermal plants most of which are owned by independent power producers (IPPs) increased significantly from 13.2 per cent to 21.2 per cent.

This meant that the amount of power generated by the thermal power plants increased by 67 per cent to 2,165 GWh from 1,297 GWh in 2016.

“We had significantly less rainfall, particularly in the east, home of the Seven Forks Dam. This meant increasing generation from thermal plants,” said Dr Tarus.

Notably, the Kenya Electricity Generating Company (KenGen) which produces 74 per cent of the electricity consumed in Kenya, also increased its output from thermal sources in order to benefit from the windfall that is mainly reserved for privately owned IPPs.
The company more than doubled its output from burning diesel from 408 GWh to 872 GWh.

Fluctuating cost

The overall increase in thermal generation resulted in increased fuel costs, with Kenya Power paying $209.4 million to thermal power producers compared with $120.3 million in 2016.

It is also important to note that IPPs are also entitled to a fixed-capacity charge of $0.04 per kilowatt-hour when generating and even when the plants are idle.
This amount is a burden that is passed on to electricity consumers as fuel cost charge which fluctuates depending on the amount of fuel used in power production and currently stands at $0.03 per unit.

Stability of the Kenyan shilling during this period saved consumers more pain considering that foreign exchange costs held steady with Kenya Power spending $58.7 million on forex, the same amount spent in 2016.

The country also benefited from the relatively stable crude oil prices at the international market that averaged $48 per barrel.

Rebecca Miano, KenGen acting managing director, says the company is increasing investments in geothermal sources to reduce dependence on hydropower and cushion the country from the unpredictability of the weather.