Ruto’s tariff freeze order pushes Kenya Power into a tight corner

Was Deputy President William Ruto motivated by mere populism when he ruled out any increases in electricity tariffs?

Did he get a proper brief before making a decision so critical not only to the consumer but also to the financial health of the only electricity off-taker in the economy — Kenya Power?

Whichever way you look at it, it is clear Mr Ruto has sent signals that he will want his fingerprints on most of the critical decisions made in the energy sector in the coming months.

After all, the new Cabinet Secretary for Energy and Petroleum, Mr Davis Chirchir, is not only a close ally of the Deputy President but, in reality, his own appointee.

The saga of electricity tariffs is but a reflection of what should be expected as the major centres of power in the electricity sector start shifting.

Apart from the new cabinet secretary, the long-serving CEO of Kenya Electricity Generation Company (KenGen) Eddy Njoroge, who has been an influential voice and player in the sector for more than 10 years, is leaving the scene.

Even more significant, the long-serving and powerful permanent secretary in the ministry, who has bestrode the energy sector like a colossus for over 10 years, Mr Patrick Nyoike, is also stepping down.

These changes are bound to disturb the power-broking networks in the energy sector in major ways.

Pundits in the electricity sector have been struggling to decipher how these changes and the incoming regime will impact on predictability of policy-making in the all-important sector.

By setting aside the proposals on electricity prices by Kenya Power and the Electricity Regulation Commission, the new wielders of the instruments of power in the electricity sector have sent signals that they may choose to pursue a separate path from that the out-going administration at Nyayo House was following.

Still, what confounded the energy industry most was Mr Ruto’s style and manner of delivering the message.

He simply summoned top ministry of Energy officials, top officials of ERC and the CEO of Kenya Power, Mr Joseph Njoroge, to his office one afternoon and declared that electricity prices would not be revised upwards.

According to some of the government officials who attended the meeting, they were not even informed in advance that the tariff review issue would come up for discussion during the ad hoc meeting with the Deputy President.

Suddenly, all the analytical work and studies that had been done on electricity tariff review since Kenya Power submitted the application for review of tariffs in February 2011 had come to naught.

In the past, the practice was that decisions on tariff increases were made and announced by the Electricity Regulatory Commission.

Would not wait

The Deputy President would not wait for due process.

Politically, Mr Ruto’s move was a masterstroke. With a new administration having romped into town promising goodies, allowing an increase in electricity tariffs in these early stages of the Kenyatta administration was going to disrupt the honeymoon it was enjoying.

Whether the application by Kenya Power to raise tariffs had economic merit did not matter.

What is clear is that Mr Ruto’s decision to freeze increases in electricity tariffs will not be without economic implications.

In the first place, considering that Kenya Power is the sole electricity retailer collecting revenues for all other players in the sector, a freeze in the increase in electricity tariffs may affect not only their financial sustainability but also the major investment plans by other players in the energy sector, including KenGen, the Independent Power Producers (IPPs) and the Kenya Electricity Transmission Company Ltd.

Cautious voices have also warned that a freeze on electricity tariffs is likely to impact negatively on financial covenants signed and agreed with the World Bank and other multilateral lenders who have committed billions in projects within the electricity sector.

Also said to be at risk are the power purchase agreements for the new power generating plants that are expected to come on board before the end of the year.

Kenya Power has said it will need more revenue to buy power from the new IPPs. It has also argued that it needs higher tariffs to maintain the momentum of new electricity connections in rural areas.

In recent times, the company has been connecting new users at an average rate of 300 annually as part of the government’s policy to improve access to electricity in rural areas.

Under the programme, which began in 2004, electricity applicants within 600 metres from existing transformers are charged Sh34,980 and Sh49,080 for a single phase and three phase connection, respectively, inclusive of VAT and account deposit.

Kenya Power says that since 2004 when the programme was rolled out, the actual connection cost has escalated from Sh75,580 and Sh89,680 for single phase and three phase, respectively, inclusive of VAT and account deposit.

According to Kenya Power, the difference between actual cost and customer contributions has been subsidised by the company — having risen from Sh1.08 billion in 2008 to Sh7.5 billion last year.

Last year, the Treasury gave Kenya Power Sh3.75 billion to cover the six months subsidy up to December 2012, on the understanding that the remaining six months of the current financial year was to be covered by a tariff adjustment of Sh1.10 per kilowatt hour.

But, as it turned out, the tariff adjustment to cover new connections was not approved by the ERC.

With tariff increases frozen by Mr Ruto’s directive, it is understood the government has formed an inter-ministerial committee comprising officials of the Treasury, the ministry of Energy, ERC and KenGen to come up with a formula to mitigate the risks arising from the freeze.

Two options are on the table. First, a comprehensive programme to get Kenya Power to reduce its costs.

Two, budget support from the Treasury to mitigate the adverse effects likely to hit Kenya Power finances on account of the freeze imposed on electricity tariffs.