State’s big return in power business
A KPLC clerk reads power meters. The government is investing more to boost the country’s transmission and generation capacities. Photos/file
In a rare but startling admission, the government says it regrets selling its power producing and distributing companies to the public.
According to the Ministry of Energy, hiving off part of the two utility companies — Kenya Electricity Generating Company (KenGen) and Kenya Power and Lighting Company (KPLC) — has left the government in a dilemma when it comes to funding the energy sector to meet the country’s growing demand for power.
In an effort to extricate itself from the problem, the government has formed two new companies: Kenya Electricity Transmission Company Ltd to operate parallel to KPLC and the Geothermal Development Corporation (GDC) to work alongside KenGen.
At present, the power that is being produced and distributed almost equals demand, putting the country’s economic growth at the risk of stagnating due to power shortage as electricity consumption grows.
Energy Ministry statistics show that the country’s effective power production and distribution capacity is 1,289 megawatts while demand stands at 1,072 megawatts, giving a margin of just 3.5 per cent. This has left the country exposed to both planned and intermittent power outages.
The global best practice requires a margin of at least 15 per cent between supply and demand to cater for the power outages. In its latest annual financial statement, KPLC puts the reserve margin at 18 per cent.
Enhancing transmission
Faced with this dim outlook in such a critical sector, the government is seeking to fast-track power production, while cutting over-reliance on rain-fed power generation and enhancing transmission and distribution.
But now, it seems, there is a problem. “The main contributing factor to the current shortfall in generation capacity is delay in implementing the capital intensive committed generation projects,” Ministry of Energy Permanent Secretary Patrick Nyoike told Smart Company in an interview.
To enhance power distribution and transmission, the government estimates that it needs to spend more than $300 million (about Sh24 billion) to construct about 1,500km of high voltage electricity transmission lines and substations within the next three years.
“In its current financial position, KPLC is not capable of doing that,” Mr Nyoike notes. And hence the need to set up the Kenya Electricity Transmission Company to be fully funded by the State.
Otherwise, with no usable funds, the requisite increase in power production and transmission in line with the country’s growth plans would hang in the balance.
Under the country’s Vision 2030, the power demand is projected to grow annually by over 8 per cent, but the ministry is worried that this would not be met unless project funding to expand power production and enhance transmission is increased.
On power generation, the country needs to invest at least Sh35 billion annually to produce an additional 2,000MW of electricity by 2018 to meet the expected increase in demand for power as country moves towards industrialised nation status.
But with KPLC and KenGen being publicly listed companies, injection of funds by the State has to take into account the restrictions placed by the Nairobi Stock Exchange (NSE) listing and trading rules.
“I think it was a total mistake to privatise KenGen,” Mr Nyoike admitted during the interview on Wednesday. “We should have looked for a strategic investor whom we could have given clear mandate on what we want done.”
In 2006, the government sold 30 per cent of its stake in KenGen to the public in what was hailed as the best initial public offering ever at the NSE, while earlier, in 1972, it sold part of KPLC to the public where with time its stake has shrunk to mere 40 per cent. “KPLC has a major private shareholding. So the government cannot inject capital from public funds into the company,” the KPLC management concurred with the PS in response to queries sent by Smart Company.
According to the laws regulating the stock market, if the government is to inject new capital into any listed company it can only do so by buying additional shares, either in a rights issue or increased issued shares.
The most direct effect of such a move would be to alter the shareholding structure, and in case of KenGen, from the current 70:30 per cent share structure.
Any such changes would most likely see KenGen run afoul the Capital Market Authority rules on continuous listing obligations, which require any listed company to at least have 25 per cent of its issued shares held by the public.
Then there is the related cost of raising money at the stock market, which takes almost 2.5 per cent of the receipts. KenGen is preparing to raise Sh15 billion in an infrastructure bond aimed at increasing its power generating capacity by at least 500MW, leaving a financing hole of Sh345 billion if it is to meet the 2,000MW additional production capacity.
Electricity penetration
On its part, the Kenya Electricity Transmission Company Ltd has been mandated to construct, operate, and maintain new high voltage electricity transmission lines and substations that will form a backbone for the national transmission grid.
“The idea is to expedite increase in electricity penetration in the country without passing the cost directly to the consumer through tariffs,” said KPLC said.
Lack of a wider transmission network has been cited as one of the key obstacles to the country’s efforts to diversify power production to coal, steam, and wind in order to reduce its over-reliance on hydro-power generation, currently standing at 72 per cent.
“If you want to put a windmill in Marsabit, how would you supply the power to Nairobi?” said Mr Nyoike.
To rectify the situation and widen the power transmission, the government will be pumping at least Sh8 billion into the Kenya Electricity Transmission Company to enable it to access over $260 million (about Sh20 billion) from donors in form of debt. Donor funding of projects requires that the borrower contributes at least 30 per cent of the project cost in what is known as debt-equity balancing.
That means that if a project is to be undertaken by KPLC, the power firm would need to raise at least Sh7.2 billion. As it is now, KPLC has about Sh756 million available for investment in form of cash flow balance as at December 2008.
And borrowing is not a viable option for KPLC as it is currently servicing debt of over Sh11 billion, Sh10 billion of which was borrowed last year and preference shares amounting to Sh15 billion.
“We are doing what KPLC could not technically and financially do,” said Mr Nyoike. “If KPLC was 100 per cent government owned, this would not have mattered.”
It is this same reasoning that pushed the government to set up the Rural Electrification Authority (REA) as the State sought to increase electricity connections from about 4 per cent in 2003 to 20 per cent by 2010 and 40 per cent by 2020 and universal access in 2030.
This is in keeping with Vision 2030’s goal of providing a high quality life to Kenyans. Electricity has been singled out as one of the drivers of this dream.
Already the State has spent about Sh19 billion in connecting rural areas through REA and estimates that it will spend about Sh114 billion to meet its objectives.
KPLC says direct investment in rural lines may not have the acceptable return and, therefore, as a commercial entity, it may not be attractive.
“Hence the need for the government to directly invest in them (rural areas) through REA, which is wholly owned by the government,” said KPLC.
