Kenya will negotiate power purchase deals in local currency, a move likely to lower overall electricity costs for consumers.
Speaking during a review and adoption of a study conducted by GuarantCo five years ago on the benefits of shilling-denominated Power Purchase Agreements (PPAs), Energy Principal Secretary Alex Wachira said the shift is expected within two years.
“The aim of this study was to present a case to have PPAs in shillings in order to promote local financing leading to a reduction of power costs to consumers,” Wachira said.
The move follows recommendations made by a study on the availability and viability of local financing for infrastructure projects in the energy sector, supported by PIDG companies TAF and GuarantCo.
It revealed that local firms such as pension funds, commercial banks, and insurance companies have a projected capital availability of Sh4.45 trillion over the next decade.
Local investors have in the past had to buy hard currency to participate in infrastructure projects a factor that has exposed them to exchange losses due to currency fluctuations.
According to GuarantCo executive director Samuel Chasia, locally denominated tariffs also enable the growth and deepening of local markets, enabling investors to take up longer-term investments.
The PS said that because of the change in denominations from shillings to dollars, the customer has had to bear the increased cost in power bills through the adjustment of forex in their bills.
"The initiative is aimed at limiting or reducing that fluctuation and therefore creating a stable tariff for the customer," he said.
According to the Ministry of Energy, the study was in line with the Kenya Kwanza government's objective of ensuring an adequate, quality, cost-effective and affordable supply of energy through indigenous resources.
The shilling-denominated deals promise to wipe out the forex levy, easing consumers’ burden,'' GuarantCo said in a joint presser in Nairobi.
The country follows the example of countries such as India and South Africa that have successfully adopted their local currency-denominated bulk tariffs for energy projects.
The cost of power has been going up in the last ten years despite increased generation capacity.
In the initial report, GuarantCo had proposed that the government adopt a hybrid approach to financing infrastructure projects in the energy sector to retain international investors.
Tariffs for all projects under 10MW should be fully denominated in local currency while all projects above 10MW should partially be denominated in hard currency depending on the technology used to generate power.
The study found out that consumers are paying highly especially when the shilling weakens. Most of the power deals were negotiated when the dollar was trading at Sh90.
This means, if the dollar moves from trading at Sh90 to the current Sh124 then it will translate to a 37 per cent rise in payments which is often passed to consumers.
Consumers are currently paying Sh6.79 per kilowatt-hour (kWh) per kilowatt as Foreign Exchange Rate Fluctuation Adjustment fee up from Sh0.83 charged 10 years ago when the shilling was trading at Sh90.
In 2021, former President Uhuru Kenyatta formed a task force to undertake a comprehensive review and analysis of the terms of all Power Purchase Agreements (PPAs) entered into by Kenya Power and probe the compliance of the PPAs and all associated agreements with government policies.
It also reviewed the sustainability and viability of all independent power generation projects that have been proposed, are under implementation, or are in operation, and made appropriate recommendations.
