[kictanet] KENYA POWER TO 'EXIT' RURAL ELECTRIFICATION MARKET - A CASE OF THE TAIL WAGING THE DOG?

Thu Aug 15 14:52:06 EAT 2013

Ali

Let me weigh in as I represent Kenya Power in Investor Relations.

I was present at the press conference yesterday and suffice it to say,
Business Daily and Daily Nation grossly misreported the situation. Read the
Standard and People they seemed to have gotten it.

There are a few things to appreciate about Kenya Power.

1. Following the multi-sector working group from across the energy sector,
petroleum industry players and World Bank that was convened in 2001, its
recommendations on the energy policy were subsequently issued as Sessional
Paper No 4. on Energy of 2004.

2. Out of this, The Energy Act of 2006 was enacted that brought into force
among other things, the Energy Regulatory Commission, the Geothermal
Development Corporation, the Kenya Electricity Transmission Company Ketraco
and the Rural Electrification Authority.

3. To shield consumers from the high capital expenditure of rural
expansion, the government formed REA to absorb that cost and leave Kenya
Power to distribute power.

4. The Energy Act of 2006 also ended Kenya Power's monopoly on
distribution. So as at now, KPLC is not a monopoly. In fact, the Energy
Regulatory Commission would license anyone who demonstrates both the
technical and financial capacity to be a distributor. All, they have to do
is to sign a power purchase agreement with an Independent Power Producer
and then negotiate a wheel-in charge for transmission to use either Kenya
Power's or Ketraco's lines or if they can, put up their own lines, and then
organize their billing and collections at the other end.

5. Rural Electrification is done by REA which has been connecting centres,
hospitals, schools, markets etc while KPLC comes in to metre and switch on
consumers.

6. Rural Electricity has always been subsidized by urban consumers. For
anything less than 50KWh, they are charged Sh2/Kwh while the average cost
of a Kwh will come to about Sh4. Nairobi/Urban residents typically pay
around Sh8/Kwh.

7. Since 2006, the Kenya Government has not subsidized power at generation
like it used to. Kenya Power purchases the power at cost and has to
subsequently evacuate, transmit and distribute this power at an additional
cost.

8. Since 2002 despite the rise in cost of materials from poles, to cables
and transformers, KPLC has not increased the price of connecting customers
until it decided to review that earlier this year.

9. In the year 2012 alone, Kenya Power added 307,000 new connections at a
charge it believes is lower than the actual cost of connecting the consumer.

10. Because of the ever expanding network, and you will see from financial
reports that the firm books ever bigger figures for depreciation, and newer
power purchase agreements, it has become necessary for KPLC to spend more
money on maintenance e.g. After connection, it is the company that repairs
vandalized wires, transformers etc.

11. Despite this, the government has (a) Not subsidized power which is
being supplied to an ever larger number at lower than cost (b) The
government does not provide guarantees for organizations which are not
wholly government-owned to access loans or bonds. (c) Between 1991-2007
there was very little investment in the grid as donors had frozen aid; only
until the Energy REcovery Strategy Program and the Kenya Electricity
Expansion Program have we seen significant investment to expand and
strengthen the grid.

12. Bear in mind that while constrained as to what it can charge consumers,
selling power in some cases at below cost, KPLC is expected to source
funding for investment either from its squeezed margins or from financiers
without government guarantees while purchasing power at cost and taking
responsibility for vandalism.

13. At the end of all this, it has to make its case to shareholders as to
what kind of returns they should expect.

James

On Thu, Aug 15, 2013 at 1:57 PM, Ali Hussein <ali at hussein.me.ke> wrote:

> Listers
>
> Kenya Power has announced that they will no longer prioritize Rural
> Electrification because of what they term unacceptable terms for
> connectivity. This, even when the Government has offered 2.7B in subsidies
> to the Monopoly Power company.
>
> I don't need to dwell into the myriad of issues this country's consumers
> have faced at the hands of this monopoly. Now we have a case where the tail
> is trying to wag the dog..
>
>
> http://www.businessdailyafrica.com/Corporate+News/Kenya+Power+dumps+rural+consumers+in+cost+cutting+plan/-/539550/1948510/-/qbmf1z/-/index.html
>
> This level of irresponsibility on a utility solely responsible for
> electrification in the country is not only unacceptable but bordering on
> economic sabotage.
>
> In defense of Kenya Power, the Ag.CEO did say that they are unable to do
> this Rural thing because they are subjected to the vagaries of the market
> as they are a public company quoted on the NSE.
>
> I have some questions to the Cabinet Secretary of Energy, the Government
> at large and listers in general:-
>
> 1. Isn't it time to call Kenya Powers bluff and kill this monopoly? You
> can't at the same time try to protect your monopoly while vomiting on our
> shoes - read the Kenya People. (sorry but couldn't help the analogy once
> used by the British Ambassador when he was referring to the Govt accepting
> grants from the British people and then use the money to buy Chinese
> vehicles instead of Landrovers! :) what cheek! )
>
> 2. There has been discussions on this list about whether the whole Power
> Sector needs to be liberalists ala the Telkom Sector. Maybe there is an
> Mpesa waiting to happen there...
>
> 3. Should the government empower the Rural Electrification Authority to
> roll out connections in the counties? Are there synergies between this
> Authority and the yet to be heard of Universal Access Fund? Can the
> Government find the strength to break silos and work together in this?
> After all where power goes internet connectivity should be its bedmate.
>
> What's your take?
>
> Ali Hussein
> CEO | 3mice interactive media Ltd
> Principal | Telemedia Africa Ltd
>
> +254 713 601113/ 0770 906375
>
> "The future belongs to him who knows how to wait." - Russian Proverb
>
> Sent from my iPad
>
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