Power tariffs fiasco actually raises costs for Kenyan industry by upto 30pc

Manufacturers in Kenya will pay 30 per cent more in electricity as per rates announced this past week.

The tariff review comes at a time other East Africa Community countries, particularly Tanzania and Uganda, are seeking ways to bring down the cost of power in order to attract foreign investment and boost industrial growth.

In Tanzania, President John Magufuli has directed the Tanzania Electric Supply Company (Tanesco) to find ways of lowering electricity tariffs with the coming on stream of cheaper power generated from gas and scaling down of thermal generation.

In Uganda, manufacturers are set to enjoy a 20 per cent cut in tariffs after the government signed a deal that will see the loan repayment period for the Bujagali hydropower project extended by 15 years.

Although the Energy Regulatory Commission (ERC), which released the harmonised electricity tariffs this week, contends that manufacturers in Kenya will get relief from the reduction in fuel cost charge (FCC) and abolishing of the fixed cost charge, manufacturers reckon that an increase in the base tariff will make Kenya uncompetitive.

4.4pc reduction

While announcing the new rates, ERC said that commercial and industrial consumers would benefit from a 4.4 per cent reduction in costs in addition to the 50 per cent discount in off-peak tariffs, and the proposed Special Economic Zone tariff.

“The economic policy objective of retail tariff reviews is to achieve efficient resource allocation within the economy with consumers only paying for the costs prudently incurred by the utilities,” said Robert Oimeke, ERC director general.

The Kenya Association of Manufacturers has however put ERC on the spot on the basis that the FCC was expected to come down anyway, from Ksh4.8 ($0.047) per kilowatt hour (kWh) to Ksh2.5 ($0.024) kWh after improved generation from hydro, and thus should not be considered a reduction.

“The energy charge for industrial consumers has increased by more than 30 per cent. The increased energy tariff erodes the benefit that consumers expected from the lower FCC,” said KAM energy manager, David Njugi.

He added that the fixed cost charge that has been removed is an insignificant component for industrial consumers and as such does not lead to lower costs.

Stabilisation fund

On FCC, the lobby group is calling for the establishment of a stabilisation fund to make power bills more predictable, since the charge is a variable cost driven by the generation mix in any given month, and the prevailing global fuel prices.

According to the new tariffs unveiled by the ERC following a review application by Kenya Power, the cost of electricity for industrial consumers has increased from an average of Ksh14.9 per kWh ($0.14) to Ksh16.15 per kWh ($0.15).

This is a major slap in the face considering manufacturers have been pushing for a cut in the cost of electricity to about Ksh9 ($0.08) per kWh.

The increase does not take into consideration charges such as foreign-exchange rate fluctuation adjustment, inflation adjustment, security support facility, water levy, ERC levy and the rural electrification programme levy.

The increased electricity cost makes Kenyan manufacturers less competitive in a region where the pricing of energy plays a central role in determining the cost of consumer goods and services, and in attracting foreign investors.
The tariffs in Kenya are among the highest in the region. The cost of electricity in Ethiopia for example is as low as $0.03 per kWh, Egypt $0.06 and South Africa $0.09.

In Uganda, manufacturers pay $0.10 per kWh while in Tanzania the cost of electricity stands at $0.14 per kWh.

The move to increase the cost of electricity in Kenya contradicts efforts by the government to accelerate growth of the manufacturing sector to ensure it contributes at least 15 per cent of the GDP over the next five years, up from the current nine per cent.

The sector posted a depressed growth of 3.5 per cent in 2016 from the 3.6 per cent in 2015, according to the Economic Survey 2017.

Expensive destination

The new tariffs make Kenya one of the most expensive countries for manufacturers, and could force more companies to relocate to countries like Ethiopia, Egypt and South Africa.

“Kenya is likely to fall from its place as an attractive investment destination thus reducing its competitive advantage to neighbouring countries and the rest of the world,” said KAM.

According to a detailed analysis presented to ERC early last month, the industry lobby group reckons that raising the electricity tariffs would erode gains in the manufacturing sector at a time many industries are struggling to remain afloat owing to losses caused by power outages, an influx of imports, the rising menace of counterfeits, lack of credit and a depressed economy.

While the manufacturing sector consumes about 65 per cent of all power produced in Kenya, it is estimated that an average manufacturer in the country incurs 10 to 15 per cent production losses due to power outages, quality and voltage fluctuations.

The sector has the potential to increase revenues by a staggering $600 million if Kenya Power improves the quality and reliability of supply by 10 per cent.

“These are the low hanging fruits for Kenya Power, instead of taking away the promised lower tariff rates and keeping energy costs high,” notes the KAM report.

It adds that Kenya Power should find other ways of meeting its revenue requirements including reducing transmission and distribution losses as well as operational costs.

On average, Kenya loses 18 per cent of electricity due to unreliable transmission and distribution systems.