Energy Policy in Kenya: Have We Blown the Fuse?

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Energy Policy in Kenya: Have We Blown the Fuse?

Thursday, May 06, 2021

Electricity is literally the heartbeat of an economy. FILE PHOTO | NMG

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  • Kenya’s economic outlook has grown ugly.
  • Dozens of commentaries and diagnoses on public finances reveal not only how deep we have sunk, but also the end of the silence from Kenyan public affairs experts.
  • The bonfire of debates will not be easily put out with bureaucratic subtleties.

Kenya’s economic outlook has grown ugly. Dozens of commentaries and diagnoses on public finances reveal not only how deep we have sunk, but also the end of the silence from Kenyan public affairs experts.

The bonfire of debates will not be easily put out with bureaucratic subtleties.

If we turn to foreign experts like the International Monetary Fund (IMF) and the World Bank, we will fall straight into the humiliating political traps and economic fallacies of the Washington Consensus that derailed many African countries over the past century.

On the contrary, overwhelming evidence – China, India, Malaysia, Singapore, etc. – shows that emerging economies, who turned down the path and created their transformative ladders for growth, increased their prospects of rivaling the First World. Better to contemplate an unprecedented economic shock treatment for Kenya as contraction and increasing poverty empty this outsider-driven strategy.

Austerity measures defy a simultaneously weaker demand and supply side. As usual, it delivers crumbs of development out of the streams where the cold free market fundamentalism meets our smug operators waiting to eat mercilessly. She hands out a disheartening bill for the festival to be paid by future generations of taxpayers whose debts they will repay without the economic benefits of intergenerational production and employment. But I digress.

This piece reminds us that the big lie is also prevalent in many areas of our economy with microeconomic distortions. The stakes are high, extremely high. For the same reasons we choose flawed priorities, our impending economic disasters are also reflected in plans drawn up by complacent operators who haven’t learned much from their mistakes.

Take the ongoing disputes between Kenya Power and power producers – particularly KenGen and Independent Power Producers (IPPs), who entered into Power Purchase Agreements (PPAs) that were imposed on Kenyans by the World Bank’s Energy Sector Recovery Program in the 1990s.

The debate so far not only reveals some shortcomings in previous policy, but the entire philosophy behind the energy sector is wrong.

It also shows Kenya as a country being manipulated by generators so that its electricity consumers, taxpayers and the regulator see Kenya Power as a veil that extracts stratospheric high electricity prices based on production and take-or-pay for electricity. I hope the Task Force deployed doesn’t get Kenya Power to swim deeper in red ink if consumer demand doesn’t consume all of the electricity it produces.

The part of the generated and unused generation is billed as a “capacity fee”, which Kenya Power receives back from the consumers and pays the producers. At 54 percent (Sh47.4 billion) of Kenya Power’s total sales of Sh97.8 billion for the fiscal year ending June 2020, fees account for more than half of total sales.

It reminds me of the era of exchange controls when we paid strict shilling prices for dollars on the black market. Except that electricity is not a dollar. Electricity is the essential horizontal and vertical glue for modern economies to grow, compete, conduct trade, promote jobs and services for families in all sectors. Kenya’s scenario has the country held in a stranglehold by generators. These hopes are disappointed.

Meanwhile, sectors are looking to replace the high-priced electricity by bypassing Kenya Power and connecting affordable sources like solar power, thereby discrediting the current model.

How did we get here because electricity is a system, not the US dollar? As part of the World Bank program, the then Kenya Power and Lighting Company with decades of profits and profitability was unbundled from an integrated colossus to create the tripartite segments of electricity generation, transmission and distribution and to partially privatize them from 1996 onwards.

It became Kenya Power – the sales segment with 51 percent state participation – at the behest of the World Bank’s loan terms. Few can argue with the segmentation that is standard for modern energy sectors. However, if the result has been a system that depends on incentivizing investors through extremely high prices and tax exemptions for the power generation segment, then it is neither practical, sustainable, pragmatic, or political.

Worse still, through the last mile connectivity project, we have extended expensive electricity to remote locations to use up the oversupply without any social program knowing the even lower affordability in rural areas.

So if the issue of unbundling was conceived as a way of charging consumers and taxpayers in Kenya for excess, expensive energy through the stripped-down Kenyan power, we have a profound problem that will hold the economy in the long run. A superior strategy would be to fight for affordable electricity, i.e. lowering prices to fuel demand and economic growth, rather than prioritizing electricity producers’ profit margins. You decide.

The core of the problems are the bulk supply tariffs. They can be characterized as support prices, whose emerging surplus of electricity generation capacity, which is well above demand, should have been predicted from economic theory.

The surplus is usually paid for by the government and stored for social purposes – think cheese, milk, and other farm products in the US. In our case, it is passed on to consumers as a capacity fee. Surprisingly, the government stepped up this support, giving generators generous tax exemptions amid flimsy arguments that they would have to pay their loans and dividends to shareholders.

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