Kenya Moves to Stabilize Electricity Costs by Shifting Power Deals to Kenyan Shillings

Kenya’s National Assembly Committee has proposed a major shift in how the country manages electricity pricing by recommending that future Power Purchasing Agreements (PPAs) be denominated in Kenyan Shillings instead of foreign currencies.

The recommendation aims to tackle rising electricity costs, which are heavily influenced by exchange rate fluctuations.

Led by Mwala MP Vincent Musyoka, the committee’s report points out that most current PPAs are written in currencies like the Euro and US Dollar, exposing Kenya to financial risks.

Long-term contracts, some lasting up to 30 years, have driven up payments to Independent Power Producers (IPPs) whenever the Kenyan Shilling depreciates.

This cost is passed on to consumers, leading to higher electricity bills. By switching to local currency agreements, the committee believes electricity costs could stabilize, protecting consumers from unpredictable price increases caused by foreign exchange volatility.

This move is particularly important as the Kenyan Shilling continues to face pressure against major currencies.

For example, in the fiscal year ending June 2023, Kenya Power, the state-owned utility, reported losses exceeding Sh3 billion, largely due to rising finance costs tied to foreign currency loans and contracts.

While Kenya Power has considered dollar-based billing for large customers to mitigate losses, such a strategy might worsen costs for everyday consumers.

Switching to Kenyan shillings in PPAs could also boost local investment in the energy sector. With agreements tied to the local currency, IPPs may turn to local banks and investors for financing instead of relying on foreign capital.

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This shift could enhance economic stability and foster domestic ownership in energy projects.

However, implementing this change will require amendments to the Energy Act of 2019. The committee intends to introduce amendments to ensure all new power generation deals adhere to this recommendation.

A key challenge will be addressing existing contracts with IPPs, who have raised concerns that changing currency terms could threaten their financial stability, as many rely on foreign currency loans for their projects.

The committee has also called for more transparency in structuring and negotiating PPAs. It has urged a review of IPP ownership structures to ensure compliance with local laws and improve accountability.

Addressing these long-standing concerns could lead to fairer pricing and better contract terms between IPPs and Kenya Power.

As discussions around this proposed shift continue, addressing the challenges of foreign currency-denominated agreements is critical for ensuring affordable electricity for Kenyan consumers.

The recommendation reflects a broader push for reforms in Kenya’s energy sector to stabilize prices and create a more sustainable and equitable market.

In conclusion, moving future power deals to Kenyan Shillings could make Kenya’s energy sector more resilient and shield consumers from volatile electricity costs.

However, balancing the needs of IPPs with consumer interests will be key to achieving a fair and sustainable energy future for all Kenyans.