Adoption of Local Currency Tariff Power Purchase agreements to ease cost of power

Kenyans could see a decrease in the cost of electricity with the Government set to adopt local currency-based tariffs for power purchase agreements.

The move follows the completion of a study on the availability and viability of local financing for infrastructure projects in the energy sector.

The study found that local firms comprising of pension funds, commercial banks and insurance companies have a projected capital availability of KES 4.45 Trillion available over the next decade. The utilisation of this local capital could significantly reduce the development cost of energy projects and mitigate against the forex component applied on power purchase tariffs which is passed on to consumers.

The study was funded by the Private Infrastructure Development Group’s (PIDG) Technical Assistance Facility and implemented through its guarantee arm, GuarantCo, which was established to mobilise local currency investment for infrastructure projects and support the development of local financial markets.

According to Energy PS Joseph Njoroge the government will put in place measures to ease the cost of energy in support of the Manufacturing Pillar of its ‘Big Four Agenda’.

“Over the last decade the Government has been focused on access to power for all citizens undertaking various initiatives at both National and County level, we are now shifting focus to ensuring that power is not only accessible but also affordable. Our focus as government is on the Big Four Agenda under which energy is plays a critical role across all four-pillars driving Manufacturing, Affordable House, Food Security through Agro-processing and Universal Health Care.” PS Njoroge said.

The study, which has been presented to the Energy Regulatory Commission (ERC), recommends 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.

“Energy infrastructure development is a capital-intensive venture a factor that has traditionally seen local investors shy away from participating in the sector. The emergence of alternative investment models and the development of the local capital markets will facilitate local investment while at the same time enabling the sector to continue to attract foreign Investment.” ERC Director General Pavel Oimeke said.

The report however notes that key measures need to be taken to encourage local investors to participate including the rollout of incentives for early adopters and capacity build local investors to enable them take up the investment opportunities.

According to GuarantCo the adoption of local currency-based tariff structures will enable Local institutional investors to participate in various projects by eliminating the need for hard currency.

“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. Locally denominated tariffs also enable the growth and deepening of local markets, enabling investors to take up longer term investments.” Samuel Chasia, Executive Director, GuarantCo said.

GuarantCo is supported by the governments of the UK, Switzerland, Sweden, the Netherlands and Australia and is rated AA- by Fitch and A1 by Moodys.

DOWNLOAD THE EXECUTIVE SUMMARY