ERC to undertake study on local currency tariffs for power purchase agreements

  • Date written
  • July, 2017

The Energy Regulatory Authority (ERC) will undertake a study to help address existing constraints in the supply of local financing to infrastructure projects in the energy sector

The 3 months’ study is funded by the technical assistance facility of the Private Infrastructure Development Group (PIDG) to the tune of Kshs 20 million. The project will be implemented by GuarantCo, which is part of the PIDG. GuarantCo was established to support the development of local financial markets in low income countries.

ERC’s Acting Director General Pavel Robert Oimeke said the study was in line with the commissions objective is to ensure adequate, quality, cost effective and affordable supply of energy through indigenous resources.

“One of the key challenges facing the energy sector is lack of appropriate and affordable financing option and attractive incentives to mobilize investments in energy infrastructure. This study will help unlock the potential of the sector while reducing cost for the end consumer,” said Mr. Oimeke.

Historically, power generation in Kenya has been a dollarized business supported by development agencies and international lenders with dollar balance sheets, although the success of the South African renewables initiative shows that financing can be sourced from the local market.

GuarantCo’s Executive Director, Samuel Chasia said local currency financing involves productive recycling of savings within a country rather than increasing the country’s external debt burden. Mr. Chasia further said the infrastructure funding gap is large and its growing in Kenya alone where it is estimated to be in the range of Kshs 300- 400 billion (USD3-4 billion).

“The private sector needs to participate and this participation needs to be in local currency. Infrastructure project revenues are typically in local currency and it is only logical to finance in the currency of project revenues as this reduces foreign exchange risk which can be very punitive as we saw last year,” said Mr. Chasia.

Mr. Chasia said a movement from Kshs 90/USD to Kshs 105/USD translates to a 15% jump in repayments which is often passed on to the consumers.

“Any reduction in the consumer tariff will translate into more affordable power and deliver a sustainable advantage to consumers including businesses and industries in Kenya, particularly in the manufacturing sector, creating more employment and contributing to the growth of the economy,” said Mr. Chasia.

According to GurantCo, at a conceptual level, obtaining local currency funding would reduce the impact of the Foreign Exchange Fluctuation Adjustment, (“FERFA”), although the impact of different interest and inflation rates would also need to be taken into account in the final generation tariff and reflected in the consumer tariff.

GuarantCo notes that the local bank and debt capital markets have expanded and deepened greatly since the first independent power projects were financed.

“The pension fund management industry in Kenya alone controls over Ksh 800 billion of assets under management. These funds that they collect need to be invested in a manner that allows pay out over several years. Infrastructure assets are a natural home therefore for these funds,” said Mr. Chasia.

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