Dr. Frederick Nyang Director, Economic Working With Cost … · 2019-09-02 · East African Power...

Dr. Frederick

Nyang

Director,

Economic

Regulation

Energy Regulatory

Commission

Kenya

www.eapicforum.com

Working With Cost Reflective

Tariffs- The Kenyan

Experience

INTRODUCTION

• Energy Regulatory Commission is a single sector regulatory agency, with responsibility for economic and technical regulation of power, renewable energy, and downstream petroleum sub-sectors, including tariff setting and review, licensing, enforcement, dispute settlement and approval of power purchase and network service contracts.

• The retail tariffs in Kenya are designed to satisfy three policy objectives namely; the economic objective, financial objective and the social objective.

East African Power Industry Convention 2010, Nairobi, Kenya www.eapicforum.com


LEGAL FRAMEWORK

• Sessional Paper No.4 of 2004 on Energy provides that

energy pricing in Kenya is determined by the market

mechanism and the cost of supply.

• The Energy Act of 2006 requires the regulator to

ensure that the rates and tariffs established in

electricity sale contracts, transmission and

distribution are just and reasonable.

• Of which a just and reasonable tariff means a rate

that enables a licensee to: maintain its financial

integrity, attract capital, operate efficiently, and fully

compensate the investor for the risks assumed.

INDUSTRY INSTITUTIONS & STRUCTURE• The Ministry of Energy (MoE) leads the Government’s

policy-making in the electricity sector.

• The Government established the Geothermal

Development Company (GDC) in 2008 to take primary

responsibility for the exploration and development of

geothermal resources.

• The Rural Electrification Authority (REA) was

established under the Energy Act, 2006 to implement

the Rural Electrification Program.

• The REA is responsible for planning rural electrification

according to guidelines provided by the Ministry of

Energy, and manages the Rural Electrification Program

Fund for these objectives.


TRANSMISSION & DISTRIBUTION

• Kenya Power & Lighting Company Ltd (KPLC)

Its core business is transmission, distribution and retail of electricity purchased in bulk from licensed operators.

These operators include; Kenya Electricity Generating Company (KENGEN), Independent Power Producers (IPPs), Uganda Electricity Transmission Company (UETC) and Tanzania Electric Supply Company (TANESCO) Ltd.

• Kenya Electricity Transmission Company Limited (KETRACO)

KETRACO, a wholly Government owned state corporation was established in late 2008 to plan, finance, build and manage new transmission assets. Existing transmission assets will remain with KPLC.


GENERATION

• Kenya Electricity Generating Company Ltd (KenGen)

KenGen is the largest electricity generator in Kenya producing about 75% of the electricity supplied to KPLC.

KenGen’s main sources for electricity generation include hydro, geothermal, petro-thermal and wind.

• Independent Power Producers (IPPs)

Five independent power producers (IPPs) – Iberafrica (thermal), OrPower4 (geothermal), Tsavo (thermal), Mumias (bagasse) and Rabai (thermal) account for about 25% of installed capacity as at 30th June 2009.


Figure 1: Institutional Framework of

Kenya’s Electricity Sub-Sector


Ministry of Energy

GDC

KPLC KETRACO

IPPs

REA

KenGen

CUSTOMERS

ERC Licensing &

Regulation

RuralElectrification

Planning & Construction

Electricity Transmission

& Distribution

Policy & Planning

Geothermal

Exploration

Development

Power Purchase Agreements

Electricity

Generation

RETAIL TARIFF REGULATION• Current retail tariffs (KPLC tariffs) have been in place

since July 2008.

• The detailed mechanisms were drawn up following a (World Bank-financed) tariff study (Fichtner Study)

• A key feature is the automatic pass-through on a monthly basis, of generation related fuel costs, as well as of adjustments for exchange rate depreciation.

• In addition, adjustments for inflation take place every six months.

• The annual tariff revision also takes into account the target for annual system losses.

• KPLC has a strong incentive to improve its performance between tariff reviews.


RETAIL TARIFF REGULATION• Any cost reduction or increase in sales will directly

improve KPLC’s operating income.

• At the same time, the tariff mechanisms adequately

protect the company from most of the major risks it

cannot control (variation in the cost of generation

and exchange rate).

• The current tariff mechanisms have worked well.

• They have effectively protected KPLC’s financial

viability in a context of stress (drought, high oil

prices)

• They have also created adequate incentives for the

company to reduce its own costs and enhance its

commercial performanceEast African Power Industry Convention 2010, Nairobi, Kenya www.eapicforum.com


RETAIL TARIFF REGULATION

• It is also in KPLC’s interest to source bulk power

supply efficiently (in terms of cost and availability).

• The periodicity of tariff reviews (every three years) is

considered optimum given the characteristics of the

Kenyan power sector.

• The five-year periodicity for tariff reviews which is

practiced in many developed countries would be

excessive.

• This is because the utility is undertaking significant

investments, expanding its customer base at a rapid

rate, and operating in a less predictable environment

than mature distribution utilities in industrialized

countries

• .


• The next tariff revision is scheduled to take effect in July 2011.

• ERC will conduct a cost of service study in order to re-examine the tariff structures.

• Retail Tariffs are set to recover costs and there is a special “feed-in-tariff” to promote renewable energy generation.

• A Feed in Tariff is an instrument for promoting generation of electricity from renewable energy source (RES).

• A Feed in Tariff (FiT) allows power producers to sell and obligates the distributors to buy on a priority basis all renewable energy sources generated electricity (RES-E) at a pre-determined fixed tariff for a given period of time.


• FiT objectives are to:-

• (a) Facilitate resource mobilization by providing

investment security and market stability for

investors in Renewable Energy Sources (RES)

electricity generation.

• (b) Reduce transaction and administrative costs by

eliminating the conventional bidding processes.

• (c)Encourage private investors to operate the power

plant prudently and efficiently so as to maximize its

returns.

• The Feed in Tariffs include interconnection costs-

transmission, substations and associated equipment

KENGEN & IPP TARIFF REGULATION• Long-term Power Purchase Agreements (PPAs) with

KPLC determine the company’s prices.

• The PPAs for KenGen related to existing generation assets were signed and approved by ERC in June 2009.

• Under the earlier pricing structure, KenGen remuneration was entirely based on the volume of energy generated.

• Under the new PPAs, KenGen remuneration has three main components:

• the capital recovery charge (CRC), the fixed operation and maintenance charge (FOMCR), and the variable operation and maintenance charge (VOMCR).

• KenGen is entitled to receive the first two

components in full as long as it meets the

contractual target for generating plant availability.

• Only the VOMCR component is based on the volume

of power generated.

• In addition, for thermal generation plants, fuel costs

are automatically passed through.

• This pricing structure reflects KenGen’s underlying

costs.

• It is similar to the pricing formulas of PPAs with

Independent Power Producers (IPPs).

KENGEN & IPP TARIFF REGULATION

• The structure provides incentives for KenGen to

maximize the availability of its generation plants and

reduce operating costs.

• This structure, remunerates KenGen on a plant by

plant basis.

• It is also consistent with the fact that KenGen does

not determine dispatch of its generation plants.

• KPLC is responsible for generation dispatching.

• The term of each PPA is variable and depends on the

generation technology as well as the age of the

plants concerned.

KENGEN & IPP TARIFF REGULATION

ELECTRICITY SECTOR REFORMS• The Government established its long-term vision and

policy framework for the sector in the late 1990s and

early 2000s.

• This culminated in the 2004 Energy Policy and the

2006 Energy Act.

• These two milestones in sector development have

established an effective framework for enabling the

commercial viability of electricity companies and

have opened the door for competition in the

electricity market.

• These major reforms in the electricity sector have

established an efficient, transparent, institutional

framework to manage the program.

ELECTRICITY SECTOR REFORMS

• The guiding principle of the government’s strategy for

expanding infrastructure in the electricity sector is to:

• “promote equitable access to quality energy services at

least cost while protecting the environment.”

• The strategy has three elements:

a) an increase in electricity generation capacity to

eliminate supply shortages;

b) the expansion and upgrading of the transmission and

distribution networks to enhance the quality and

reliability of supply to customers; and

c) the extension of affordable household electricity

access, with particular attention to reducing regional

imbalances in the country.

ELECTRICITY SECTOR REFORMS

• The reform program already has resulted in major

operational improvements:

• The annual rate of new electricity connections

increased from 43,000 per year in 2003/2004 to

around 200,000 in 2008/2009.

• Kenya now has five Independent Power Producers

(IPPs) that account for about 25% of installed

capacity.

• Losses in the power system declined from 18.8% in

2003/2004 to 16.3% in 2008/2009.

CONCLUSION

• The independent Energy Regulatory Commission

(ERC), has been very instrumental in ensuring that

the three policy objectives have been met.

• The secret to maintaining Cost Reflective Tariffs is

proper institutional framework, independent and

transparent regulation and a dedicated workforce.

• The cost reflective electricity tariffs that are in place

convey the right signals for efficient resource use by

consumers and utilities.

Dr. Frederick Nyang Director, Economic Working With Cost … · 2019-09-02 · East African Power...

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