Pursuant to section 45 of the Energy Act, tariff structures in Kenya are set in accordance with the principles prescribed by the ERC. It is a requirement that such tariffs be set in a just and reasonable manner. As such, in performing this function, the ERC encourages inter alia the views of stakeholders, including KPLC.
Electricity tariffs are treated in slightly different ways, depending on whether the tariff is in respect of the supply of electricity by KPLC to its end users, or whether it is in respect of the bulk supply of power from IPPs to licensed offtakers (predominantly KPLC).
Tariffs applicable to the supply of power by KPLC to end users
The ERC is mandated to publish a schedule of electricity supply tariffs in a Gazette Notice, which sets out the tariffs, charges, prices and rates to be charged by KPLC to end users of electrical energy. The Gazette Notice also specifies the date from which such tariffs will take effect.
In computing the fixed electricity tariff, the ERC has established formulae for different categories of electricity consumption, being domestic consumers; non-domestic consumers; small commercial consumers; commercial and industrial consumers; interruptible off-peak supplies; and street lighting.
Tariffs applicable to the bulk supply of power by IPPs to licensed offtakers
The tariffs at which IPPs are permitted to sell power to licensed offtakers (which is most commonly KPLC) are established in one of two ways. For small scale renewable energy projects, including wind, biomass, small hydros, geothermal, biogas, solar and municipal waste to energy projects, a feed-in-tariff applies.
Feed-in-tariffs were established by the Ministry of Energy Feed-in-Tariff Policy on Wind, Biomass, Small-Hydro, Geothermal, Biogas and Solar Resource Generated Electricity (the FiT Policy), issued by the Ministry of Energy in March 2008 and revised on two occasions, in January and December 2012.
Under the FiT Policy, the offtaker is required to guarantee priority purchase, transmission and distribution of all electricity supplied by small renewable energy projects, with an installed capacity of up to 10MW, for a certain period of time. The FiT Policy also makes available feed-in-tariffs for wind projects between 10 and 50MW, for geothermal projects with a capacity of between 35 and 70MW and for solar projects in the 10-40MW range. These tariffs are only available to the first 500MW of wind projects, 500MW of geothermal projects and 100MW of grid-connected solar projects constructed under the FiT Policy. However, the purchase, transmission and distribution of electricity produced by larger renewable energy projects or projects exceeding the aggregate capacity limits is subject to the terms of each negotiated power purchase agreement (PPA).
The FiT Policy provides a technology-specific methodology of designing and establishing tariffs which takes into account the following factors:
- the investment costs for the plant (including the costs of feasibility studies, site development, construction costs, and the costs of connecting to the transmission system, including transmission lines, substations and associated equipment)
- the operation and maintenance costs
- fuel costs, where applicable
- financing costs (including interest during construction) and a fair return on capital invested (the availability of debt finance will be taken into account when establishing such costs)
- the design life of the power plant.
Further regulations have been proposed in respect of electricity tariffs, which were published for public comment in February 2013. It is anticipated that these regulations will introduce positive reforms by improving the existing tariff setting mechanism.
The feed-in-tariff currently applicable to wind projects is US$0.11/kWh, 12% of which is escalated to reflect changes in underlying operating costs. Geothermal projects that qualify under the FiT Policy receive a tariff of US$0.088/kWh, of which 20% is escalated in the first 12 years of the project and 15% thereafter. The feed-in-tariff for grid-connected solar projects that qualify under the FiT Policy is US$0.12/kWh of which 12% is escalated.
For thermal power projects and renewable energy projects with an instal led capacity of more than 10MW or which are ineligible for support under the FiT Policy due to aggregate capacity limits, tariffs are set by agreement between the IPP and the licensed offtaker. The tariffs are set out in the relevant PPA, which must, in turn, be approved by the ERC. When reviewing and approving tariffs for large scale grid-connected renewable energy projects, the ERC will customarily have regard to the cost components described above in relation to the FiT Policy.
Whilst the basis for setting tariffs on KenGen’s 560MW geothermal procurement programme is not yet finalised, it is understood that they will be set by the procurement competition (ie, the successful bidders will be determined, among other things, on the basis of the tariffs offered).