The governor of the Central Bank of Nigeria (CBN), reacting to calls by citizens to take drastic action against the free fall of the naira against ... the US Dollar, was quoted in a report saying: "Domestically, there has been zero dollar remittance to the country’s foreign reserve by the NNPC. Monetary policy alone cannot bear all the burden of the expected adjustments needed to manage all these difficulties. It’s our collective duty as Nigerians to shore up the value of the naira.’’
Drivers of Kenya’s growing C&I solar market
The commercial and industrial (C&I) solar market has taken off across Sub Saharan Africa over the past five years. In Kenya, it is the fastest-growing solar segment today, with roughly 50 MWp installed by end of 2020.
In addition to a myriad of technical and operational inefficiencies, Kenya Power and Light Company (KPLC) has come under public fire for poor governance, gross financial mismanagement, and excessive issuance of power purchase agreements (PPAs).
The cost of idle capacity sitting under take-or-pay contracts passes through to customers as high tariffs, driving customers toward C&I solar for cost savings. East Africa Breweries Limited is the latest in a list of big power consumers, including Mombasa International Airport and Africa Logistics Properties, to announce its shift to solar, and large commercial electricity consumption from the main grid has been waning since May.
Private sector solar companies have aggressively grown consumer awareness, plus financing avenues from DFIs, investors, and local banks have become more readily available. The Cooperative Bank of Kenya, for instance, has recently announced a new loan facility to support SMEs shifting to solar. As such, a competitive C&I solar market has emerged, virtually unsubsidised, and without direct incentivisation. These trends in Kenya signal a future of shifts to C&I solar to come across East Africa.
The Kenya Power response
KPLC’s few commercial and industrial customers account for over half of its consumption and revenues, so there is a perceived incentive toward policies that deter grid defection.
For instance, Kenya’s anticipated net metering programme is only available to small capacity plants leaving many self-generators ineligible. Likewise, a Feed-In-Tariff is now available at 120 KSh/kWh, but is only available to plants larger than 500kW, again disqualifying many self-generators. In effect, such policies hinder C&I solar, with implications for slowing energy access and clean energy expansion. What happens in Kenya from this point could set precedent for a ripple effect across the East Africa region.
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Utilities defensively guarding sales in the face of growing customer-side solar markets has been a knee-jerk response since solar markets began taking off in the 1970s.
In fact, this is largely what held solar markets at bay until widespread net metering rollouts in the US starting in California, and Feed-In-Tariff rollouts in Europe starting in Germany.
Today, net metering is available in some form in over 44 states in the US and the Feed-in-Tariff is standard across Europe, with utilities even acting as proponents for solar expansion. Experience in these advanced electricity markets shows that the advent of distributed resources is an opportunity not to double down on a slim bracket of existing customers, but rather to (re)orient the power sector around what matters most for business: system efficiency, demand growth, and avoiding unnecessary costs.
What could this look like for Kenya? What does this cautionary tale mean for utilities of the future in East Africa?
The case for (re)orienting the utility business model
Aside from addressing the obvious issues of governance and financial mismanagement, three important areas of the utility business model are overdue for redesign, especially as C&I solar takes off:
- System Efficiency: Right now, KPLC, like most “wires only” utilities, is rewarded based on how many kWh it can sell, rather than how well it meets customer service needs. As a result, investments in efficiency are limited, and system losses – both commercial and technical – are steadily on the rise. Quality and reliability are the keys to growing industrial demand. So, incentives for the utility to improve service – rather than sales – would drive industrial demand and grow the customer base. While there is a cap on acceptable losses for KPLC, it is not enforced by the regulator, and in fact is being revised upward rather than downward, to alleviate penalties owed.
- Demand Growth: Kenya is in a situation where generation has overshot the existing customer base’s ability to absorb power. Meanwhile, sectors like agriculture are hindered from growth by unreliable power. Improved system efficiency would allow KPLC to tap into the latent demand of such sectors, recouping on those hefty generation investments, and increasing the revenue base beyond a small pool of existing commercial customers. As agricultural value chains become more urbanised and consumer-driven, with a greater emphasis on quality and food safety, many new growth opportunities are developing, especially for SMEs, which could spell an expanded customer base for the utility. Even former KenGen (Kenya Electricity Generating Company) CEO says rather than a short-term focus on renegotiating PPAs, the Kenya power sector needs to fundamentally reorient itself around demand growth and system efficiency for its own long-term sustainability.
- Avoided Costs: With high-quality service, and a larger commercial and industrial customer base secured, the utility will then find that a healthy customer-side generation segment can be a blessing in disguise. Customers opting for solar in Kenya are not going completely off-grid, they are mostly installing grid-tied systems with no storage. This suggests that, rather than defecting from the grid entirely, businesses are trying to avoid the high day-time penalty charges enforced due to grid congestion. If these customers are willing to go offline at a time when congestion is high, then KPLC could see this segment as an important mechanism to help it avoid expensive investments in distribution infrastructure. In fact, rather than safeguard against defection, many utilities in advanced markets now leverage customer self-generation, even using its gains to finance net metering or Feed-in-Tariff policies. A healthy dose of customer self-generation also abates the need for future generation investment, again cutting utility expenditures.
Many mature electricity markets have redesigned incentives and business models around these principles. For instance, decoupling, where utility profits are disassociated from kWh sales, has become a very effective mechanism in the US and Europe.
Decoupling has been successfully utilised for decades in California. Since 1973, on a per-capita basis, energy bills in California have averaged $100 per year less than the rest of the US, all while California invested in more solar programmes than any other state.
Decoupling can change a utility’s perspective on customer self-generation by clearly breaking the link between electricity sales and the amount of revenue recovered, while also sharing or eliminating upside and downside risks between the utility and ratepayers. There are many rate decoupling methods that could be appropriate for Kenya. Other mechanisms could include real-time pricing, revising the rate case process, and more.
At a crossroads
So, something will have to give. Right now, KPLC’s decisions are at odds with both its own long-term sustainability and that of distributed solar markets.
The current business model encourages inefficiency, rather than least-cost mechanisms to deliver highly reliable energy service.
This stymies economic growth, strangles industrial, commercial, and residential customers alike, and rewards financially unscrupulous behaviour that ultimately keeps the utility itself in the red.
Rather than resisting change, this is a crucial time to lean into the much larger latent market opportunities that exist by reorienting the utility business model.
Other utilities in the East Africa region should take heed and consider their own opportunities to evolve. The president’s recent order for KPLC to cancel all unconcluded power purchase agreements with immediate effect shows the writing is already on the wall, and perhaps Kenya’s requirement to restructure loss-making state agencies like KPLC on condition of its latest IMF loan might offer a window of opportunity. The regulator and utility do not need to reinvent the wheel, but they do need to get behind and start driving.
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