Kenya Power will start charging some of its customers in dollars and euros to shield the utility from foreign exchange losses following the weakening of the shilling.
The country’s sole electricity distributor wants consumers whose revenues are in dollars and euros to pay it using foreign currencies. The utility firm on Monday disclosed that the continued weakening of the shilling against major currencies, including the dollar, is hurting its financial performance through exchange rate losses.
The emerging preference for dollar payments points to the increased dollarisation of the economy, with the shilling weakening against the dollar by 24 percent since March 2020 to settle at Sh126.61.
“To mitigate against the impact of the fluctuation in foreign exchange rates that have continued to adversely affect the financial performance, we are pursuing several initiatives including allowing a section of our customers whose income is in foreign currency (USD and Euro) to settle their electricity bills in these currencies,” said Kenya Power on Monday.
The push to have some electricity consumers pay in dollars will raise regulatory questions given the utility is already being compensated for foreign exchange losses in current bills. The compensation is done monthly on consumer bills through the foreign exchange surcharge, which reimburses the utility for fluctuations of hard currencies for spending denominated in dollars and euros such as loan repayments.
This means that Kenya’s electricity bills are already dollar-denominated.
“We have the foreign exchange adjustments to cater for the hard currency losses. It simply means some consumers will be compensating Kenya Power twice for exchange losses,” said a source at the Energy and Petroleum regulatory Authority (Epra) who sought anonymity.
A wobbly shilling saw the foreign exchange fluctuation adjustment rise to Sh1.85 per kilowatt hour (kWh) in October electricity bills, from Sh0.73 in August last year. Receiving payments in dollars and euros will help Kenya Power avoid exchange losses for wholesale electricity it buys from generators that are based on hard currencies.
It will also help cover the additional costs in repayments for loans denominated in dollars and euros.
Kenya Power saw its finance costs, which are related to loan repayments, increase to Sh7.39 billion in the six months to December compared to Sh6.8 billion in a similar period a year earlier. It blamed the weakening of the shilling for the increased cost.
Kenya Power’s move comes in a period when a number of prime office space landlords in Nairobi are setting rent prices in dollars, joining a growing number of businesses that are pegging daily sales prices on the movement of the greenback in a bid to cushion themselves against forex losses triggered by the weakening shilling.
The landlords and traders have been adjusting prices upwards regularly to cover the movement of exchange rates, contributing to the rising inflation.
In addition to office rentals, lease agreements in certain malls have been pegged on the dollar alongside the cost of short-term rentals, including on platforms such as Airbnb and Booking.com. The Central Bank of Kenya (CBK) foreign exchange guidelines issued in 2002 allow Kenyan residents and non-residents to invoice their goods and services in foreign currencies such as dollars.
“Kenya residents and non-residents may: (a) Invoice for their goods and services in Kenya shilling or foreign currency,” say the guidelines that also allow for possession of foreign currency.
Kenya Power posted a Sh1.1 billion net loss for the six months that ended December, marking the first half-year loss in at least 10 years, blamed on the weak shilling and the 15 percent tariff cut that was affected in January last year. It posted a net profit of Sh3.82 billion in a similar period a year earlier.
“This drop is attributable to increased foreign exchange losses, and the implementation of the 15 percent reduction of the end user electricity tariff as recommended by the Government in January 2022,” Kenya Power said on Monday.
The weak shilling saw its operating costs rise from Sh19.1 billion to Sh21.7 billion as the dollar-denominated payments to power generators increased. The Kenya shilling has been weakening against the dollar, moving from an average of Sh117.96 units at the start of July last year to close December at 123.37 units.
The local currency is now averaging Sh126.61 to the dollar, according to CBK data even though banks and forex bureaus have been quoting figures of up to Sh137. Epra, for instance, quoted the shilling at 130.61 units to the dollar in the January fuel price review, showing that the pain of forex losses is more than what is being reported.
Data from the CBK show that the shilling has lost ground on the dollar by 11.2 percent since February 2022. Buyers from commercial banks, however, pay a higher rate of up to Sh134 per dollar, with supply also constrained by reduced inflows into the country and high demand from a mix of manufacturers, traders and oil marketers.
Kenya’s forex reserves are currently below the desired import cover of four months and have been dependent on foreign debt and diaspora remittances for recovery. The shilling’s slide against the dollar became more pronounced from mid-March 2020 as Covid-19 disruptions set in. The shilling has weakened by about 24 percent between March 13, 2020 and now.
The CBK has over the months maintained calm over the direction of the shilling, emphasising that the currency remains well-priced while arguing its interventions are limited to minimising volatility. The regulator nevertheless told the International Monetary Fund (IMF) in December that the exchange rate had allowed the country to absorb external shocks and preserve export competitiveness.
The weaker local currency has, for instance, had the inverse effect of cushioning exports, which served to trim the country’s current account deficit to 4.9 percent of GDP despite shocks experienced across 2022.