Vertically Integrated with Private Sector Participation
EPRA was established by an act of parliament, the Energy Act 2019, replacing the Energy Regulatory Commission, which was formed under the Energy Act, 2006. EPRA is responsible for the regulation of the electricity, natural gas and petroleum sectors in Kenya. Its establishment by law gives EPRA credibility, and this impacts positively on investor and consumer confidence.
Clarity of Roles and Objectives
ERPRA’s regulatory functions are set out clearly in the primary legislation that established the institution. Secondary legislations and license conditions set out obligations of regulated utilities.
EPRA is rated high in terms of its “arm’s-length” relationship with the government. While the Kenyan President appoints the board chairperson, the cabinet secretary (minister) of energy appoints the ten EPRA board members, five of whom are from the private sector. The appointments are for a term of three to four years each, renewable once. The terms of board members are also staggered to ensure continuity and allow for institutional memory and transfer of knowledge to new members. The board competitively selects and appoints the CEO. The legislation defines the skills required of the agency head/board members. The majority of EPRA’s permanent staff are also recruited through competitive processes.
With regards to independence from stakeholders, EPRA rates low. There are no provisions in the law that prohibit board members from accepting employment in the regulated utility company immediately after the end of their term in office. Although the Mwongozo Code of Governance for State Corporations prohibits commissioners from holding other public offices within the energy sector during the tenure, there are no provisions in the regulatory Act that prohibit the appointment of the CEO/board member of the regulatory authority, if any of them has previously held a position in the regulated utility company. Furthermore, there are no provisions in the primary law prohibiting the CEO and/board members from having any personal interest in the regulated utility. There is therefore a risk of stakeholder interference in the regulatory functions of the regulator. This may affect investor confidence.
EPRA maintains a high level of regulatory development in decision-making. Decisions of the board regarding tariffs, issuance and amendment of licenses and resolution of disputes between companies on the one hand, and between companies and their customers on the other are final and legally binding. The executive arm of government cannot legally overturn regulatory decisions of the authority and EPRA is not required to seek approval from the executive on regulatory decision. EPRA undertakes public consultation to engage with the public and relevant stakeholders before taking regulatory decisions.
By allowing the regulator to be financed from fees levied on regulated utilities and license fees approved by Parliament, EPRA rates high in the level of financial independence from government. The board is responsible for proposing and discussing the annual budget, which the Ministry of Finance then approves. EPRA provides information to the legislature or the relevant budget authority on the costs and resources needed to fulfil its mandate prior to the next budget cycle. The EPRA board decides on the authority’s staff salary level, which is based on the Kenyan Civil Service Scale. The average salary level of the regulatory staff is higher than those of the utilities. This enables the regulator to attract, train, maintain and retain high-quality staff for its activities.
The level of regulatory development of EPRA with regard to accountability to sector stakeholders is rated substantial. EPRA is required to answer requests from or attend hearings organized by parliamentary committees. It has a legal obligation to produce annual reports on its activities, which are presented to the Cabinet Secretary of energy. There is a formal mechanism for regulated utilities (or other parties), to challenge EPRA’s regulatory decisions. In the event of such challenges, a specialized body, the Energy and Petroleum Tribunal, adjudicates over the matter, thereby avoiding lengthy judicial processes.
Transparency of Decisions
EPRA rates high in Transparency. The public has access to all key regulatory procedures and documents from the EPRA website www.epra.go.ke. The publication of regulatory documents and decisions is mandatory, and the authority publishes all regulatory decisions that it makes, supported by explanations.
EPRA maintains a rating of high in terms of predictability. A documented tariff methodology, adopted in 2007, sets out procedures and a timetable for major tariff reviews. Although it has not been reviewed over the last five years, it can only be changed by the regulator, in consultation with regulated firms and stakeholders. There is a predictable mechanism used by the regulator to disallow costs considered unreasonably incurred by a regulated entity and a documented procedures, with timelines, for obtaining a license. The downside, which could affect investor confidence, is that other regulatory documents like licenses, contracts and authorizations may be modified by regulatory decision rather than in consultation with the parties involved.
The level of public participation in EPRA’s regulatory processes is substantial. In fulfilment of constitutional requirements, EPRA involves all major stakeholders in its decision-making process through public hearings, ad-hoc meetings and other outreach events. EPRA considers stakeholders’ inputs and responses in making regulatory decisions. It always provides feedback on comments received from stakeholders. EPRA presents comments received during consultation engagements to stakeholders.
Open Access to Information
EPRA rates high in the level of open access to information. It has two public websites, through which it disseminates information. This includes forward looking action plans, primary and secondary legislations, and other regulatory documents.
The level of development of EPRA’s economic regulation framework is high. The tariff setting methodology includes a formula for setting end-user tariffs, and a schedule for major and minor tariff reviews. The end-user tariff-setting regulations avoid passing inefficient costs on to customers. Generators are compensated for the provision of firm capacity, ancillary services and the costs of stranded assets. EPRA requires regulated companies to submit financial information according to regulatory accounting standards. The regulator has carried out a cost-of-service study, and the current tariff level is cost-reflective. To make tariffs affordable to support low-income consumers, the poor and vulnerable, lifeline block tariffs, cross-subsidies and capital subsidies from government are applied. Utilities are automatically penalized for failing to meet the allowed loss targets. A network connection policy has been developed as a separate document from the tariff methodology.
EPRA is rated substantial in terms of technical regulation. EPRA has developed quality-of-service regulations and codes, which provide for monitoring the performance of the regulated utility on technical performance. A national transmission grid code and a distribution grid code provide procedures for access and operation of the inter-connected power system. The quality-of-service regulations stipulates various regulatory requirements. For example, there are time-bound performance parameters, like the length of time that it takes for a utility company to respond to customer requests for new connections. The regulator has the power to compel the regulated entities to provide quality of service information. Although it analyses the quality-of-service information and discusses the results with the regulated utility, the regulator does not publish performance assessment reports. These regulations and measures help to check the utility to ensure that it delivers the desired quality of service to consumers. They also help to protect consumer interests.
EPRA is rated high with regard to the development of the licensing frameworks. The regulator has developed the frameworks and regulations for both grid and off-grid systems – both large and small size generators. All licensing requirements, procedures and fees are specified. A separate, simplified and light-handed framework and procedure for off-grid and small sized systems has also been developed and published. These provisions boost investor confidence by providing them with the needed insight and information to enter and engage in the sector.
EPRA is rated substantial as it has adequate and qualified staff to collect data and perform all forms of analysis on tariffs and utility performance reports that it requires for its operations.
Renewable Energy Development
The level of development of Kenya’s renewable energy (RE) framework is rated high as Kenya has policy and legal frameworks for renewable energy developed and published to facilitate and guide the commercial development of renewable energy resources. EPRA is in charge of renewable energy regulations while the Rural Electrification and Renewable Energy Corporation is responsible for the formulation, development and implementation of RE strategy. EPRA has developed technology-specific feed-in tariffs and model contracts for different renewable energy technologies. Access to the grid and priority dispatch is given to electricity generated from renewable energy sources based on least cost or procured through the feed-in tariff. The national Transmission Grid Code specifies renewable energy connection procedures. The Electricity Licensing Regulations 2012 provides the legal framework that allows a private operator the right to produce electricity from renewable energy sources on behalf of a consumer or a group of consumers connected to the national grid.
Mini-Grid and Off-Grid Systems
There is a substantial level of development of mini and off-grid systems in Kenya. The national electrification plan is an integrated plan that sets out a least-cost electrification pathway. It includes grid, mini-grid, and off-grid systems and clearly demarcates areas for each system. The tariff regime allowed under the regulations for mini-grid operators is based on the market approach in the form of buyer-seller agreements. Technical standards for mini-grids have been developed, and there are connection codes specifying technical standards for connecting mini-grids to the national grid. There is a national program to support the development of stand-alone systems. This includes individual home systems. Duty (and other tax) exemptions are the financial incentives available to promote the development of both mini-grid and stand-alone systems. Quality standards for stand-alone and individual home systems have been developed.
There are no regulatory policies that clarify the arrangements for transfer of asset ownership and/or ongoing operation and maintenance when the national grid encompasses a privately owned mini-grid system. There are no regulatory policies that allow them to sell mini-grid energy into the grid at a sustainable tariff.
Energy Efficiency Development
The energy efficiency development framework in Kenya is at a high level. The policy and legislative provisions for energy efficiency are provided in the Energy Act, 2019 and a National Energy Efficiency Action Plan has been developed to reduce losses from the current 23% to 15% by 2025. The published electricity tariffs provides a loss reduction path for the distribution utility. EPRA is in charge of energy efficiency regulation and the Ministry of Energy is responsible for energy efficiency policy and implementation. The Ministry of Energy supports identification of energy efficiency projects and their implementation through the Kenya Association of Manufacturer's Center for Energy Efficiency and Conservation. There is a financing mechanism for the development and implementation of energy efficiency projects. Minimum energy performance standards (MEPS) and an energy labelling scheme has been developed for refrigerators, HVAC equipment, lighting equipment, and industrial electric motors. The Energy Management Regulations 2012 require all entities with energy consumption above a defined threshold to carry out energy audits every three years and to submit the reports to the regulator.
Financial Performance and Competitiveness
From the perspective of the utility, there is substantial level of regulatory outcome on financial performance and competitiveness of the utility and the sector. The regulator carried out a cost-of-service study on the utility’s operations in March 2018, and has implemented the findings. There is no predictable mechanism to disallow costs incurred by the utility that may be considered unreasonable, as a result of non-transparent procurement practices used by the utility. Price adjustment clauses in approved power purchase agreements are however recognized by the regulator for tariff adjustments. A loss reduction target of one percent per year has been instituted to improve financial performance of the utility.
Quality of Service Delivery (Commercial and Technical
The level of development of the regulatory framework for the utility’s quality of service delivery is low. although it is not a regulatory requirement for the utility to undertake periodic technical audits or a valuation of its assets to establish the true state of its facilities, the utility performs the audit for its own operational purposes. There is also no requirement for the utility to calculate and publish its performance indicators such as the Systems Average Interruption Duration Index (SAIDI) and the Systems Average Interruption Frequency Index (SAIFI). yet, the utility calculates and publishes the indices for its own internal governance purposes, and discusses the reports with the regulator. There are no ceilings on SAIDI and SAIFI set by the regulator and calculated values are not factored into the electricity tariff setting procedures.
Facilitating Electricity Access
The level of development of the regulatory framework for facilitating electricity access in Kenya is rated substantial. The government and the utility provide funds for rural electrification in the country. Investment made by the utility for electrification is factored in the tariffs through a rate of return granted on the invested assets. Private sector participation in grid extension is limited to last-mile-connection. Distributed generation/mini grid is also under last mile connectivity.
The regulatory law should be amended, or secondary legislations enacted to allow for :-
- A cooling-off period for the CEO and board members after their term of office before they can accept employment in a regulated entity. This will ensure that regulatory decisions are devoid of future personal benefit aspirations of regulatory officials;
- Prohibition for the regulator CEO from holding other offices in the government during his tenure as regulator;
- Prohibition of the appointment of commissioners who were previously staff of a regulated entity;
- The Regulator to report directly to parliament
Considering the gap between the acceptable loss rate of 14.9% and the actual loss level of 23.46% and the roll-out plan of 0.5% loss reduction per annum, the regulator should develop a more aggressive loss reduction target and action plan, in collaboration with the utility, to quicken the achievement of cost reflectivity.
The regulator should carry out an assessment on the quality-of- service performance of the utility and review the existing Quality of Service code/regulations, to set clear ceilings for SAIDI and SAIFI for incorporation into the tariff setting. This will incentivize the utility to ensure quality of service delivery to consumers.
The regulator should collaborate with the utility to conduct a consumer satisfaction survey on a regular basis – at least every two years. This will help to track the level of quality-of-service delivery by the utility and identify areas for improvement along a pre-agreed roll-out plan.