Why local currency power deals will not bring down electricity cost

Power producers are unlikely to embrace push for local currency denominated deals given supplies are bought in dollars and most financers will require multiple level of guarantees that make such an alternative even more complex and expensive.

Speaking at a panel discussion organized by the Canadian government ahead of the Africa Energy Forum in Nairobi, Joao Duarte, Africa Development Bank Division Manager Renewable Energy, said when they tried local currency financing through swaps, the contracts became very complex and expensive and created new unanticipated risks.

Mr Duarte said power producers would also require protections against local currency inflation that would reflect in the tariff.

Senior Investment officer at the International Finance Corporation Ulisha Sing said local currency denominated projects have been possible through indirectly funding banks to on lend to power projects or contracts backed by dollars that will also need to be hedged against currency fluctuations creating additional costs.

The financiers say local currency contracts will be more likely in the decentralized renewable energy space in partnerships with local lenders.

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Local energy experts have been calling on the government to pursue more power purchasing agreements (PPAs) that are denominated in local currency as the silver bullet to lower the cost of electricity.

The bulk of PPAs between Kenya Power and power producers are dollar-denominated, leading to higher forex exchange in the computation of power bills at a time the shilling has plunged to record lows against the greenback.

The shilling has breached the 140-unit mark trading against the US dollar, defying State interventions to stop its downward spiral that is blowing up electricity bills and general cost of living.

The weakening of the local currency has been passed on to consumers through high forex fluctuations, partly contributing to the rise in power bills.

The Energy and Petroleum Regulatory Authority (EPRA) increased power prices electricity prices by 3.7 percent in June citing high fuel costs and a weak shilling, adjusting the foreign exchange fluctuation rate by 226 percent to Kes2.06 from 84 cents per unit.

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