KenGen and independent power producers (IPPs) play a major role in determining the size of Kenya’s Foreign Exchange Fluctuation Adjustment (FEF/FERFA) because they carry much of the power sector’s exposure to foreign currencies. Their power-purchase agreements, loans, imported equipment and other obligations are often denominated or indexed in US dollars. When the shilling weakens, these costs become more expensive in local-currency terms, creating exchange losses that ultimately feed into the electricity tariff.
The exposure is particularly significant among IPPs, whose PPAs commonly contain dollar-linked payments and whose projects are frequently financed with foreign-currency debt. KenGen also has foreign-currency obligations and imported inputs, although its contribution to the overall forex-loss pool can be smaller. Kenya Power has some foreign-exchange exposure of its own, but recent figures show IPPs accounting for the largest share of the sector’s reported forex losses.
EPRA then converts these individual exposures into a charge paid across the electricity system. Each month, it aggregates the actual foreign-exchange gains and losses reported by KenGen, Kenya Power and IPPs, nets the figures and calculates the resulting cost against the electricity generation and purchases for the period. The resulting amount is converted into a per-kWh adjustment, which appears on consumers’ electricity bills. In one recent period, for example, combined sector forex losses were around KSh1.4 billion, with IPPs accounting for roughly KSh1.04 billion.
The structure of the contracts therefore matters almost as much as the exchange rate itself. A USD-linked PPA effectively means that a weaker shilling increases the local-currency cost of purchasing that electricity, even if the underlying dollar price has not changed. When larger volumes of such power are being purchased or dispatched, the absolute forex exposure can become even greater. Because the adjustment is calculated and passed through periodically, consumers can feel the effect relatively quickly rather than having the cost absorbed over many years.
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The bigger problem is that Kenya can have a largely renewable generation system and still carry substantial foreign-exchange risk in its electricity bills. Renewable electricity may have low operating costs, but the financing, contracts and equipment behind generation can be dollar-linked. Reducing this vulnerability therefore requires more than adding renewable megawatts. The way Kenya finances power projects and structures PPAs and how much foreign-exchange risk is transferred to consumers will determine whether its clean-energy expansion actually produces cheaper and more predictable electricity.
