May 18, 2021

Energy auctioning policy could be a weight off consumer’s shoulders as utility companies go for the lowest bidder

2 min read

Under the 2019 Energy Act, energy procurement policy changes provide for the introduction of energy auctioning to replace Feed-in-Tariff (FiT). As much as it would change how energy off-takers procure their power from developers, it is not easy to implement. Renewable energy technology has significantly advanced, which has reduced the cost of energy production. Solar and wind farms have become common, and the energy supply is increasing day by day. This increase has paved the way for the change in energy policies as off-takers now have a choice to purchase power from the lowest bidder.

However, a lot of work has to be done to shake things up from where they were. Power Purchase Agreements (PPAs) are long-term, and developers are reluctant to renegotiate the tariffs despite the reduction in energy generation costs. For instance, in 2020, Abu Dhabi placed a solar bid for as low as $0.0135/kWh, but the cost of selling the power generated to Kenya Power and Lighting Company (KPLC) is still as the amount agreed when signing the PPA.

So, KPLC finds itself paying $0.07-$0.12 per kWh for the procured pay until the PPA period elapses, usually 20 to 25 years. The utility company finds itself in a cost mishap and consequently passes the burden to Kenyan consumers. If energy auctioning is introduced, the consumers could get better rates since KPLC could be contracting the lowest bidder. FiT is the most long-standing energy purchase policy. The tariff is negotiated individually depending on the technology used in the generation of energy. Both the energy supplier and the off-taker deem it a stable investment atmosphere. The energy generator is assured of revenue for the entire agreement period while the buyer enjoys an uninterrupted supply of energy to their grid.

The above situation poses a hindrance to the success of the energy auctioning policy since both parties are reluctant to negotiate the tariff later in fear of interfering with their assured obligations. Furthermore, the energy production technology is unlikely to change significantly in the agreement period. Another obstacle to KPLC moving towards the bidding policy is its destabilizing grid, courtesy of an imbalance in the energy supply and customer demand. Kenya does not have enough energy storage facilities. Energy storage is quite expensive and could increase the already high cost of electricity in the country.

Some of the countries that have adopted the bidding system for their energy procurements have reduced the cost of buying electricity but increased the cost of supplying that power to consumers due to adopting expensive battery storage. Energy auctioning allows power purchasers to have a pool of options to pick from. Also, competitive bidding can bridge the gap between regulators and developers. However, the same policy can be detrimental by compromising the quality of energy to go for the lowest bid. If energy auctioning policy is undertaken in a transparent and competitive process, it can reduce market monopoly, and utility companies can purchase power at affordable costs, reducing consumer’s burden.

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