The Rural Electrification Scheme (RES), a not-for-profit scheme established by the government in 1973 to expand power access to the rural poor, has accumulated Sh55.9 billion in losses, threatening its sustainability.
The scheme, which is administered by Kenya Power on behalf of the government, returned a loss of Sh9.87 billion in the year to June 2023 to extend its loss streak.
Auditor-General Nancy Gathungu says the scheme is technically insolvent as its current liabilities hit Sh35.5 billion against Sh5.3 billion in current assets.
The RES has also reported a negative working capital in eight consecutive years, even as Ms Gathungu raised questions over whether it can be sustained in the long-term.
The scheme is funded by the government through annual budgetary support. These allocations are buttressed by grants from donors.
Its accumulated deficit comes in a period during which the government’s finances are strained due to expenditure pressures, particularly the rapidly ballooning debt burden.
This has forced the government to decelerate spending on development projects as well as non-essential items amid a revenue squeeze that has seen tax revenue collection lag below target for two years in a row.
“The above conditions are indicative of the existence of material uncertainty that may cast significant doubt on the Scheme’s ability to continue as a going concern unless satisfactory measures are taken to reverse the trend,” the auditor said.
According to the Auditor-General, the government ought to take urgent measures to reform how the scheme is run to stem the financial bleeding.
RES is one of the multiple schemes run by the government to expand electricity access to rural areas with a target to achieve universal access by 2030.
All electricity customers are currently charged a levy on their power purchases to cover part of the costs of running the scheme.
The schemes are, however, not economical as it takes large spending to build and maintain electricity transmission and distribution networks.
Further, the beneficiaries are often in the low-income segment, which means they cannot use enough electricity in the long-term to recover the investment.
“The schemes of RES are generally sub-economic since their operational and maintenance costs exceed their revenue,” says Kenya Power in its latest annual report.
The Auditor-General has also raised questions over how the costs related to running the RES are allocated to the scheme.
Ms Gathungu stated that the sharing formula of the costs incurred by the utility to manage the entire power grid in addition to the RES customers is based on the Mercados Formula (cost sharing formula) which was adopted by the Kenya Power Board on 19 August 2010.
“However, changes that have occurred in the operations between 2010 and 2023 had not been factored in the formula.
“For example, the Mercados Formula does not explicitly cover the foreign currency adjustments, wheeling charges and finance costs of KPLC to the scheme,” she said.
Ms Gathungu said that the judgmental recharge of costs without an agreed basis may lead to misstatements of the costs allocated to RES as a result of ineffective internal controls and governance by the utility.
