Executive Summary
We have upgraded our investment recommendation for Kenya Power from a HOLD to BUY, deriving a fair value estimate of KES 25.57 (+65.0% upside) per share, with a sensitivity range of KES 12.04 to KES 43.44. Despite core challenges faced by the business, our revised analysis underscores robust underlying value within the business, propelled by the company’s strategic transition within a liberalized power sector and its growing utility as an infrastructure provider. That said, the elevated system losses and problematic receivables warrant close monitoring; any meaningful progress in grid clean-up will serve as a direct driver for margin optimization.
Worth noting:
- The enactment of the Energy (Electricity Market, Bulk Supply and Open Access) Regulations, 2026 marks a structural shift in Kenya’s power sector, dismantling the legacy single-buyer model framework and favouring a competitive and multi-supplier electricity market. We believe Kenya Power’s business model is set to transition from being an exclusive electricity retailer to an infrastructure landlord. While they face the risk of losing direct retail revenue from their top commercial clients to competitors, their topline will depend on collecting wheeling fees from private players and cleaning up some of the 21% power leaks across their network. To this end, Kenya Power’s future profitability will heavily depend on its ability to run a highly reliable, low-loss transmission network that private energy companies are willing to pay to use.
- While system losses improved from 23.16% to 21.21% in FY25, they remain uncomfortably high against the regulator’s 17.50% target loss factor. This “efficiency gap” is costly as the variance represents a direct hit to the bottom line, given that energy losses exceeding the threshold cannot be recovered through consumer tariffs. Our back-of-the-envelope calculations indicate that every 1% of system losses above the target quota results in a KES 1.5Bn revenue haircut, implying that the current inefficiencies are leaching c. KES 6.9Bn from annual earnings.
- We previously noted that the transfer of transmission assets to KETRACO remains pivotal for balance sheet optimization of Kenya Power and compliance with the Energy Act (2019). While asset valuations were initiated in 2024, management has provided no further updates. We suspect a pricing deadlock; specifically, the firm’s asset valuation likely exceeds KETRACO’s acquisition threshold, effectively stalling the restructuring process and thus stalling the anticipated relief to finance costs and liquidity.
- A critical methodological nuance in the Discounted Cash Flow (DCF) framework adopted in this report was the treatment of trade payables as quasi-debt. We contend that the current protracted aging of payables transcends standard working capital fluctuations, signalling either structured reverse factoring or negotiated delays, which are financial debt equivalents. Consequently, we reclassified these as de facto financial liabilities to ensure a more robust and conservative representation of the firm’s true leverage and enterprise value.
Kenya Power’s electricity tariff review submitted on behalf of the sector has been withdrawn. Our take is that a tariff adjustment needs to involve a technical input by EPRA, which has pronounced itself on the system losses and the likely link of any tariff benefit to a reduction in system losses below the target loss factor.
Sector Highlights
Tariff reviews on Hold: Sector Braces for Stringent Regulatory Targets
The recent withdrawal of Kenya Power’s tariff review underscores a persistent structural vulnerability in its revenue model. As disclosed in its FY25 annual report, management highlighted that the utility faces acute revenue shortfalls whenever actual electricity demand deviates from the baseline forecasts used to anchor the current retail tariff framework. Because Kenya Power’s revenue projections are rigidly contingent upon meeting these volume targets, any demand deficit translates directly into unrecovered costs that must be absorbed entirely by the company.
While management intended to use the scheduled 2025/26 base tariff review in part to lobby to claw back these cumulative deficits, the withdrawal shifts the focus back to regulatory realities. In our view, any future tariff adjustments will require stringent technical validation from EPRA. The regulator has increasingly tied tariff relief to operational benchmarks, signalling that any upward tariff revision will likely be explicitly conditional upon Kenya Power successfully reducing its system losses below the mandated target threshold and/or expanding its network.
Kenya’s Energy (Electricity Market, Bulk Supply, and Open Access) Regulations 2026
The enactment of the Energy (Electricity Market, Bulk Supply and Open Access) Regulations, 2026 (published as Legal Notice No. 79 in Kenya Gazette Supplement No. 115 on May 8, 2026) marks a structural shift in Kenya’s power sector. By dismantling the legacy single-buyer model, this framework establishes a competitive, transparent, and multi-supplier electricity market designed to stimulate broader economic growth through three primary channels:
- Catalysing Private Capital: The establishment of formalized rules for forward contracts, spot markets, and non-discriminatory open access significantly lowers entry barriers for Independent Power Producers (IPPs), unlocking new waves of private investment.
- Enhancing Grid Reliability and Industrial Productivity: By granting the System Operator strict mandates over ancillary services and congestion management, the regulations safeguard power quality and mitigate outages.
- Deepening Regional Energy Integration: Clear cross-border trading frameworks within the Eastern Africa Power Pool (EAPP) enables Kenya to monetize surplus domestic generation and seamlessly import lower-cost power addressing domestic supply constraints.
The regulations introduce structural mechanism changes engineered to drive downward pressure on power tariffs over the medium-to-long term:
- Market-Driven Pricing Discovery: By enabling direct bulk purchasing for eligible consumers and establishing a dynamic spot market, the regulations allow competitive market forces—rather than rigid, legacy Power Purchase Agreements (PPAs) – to drive transparent price discovery and unlock lower energy costs.
- Operational Accountability for Transmission Losses: In a significant development for consumer cost protection, Network Service Providers (Kenya Power and KETRACO) will be financially liable for any energy losses exceeding the “allowable system losses” capped by the Authority. This prevents utilities from passing the financial burden of operational inefficiencies onto end-consumers.
- Granular Tariff Unbundling: Tariff structures will transition to a highly transparent model, explicitly unbundled into generation costs, ancillary service fees, and network wheeling charges.
While the legislative framework was officially enacted as of May 2026, competitive market dynamics will mature progressively across three distinct phases:
Phase 1: Immediate Voluntary Transition
The market enters a Transitional Phase where participation is voluntary. Initially, the System Operator will test the online trading portal. Early competition will be driven by large industrial consumers seeking to bypass Kenya Power for cheaper bulk contracts with KenGen or private IPPs.
Phase 2: Commercial Contract Realignment
Merchant competition will steadily escalate as legacy long-term PPA contracts mature or are renegotiated into the forward and spot market structures. The introduction of “Day Ahead” and “Contingency” open-access contracts will gradually activate a live, liquid spot market.
Phase 3: Mature Retail Competition
Full retail competition – characterized by aggressive customer acquisition strategies from competing retail licensees targeting smaller commercial and residential consumers – will take longer to materialize. This phase is contingent upon the rollout of localized retail regulations and the widespread deployment of advanced metering infrastructure (AMI) nationwide.
For Kenya Power,
- Erosion of Retail Monopoly: Kenya Power loses its exclusive grip on electricity distribution. As consumers gain the right to select their suppliers, Kenya Power must optimize its service delivery and billing efficiency to retain high-value, large-scale power consumers. KenGen has already applied to break the single buyer model by seeking an Electric Power Transmission and Distribution Licence for its Green Energy Park SEZ in Olkaria, Naivasha.
Centum is also planning to bypass the traditional retail tariff framework, with plans to produce power from Akiira Geothermal facility in Naivasha and wheeling it through the utilities to its special economic zone in Vipingo at the coastal region, powering its own commercial interests. - Transition to an Infrastructure Provider: Kenya Power’s business model will likely pivot toward functioning as a Distribution Network Service Provider (DNSP). Revenue generation, in the long run, will increasingly depend on regulated, predictable streams, specifically “wheeling charges” 1 levied on third-party suppliers utilizing its grid network.
In conclusion, Kenya Power’s business model is set to transition from being an exclusive electricity retailer to an infrastructure landlord. While they face the risk of losing direct retail revenue from their top commercial clients to competitors, their survival will now depend on collecting “wheeling fees” from private players and cleaning up the 21% power leaks across their network. To this end, Kenya Power’s future profitability will heavily depend on its ability to run a highly reliable, low-loss transmission network that private energy companies are willing to pay to use.
- At its simplest, wheeling charges are infrastructure rental fees. Think of Kenya Power’s network of grid lines, transformers, and substations as a toll road. If an independent energy company wants to generate electricity and sell it directly to a factory, it doesn’t necessarily have to build its own extensive network of power lines across the country (which would be capital-intensive). Instead, they can “rent” Kenya Power’s existing wires to transport (or “wheel”) that electricity from their power plant to their customer. The fee they pay Kenya Power for this rental is the wheeling charge. ↩︎
