The fallacy that was the reduction in fuel prices

By Macharia Kamau

A case of going to the rescue with inadequate equipment and a little too late may describe last week’s reduction in fuel prices by the Energy Regulatory Commission and a planned reduction in electricity tariffs.

ERC on Wednesday reduced prices of crucial petroleum products by between Sh3 and Sh5.

Kenya Power has also said following the recent rains and reduced reliance on thermal power generation in favour of hydropower would see power bills reduce significantly.

"Now that the dams are full you will soon see a big difference in both supply and pricing. We are using more of the hydro-generation as opposed to the diesel fired thermal generators," said Joseph Njoroge, Managing Director Kenya Power.

He added that there is already a reduction in the fuel charges and foreign exchange adjustments in the power bill. Njoroge also said the power rationing programme the firm introduced in September would end.

The programme saw certain industrial areas being denied electricity in the evening, as power generation affected by the reduced water levels at the dams could not meet demand.

The downward review in the prices of fuel and power are a welcome development in an economy where everyone has taken a beating from high cost of energy.

Taken a beating

But there is the grumbling among the public of the reduction being too little and a general feeling that the reduction would not translate to anything meaningful.

And then there are economic experts who contend the damage has been done, and it might take several months before consumers can see substantial difference in pricing of manufactured commodities and cost of living.

Patrick Obath, chairman Kenya Private Sector Alliance (Kepsa), said for the public to see meaningful change in the cost of living, the downward trend should be sustained.

He also noted that a sustained drop in energy prices would only result in reduced cost of living and a conducive environment for business if the economy does not experience major shocks, like the recent sudden drop in the shilling exchange rates against major currencies.

"It is a good indicator but then it needs to be sustained for there to be an impact," said Engineer Obath.

"It might take several months before we see reduction in prices of manufactured commodities and again this is pegged on several factors being constant like the shilling stabilising."

He noted that the country’s balance of payments, which he termed a big headache, and the Eurozone crisis as other key factors that might determine the direction of the economy.

"The Eurozone might affect our dollar incomes. Europeans might cut their travel plans and European destined exports from Kenya might not perform as expected," he said in in interview.

Independent analyst Alykhan Satchu noted that while the news of the reduction in prices of crucial petroleum products is good at face value, the significance of the announcement lies in whether it would reduce the cost of living.

Price capping

"Petroleum prices affect the economy adversely as almost the prices of all commodities depend on the price of petroleum and petroleum products," Satchu said on Wednesday, after ERC announced its monthly price capping for petroleum products.

The Central Organisation of Trade Unions (Cotu) dismissed the between Sh3 -5 reduction in a litre of super petrol, diesel and kerosene as a drop in the ocean. It said an acceptable drop would be in the region of 30 per cent, which would translate to a litre of petrol retailing at about Sh90, while diesel would be around Sh80 a litre.

Secretary General Francis Atwoli told a press conference Friday that a strike planned for next week would go on.

While the industrial action might be a signal of a populace that has been pushed to the wall, the Consumers Federation of Kenya (Cofek) said industrial strikes have proved less productive and had potential to further derail the economy.

The consumer lobby however concedes that the prices are still high, but said a better move would be a review of regulations, noting that price capping is flawed.

"Rather than resort to counter-productive industrial strikes, we should demand better regulation of various sectors, especially energy and finance. The reason we have been asking in vain for the Finance Minister to name the Competition Authority Board to rein in on regulators conspiring with the industry to defeat consumer protection issues," said Stephen Mutoro chairman.

The Government on Friday announced it plans to import electricity from Ethiopia to be fed into the national grid.

Volatile currency

The country’s inflation rate has soared this year to 20 per cent last month, partly due to high electricity bills affected by drought and a volatile local currency.

Kenya has set a target of 30,000 MW generation by 2030, by developing a mix of plants powered by hydro, wind, geothermal, coal and nuclear energy.

Ethiopia, which has cascading rivers flowing through rugged mountains, is estimated to have a hydropower potential of around 45,000 MW and plans to sell power to Sudan, Yemen, Kenya and Egypt.

"A country which already has surplus electricity, Ethiopia has a huge hydro-electric power potential ...relatively much cheaper to develop than the remaining hydropower potential in Kenya," the Ministry of Energy said in the statement signed by PS Patrick Nyoike.

Nyoike said that funding for the construction of the interconnection line, that could transmit up to 2,000 MW, would be sourced from the World Bank, the French Development Agency and the African Development Bank.