Manufacturers push for refunds on electricity use
By Macharia Kamau
| Jul 9th 2019 | 5 min read
Local industries and manufacturers expect the State to cut the high cost of power substantially - a challenge they have grappled with for years.
If implemented, the new programme will see the taxman take a hit to power the “industrial takeoff.” Despite the optimism following the introduction of the Electricity Rebate Programme last year, manufacturers say it has taken too long to implement.
This, they argue, has left them unsure of what direction to take or strategic decisions to make.
The National Treasury in the Finance Act 2018 amended the Income Tax Act, enabling manufacturers and other heavy power users to deduct 30 per cent of their electricity expenses from their taxable income.
This would mean a possible reduction in the Government’s income tax from the industries in a move that would enable firms to produce more for local and export markets as well as possibly reduce the prices of consumer goods.
“The Electricity Rebate Programme was designed to significantly reduce the expenses on electricity by manufacturing companies, both large and small, by deducting the taxation on a percentage of their electricity bills,” said Kenya Manufacturers Association (KAM) Chief Executive Phyllis Wakiaga.
“This was done through the amendment of section 15 of the Income Tax Act in 2018, which ultimately provides that 30 per cent of electricity costs incurred by manufacturers will not be subjected to tax.”
The manufacturers’ lobby boss noted that the intended impact of the rebate programme promises to be massive for the local industry.
“Its effective implementation will enhance the competitiveness of locally made products in the region. For instance, the electricity cost to produce a bag of cement is on average about 20 per cent of the overall cost of production. With the rebate programme, the cost of the same bag will reduce by an approximate five per cent,” observed Wakiaga.
“It is also projected that the impact to the Gross Domestic Product (GDP) will be immense as the 30 per cent rebate will reduce the cost of doing business for manufacturers and, therefore, enhance their capacity to produce for local markets and grow exports,” said Ms Wakiaga.
“This is why the industry now calls for the immediate gazettement of the rebate programme to enable it to take effect, and begin to bear fruits for the country.”
Energy Cabinet Secretary Charles Keter said the back and forth between ministries and business representatives had been concluded in the talks on the implementation of the programme, which would be gazetted soon.
“The 30 per cent rebate on power costs programme is ready and awaiting gazettement. We (Energy Ministry), together with Ministries of Trade and Treasury, have finalised everything and it is now with the Treasury for gazetting. It should happen in the next one or two weeks,” Keter said last week.
This is one of the measures that the Government has taken to reduce power costs and spur activity within the manufacturing sector. The Times of Use Tariff is the other mechanism, whereby industry players stand to save up to 50 per cent of power costs while operating during the off-peak hours of between 10pm and 6pm.
The tariff was introduced late 2017 and according to Kenya Power, more than 3,000 large and commercial consumers qualify for it. The uptake, however, remains low, and only a handful of heavy power users have been able to enjoy the relatively lower power rates.
This is as companies grapple with a tough operating environment that has eroded consumer spending, resulting in low demand for manufactured products.
Other factors that have contributed to the manufacturers’ lacklustre uptake include conditions that come with the tariff, whereby a user has to surpass their previous consumption.
Mr Keter noted that uptake has been growing, with the manufacturers cumulatively saving billions of shillings. “It has been picking up over time as many companies rearrange their operations so that they take advantage of the cheaper tariff,” he said.
“We had put a condition over and above what you have been consuming so that it does not affect the projected revenues and you can see it has been picking up. For a new company, they will get an advantage.”
According to KAM, the amount saved on monthly average has risen to Sh196.7 million in December 2018, more than double when the tariff was first introduced in the same period in 2017.
“Time of Use (ToU) tariff was launched to incentivise manufacturers to use more energy at their off-peak times, and for most, this translates to night time,” said Wakiaga.
The uptake of the Time of Use tariff has been on the increase on a monthly basis, with industry savings rising from Sh78.8 million in December 2017 to Sh196.7 million in December 2018.
An analysis of the top 17 ToU individual companies indicates that the highest firm beneficiary during the first 12 months saved a total of Sh52 million, whereas the lowest saved Sh5.4 million
Other modalities of bringing cheaper power to manufacturers include a planned tariff for industrial parks, especially those close to power generating sites.
CS Keter said the ministry is working on a tariff for firms that will open up in the planned industrial parks near the Olkaria geothermal fields where little costs are incurred in transmitting power to the customers.
It will also design another cost structure for special economic zones (SEZ) where power is delivered by high voltage lines. “The current connectivity to heavy industries uses 132 kilovolts (KV) power lines, we are working on a tariff for connectivity of 220KV. This is still subject of discussion but it should be cheaper,” said Keter.
“We are working on the tariff for four sites – that is the industrial sites in Dongo Kundu in Mombasa, Naivasha, Eldoret, and Kisumu. For the Naivasha industrial park, it will be cheap because the generating sites are about 20 kilometres away and there will be no need for transmission lines.”
The CS explained that the Dongo Kundu SEZ will eventually have a liquefied natural gas plant.
“In the short-term, we will 220KV line to connect the SEZ to the grid, which will reduce the cost of power because the transmission losses are lower when using a higher capacity transmission line,” added Keter.
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