Stimulate industrial growth to lower high cost of electricity

High-voltage power lines at sunset. [Getty Images] Kenya has made significant strides in expanding its electricity infrastructure over the past two decades, according to the World Bank. The country's installed capacity has increased from less than 1,000 Megawatts (MW) in 2000 to the current 3,000 MW, and the percentage of the population with access to electricity has risen from 18 per cent in 2010 to approximately 70 per cent in 2020. Additionally, the government has been diversifying its energy sources to other renewable energy resources such as geothermal, wind and solar which have shielded the country from vulnerability to drought in the generation of electricity. The diversification of energy sources has not only reduced greenhouse gas emissions but also reduced the final tariffs for consumers. The government also plans to retire thermal power plants by 2034 as respective power purchase agreements expire as renewable energy is cheaper than non-renewable energy from fossil fuels. This will reduce the cost of generating electricity as it will not be subject to the volatility of global fuel prices. In addition to reducing the cost of electricity generation, renewable energy presents opportunities for power producers to earn carbon credits which is an extra source of income for businesses. Furthermore, some of the proceeds of the carbon credits are also used to benefit communities living in the areas surrounding the power plants. Despite the significant achievements in Kenya's energy sector, there are still challenges that need to be addressed. For instance, access to electricity is not evenly distributed, with urban areas being more likely to have access to electricity than rural communities, despite the installed capacity of approximately 3,000 MW against a peak demand of approximately 2,000 MW. To address the access to electricity and low demand challenges, the government implemented a programme called 'Last Mile Connectivity', which aims to provide electricity to rural areas that are not connected to the national grid. However, this has not resulted in significant increases in demand as most of those being connected are domestic users who, on average, consume about 10 units of electricity in a month. Furthermore, the energy sector in Kenya faces the challenge of high electricity costs, which are borne by consumers. The costs are spread over approximately only 8.9 million customers, with 95 per cent of them being domestic consumers, according to the KPLC Annual Report, 2021-2022. Given that the costs are shared per the units consumed, the retail price is inevitably high since consumption from domestic consumers is low. To address this challenge, stimulating industrial growth and creating more consumption of electricity to increase the base for sharing electricity costs could be the way forward. The electricity peak demand increased from 1,512 MW in 2014/15 to slightly over 2,000 MW in 2022 is a step in the right direction, but more needs to be done to stimulate industrial demand. Moreover, the energy sectors faces challenges with the transmission and distribution of electricity attributed to aging infrastructure, leading to high transmission losses that are costly for the off-taker. The transmission challenges also mean that there is an increased need for additional step-down and step-up transformers. The government has entered into a private public partnership arrangement with private investors to develop, finance, construct, and operate the 400kV Lessos - Loosuk and 220kV Kisumu - Musaga transmission lines. This is expected to improve the power system reliability and promote electricity access in the Western region. To fast-track the upgrading of the transmission network throughout Kenya, a similar approach should also be adopted. Additionally, the government should provide more incentives to investors engaged in transmission and distribution infrastructure. Tax incentives such as exempting goods used in the construction of the transmission and distribution infrastructure from taxes such as VAT and import taxes should be considered. This will ultimately lead to improving the transmission infrastructure which will in turn reduce system losses and improve access to electricity for all. In conclusion, the current state of the energy sector is marked by both progress and challenges. Although access to electricity has increased significantly in recent years, there are significant barriers to expanding access, particularly in rural areas. There is a need to stimulate more industrial demand and bring down the high cost of electricity. Kenya should continue scaling up renewable energy generation in order to achieve sustainable development. The authors are consultants with PwC Kenya's Tax and Policy division

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