Prioritize long-term energy cost reduction for sustained industry growth

By Rajul Malde

On January 7, the 15 per cent reduction in electricity tariffs came into effect as the first part of a presidential directive to cut the cost of power in Kenya by 30 per cent by the end of March this year. 

This came as a relief to households and industries given the escalating cost of living and production in recent times. The 30-per-cent cut will see consumers pay Ksh 16 per kilowatt hour compared to Ksh 24 previously.  

The Kenya Association of Manufacturers says the lower tariff will reduce the cost of producing goods by between Ksh 2.67 and 3.64 per unit of electricity depending on the tariff bracket.

Certainly, lower electricity tariffs directly reduce the cost of production, enhance the competitiveness of the manufacturing sector, and save consumers money. According to the Kenya Private Sector Alliance, the cost of electricity has risen by over 70 per cent in the last decade.

This is attributed to expensive thermal power purchase contracts, high cost of fuel, multiple levies on electricity consumption, and system inefficiencies. Therefore, even the increased power supply due to expansion in generation capacity is not enough to offset the overall spike in production costs linked to surging electricity tariffs.

This implies that while the short-term benefits of the 30-per-cent cost reduction are significant from a manufacturing perspective, there is a need for a long-term energy cost reduction plan. This encompasses sustainable, stable policies on the cost, availability and reliability of power.

Such policies will encourage manufacturers to invest in productivity and innovation, two critical ingredients in achieving the national industrialization goals under the Big 4 and Vision 2030.

Without a long-term cost reduction approach, it is impossible for local industrialists to invest in the right mix of technology and human skills to build a resilient manufacturing sector.

Indeed, a previous study by PwC identified inefficient long-term planning as one of the major factors contributing to high cost of energy in Kenya. Efforts to bring down electricity tariffs must also be entrenched in policy and law so as to insulate consumers from arbitrary hikes.

For instance, in September last year, Kenya Power attempted to increase power bills by 20 per cent without even consulting stakeholders. While the law allows for tariff reviews every three years, the process should be subjected to public participation as required by the Constitution.

Review of the Time-of-Use (ToU) tariff structure allowing large power users a 50 per cent cut on their off-peak consumption if they meet a certain threshold should also be expedited. The truth of the matter is that the set targets are too high and may not benefit the majority of manufacturers. Covid-19 economic stagnation also worked against industries due to depressed household incomes and consumption of goods.

The next ToU review is due and should focus on addressing these concerns and of course taking into account stakeholder input.

The government should also speed up ongoing reforms in the energy sector, particularly at Kenya Power to reduce corruption and inefficiencies that have bedeviled the power distributor. Addressing frequent power blackouts should top the energy sector reforms agenda in 2022.

According to the World Bank, Kenya experiences at least six power outages in a month lasting an average duration of five hours each. These interruptions cost manufacturers 7 per cent sales as losses. Clearly, even if we reduce the cost but fail to address the frequency of power blackouts, we will not have achieved much in terms of boosting the competitiveness of our manufacturing sector.  

Intensifying the crackdown on vandalism and illegal connections while continuously investing in the ageing transmission and distribution infrastructure will address this challenge.

Also, manufacturers should be allowed to claim compensation for losses arising from unscheduled interruption in power supply. This will ensure the concerned agencies are held accountable for losses incurred by factories as a result of system inefficiencies and even negligence.

Mr. Malde is Commercial Director, Pwani Oil Products Limited 

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