Strong Policy interventions required to avert shocks in electricity pricing.
The cost of electricity in the country has been highly unstable. This unpredictability continues to burden industrial firms and households with high costs of electricity; often raising their monthly electricity bills by at least 10%. Electricity prices make up an important input for production and challenges in predicting them complicate production planning for firms.
Electricity prices in Kenya have historically been influenced by both demand and the supply side of shock. Costly electricity causes inflationary pressure, weakening consumer purchasing power. Prices of goods and services produced by expensive power are also set to increase. If this persists, such shocks may be transmitted to other sectors of the economy, leading to inflation.
The demand for electricity is due to the rapid growth of sectors such as manufacturing that heavily relies on electricity for the production process. They also arise from higher consumer demand associated with an increasing population.
Supply shocks arise from Kenya’s heavy reliance on hydroelectric power which is in turn influenced by unpredictable annual rainfall patterns.
Major attempts to diversify Kenya’s sources of electricity especially towards wind and geothermal sources are expected to provide as much as 45% of electricity supply by 2022. Currently, the government has set ground on a 140 Megawatts geothermal plant in Olkaria and a 105 Megawatts in Menengai. Diversifying the sources of energy also includes projects such as: Lake Turkana Wind Power plant and the Garrissa 50 Megawatt solar power project. Hydroelectric power is expected to fall to 20% by 2022 so as to potentially make Kenya’s supply of electricity much less vulnerable to hydroelectric power rationing.
If more renewable energy is implemented, as is currently the focus of the Kenyan government, electricity prices are predicted to fall in the long-term. The trend would also offset potential increase in electricity costs arising from higher interest rates, which are heavily driven by oil prices.
Thus, lower production costs arising from greater reliance on renewable energy would mitigate the adverse effects of shocks arising from oil prices and interest rates.
Information about electricity price shocks also reinforces the need for policy makers to take strong policy action to address such shocks. Strong policy intervention will be required by the Energy Regulatory Commission whenever there are significant shocks to electricity prices. If this action is not taken, then an increase in electricity prices will have a major and long lasting impact on inflation in the Kenyan economy.
Professor Robert Mudida – Director, Strathmore Institute of Public Policy and Governance explores the significant role of policy in stabilizing the cost of electricity in Kenya in his recent research paper: Shocks Affecting Electricity Prices in Kenya, A Fractional Integration Study (2017), published in the energy journal hosted by Elsevier. The research provides reliable forecasts of electricity prices in Kenya. This methodology can potentially lead to better planning at consumer and firm level which would have a positive effect in the reduction of uncertainty in electricity prices. The full text of Prof. Mudida’s research article can be accessed through this link: Click here.