By George Aluru:
The ability of the Kenyan Economy to grow its manufacturing base is heavily reliant to the cost of electricity. Indeed, it has been a common place suggestion that if only the cost of electricity could be low then manufacturing could boom. There has been a complaint about the cost of power being expensive compared to other countries and quite commonly compared to Egypt, Ethiopia, and South Africa. When observed superficially the cost of power in the three countries is 0.061 USD/kWh, 0.02 USD/kWh and 0.075 USD/kWh compared to Kenya’s cost of 0.17 USD/kWh.
We should ask why? In Egypt they generate 80% of their electricity based on local gas resources whose price as an input they can control. In South Africa 70% of their electricity is generated from local coal resource. In Ethiopia 90% of electricity is generated from locally available hydro resources. Coal, Hydro and gas when locally available and subsidised as inputs to electricity generation end up in the lowest costs of electricity. The tariffs in Kenya are minimally subsidised due to the recent controls in the price of electricity and denial of KPLC tariff increase over the past 3 years but had been largely reflective of the cost of production and supply, also related to KPLC revenue requirement. For an electricity sector to be sustainable and attractive for investment the tariffs charged must reflect the cost of production.
Today, Egypt is struggling to reduce subsidies in electricity as it has found it not a sustainable way to go forward. As of 2020 the Egyptian state increased electricity prices by 19% and was expecting that they would need to spend about USD 1.5B in subsidies up to 2024/25, the year they intend to eliminate the subsidies in their electricity. In 2021 in South Africa Eskom got awarded a 15% tariff increase after it won a court case in Gauteng to be allowed to recover approx. USD 600Mln in allowable revenue from tariff. This implied a 15.63% increase in tariff in 21/22. Today the overall cost of generation in Ethiopia is reported as 0.09 USD/kWh while the price is between 0.04 and 0.06 /kWh. Subsidies are not sustainable as we have seen in the petroleum sector.
The top five global manufacturers are China, USA, Japan, Germany, and India with industrial tariffs of 0.12 USD/kWh, 0.07 USD/kWh, 0.12 USD/kWh, 0.2664 USD/kWh and 0.084 USD/kWh. The countries with the cheapest cost of electricity are not the countries with the most vibrant manufacturing sector. The countries with the cheapest cost of electricity are within the 0.02 USD/kWh and below range and include Sudan, Libya, Iran, Lebanon, Ethiopia, Kyrgyzstan, Zimbabwe, Bhutan, Suriname, and Iraq. None of these countries are manufacturing powerhouses. Germany with a much higher cost of electricity than Kenya is the 4th largest manufacturer in the world.
Manufacturing seems to follow good business environment and availability of power in quantity and quality. The top 5 manufacturers are also the top five biggest grids in the world in that order with China having a 2400 GW grid and India trailing the pack with a 170GW grid. Our closest comparisons South Africa, Egypt and Ethiopia are 60GW, 60GW and 10GW (soon) grids. Manufacturing is attracted by the abundance of power and related quality of supply. Kenya today has an installed grid of 3GW with quality of supply issues. To attract more manufacturing, we will need more power capacity installed on the grid and to improve the quality of the supply.
Top manufacturing countries have a stable policy and investment environments together with abundant power capacity. Today, companies and institutions and homes in Kenya invest in standby generators owing to quality of supply issues adding to their electricity costs. A focus on building the quality and quantity of supply will encourage the expansion of manufacturing more than a focus based on reduction of electricity tariffs. The tariffs charged for supply of electricity should be reflective of the cost of production and supply and allow for investment in maintenance of the network, the improvement of the quality of supply and attract investments in more capacity.
The cost of electricity should however be reduced, and this will be achieved gradually as Kenya brings in new generation in competitive tendering processes allowing for greater economy of scale.
George Aluru is Chairperson Electricity Sector Association of Kenya (ESAK).
