Access to affordable and efficient energy is crucial for economic growth and development in Kenya. The Kenya Vision 2030 identifies energy as an enabler to achieving the economic, social, and political pillars in the vision. Electricity is a basic need and an important component of household’s consumption basket, and the ability to afford it will affect the quality of life and welfare of individuals.
Individual welfare can be defined as individual benefits derived from the consumption of goods and services. Consumption expenditure is the indicator commonly used to assess an individual level of satisfaction. Higher energy prices can reduce household welfare by inducing households to spend more money to satisfy their energy needs. Thus, the higher the household expenditure on energy the more their welfare is affected since households have less income to acquire other basic goods and services.
Status of Electricity Generation and Costs
According to the Kenya National Bureau of Statistics Economic Survey of 2023, 87.5 per cent of all electricity generated in the country is from renewable sources; 43.6 per cent is from geothermal, hydro constitutes 24.0 per cent, wind power is at 16.9 per cent, and solar constitutes 3.0 per cent. Thermal energy, which is a non-renewable source constitutes the balance of 12.5 per cent. Statistics from the Energy and Petroleum Regulatory Authority 2022 indicates that Kenya Power and Lighting Company (KPLC) has connected 8,837,978 customers to the grid; and 98 per cent of the customers are domestic customers who consume on average 100kWh and below.
Renewable energy is cheaper than non-renewable energy. Despite most of the electricity generated coming from renewable sources, electricity remains relatively expensive in Kenya compared to other countries. Power costs affect the standard of living directly to households through rise in power bills and affects household expenditure. Since the power bill is price inelastic, consumers may have to forego other spending, thus reducing their welfare.
To reduce electricity prices, the Kenyan government has introduced a myriad of interventions to alleviate the high power bills. This includes Renewable Energy Feed-in Tariffs (REFIT), investment in geothermal energy, rural electrification, and independent power producers. In June 2022, the government introduced a 15 per cent subsidy to reduce the cost of power. However, with the removal of the subsidy and the introduction of new tariffs in April 2023, the price of power bill has increased by 77per cent.
Electricity prices in Kenya have been increasing over the years. Demand for electricity is highly inelastic, implying that consumers will have no alternative but to continue using it even when prices increase. Electricity consumer bills have been a concern for years, with new higher tariffs burdening consumers, households, and industrial users. Past electricity subsidies by the Kenyan government have not fully addressed the issue, as consumers continue to face high prices, and subsidies create financial burdens for the government.
High energy costs are a barrier to economic growth and development. Because electricity is used to produce most goods and services, higher electricity prices have affected the prices of products and services directly and indirectly in all sectors. How can low electricity prices be achieved in the country to balance affordability and efficiency for Kenyan households?
Electricity pricing is determined by the Energy and Petroleum Regulatory Authority (EPRA), which sets tariffs for residential and commercial consumers and determines the prices for electricity generated. Electricity prices are set with the aim of attaining sufficient revenue to meet generation, transmission, and distribution requirements. The pricing system is reflective of the cost of power generation, which forms the base, pass-through charges, system losses, taxes and levies.
The previous base electricity tariff was approved in 2018. However, in April 2023, the rates were adjusted to Ksh 26.10 and Ksh 31.75, respectively, for the domestic category (Table 1). This saw a 19.0 per cent increase in power bill for the domestic category.
Table 1: Electricity tariff rates (2018 and 2023)
| Tariff rates 2018 Ksh/Kwh | Current tariff April 2023 Ksh/Kwh | |
| Domestic customer 30-100 KWh | 21.99 | 26.10 |
| Domestic customer category >100 kWh | 27.92 | 31.75 |
The pass-through cost constitutes additional charges incurred by electricity generating plants and include fuel energy charge (FEC), foreign exchange rate fluctuation adjustment (FERFA), Water Resource Management Authority (WARMA) levy, and inflation adjustments. Taxes fluctuate due to global oil prices and electricity generation. The Foreign Exchange Rate Fluctuation Adjustment (FERFA) fluctuates due to project loan repayments. Inflation adjustment, which factors in inflation, is reviewed every six months to protect the utility company from inflationary pressure. Other approved components include the 3 Kenya cents/kWh EPRA Levy, a 5 per cent levy on the cost passed to the Rural Electrification Authority for the Rural Electrification Programme (REP) levy, and a 16 per cent Value Added Tax (VAT) passed to Kenya Revenue Authority (KRA). The tariff bands are broadly categorized into domestic, small commercial, and industrial/commercial consumers. The domestic lifeline tariff has been inclusive by accommodating low-income consumers, minimizing illegal connections while enhancing access, and improving safety for slum dwellers (Figure 1).
The figure below summarizes the average monthly electricity prices for domestic lines 50 kW and 200 kW for the period 2016 to 2023.
Source of data: KNBS, Consumer Price Index report
The FEC rate is computed monthly, but the applicable charge is set at an agreed level to mitigate against any sharp increases in electricity prices. When the computed FEC exceeds the assigned cost, the customer charge is maintained at the fixed cost. The FEC component has continued to rise from 3.3 Ksh/Kwh increasing to 4.63 Ksh /kwh for the year.
However, to avoid a cycle of low revenue, high debt, inadequate maintenance, under-investment, and poor quality of service in the power sector, it is essential to balance the structure of tariffs. This balance ensures that electricity remains affordable for end-users while power companies can recoup their supply costs.
The causes of rising electricity prices in the country can be attributed to the fact that the energy sector heavily depends on fossil fuels, subject to global price fluctuations. This results in higher costs for electricity generation and increased electricity prices. Additionally, the country has invested heavily in hydropower generation. Frequent shortages of water in the main reservoirs often adversely affects the effective capacity factor of hydropower. Also, the pricing of electricity includes a fuel cost adjustment, which has been fluctuating in recent years owing to high fuel costs globally. There has also been a lack of investment in energy infrastructure; Kenya has faced challenges in attracting investment in energy infrastructure, which has limited the expansion of the energy sector and increased costs. KPLC has also seen challenges in energy distribution. Inefficiencies in the energy distribution system, such as energy theft and distribution losses, have increased electricity costs and resulted in higher consumer prices. In 2023, the devaluation of the Kenyan currency had contributed to higher electricity prices, as the cost of importing fossil fuels and other energy-related products becomes expensive. Government policies, such as taxes and tariffs, have also raised electricity costs since most dominant players are government owned.
Rising electricity prices in Kenya have significant implications for the cost of living, including higher energy bills for households. This results from increase in electricity consumption in the last five years, with the relative increase in tariffs. The increase in energy bills leads to decreased disposable income. It may force consumers to cut back on other essential expenses such as food and healthcare. Additionally, businesses are vulnerable to higher operating costs due to increased electricity prices, which they may pass on to consumers through higher prices for goods and services. As a result, the cost of living for households continues to rise.
Moreover, higher electricity prices may hurt economic growth as businesses become less competitive and less able to invest in growth opportunities. This can lead to reduced job creation, lower wages, and, ultimately, a lower standard of living for Kenyan citizens. Rising electricity prices can also push electricity out of reach for low-income households, resulting in energy poverty, exacerbating inequality, and hindering socio-economic development.
Conclusion and Recommendations
Several actions could be considered to address the underlying factors contributing to high electricity prices in Kenya, which affects the cost of living:
- Diversification of the sources of electricity supply from hydropower and oil-based generation will moderate price increases and reduce price volatility.
- Encourage renewable energy. Kenya has abundant renewable energy sources such as wind, solar, and geothermal power. By investing in these sources of energy, Kenya can reduce its dependence on expensive fossil fuels and lower the cost of electricity. The government could incentivize renewable energy investments through tax breaks and subsidies.
- Upgrade and expand electricity infrastructure and invest in renewable energy projects to improve reliability and reduce long-term costs. Investments in transmission and distribution infrastructure need to be accompanied by effective enforcement of regulations on service quality to ensure reliable service is provided to consumers.
- Increase competition in the energy market. The electricity market in Kenya is dominated by a few large companies, which can lead to higher prices. By promoting competition in the energy market, the government could help lower prices for consumers. This can be achieved by allowing more companies to generate and sell electricity, and by implementing regulations that prevent anti-competitive practices.
- Improve energy efficiency. Another way to reduce the cost of electricity is to improve energy efficiency. This can be achieved through measures such as energy-efficient appliances, lighting, and buildings. The government could provide incentives for consumers to invest in energy-efficient technologies and enforce energy-efficiency standards for new buildings.
By Austin Odera and Susan Thuo, KIPPRA Young Professionals
