Ratio Magazine :: The Inside Track to East Africa’s Economies - Kenya: Press Release: KAM Warns on Effects of Escalating Power Costs

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Kenya: Press Release: KAM Warns on Effects of Escalating Power Costs

Tuesday, 23 September 2008

Following the recent increase in electricity costs, the Kenya Association of Manufacturers (KAM) would like to urge the government to make quick interventions in order to save the country from the current power cost crunch which is posing a major threat to the country’s socio-economic well-being. We believe that the government is the only entity that holds the key to this crisis that is affecting all Kenyans.

Energy costs in the country have increased tremendously over the past few months affecting the cost of doing business across all sectors of the economy making Kenya’s products very uncompetitive in the international market. With these exorbitant rates, Kenyan industries are now faced with the grim reality of business closures and possible relocations which will deal the country’s economy a major blow since the manufacturing sector, including the SME sector, is the main engine of our economy.

Over the last two months, we have received strong protests from our members regarding the recent increase in electricity costs. Our analysis reveals the following facts on how the electricity costs are slowing down productivity within the manufacturing sector:

•    Overall effective cost per unit of electricity for the industrial sector has gone up from KES8.00 to KES15.00 on average.
•    In September 2008 alone, fuel cost adjustments are set to go up from KES7.69 to KES7.78 per unit; the cost is expected to increase further.
•    In January this year, the fuel cost charge was KES1.77 per unit compared to KES1.12 per unit during the same period last year.
•    The current increases constitute approximately 600% over the past one year which is outrageously high for our struggling economy.
•    Kenyan manufacturers are paying between KES10 and KES15 per kilowatt of electricity; while their competitors in China and India pay the equivalent of between KES2.50 and KES3.80 per kilowatt of electricity. This makes their products much cheaper than Kenya’s.

To say that production costs in Kenya are among the highest globally is an understatement; yet manufacturers are the largest power consumers. Energy costs alone constitute over 40% of the total manufacturing costs which is approximately 33% increase in overall costs. Kenya’s products are increasingly finding it difficult to compete with those from other countries especially Asia, because of the variations in the costs of doing business.

Within the COMESA block, Kenya’s two major competitors Egypt and South Africa pay minimal electricity costs compared to Kenya. This is unfortunate bearing in mind that these are among our main competitors. For instance, Kenya pays four times higher than Egypt. As a result of this high cost of electricity, Kenya’s target of attaining into a middle income economy status by the year 2030 is becoming a pipe-dream.

The ambitious Vision 2030 which was launched early this year pledges to triple Kenya's economic fortunes within the next 22 years to the levels of economically rising countries including Malaysia and Singapore. However, this will be difficult to achieve if the costs of electricity remain punitive and therefore discourage the growth of the manufacturing sector.

In view of this, we propose immediate remedial action to halt this display of impunity by the electricity providers. The Minister for Energy must step in before it is too late to save our industries from collapse.

What would Business like Government to do Regarding High Electricity Prices

1. Increase investment generating capacity: Government should demonstrate by policies and processes that it is doing everything possible to increase generating capacity. Relying on state provision by KENGEN alone is insufficient. Government should actively encourage other investors from the private sector to participate and explore other sources of thermal energy besides fuel based e.g. coal. There are investors that have expressed interest to government in this regard and but there has been slow response.

2. Encourage industries to generate for own use and sell excess to grid. Beyond the policies thus enacted, Government should actively encourage large consumers to generate electricity for own use and sell excess to the national grid.

3. Demonstrate seriousness and commitment to roll out of programmes for renewable energy: Government has stated severally its commitment to expansion and adoption of renewable energy generation e.g. solar and wind. However, there are no significant government-backed programmes to do this. Requirements for all buildings to have solar power installations and exploitation of wind power, would go a long way in reducing the current pressure on existing supplies.

4. Review revenue maximisation policies: Government should stop fuelling the inflationary pressure: Government revenue makes up a significant portion of fuel price at 35%. With a high thermal content in electricity, Government should cap its revenue collections from fuel used for generation to ease the price consumers pay. This situation is grave for the economy and painful for all consumers. It does not augur well for government to increase its revenue collection beyond anticipated targets out of such a grave situation.

5. Incentives energy conservation: Government should provide tax incentives and credits for installation of power saving devices at household level and industry.

6. Review the financing models used by the utility companies; one of the arguments made by the ERC when announcing the new tariffs in June was that it would help both KPLC and KENGEN meet the cost of new capital expenditure in systems improvement. However we urge that this model used is revised to reduce initial burden on consumers and spread payout over a longer time span.

7. Be a partner to society in absorbing the pain of high energy costs. Government should provide relief to consumers by absorbing some of the additional costs e.g. of rental charges for the emergency power generation. Other charges the government should pick up include cost of fuel used for generating electricity above USD70 pb.

8. Review programmes for demand expansion: there are many government programmes to expand demand for electricity amid crippling shortages and prices. In order to match promise and delivery, government should review such programmes.

9. Demonstrate partnership with business and society in finding lasting solutions to the power problem. We as business and other sections of society have ideas for solutions to the existing challenge. We ask government to actively partner with all in the search for solutions to this crippling challenge.

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