The Impact of Pass Through Costs in Electricity Consumption in Kenya

Abstract

Electricity consumption is important for both economic growth and wellbeing of households. As the government implements its growth agenda by increasing investments in energy infrastructure, this has seen increased growth in power supply that is out of proportionate to the increase in power demand. The lag in demand growth has been attributed to rising unit cost of electricity over the five-year period ending June 2018. This study provides empirical evidence on the impact of electricity pass through cost on consumption of power by consumers in Kenya. The study adopts ARDL regression technique to examine the impact of electricity pass through cost on consumption of power by domestic consumers in Kenya. Data on consumption was obtained from Kenya Power & Lighting Company (KPLC), while the monthly pass through costs obtained from Energy & Petroleum Regulatory Authority (EPRA). The study concludes that WARMA Levy and FCC significantly impact on consumption of electricity by the category of consumers., followed by FERFA and INFA. The impact observed is pronounced on the commercial and industries customer category, where a 1% increase in the pass through costs, is observed to reduce consumption for electricity in the commercial and industries customer category by around 1.4Million KWh in the short run and around 800,000KWh in the long run. Study recommends review of the pass through costs with reduction of the levies through legislation, abolishing the FCC through 100% adoption of renewable energy power generation and decommissioning of Thermal Power generators. In addition, abolishing the FERFA by adopting local currency based PPAs to avert costs associated with foreign currency based PPAs. Finally, breakdown of the impact of the pass through costs on particular sectors like agriculture and service sectors of the economy. The study recommends further future research on these sub-sectors of the economy.