Ditch cost-reflective for subsidised tariff

As Kenyans grapple with the increased electricity tariffs which took effect in July, the government ought to steer a conversation among all stakeholders in that regard.

Policymakers in the electricity sub-sector have always found themselves in a trade-off dilemma regarding a cost-reflective and a subsidised (or what the political class call ‘pro-poor’) tariff.

For a lower middle-income economy like Kenya, there is a need for the government to embrace more of a subsidised tariff regime as opposed to a cost-reflective one.

What is most important is that every citizen should enjoy access to affordable electricity, which can only be achieved through subsidising electricity.

What consumers don’t understand is that it does not mean infrastructural and highway expenditure were not incurred; most of these costs have been borne by government.

What that essentially means is that somebody else pays a bigger proportion of your bill: In this case, the government.

HIGH TARIFFS

Take a scenario where these costs were passed on in form of high tariffs to consumers. This would result in increased cost of power, leading to fewer Kenyans getting access to electricity and making most of the economy redundant, given that energy is a key driver of the economy. That would, subsequently, negatively affect the political support for the government.

The SADC region, for example, offers a very interesting scenario. The regional economic bloc had a policy framework which required all member States to have transitioned to a cost- reflective tariff regime by the end of 2013 as set out by the ministerial council in 2008. Only Namibia and Tanzania managed that.

Most established markets, like the OECD countries in Europe, are perusing a subsidy tariff regime, especially in the renewable energy market — except Australia and parts of American federal states such as New York and Virginia.

NOT READY

Developing economies are totally not ready for a cost-reflective tariff.

There should be a mechanism on how to encourage, especially the domestic consumers, to be aware of the tariffs they pay vis-à-vis what the government pays for them and thus appreciate the value they get on their power bills. That way, they will be more efficient, vigilant and effective in the use and management of their electricity and, hence, avoid extravagance.

On the other hand, the government needs to be sincere with itself because cost-subsidy tariffs bring with them serious budget constraints as they constitute a greater proportion of the Budget. Economies such as Germany and China have heavily felt the burden in respect to this.

COST ADJUSTMENTS

Therefore, the government, through its regulatory agencies, should do cost adjustments on pricing and totally detach politics from electricity supply.

Lastly, energy agencies should propagate and enforce prudent administrative and managerial procedures, especially in both capital and operations expenditure.

That way, cases such as purchase of sub-standard transformers and other utility components that are often perennial in Kenya’s electricity market and are very costly will be minimised.

Mr Daniel is an Africa Utility Forum advisory board member and energy economist with GBS Africa. [email protected].