Discussion Paper No. 129 of 2012 on The Relationship Between Electricity Consumption and Output in Kenya's Manufacturing Sector

Abstract

This study investigates the relationship between electricity consumption and output produced by the manufacturing sector in Kenya, while accounting for fixed investment, employment (labour), and prices of oil and electricity. Data for the period 1970-2008 was utilized, a multivariate analysis was carried out based on a VECM, because although the series were unit root processes, they were found to be integrated of first order, hence co-integration, and some of the variables of the study were endogenous. The study shows unidirectional causal relationship running from output of the manufacturing sector to electricity consumption, leading to the conclusion that information about the extent of the manufacturing sector is important in predicting the amount of electric power used by the sector. Additionally, the results imply that the manufacturing sector in Kenya is not electricity-dependent, and a shock in power consumption will not lead to a significant change in the output. The results of the study are consistent with Wolde-Rufael (2009) who found that a unidirectional relationship running from economic growth to electricity consumption exists in Cameroon, Ghana, Nigeria, Senegal, Zimbabwe and Zambia. The results, however, contradict those of Soytas and Sari (2007), who found a unidirectional relationship running from energy consumption to economic growth in the Turkish manufacturing industry. The results of this study are unique in that limited analysis has been carried out in such disaggregated levels. This study recommends implementation of energy audits (efficiency measures) by the Energy Regulatory Commission in the manufacturing sector to conserve energy use, as well as inclusion of the output of the manufacturing sector in the forecast model of the Least Cost Power Development Plans. The manufacturing sector should also prepare indicative plans to show planned production, and the same used by energy planners to inform electric power generation and transmission investment plans.