State to halve VAT on electricity in cost reforms

Kenya Power

A Kenya Power technician at work.

Photo credit: File | Nation Media Group

 The government plans to cut value-added tax (VAT) on electricity bills in proposed reforms aimed at lowering the cost burden on consumers.

The Energy ministry in a white paper proposes to gradually reduce VAT on electricity from the current 16 per cent to eight per cent and effect an equivalent chop on two other levies imposed on power bills by the Energy and Petroleum Regulatory Authority (Epra) and Rural Electrification and Renewable Energy Corporation (Rerec).

The State raised VAT charges on electricity to 16 per cent in 2013 from 12 per cent to help the Kenya Revenue Authority (KRA) to meet its collection targets.

Halving VAT will hugely reduce the cost of electricity as it is the third largest component of the electricity bill only behind the consumption charge and the fuel cost charge (FCC).

For instance, a lifeline consumer buying electricity worth Sh1,000 since December when Epra froze monthly price adjustments has been paying Sh483 for consumption, Sh290 for the FCC, and Sh123 for VAT.

The ministry in its white paper has also proposed a reduction of Epra charge by half from three cents per unit to 1.5 cents per unit. The levy is collected by Kenya Power and remitted to Epra for its operational expenses.

Also earmarked for reduction is the Rerec levy that is charged at five per cent of the consumption charge. The levy is remitted to Rerec to carry out rural electrification to connect more households to the national grid.

“Critical to reducing energy costs is the reduction in base tariffs and fuel cost charges (FCC), as this will account for 85 per cent of the targeted reduction in average consumer tariffs,” says the paper.

The paper has also proposed the reduction of the FCC by up to 80 per cent by gradually reducing the uptake of thermal power and replacing it with cheaper renewable energy.

Despite the fuel component being the single second largest component of the electricity bill, Kenyans consumed just six per cent of thermal power in 2020, making it by far the most expensive power source.

“A reduction in energy costs will require a multi-pronged intervention focused on each of the cost drivers but a reduction in base tariffs and FCC represents the biggest opportunity for effecting change,” it said.

Reduction of the taxes and levies charged on electricity is among the proposals mooted by the paper to reduce power costs after the government’s attempts to negotiate with independent power producers (IPPs) to reduce their tariffs failed to bear fruit.

The government has now turned its attention to adjusting the power components that are within its control even though it has left the door open for future talks with IPPs to lower their charges.

Power prices had been on the rise last year due to high fuel prices which forced the energy regulator to raise the FCC hitting households and energy-intensive firms hard.

In December last year, Epra raised the component to Sh4.63 per kilowatt-hour (kWh), the highest since June 2018 when it reached Sh4.75.

However, the energy regulator in January published new power tariffs that cut the consumption charge element of electricity by 15 per cent following the intervention of President Uhuru Kenyatta.

Epra has since entered into a subsidy deal with Kenya Power that has seen electricity prices unchanged since then, helping relieve consumers from the burden of high power costs amid soaring prices of food, fuel, cooking gas, and other key commodities.

Consumers are already reaping the fruits of a similar VAT reduction by the government on liquefied petroleum gas which has seen the price of the product drop last month.

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