In a significant policy reversal that is poised to reverberate across Kenya’s industrial landscape, the Energy and Petroleum Regulatory Authority (EPRA) has revoked the specially discounted electricity tariff for industries operating in the Olkaria-Kedong Special Economic Zone (SEZ) in Naivasha. Introduced as a pilot scheme in 2020, the discounted rate of KSh 5 per kWh was designed to attract investment by lowering production costs. With the removal of this subsidy—now replaced by a uniform rate of KSh 10 per kWh—the move is expected to increase power bills for businesses in the zone and could potentially dampen the investment climate in one of Kenya’s pioneering industrial hubs.

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Background: The Genesis of the Discounted Tariff

In 2020, the Kenyan government, through EPRA, introduced a specially discounted tariff of KSh 5 per kWh in the Olkaria-Kedong SEZ as an experiment to assess whether lower electricity costs could serve as an effective tool for attracting industrial investments. This pilot scheme was not unique in the region; many countries have used similar incentives to boost industrial activity by mitigating high energy costs, which often represent a significant portion of production expenses.

The Olkaria-Kedong SEZ was established with the goal of transforming Kenya into a competitive manufacturing destination. Located strategically near Kenya’s vast geothermal power fields, the zone was designed to capitalize on the naturally lower transmission costs associated with proximity to power generation sites. In addition, its advantageous location adjacent to the Standard Gauge Railway (SGR) further enhanced its appeal, providing efficient logistics for the movement of raw materials and finished goods.

For several years, the discounted power tariff played a crucial role in maintaining competitive production costs, helping to lure both domestic and foreign investors to set up operations in the region. Industries ranging from agro-processing to light manufacturing benefited from the reduced cost of electricity, making the Olkaria-Kedong SEZ one of the first and most promising industrial clusters in Kenya.

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The Revocation: Policy Shift Towards Uniform Pricing

In a recent gazette notice, EPRA declared the discontinuation of the KSh 5 per kWh tariff, opting instead for a uniform rate of KSh 10 per kWh across all industrial sectors. This decision aligns Olkaria-Kedong with other Special Economic Zones and large industrial consumers in the country, where the standard rate has long been in place.

An additional measure introduced alongside the tariff revamp is the implementation of an Off-Peak Energy Charge of KSh 7.42 per kWh for electricity used during periods of lower demand. While this structure is designed to encourage more efficient energy consumption, it does little to offset the immediate increase in operating costs for companies accustomed to the lower tariff.

The revocation has been met with mixed reactions. Proponents of the change argue that it is a necessary step toward ensuring fairness in the electricity market, preventing distortions caused by subsidized tariffs, and safeguarding the financial sustainability of the power sector. However, critics warn that the policy shift could have far-reaching consequences for the competitiveness of the Olkaria-Kedong SEZ.

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Impact on Industries and Investor Sentiment

Rising Production Costs

The most immediate and tangible effect of the tariff revocation is the anticipated increase in electricity bills for companies operating within the SEZ. For industries where energy costs represent a significant portion of overall expenditures, the jump from KSh 5 to KSh 10 per kWh could translate into higher production costs, reduced profit margins, and diminished price competitiveness.

Manufacturing firms, in particular, are expected to feel the pinch. Energy-intensive industries such as textiles, agro-processing, and chemicals might face tougher market conditions, especially in a global environment where competitors from regions with sustained industrial subsidies continue to benefit from lower production costs.

Investor Caution and Market Dynamics

Investor sentiment is also likely to be impacted by this decision. The original discounted tariff was seen as a strong inducement for new investments, creating a perception of cost predictability and fiscal support for industrial ventures. With the removal of this incentive, potential investors may reassess the overall attractiveness of setting up operations in the Olkaria-Kedong SEZ.

Some industry insiders have voiced concerns that the higher power costs could deter foreign direct investment (FDI) at a time when regional competitors are still offering attractive incentives. “The revocation of discounted tariffs sends a signal that the government is recalibrating its industrial policy. While fiscal prudence is necessary, it may also mean that companies will look elsewhere for a more conducive business environment,” noted an anonymous industry analyst.

Ripple Effects Across the Economy

Beyond the immediate impact on businesses within the SEZ, the policy change could have broader ramifications for Kenya’s industrial strategy. The Olkaria-Kedong SEZ was not only intended to spur industrial growth but also to serve as a model for integrating renewable energy sources with manufacturing. The discounted power rate was a key component in this vision, enabling industries to leverage Kenya’s geothermal energy advantage.

With the uniform tariff now in place, there is a growing debate over whether similar concessions might be necessary in other parts of the country to maintain a competitive edge. Policymakers will need to balance the twin objectives of ensuring a financially sustainable power sector and fostering an environment conducive to industrial expansion.

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Kenya’s Energy Landscape: A Broader Perspective

Geothermal Energy and Economic Development

Kenya is widely recognized as a pioneer in harnessing geothermal energy, with the Olkaria geothermal fields playing a central role in the country’s power generation portfolio. As one of Africa’s largest producers of geothermal power, Kenya has leveraged its natural resources to provide a stable and sustainable source of electricity. The close proximity of the Olkaria-Kedong SEZ to these power fields was a strategic advantage, significantly reducing transmission costs and enabling the subsidized tariff.

Geothermal energy is critical to Kenya’s energy security and its ambitions for sustainable development. The government’s continued investments in expanding geothermal capacity are expected to bolster the country’s renewable energy mix, reduce reliance on fossil fuels, and support broader economic growth initiatives. However, as the energy sector evolves, regulators face the challenge of ensuring that pricing mechanisms accurately reflect the costs of production while remaining competitive.

The Rationale for Uniform Tariffs

The move toward a uniform tariff structure is not without precedent. Many regulators around the world are grappling with the need to eliminate distortions in the energy market that arise from preferential pricing schemes. A uniform tariff helps to:

• Ensure Fair Competition: By standardizing the cost of electricity across sectors, all businesses are subject to the same pricing dynamics, reducing the risk of market distortions.
• Enhance Revenue Stability: Subsidized tariffs can place a strain on the financial health of power utilities. Uniform pricing ensures a more predictable and stable revenue stream, which is crucial for ongoing infrastructure investments and maintenance.
• Promote Efficiency: When electricity costs more accurately reflect production and transmission expenses, companies are incentivized to adopt energy-efficient technologies and practices.

While these benefits are clear from a regulatory standpoint, the challenge lies in managing the short-term impact on industrial competitiveness. The government and EPRA will need to closely monitor the effects of the policy change and consider targeted interventions if the higher costs significantly impede investment.

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Comparative Analysis: Lessons from Other Special Economic Zones

Regional and Global Trends

The use of preferential tariffs in special economic zones is a common strategy globally. In several Asian and African countries, governments have offered discounted power rates as part of broader efforts to attract foreign investment and stimulate industrial activity. These zones often serve as testing grounds for innovative economic policies, with the hope that successful initiatives can be scaled up nationwide.

For instance, countries like Vietnam and Bangladesh have employed similar strategies to boost their manufacturing sectors. In these contexts, preferential power tariffs have been credited with creating an enabling environment for rapid industrial growth. However, these schemes are typically accompanied by strong policy frameworks that ensure sustainability over the long term.

Balancing Incentives and Fiscal Responsibility

Kenya’s decision to revoke the discounted tariff at Olkaria-Kedong SEZ reflects an ongoing tension between offering attractive investment incentives and maintaining fiscal responsibility. While preferential tariffs can jump-start industrial activity, they may also lead to significant revenue losses for power utilities if maintained over an extended period.

In many cases, governments have opted for a gradual phase-out of such incentives as the market matures. This approach allows businesses time to adjust to the new pricing environment while the regulator incrementally restores a tariff that reflects true production costs. Whether Kenya will consider a transitional period or alternative support measures remains a key question for industry stakeholders.

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The Role of Location Advantages in the SEZ

Proximity to Geothermal Power and the SGR

The Olkaria-Kedong SEZ was strategically designed to leverage two of Kenya’s most significant competitive advantages: its geothermal power fields and the Standard Gauge Railway (SGR). The close proximity to the geothermal plants meant that energy could be supplied at a lower cost, while the nearby SGR provided efficient logistical support for industries operating in the zone. This combination was intended to create a low-cost, high-efficiency industrial environment that would attract investment from both local and international players.

With the removal of the discounted electricity rate, the value proposition of these location advantages comes under greater scrutiny. While the inherent benefits of proximity to renewable energy and efficient transport remain intact, they may not be sufficient on their own to offset the impact of higher energy costs. Investors will likely weigh these factors carefully, considering whether the overall package remains competitive compared to other regions that continue to offer attractive incentives.

Logistical and Infrastructure Considerations

Beyond energy and transportation, the success of any SEZ depends on a robust infrastructure ecosystem. Kenya has made significant strides in recent years to upgrade its transport networks, communications systems, and industrial facilities. However, the interplay between these infrastructural elements and energy costs is critical. Higher electricity prices could ripple through the supply chain, affecting production, distribution, and ultimately, the pricing of finished goods.

Industry experts suggest that the government may need to explore complementary policies to mitigate these impacts. Potential measures include tax breaks, infrastructure grants, or targeted subsidies in areas where the increased energy costs are most acute. Such initiatives could help preserve the competitive edge of the Olkaria-Kedong SEZ while ensuring that the power sector remains financially sustainable.

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Stakeholder Reactions and the Way Forward

Voices from the Private Sector

The business community’s response to the tariff revocation has been mixed. While some see it as an inevitable step toward market rationalization, others view it as a setback that could stymie industrial growth. Several leading industry figures have expressed concern that the increased electricity costs may force companies to reconsider their investment strategies or relocate to areas with more favorable cost structures.

A spokesperson for a manufacturing firm operating within the SEZ remarked, “The discounted power tariff was a cornerstone of our cost management strategy. Its removal forces us to re-evaluate our operational model and may impact our ability to remain competitive in a price-sensitive global market.” Such sentiments underscore the delicate balance policymakers must strike between fiscal discipline and maintaining an environment conducive to investment.

Government and Regulatory Perspectives

From the perspective of government and regulators, the decision to standardize tariffs is rooted in broader goals of transparency, fairness, and long-term sector stability. EPRA has maintained that the move is necessary to avoid market distortions and ensure that all industrial consumers contribute their fair share toward the costs of power generation and transmission.

Government officials have also indicated that the decision was made after careful consideration of the overall fiscal health of the power sector. With rising operational and maintenance costs, maintaining subsidized tariffs could have jeopardized the sustainability of Kenya’s energy infrastructure investments. In the long run, a uniform tariff is expected to create a more balanced and resilient market, even if the short-term transition proves challenging.

Policy Options and Mitigation Strategies

In light of the concerns raised by industry stakeholders, there is growing discussion about potential mitigation measures that could ease the transition. Some experts advocate for a phased approach, where transitional subsidies or tax incentives could be introduced to cushion the immediate impact on energy-intensive industries. Others suggest that the government may look to invest in complementary infrastructure projects that would help reduce overall operational costs.

Additionally, partnerships between the public and private sectors could play a pivotal role in addressing the challenges posed by the tariff increase. Joint initiatives to boost energy efficiency, adopt renewable technologies, and modernize industrial processes may help offset the higher electricity costs over time.

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Broader Implications for Kenya’s Industrial Policy

Attracting Foreign Direct Investment

The Olkaria-Kedong SEZ was envisioned as a magnet for foreign direct investment (FDI), offering a package of competitive advantages that included lower energy costs, strategic location, and robust infrastructure. The recent policy change, however, may necessitate a rethinking of this strategy. Investors from regions where industrial subsidies remain intact might find the revised cost structure less attractive, potentially leading to a slowdown in new investments.

To counteract this risk, the Kenyan government may need to reinforce other aspects of its investment climate. Improving ease of doing business, ensuring political and economic stability, and enhancing infrastructural support will be critical in maintaining Kenya’s reputation as a competitive destination for industrial investment.

The Future of Special Economic Zones in Kenya

The decision to revoke the discounted tariff also prompts a broader reassessment of the role and design of Special Economic Zones in Kenya. SEZs are intended to serve as incubators for industrial growth by offering tailored incentives that address local challenges. As Kenya’s economy evolves, so too must the policy frameworks governing these zones.

Future iterations of SEZ policy might consider more flexible incentive structures that can be adjusted in response to market conditions. For example, a tiered tariff system that gradually transitions from discounted rates to market-based pricing could provide a more balanced approach. Additionally, targeted support for emerging industries—such as renewable energy, technology, and advanced manufacturing—could help offset the impact of higher electricity costs while ensuring long-term sustainability.

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Conclusion: Navigating Change in a Dynamic Economic Environment

Kenya’s decision to end the specially discounted power tariff for the Olkaria-Kedong SEZ represents a pivotal moment in the country’s ongoing efforts to balance fiscal sustainability with industrial competitiveness. While the move toward a uniform tariff is aimed at promoting fairness and ensuring the long-term stability of the power sector, it also brings with it a host of challenges for businesses operating within one of Kenya’s most promising industrial zones.

As companies brace for higher operating costs, industry stakeholders, regulators, and policymakers will need to work collaboratively to devise strategies that mitigate the negative impacts while preserving the overall competitiveness of the region. Whether through phased subsidy reductions, enhanced infrastructure investments, or new fiscal incentives, the coming months will be critical in determining how Kenya adapts to this policy shift.

The long-term success of the Olkaria-Kedong SEZ—and, by extension, Kenya’s broader industrial strategy—will depend on the country’s ability to foster an environment where innovation, efficiency, and sustainability go hand in hand. By leveraging its unique advantages in renewable energy and strategic logistics, Kenya can continue to attract investment and drive economic growth, even as it navigates the challenges of a rapidly evolving global market.

In this dynamic economic environment, the end of the discounted power tariff is not just a regulatory adjustment—it is a bellwether for the future of industrial policy in Kenya. The outcome will likely influence policy debates and investment decisions for years to come, as the nation seeks to strike the right balance between incentivizing growth and maintaining fiscal prudence.

As the government and private sector stakeholders adjust to this new reality, all eyes will be on the Olkaria-Kedong SEZ to see how it evolves in response to higher energy costs and shifting market dynamics. The coming period will be a test of resilience and adaptability—a challenge that, if met successfully, could serve as a model for other emerging economies grappling with similar issues.

Ultimately, while the revocation of the discounted tariff may present short-term hurdles, it also offers an opportunity for Kenya to recalibrate its industrial strategy and set the stage for a more robust and sustainable economic future. The balancing act between regulatory discipline and investor incentives will be critical, and the lessons learned here may well inform broader policy initiatives across the region.

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photo source: Google

By: Montel Kamau

Serrari Financial Analyst

11th March, 2025