Empirical assessment of drivers of electricity prices in East Africa: Panel data experience of Rwanda, Uganda, Tanzania, Burundi, and Kenya

Abstract

Sustainable electricity supply plays a key role in economic development. Cost recovery, profitability and affordability of electricity through power tariff regulation, have become a subject of conflict between private providers and regulators. Consequently, regulators need to balance the interests of all stakeholders. The objective of this study, is to measure to which extent, Electricity Net Consumption (EC), Electricity Net Generation (EG), electricity transmission and distribution losses (Losses), International Average Crude oil prices (FP), Consumer Price Index (CPI), Industry Value Added (IVA) could influence the Average Electricity Prices (EP) in East Africa, especially in Rwanda, Uganda, Tanzania, Burundi, and Kenya. The data are from World Bank Indicators and cover the period from 2000 to 2019. This study adopts a three-stage approach, consisting of panel unit root tests, panel cointegration tests and estimating the long run cointegration relationship of the variables in a panel context. We applied four different panel unit root tests including ADF-Fisher Chi-square, Levin, Lin and Chu (LLC); PP-Fisher Chi-square, and Im, Pesaran, and Shin, (IPS). The results reveal that the variables are non-stationary at "level", stationary at first-differences and integrated with order one denoted as I(1). The Pedroni, Kao and Johansen Fisher co-integration tests were performed. This study uses full modified ordinary least squares (FMOLS) and dynamic ordinary least squares (DOLS) to estimate the long run relationship among the variables. We find that the increase in EG, FP, and CPI increase the Average Electricity Prices (EP); while the increase in Losses, EC, and IVA decreases EP. Therefore, we recommend the promotion of long-term investment policies in renewable sources and efficient policies to reduce technical and commercial losses. In addition, this study suggests that appropriate policies related to subsidized electricity prices would, however, prevent adverse effects related to inefficient over-consumption of electricity.