The dynamic relationship between renewable energy investment, renewable energy consumption and economic growth in Kenya

Abstract

Despite Kenya having a massive generating capacity of renewable energy, its supply and consumption levels remain significantly low. The low supply levels have driven the costs of production upwards leading to high energy prices thereby slowing economic activity occasioned by inadequate investments in the energy sector. However, there are conflicting results on the link existing between economic growth and renewable energy in the developing world; while some established positive association between renewable energies and economic growth, some suggested that no causality existed between the variables. The main objective of this study was to determine the dynamic relationship between renewable energy investment, renewable energy consumption and economic growth in Kenya. Specific objectives of this study were to; establish the effect of renewable energy investment on economic growth in Kenya, establish the effect of renewable energy consumption on economic growth in Kenya and to establish the effect of renewable energy investment on renewable energy consumption in Kenya. This study was anchored on the Neo-Classical Solow-Swan growth model. This study adopted the correlational research design and used time series data from 1980 to 2017 to determine the nature of the existing linkages. Vector Error Correction Model results showed that a unit increase in total renewable energy consumption led to a gross domestic productrise by 0.013340 million dollars in the second year; a unit increase in total renewable energy investment led to an increase in gross domestic product by 0.00209 million dollars in the second year. Also, a unit increase in renewable energy investment led to an increase in renewable energy consumptionby0.045097 million kilowatts in the third year; implying that in the short run, renewable energy investment and renewable energy consumption have a negative impact on gross domestic product but the returns on investments are realized from the second year onwards after the initial investments are recouped; hence the positive association in the long run as revealed by the granger and cointegration test results that established a feedback kind of relationship amongst renewable energy investment, renewable energy consumption and economic growth. Therefore, investment in modern energy generation and supply technologies and demonopolisation of the generation and supply of renewable energies to encourage private investments are recommended as the necessary measures to increase the level of renewable energy consumption. Interventions such as tax exemptions on renewable energy equipment may encourage more uptake and consumption of renewable energies. This study may assist the government in the formulation of sustainable energy policies.