Effect of Renewable Energy Consumption on Economic Growth in Kenya

Abstract

Despite Kenya having a massive generating capacity of renewable energy, its 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 existing link between economic growth and renewable energy consumption in the developing world. This study purposed to establish the effect of renewable energy consumption on economic growth 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 for the period 1980-2017 to determine the nature of the existing linkages. Capital and labour were incorporated as control variables. The granger causality results established the existence of a bidirectional and feedback relationship existing between renewable energy consumption and economic growth in Kenya. Vector Error Correction Model results showed that a unit increase in total renewable energy consumption led to a gross domestic product rise by 13,340 million dollars in the second year. Therefore, both the granger causality and Vector Error Correction Model (VECM) tests advocate for investment in the consumption of renewable energy if desired levels of economic growth are to be attained. 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, which in turn accelerates the rate of economic growth. 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. This study may assist the government in the formulation of sound and sustainable energy policies for industrial and economic growth.