Regulating price of LPG is no solution to overcharging clients

Last week the government said it was considering introducing price regulations for liquified petroleum gas (LPG) to rein in high consumer prices.

It is true that LPG retail prices in Kenya are among the highest in the world. It is also true that global LPG prices are fast falling as crude prices drop and yields from new natural gas discoveries increase supply.

But why are our LPG prices so high? While one cannot rule out unfair market profiteering (the Energy Regulatory Commission should be able to establish this) the real LPG cost drivers are known.

Many studies have been done on how LPG prices can be brought down and demand increased. The key recommendation has been investment in robust LPG imports and distribution infrastructure.

Kenyan LPG import systems are still quite “primitive” and constrained. They do not reflect the essentials of modern-day petroleum logistics. Very small import parcels are discharged into numerous small capacity terminals in Mombasa.

Small sized imports deny Kenya essential economies of scale that would bring down LPG unit import costs.

Further, insufficient import receiving capacity at Mombasa port causes ships to wait for days and weeks resulting in additional costs which are passed on to the consumer.

The recent closure of Mombasa refinery reduced LPG supply by as much as 30 per cent. Some of this deficit is being ferried by road all the way from Dar es Salaam, a port endowed with larger LPG imports infrastructure.

Additional supplies are trucked by road from a small refinery at Ndola, Zambia. These supplementary imports from Tanzania and Zambia come with a high cost premium, and consumers pay for it.

It is inconceivable that a fast growing economy like Kenya has been depending on such rudimentary LPG supply logistics for decades. LPG prices will remain high until the infrastructure is upsized to reflect market requirements.

A previous government attempt to establish a large LPG import facility at Mombasa port did not yield intended cost reducing benefits. My guess is that the import terminal investment may not have followed the business and regulatory model originally envisaged.

The import depot was supposed to be a “common user” facility, with access to all LPG importers. It was to have sufficient capacity to receive fairly large LPG imports to meet growing demand for the region.

The tariff charged to LPG importers by the terminal was to be regulated by ERC and was to be based on a fair and adequate return on actual investment.

If sufficiently large import capacity is put in place, the government’s next logical step is to require that all LPG consumed by Kenyans is jointly and competitively imported in large tankers, as is currently happening with other fuels.

The large import parcels and competitive sourcing would substantially achieve the lowest possible LPG import costs, reduce consumer prices and increase demand penetration.

The government’s principles behind the 5,000MW power supply-demand model should be replicated for LPG.

Create increased LPG supply capacity and cost will come down, leading to reduced prices which will in turn prompt latent demand to be actualised.

Growing fast

Let us think big on LPG and the results will be bigger because the Kenyan economy is growing fast. Further, we should be anticipating and planning for new regional LPG supply opportunities which are staring at us.

We need sufficient LPG infrastructure in readiness for expected substantial supplies from Tanzania and Mozambique in the next five years when the two countries commercialise their huge natural gas discoveries.

The need for LPG use in Kenya has been explained by many studies. There is the environmental push to reduce use of charcoal and firewood and preserve our forest cover, and in so doing assist climate change efforts.

There is also the need to eventually cut down on use of kerosene for domestic cooking to reduce harmful indoor household emissions.

But above all, we have a fast growing urban population and middle income groups which will need a sustainable supply of reasonably priced and modern cooking energy.

Unintended consequences

Ongoing efforts to boost electricity supply are addressing availability and affordability of energy for household lighting. We also need to focus on LPG as an affordable energy for household cooking.

Should ERC be implementing LPG price controls? The regulator should first, and urgently, undertake a quick cost and price market review, taking into account all alternative LPG supply sources.

This will advise ERC on whether there is need for an urgent market price intervention through regulation. However, we should avoid rushing into price regulation which can potentially lead to unintended consequences such as LPG shortage.

Going forward, sustainable medium and long term solutions will be realised when the government organises private-public partnership investments to set up sufficient LPG imports and distribution infrastructure.

Wachira is the director, Petroleum Focus Consultants. [email protected]