LPG Consumption and Growth in Kenya

Despite the rapid growth in LPG consumption in recent years, market penetration in Kenya remains quite low. Looking ahead, we believe the primary constraint on further growth will shift from access to affordability.

The impending reimposition of a 14% value-added tax on LPG in mid-2021, coupled with expected higher global LPG prices, will reduce the fuel’s affordability for many Kenyan households. This will likely result in slower demand growth in the near term.

However, as Kenya’s economy continues to expand and household incomes improve over the long-term, we expect per capita LPG consumption to accelerate, reaching 8-9 kg per person by 2050. Faster growth could be achieved if pricing becomes more affordable, either through improved market efficiency and lower wholesale/retail margins, or the introduction of a targeted subsidy program.

We also anticipate that Kenya’s LPG import capacity will outpace domestic demand growth, allowing the country to emerge as an import hub for the wider East African region and begin exporting some supply overland to neighboring countries with limited alternatives.

The Underdeveloped Energy Sector in Kenya

Despite its relatively large population and fast-growing economy, Kenya’s energy sector remains underdeveloped, with the vast majority of households relying on biomass sources for cooking. As of 2017, a staggering 93% of all residential and commercial energy consumption in Kenya was fueled by biomass sources, mainly charcoal and firewood.

The biomass share has slowly declined over the years, with relative gains going mainly to electricity as the country gradually expands its grid to reach more suburban and rural areas. However, the overwhelming dependence on traditional biomass fuels remains a significant challenge for Kenya’s energy landscape.

Rapid Growth in LPG Consumption

LPG consumption in Kenya began growing rapidly from a small base in 2014. Residential and commercial LPG consumption tripled from 2013 to 2017, as improved import and distribution infrastructure made the fuel more widely available.

This rapid demand growth continued in 2018-19, with consumption nearly doubling again, driven by government policies to promote LPG adoption as a cleaner cooking fuel alternative to biomass and kerosene. However, the COVID-19 pandemic interrupted this trend in 2020, though demand is expected to rebound in the coming years as the economy recovers.

Factors Enabling LPG Demand Growth in Kenya

Improved product availability and infrastructure have been key factors driving the rapid growth in LPG consumption in Kenya in recent years. The establishment of LPG import terminals in Mombasa and the expansion of transportation networks to move LPG into the country’s interior have made the fuel more accessible, particularly for wealthier urban households and businesses.

Furthermore, the planned expansion of port and storage facilities in the coming years is expected to support continued growth in LPG demand.

These infrastructure improvements, coupled with government policies aimed at promoting LPG adoption, have enabled a tripling of residential and commercial LPG consumption since 2013.

However, the looming reimposition of value-added taxes and anticipated higher global LPG prices pose affordability challenges that are likely to slow the demand growth rate in the near term, before accelerating again as economic development increases household incomes over the longer term.

Affordability as the Primary Constraint

The Kenyan government’s efforts to promote LPG adoption, such as the VAT exemption and subsidy program, have driven rapid growth in LPG consumption in recent years.

However, the reimposition of the 14% VAT on LPG in 2021 has reduced affordability for many households. Retail prices for LPG remain out of reach for the majority of Kenyan consumers, constraining further market penetration.

Despite the initial success in displacing biomass and kerosene with LPG, the affordability barrier will likely slow the growth rate in the near term, as the higher costs erode the fuel’s attractiveness for price-sensitive households. Overcoming this affordability constraint through policies that maintain or improve LPG’s cost-competitiveness will be crucial for sustaining the momentum of Kenya’s transition to cleaner cooking fuels.

Outlook for LPG Consumption Growth

Despite the rapid growth in LPG consumption in recent years, driven by improved access and infrastructure, the future outlook suggests a slower pace of expansion.

Per capita LPG consumption is expected to reach 8-9 kg by 2050, as affordability constraints and global price increases put a damper on the rate of adoption.

However, there is potential for faster growth if measures are taken to improve efficiency or introduce subsidy programs to enhance accessibility for lower-income households.

The impending reinstatement of the value-added tax on LPG is likely to further impact affordability, underscoring the need for policy interventions to ensure the continued displacement of traditional biomass fuels in Kenya’s residential and commercial sectors.

Kenya’s Transformation into an LPG Import Hub

Kenya’s LPG import capacity is poised to outpace the growth in domestic consumption, positioning the country to emerge as a regional import hub.

As the government’s efforts to promote LPG usage have driven rapid demand growth in recent years, the primary constraint is shifting from access to affordability.

The impending reinstatement of value-added taxes (VATs) on LPG and expected higher global prices will dampen demand growth in the near term. However, this is a temporary setback, as Kenya’s growing economy and rising household incomes are expected to accelerate per capita LPG consumption in the long run, reaching 8-9 kg per person by 2050.

With import capacity outpacing domestic needs, Kenya is set to become an LPG export hub, supplying neighboring countries with limited alternatives for cleaner cooking fuel. This transformation will play a crucial role in Kenya’s energy transition and its efforts to displace the reliance on biomass sources, contributing to a more sustainable and efficient energy landscape in the region.

Impact of Economic Growth in Kenya

Slow but steady economic growth in Kenya, with GDP per capita projected to rise from $1,800 in 2020 to $2,600 by 2050, is expected to gradually expand the number of households that can afford unsubsidized liquefied petroleum gas (LPG) for cooking.

While the rapid LPG demand growth seen in recent years may slow due to the impending reimposition of value-added taxes and anticipated higher global LPG prices, per capita LPG consumption is still forecast to reach 8-9 kg by 2050 as incomes improve.

Without government subsidies, affordability will remain a key constraint, limiting the pace of LPG adoption compared to the breakneck expansion of the past decade. However, Kenya is well-positioned to become an import hub for the East African region, with excess LPG supply available for export to neighboring countries with fewer domestic resources.

Pandemic’s Effect on LPG Demand in Kenya

The COVID-19 pandemic served as an inflection point in the rapid growth of LPG demand in Kenya. After several years of surging consumption, driven by improved access and distribution, the pandemic led to a slowdown in the rate of demand growth in 2020. However, we now expect a rebound in demand going forward, as the economy recovers and household incomes rise.

While the pandemic temporarily interrupted the trend of increasing LPG penetration, the underlying drivers of demand growth in Kenya remain in place. Affordability, rather than access, is expected to be the primary constraint on further expansion of the LPG market in the near-term.

The impending reimposition of a 14% value-added tax on LPG, set to take effect in July 2021, will reduce the fuel’s affordability for many Kenyan households. This will be compounded by anticipated higher global LPG prices in 2021-2022.

Despite these near-term headwinds, we forecast that per capita LPG consumption in Kenya’s residential and commercial sectors will continue to rise, reaching 8-9 kg per person by 2050.

This growth trajectory could be accelerated through measures such as improved market efficiency, lower wholesale and retail margins, or the introduction of a government subsidy program.

As the country’s economy and household incomes grow over the long-term, the number of Kenyan households able to afford unsubsidized LPG is expected to expand, driving a gradual increase in demand.

The Future of LPG Adoption in Kenya

The Kenyan government has implemented several initiatives to promote the use of LPG as a cleaner cooking fuel, including a subsidized cylinder and cookstove distribution program. However, the program was temporarily suspended in 2018 due to issues with the distribution of substandard equipment. The program has since resumed, with the aim of distributing approximately 329,000 units that were previously held up due to the court case.

Additionally, the government had previously exempted LPG from the value-added tax (VAT) imposed on other fuels. However, a new Finance Bill passed in 2020 has removed this exemption, and as of July 2021, LPG will now be subject to the standard 14% tax rate.

While some officials have proposed further delaying the reimposition of this tax, the change remains in effect as of now. This tax increase, combined with expected higher global LPG prices in 2021-22, is likely to impact the affordability of LPG for many Kenyan households, potentially slowing the recent rapid growth in LPG consumption.

Despite these challenges, the government’s efforts to promote LPG usage and the continued expansion of import and distribution infrastructure are expected to support long-term growth in LPG adoption, with per capita consumption projected to reach 8-9 kg by 2050.