EFFECT OF SELECTED MACROECONOMIC VARIABLES ON ENERGY CONSUMPTION IN KENYA

Abstract

Energy utilization is critical for Kenya's economic development and its impact on industrialization and infrastructure development. The consumption of energy has been consistently increasing over the past 4 decades. The study examined the impact of economic growth, inflation rate, interest rates, trade openness, and foreign direct investment on energy consumption in Kenya. The study is pegged on Dependency Theory, Energy Ladder Theory and the Neoclassical Growth Theory. An explanatory research design was employed using secondary annual time-series data from 1980 to 2024. Structured review matrix and stationarity and cointegration tests were employed to collect data and prepare data for analysis such as descriptive statistics and ARDL model. Data stationarity was examined by applying the Augmented Dickey-Fuller (ADF), Phillips-Perron (PP) and Clemente-Montañés-Reyes tests to identify unit roots and structural breaks. The long-run and short-run connections between the variables were then explored using the ARDL model. The ARDL long run results showed that economic growth (β = 0.1124, p = 0.166) and inflation rate (β = –0.0271, p = 0.197) were statistically insignificant at the 5% significance level. The variable interest rate was found to significantly influence energy consumption with a negative β value of –0.0342 and p value of 0.038. Trade openness also had a significant negative effect (β = –0.0158, p = 0.006) while foreign direct investment had a significant positive impact (β = 0.0205, p = 0.029). The consumption (LD.) lagged difference was also high for energy consumption in Kenya in the short run. The size of the white-collar worker's family (p = 0.009, EN = 0.5537) is a significant factor affecting current demand. As interest rates go up, energy demand goes up (LD. RI = 0.0207, p = 0.025) due to delayed adjustment. Trade openness also contributes to short-term increase in energy use through the expansion of industry and export-oriented production (TOP = 0.0033, p = 0.007). Foreign Direct Investment initially reduces energy use (D1. FDI = –0.0100, p = 0.012), reflecting project lags and sectoral effects. The study finds that structural and external drivers like FDI, interest rates, and trade openness are more sensitive to energy use in Kenya than aggregate output growth or inflation. Based on that, the study suggests measures to encourage energy efficiency in investment by encouraging the inflow of green FDI with favourable conditions and improving monetary policy related to energy efficiency, and increasing trade liberalization by focusing on energy efficient and energy-technology industries.