Treasury cuts energy sector budget despite fuel pressures

The government has sharply cut funding to the energy and petroleum sectors despite spending billions of shillings to shield motorists from record fuel prices.

The move comes amid growing concerns over electricity shortages as demand catches up with generation capacity.

The National Treasury has reduced the State Department of Petroleum’s budget by Sh8.3 billion to Sh22 billion in the 2026/27 financial year, down from Sh30.3 billion this year, while the State Department of Energy’s allocation has been cut by Sh27.6 billion to Sh35 billion, down from Sh62.6 billion.

The cuts come at a critical time for the two sub-sectors, with the petroleum sector grappling with record prices.

In contrast, the electricity sector has had to rely on increased imports to plug power production gaps, threatening to return Kenya to an era of power rationing.  

In the petroleum sector, the government has already spent Sh23.7 billion in just three months, cushioning consumers from surging fuel prices following the escalation of conflict in the Middle East.

The money spent between April and July will exceed the entire annual allocation to the State Department of Petroleum.

The Energy and Petroleum Regulatory Authority (Epra) on Sunday said the State would spend Sh10 billion over the June-July pricing cycle to cushion users of diesel and kerosene from the harsh impact of high prices. 

 This was in addition to some Sh13.7 billion it had spent on April-May and May-June cycles to cushion Kenyans from high fuel costs. “The government will, in this cycle (June-July), cushion the consumers through the Petroleum Development Levy (PDL) Fund by utilising about Sh10 billion to subsidise the price of diesel and kerosene,” said Epra. The subsidy has resulted in support of up to Sh34 per litre for diesel and Sh55 per litre for kerosene.

At Sh23.7 billion, the money spent over the three pricing cycles is nearly equivalent to what was collected into the PDL Fund in the financial year to June 2025.

The kitty collected Sh25 billion during the year. About half (Sh13.7 billion) was spent on fuel subsidies over the year to June 2025, with the other half shared among different agencies within the Energy and Petroleum Ministry.

The electricity sector is also grappling with demand that is nearly outstripping electricity production. 

Peak electricity demand has been rising steadily, while a seven-year freeze on new power purchase agreements left few large generation projects in the pipeline, forcing the country to increasingly rely on imports from Ethiopia to meet demand.

Expanding capacity

The reduced allocation comes even as Treasury Cabinet Secretary John Mbadi outlined major generation projects the government says are central to expanding capacity.

“In the energy sector, priority investments include the High Grand Falls Hydropower Project, expected to generate 700 megawatts, and the Karura Hydropower Project, expected to generate an additional 90 megawatts,” said Mbadi when he delivered his Budget Statement in Parliament last week.

“Together, these projects will add approximately 790 megawatts of clean and reliable power to support industrialisation, digital transformation and emerging technologies. These investments will be complemented by strategic transmission infrastructure projects to strengthen and expand the national grid.”

Adding to the strain of a reduced budgetary allocation is a recent directive by the Energy Ministry to Kenya Power to withdraw an application it had made to Epra for a tariff hike.

Kenya Power typically consolidates sector financing needs, including investments in generation and transmission.

 The reduced allocations suggest Treasury may increasingly expect private investors rather than taxpayers to shoulder the cost of major energy infrastructure projects.

Mbadi said on Thursday that the government would lean on the National Infrastructure Fund (NIF), established in March this year, to pull private capital into public projects.

The fund has already received the proceeds from the privatisation of Kenya Pipeline Company (KPC) as seed capital, which, in addition to proceeds from the expected sale of the State’s stake in Safaricom, will be used to attract private capital.

“The NIF is an innovative mechanism for scaling up infrastructure development by mobilising private capital and expertise to execute commercially viable infrastructure projects, while reducing reliance on taxation and debt,” he said.

“The fund will promote growth of infrastructure projects by pooling capital from diverse sources, including pension funds, sovereign wealth funds, private equity, banks, development finance institutions, among others, to finance large-scale, long-term projects.”

“The proceeds from privatisation will be channelled into the fund, thus ensuring transparent revenue flow in financing national priority projects, including national highways, airports, seaports, electricity generation, ICT, water and irrigation and agribusiness.”

 “As a start, the proceeds from the March 2026 initial public offering of KPC of Sh106.3 billion, as well as the expected Sh204 billion from the partial divestiture of the government’s stake in Safaricom to Vodacom, will form the seed capital for the Fund.”