Internalization of External Cost in the Thermal Power Generation on Social Welfare Maximization

Abstract

For decades, Kenya has incorporated thermal power technology into its grid to generate electrical energy using fossil fuels such as petroleum, natural gas, and coal. The burning of fossil fuels has become a major source of air pollutants and is associated with several undesirable side effects on the environment and human health. However, the impact of pollutants on environmental sustainability and public welfare has yet to be evaluated. Therefore, the purpose of this study is to evaluate the external cost of electricity generated by thermal power plants in Kenya. Both survey data and secondary data were used. The analysis was conducted using externality valuation and welfare maximization approaches, and the research hypotheses were tested using a negative binomial regression model. The annual external cost ($/2022) was determined to be $ 1,333,904,970.76, with the following distribution: environmental at $ 993,488,336.26, Public health at $ 86,760,038.01, and socio-economic at $ 253,656,596.49. Equally, the thermal power generation marginal social cost ($/2022) was determined to be 1.22 $cents/kWh with the following distribution: Marginal Private Cost (MPC) at 0.01 $cents/kWh and Marginal External Cost (MEC) at 1.21 $cents/kWh. The established marginal social cost (MSC) (i.e. Σ MPC+MEC) was 1.22 ($cents/kWh). Thus, MSC is significantly greater than the established social marginal benefit (SMB) of 0.089 ($ cents/kWh); hence, we conclude that the burden of social welfare loss is highly significant, making thermal power a non-sustainable and economic energy source.