The Linkage between Renewable Energy Consumption and Kenya’s Services Sector: Energizing the Service Economy

Abstract

This study sought to examine the influence of renewable energy consumption on the growth of Kenya’s services sector. It covered the period from 1987 to 2023. Using the ARDL and ECM approaches, the analysis investigates both short-run and long-run dynamics while controlling for non-renewable energy consumption, labour and gross capital formation. The results reveal that immediate and lagged changes in renewable energy consumption have limited short-run effects on service sector output. However, the first lag of renewable energy consumption exhibits a positive and statistically significant impact in the ECM framework, thereby suggesting delayed benefits from the consumption of renewable energies. On the other hand, lagged non-renewable energy consumption consistently exerts negative and significant effects, thus highlighting the negative short-run influence of non-renewable energy consumption on the growth of the service sector. Labour and gross capital formation show mixed effects, with delayed positive contributions, thus reflecting gradual absorption of workforce and capital into the economy’s productive processes. The ECM term is negative and highly significant, confirming a stable long-run equilibrium relationship with approximately 33.6% of deviations from equilibrium corrected each period. The Post-estimation diagnostics show the robustness of the model throughout the study period. Therefore, the results of this study suggest that Kenya’s services sector exhibits low immediate reliance on energy inputs but benefits from lagged improvements in renewable energy consumption, capital investment and labour integration. The study emphasizes the importance of promoting renewable energy adoption in energizing Kenya’s service economy. This adoption will also accelerate the attainment of Vision 2030’s dreams of a globally competitive economy and achieving SDGs 7 and 8 of clean energy and sustained growth. This study therefore recommends anchoring the service sector’s renewable energy transition within Kenya’s Vision 2030 and the national green growth agenda, emphasizing targeted incentives for clean energy use in ICT, transport and hospitality. By aligning service sector electrification with ongoing energy reforms and digital infrastructure expansion, Kenya can enhance efficiency, reduce operational costs and also foster inclusive, sustainable growth.