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Africa Energy Futures: Kenya

By Beatrice Nyabira

Over the last 5 years, how has the energy mix changed, and what have been the key drivers?

According to the Kenyan Energy and Petroleum Regulatory Authority (EPRA), total installed energy capacity as at June 2020 comprised 828 MW geothermal, 826 MW hydro, 335 MW wind, 2 MW biomass, 50 MW solar and 720 MW of thermal1.

While thermal energy continues to play a role in Kenya’s energy mix, more than 70% of installed capacity comes from renewables. Over the last five years, there has been tremendous growth in renewable energy technologies, particularly wind, solar and geothermal. This has seen several projects in the pipeline reach financial close, including a 40 MW solar power project in Malindi and two 40 MW solar power projects in Uasin Gishu. Africa’s largest wind farm, the 310 MW Lake Turkana Wind Power Project, began injecting power into the national grid in September 2018 while the Kipeto Wind Farm, commissioned in July 2021, is expected to inject an additional 100 MW of wind power into the grid.

Government commitment has been one of the key drivers of the shift to renewable energy as it aims to elevate Kenya to an industrialized and middle-income country, providing a high quality of life to all citizens by 20302. In 2018, the Kenya National Electrification Strategy was launched with the aim to achieve universal access to electricity by 2022.

Kenya also has in place a Feed-in-Tariff Policy (FiT Policy), which is an instrument for promoting generation of electricity from renewable energy sources by guaranteeing a pre-determined tariff for producers for a period of 20 years.

Additionally, the government has made available a number of tax incentives for renewable energy projects. These have played a big role in attracting investment in renewables.

What is the outlook for the energy and natural resources sector in the next 5 years? In particular:

Key policy decisions

The outlook remains positive. However, the following key policy decisions will likely have an impact on the outlook over the next 5 years:

  • In March 2021, the President of Kenya appointed a taskforce to review Power Purchase Agreements (PPAs) entered into by The Kenya Power and Lighting Company PLC (KPLC, the offtaker); review the allocation of risk between the independent power producers and the offtaker under the PPAs; review the take-or-pay approach applied under the PPA structure and recommend other viable payment structures; and to review the current methods of sourcing for independent power producers and recommend appropriate alternative sourcing frameworks. Upon conclusion of the review exercise, the taskforce made a raft of recommendations that if implemented, can impact the procurement of independent power producers and key PPA terms moving forward. Some of the key recommendations include:
    • renegotiation of PPA tariffs within the existing contractual arrangements, to reflect price changes;
    • exploration of denomination of future PPAs in local currency to manage fluctuations and volatility in customer bills that result from forex adjustments;
    • adoption of standard PPAs and a standard government letter of support by KPLC;
    • capping of the amounts payable by the government in the event of a change in law or change in tax that affects the financial position of the seller;
    • issuance of government support measures only in exceptional circumstances and for strategic projects of national interest; and
    • adoption of Nairobi as the seat of arbitration in PPAs so as to reduce the costs of arbitration.
  • The Renewable Energy Auctions Policy, 2021 (REAP Policy) was recently published, with the objective to enable the government to procure renewable energy on competitive terms. The REAP Policy will apply to all solar and wind power projects, as well as other renewable energy projects larger than 20 MW (except for geothermal power projects).
  • The government has also recently published the Feed in Tariff Policy, 2021 (2021 FiT Policy) which is intended to apply to renewable energy power plants not exceeding 20 MW in biomass, biogas and mini hydro technologies. The taskforce made recommendations on the 2021 FiT Policy and the REAP Policy such as setting clear timelines within which procurement should be conducted. If adopted, these timelines will ensure transparency and clarity of process. Both policies will need to be approved by the National Treasury.
  • Finally, Kenya enacted the Energy Act, 2019, a robust legal framework which consolidates the laws relating to energy; promotes renewable energy; promotes exploration, recovery and commercial utilization of geothermal energy; and regulates midstream and downstream petroleum and coal activities, among others. Key regulations under the Act are currently being developed.

Main policy challenges

Under the 2021 FiT Policy, all projects approved for implementation under it shall not require any form of security or guarantee from government, including letters of support, which have until now been synonymous with the sector. This may impact the bankability of projects procured under the 2021 FiT Policy.

Solar and wind projects approved under the previous FiT Policy (2012) whose PPAs have not been signed will be transitioned to the Auctions Policy Framework. Resistance is anticipated from the affected projects and delays as the policy will be tested for the first time.

In the recent past, the offtaker has been insisting on the “take and pay” approach in PPAs, where the national utility pays only for the electricity it actually takes from IPPs. This approach is deemed to be a potential solution to the high cost of power purchased from IPPs, a challenge faced by the offtaker. The taskforce reviewed the take-or-pay approach applied under the PPA structure and recommended that it be maintained, although where practical, existing PPAs should be renegotiated to “pay when taken” terms. It recommended that this approach be adopted in the case of expired thermal PPAs (where required). It remains to be seen if the pay when taken approach will actually be adopted in the recommended circumstances, but push back is anticipated from IPPs.

Challenges are anticipated in the implementation of the REAP Policy. Unless the government simultaneously addresses the challenges that potential developers face, such as land acquisition for projects, bidders may struggle to meet some of the prequalification requirements (for example evidence of land rights/access for plant and interconnection infrastructure).

The anticipated role that renewables and/or new technologies will play

Renewables and/or new technologies will play an important role in Kenya including:

  • boosting nationwide access to electricity through the national grid;
  • realization of the Big 4 Agenda (manufacturing, food security, affordable housing and universal healthcare);
  • reduction in the cost of power in homes and in the manufacturing sector;
  • mitigating climate change by reducing Kenya’s carbon footprint; and
  • job creation for citizens.

What are the key investment opportunities in the energy and natural resources sectors over the next 5 to 10 years?

Corporate PPAs are likely to gain prominence in a bid to address some of the cost and supply challenges associated with reliance on the national grid and to meet sustainability goals at a corporate level.

There will undoubtedly be quite a lot of investment in transmission and distribution. Kenya has made progress in the power generation sector and the focus is now shifting to transmission and distribution in order to expand the grid network and facilitate access to electricity in remote and rural areas. Under the 10 year Least Cost Power Generation Expansion Plan for the period 2021-2030 (LCPDP), there are plans to construct additional distribution lines and establish new substations to extend power supply in rural areas.

Investment is anticipated in energy storage as well, which remains a challenge. The LCPDP has identified the development of battery energy storage systems as one the necessary steps to be taken in support of the integration of variable renewable energy technologies such as wind and solar. The battery storage systems will be used for system support by storing energy which can then be utilized during peak hours.

In order to meet Kenya’s rural electrification targets, it is anticipated that there will be more focus on mini-grids. Government initiatives such as the proposed Energy (Mini-Grid) Regulations of 2021 and the selection of Kenya as a pilot country for the Scaling-Up Renewable Energy Programme (SREP) which was established to scale up the deployment of renewable energy solutions and expand renewables markets in low-income countries, are a step in the right direction.

With particular focus on sustainability, and on reducing carbon emissions, how will the energy and natural resources landscape change over the next 5 to 10 years?

Kenya has an abundance of coal which is also a cheap energy source. The negative environmental impacts of coal however pose a challenge to its adoption as a source of energy. Under the LCPDP, Kenya plans to develop coal power plants in the Mui basin. However, these projects are unlikely to take off as they will face difficulty in attracting funding given the challenges coal poses in terms of climate change/emissions and the environment. This is in addition to resistance from local communities and environmental activists. There is likely to be a shift in government plans as far as coal is concerned.

Kenya is fully committed to combating climate change and has been leading on renewables in sub-Saharan Africa. The Climate Change Act, 2016 and international treaties such as the Paris Agreement which Kenya signed and ratified in 2016 evidence this commitment. With the abundant sunlight and geothermal resources in Kenya, it is expected that more renewable energy projects will be developed in the near future.

Footnotes

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