Guide to Investing in Renewable Energy in Kenya
Opportunities and challenges you need to know
Renewable Energy resources available for commercial exploitation
Geothermal resources, solar, wind, biomass, small hydros, biogas, exploitable municipal & agricultural wastes and hybrid renewable energy systems.
Opportunities for commercial investment in solar energy
- PAYG solar for domestic & commercial use e.g. pico solar PV systems & solar home systems, solar water pumping & solar heating and solar hybrid systems for street lighting. There is also a growing interest in solar systems for refrigeration, outdoor lighting and ventilator fans & cooling systems.
- Solar mini-grid for small communities in remote areas where the possibility of grid expansion is remote in the near future.
- Solar micro-grid systems for businesses looking to replace expensive diesel back-up generators and reduce reliance on power supplied by the national utility.
- Grid-connected (utility scale) solar systems procured by the Ministry of Energy. The government recently announced plans to replace Feed-in Tariff system of procurement (FiT) with energy auctions (tender system). The process of formulating regulatory instruments and guidelines for energy auctions started in December, 2016 and is expected to be completed in 2017.
What is FiT and why is Kenya seeking to replace it?
FiT is a once-off negotiated concession between IPP and government that allows an IPP to sell renewable energy (RE) generated electricity to an off-taker at a pre-determined tariff for a given period of time. The government has deemed the tariffs under FiT expensive compared to record-low tariffs that other countries like Brazil, China, Morocco, Peru, South Africa and Zambia have yielded under energy auctions scheme. Kenya projects that the energy auction scheme will yield tariffs as low as USD.7 Cents per Kwh for solar-generated power which is remarkably lower than the USD.12 Cents per Kwh under FiT.
Off the Grid sector
Nearly 80% of those lacking access to electricity in Kenya live in rural areas where the cost of grid extension is high and will take a considerable long time. Population in these areas is growing meaning that more and more people will lack access to electricity.
Kenya is promoting a private sector-driven approach to Off the Grid electrification by encouraging private investments in Off the Grid systems like solar home systems and mini-grids. Also, international agencies like the US’ Overseas Private Investment Corporation & UK’s Department for International Development, and other international finance institutions are also playing a large part by providing financial, technical, risk mitigation guarantees and other support. The business case for Off the Grid electrification is getting stronger.
The off-grid mini-grid sub-sector
Kenya does not currently have any specific legal framework for the development of mini-grids but this has not stopped investors like Powerhive, PowerGen, Vulcan Inc., Steama, amongst other developers, from developing solar mini-grids.
Encouragingly, in an effort to promote mini-grid development, the Rural Electrification Authority commissioned a piloting program geared at promoting a private sector-driven approach for rural electrification mini-grids, and in January, 2017, the government announced that it will be rolling out a $150 million World Bank-supported mini-grid project in 2017 targeting small communities of populations of up to 11,000 people in 14 counties without access to electricity. The business environment for mini-grid development is getting better.
Essentials to start a RE project
- Setting up of a legal entity, the project company, which can be either local or foreign registered;
- Identify a suitable RE project;
- Prefeasibility assessment of the proposed project;
- Submit an Expression of Interest (EOI) to the Ministry of Energy and obtain approval of project.
Local shareholding requirements for a RE project company
Currently, there are no restrictions on ownership of shares by foreign investors and no local equity participation requirements for the project company.
The typical steps up to successful implementation of a RE project
- Obtain approval of EOI from the Ministry of Energy;
- Full feasibility study including environmental impact assessments;
- Secure project financing;
- Conclude site acquisition processes (utility scale & mini-grid projects) or leasing of space & secure access rights;
- Conclude/sign the standard PPA with the Government agency (for utility projects and mini-grid projects);
- Obtain approval of PPA by the Energy Regulatory Commission (ERC);
- Obtain other necessary regulatory clearances;
- Undertake project development & construction;
- Undertake project testing & commissioning;
- Operations, maintenance & reporting.
Other necessary regulatory clearances
Clearances are permits, licenses, approvals, statutory payments and all associated documents required for the project. The type and number of clearances required depend on the project’s capacity, technology utilised and whether it is an off-grid or on-grid system. The common clearances are:
- Environmental Impact Assessment License;
- Water Abstraction Permit;
- Kenya Civil Aviation Authority Clearance;
- Approval for change of user;
- Road development permits (if necessary);
- Development Permit;
- Electricity Generating Permit (for 1 – 3 MW) or Electricity Generating License (for more than 3 MW) in respect of off-grid applications;
- Supply & Distribution License for off-grid applications, among other clearances.
Can you obtain all the statutory clearances in one go?
No. There is no “one stop shop” for statutory clearances. Clearances are issued by the relevant government agencies.
Land Acquisition and Community Engagement
The success of the land acquisition process is critical to the overall success of the project. Therefore, proper appreciation and navigation of the legal and regulatory framework relating to land ownership and land rights is crucial.
Also, a proper engagement of the project affected persons (PAPs) is essential to get community and political support. For instance, a botched up land acquisition program for the Kinangop Wind Park project led to its collapse.
Standard terms of PPA between IPP and the off-taker
- The term is typically 20 – 25 years;
- Typical tariff structures include capacity charges, energy charges and/or fuel charge;
- Payments are made in foreign currency, usually US Dollars;
- Payments are made 30 days after receipt of invoice by the off-taker;
- Adjustments to the tariff will be possible upon the occurrence of a political event e.g. a change in tax regime or change in law.
Special payment obligations placed on IPP
IPP is obliged to pay liquidated damages for delay in putting the project in commercial operation by the stipulated date and for failing to meet availability during operation.
Guarantees and other Security Arrangements
Generally, the government does not provide sovereign guarantees but the off-taker may provide a letter of credit securing its obligations. However, the Africa Development Bank, World Bank, Multilateral Investment Guarantee Agency, amongst others have developed partial risk guarantees and political risk insurance for the Kenyan market.