The Legal Landscape of Renewable Energy in Kenya: Opportunities & Challenges for Global Investors

In the inaugural Africa Climate Summit convened in 2023 by the Government of Kenya and the African Union Commission (AUC), African leaders committed to developing and implementing policies, regulations and incentives aimed at attracting local, regional and global investment in green and inclusive growth. This article summarises the legal framework governing renewable energy investments in Kenya and explores some of the opportunities and challenges for global investors.

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Presently, renewable energy contributes more than 80% of electricity to Kenya’s national grid and the country aims to achieve 100% by 2030. This ambitious goal has spurred significant investments in recent times, including:

• the Lake Turkana Wind Power Project which is the largest wind farm in Africa and, at a cost of €625 million, is Kenya’s largest single private investment in its history. BlackRock recently acquired shares, making it the second largest shareholder in the project; and
• the 35 MW Menengai Geothermal Power Project  reached financial close on $117 million of financing early this year.

These projects along with Kenya’s relatively supportive legal framework are driving Kenya towards achieving its decarbonisation goals.

Opportunities through Kenya’s Legal Framework on Renewable Energy

Kenya’s legal framework offers a supportive and structured environment for investments into renewable energy, with specific laws, regulations, and policies designed to promote renewables projects. 

The Energy Act of 2019 (the Energy Act), as Kenya’s principal legislation on energy, provides for the promotion of renewable energy. The various legislative provisions that shape the renewables investment sector have been highlighted below:

1. Bioenergy and Hydro Technologies: The Energy Act established a renewable energy Feed-in-Tariffs (FiT) system designed to catalyse the generation of electricity through renewable sources, encourage its uptake, and stimulate innovation. The Ministry of Energy and Petroleum (MoEP) has developed a FiT Policy which allows Independent Power Producers (IPPs) to sell electricity generated from renewable sources to an off-taker at a pre-determined tariff for a given period of time, which has helped in providing investors with predictable revenue streams. Benchmark rates are published annually by EPRA on the Kenya Gazette, although IPPs are ultimately free to agree tariffs and term with the off-taker. Updated FiT Policies are published periodically. The most recent iteration, the 2021 FiT Policy, applies to renewable energy power plants not exceeding 20 megawatts (MW) in biomass, biogas and small hydro technologies. Projects which do not meet these criteria (i.e. solar and wind projects and any renewables project, other than geothermal projects, with a capacity greater than 20MW) do not fall under the FiT Policy and must instead be procured under the Renewable Energy Auction Policy.
2. Solar and Wind: The MoEP developed a Renewable Energy Auction Policy (REAP) which allows for the procurement of all solar and wind power projects, as well as other renewable energy projects larger than 20 MW, based on competitive auctions. The aim of having an auction mechanism is to attract competitive pricing and ensure cost-effective project development. The MoEP has been responsible in overseeing the auction mechanism in alignment with Kenya’s Least Cost Power Development Plan and Integrated National Energy Plan. Separately, the licensing of solar photovoltaic systems and market players is carried out by the Energy and Petroleum Regulatory Authority (EPRA) as per the Energy (Solar Photovoltaic System) Regulations, 2012.  
3. Green Hydrogen: EPRA issued Guidelines on Green Hydrogen and its Derivatives (the Green Hydrogen Guidelines) in May 2024 in recognition of the crucial role of green hydrogen in Kenya’s energy transition. The Green Hydrogen Guidelines provide a stepwise guide on the sustainability criteria for green hydrogen and its derivatives, relevant statutory requirements and standards and a monitoring mechanism for projects under development. One of the incentives provided is that investors in green hydrogen and its derivatives can apply for their project areas to be designated as a special economic zone which brings forth various benefits, including tax incentives. 
4. Geothermal: Sections 77-90 of the Energy Act specifically provide for the exploration, recovery and commercial utilization of geothermal energy. It provides a clear legal pathway for making applications for geothermal resources licences which ensures that investors can efficiently navigate the geothermal energy regulatory landscape. The FiT Policy and REAP also provide that geothermal projects are to be procured under the Policy on Licensing of Geothermal Greenfields which will be developed by the MoEP.

Other legislation indirectly support investment into the renewable energy sector in Kenya, including:

• the Public Private Partnerships Act of 2021 (the PPP Act) which was enacted in 2021 following comprehensive consultation and provides a clear framework for the procurement of public projects, including utility scale power projects; and 
• the Climate Change Act of 2016 which requires the government to publish a National Climate Change Action Plan (NCCAP) prescribing measures for use of renewable energy in various priority areas or sectors. For instance, the 2018-2022 NCCAP encouraged promotion of renewably sourced electricity in the energy, transport and manufacturing sectors.

In summary, Kenya has a robust legal framework which allows for contribution to the country’s sustainable development goals and the achievement of favourable returns on investment. 

Challenges that Investors Face in Kenya’s Energy Sector

Whilst Kenya’s legal framework provides a stable foundation for investment, policy issues  have presented a number of challenges in recent years. 

One notable challenge is the ever-changing status of Power Purchase Agreements in Kenya. 

Recently, a moratorium was imposed on Power Purchase Agreements (PPAs) entered into between the government off-taker, Kenya Power and Lighting Company (Kenya Power), and IPPs. In response to public outcry on the high cost of power supplied by Kenya Power, former President Uhuru Kenyatta constituted a Presidential Taskforce in March 2021 to review PPAs entered into by Kenya Power. The findings and report of the taskforce led to the placement of a temporary moratorium on the procurement of new PPAs by Kenya Power, all but halting progress on utility scale renewables projects. 

Kenya’s Cabinet lifted this moratorium in February 2023 in a bid to address power generation needs caused by prolonged drought which affected the country’s power supply. In addition to lifting the moratorium, the Cabinet approved a framework for the engagement of IPPs through the REAP as opposed to the use of the FiT system. Shortly after the lifting of the moratorium, Kenya’s National Assembly imposed a new moratorium on new PPAs as it commenced a further inquiry into the high cost of electricity. This moratorium imposed by the National Assembly remains in place but there is optimism that it will be lifted soon.

Another challenge faced by investors is the state of Kenya’s grid infrastructure which can present challenges in integrating renewable energy projects, particularly in remote areas which has led to a delay in project investment and development. Despite this challenge, electricity access in Kenya is continuously increasing as the MoEP has made strong commitments to expanding and upgrading the national electricity grid through on-grid and off-grid solutions. One key initiative by MoEP is the Last Mile Connectivity Program which aims to increase access to electricity by extending the distribution network to underserved and remote areas.  This program has been under implementation by the MoEP and Kenya Power since 2014 and is expected to be completed by end of this year. Additionally, the MoEP is pursuing PPPs for enhanced projects implementation as a measure to raise resources for implementation of programmes and projects. 

Lastly, many investors are reluctant to invest in public energy infrastructure without the government’s support through derisking instruments, such as guarantees and/or letters of support. Some form of liquidity support is invariably crucial in attracting financing for new projects. To address this, the National Treasury and Economic Planning Ministry published a policy on Government Support Measures in 2018 (the GSM Policy) in an effort to balance the requirements of private investors with the government’s balance sheet. The GSM Policy applies to all public institutions at both national and county levels of Government and private sector parties, including their financiers, involved in public investment programmes. Navigating the application process for GSMs, obtaining an attractive level of liquidity support and coordinating multiple stakeholders is often complex and challenging. However, recent announcements of projects reaching financial close suggests that new innovative solutions to liquidity support could unlock the streamlined negotiation of project terms and a new era for renewable energy investments in Kenya. 

Conclusion 

In conclusion, Kenya presents a promising investment landscape for renewable energy projects, both at utility scale and in the off-grid, commercial and industrial space. There is a clear policy focus on developing new sources of renewable electricity and the regulatory framework signals a commitment to taking advantage of green growth opportunities and achieving sustainable development goals. 

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Read the original publication at Clyde & Co.