PPA structures and parties involved

Do the country's regulators allow corporate owners to purchase (1) directly from a facility, or (2) from a choice of suppliers?

The legal and regulatory framework in Kenya does not expressly provide for corporate PPAs, nor does it directly provide for any corporate PPA structure. Parties who enter PPAs, therefore, tend to do so on an ad-hoc basis, structuring the transaction in accordance with the commercial needs of the parties. 

The Energy Act does provide some comfort around the propriety of corporate PPAs in creating the concept of an ‘eligible consumer’. 

An eligible consumer is a consumer that is permitted to choose any licensee to be a supplier and with whom the consumer may contract for the purchase of electrical energy for the consumer’s own use, in accordance with regulations made under the Act. There are presently no regulations which speak to this issue. 

A consumer is any person supplied or entitled to be supplied with electrical energy or petroleum.

Last modified 18 Feb 2021

Kenya

Kenya

To what extent are corporate PPAs presently deployed and what sort of structure do they take?

Currently, most of the electrical needs of the country are met by KPLC (Kenya Power and Lighting Company) with power being generated by KenGen (a government-backed power generation company) and Independent Power Producers (IPPs) who enter into long-term PPAs with KPLC. KPLC then distributes energy and sells to retail consumers. 

Changes brought in with the Energy Act of 2019 ("Energy Act") opened up the power sector by permitting other entities to distribute and transmit power and also allowing for net metering and wheeling of generated power. 

Although, most large corporates have only recently genuinely begun exploring how they might generate their own power.  There are a few limited examples of this:

  • Some large malls and corporate headquarters in Nairobi have financed and installed solar systems to generate power without the use of PPAs.
  • Other parties have used direct wire/private wire PPAs. These usually take the form of roof-mounted solar panels installed by a contractor/operator on premises owned by the corporate and operated for a fixed term with fixed prices for power generated. 

Generation of up to 1MW of power for ‘own use’ is permitted under the Energy Act without the need for extensive licensing. This makes the approaches highlighted above appealing to corporates who want a simple fix to the rising costs of power in Kenya. Direct wire PPAs also avoid the need to rely on any external party for transmission or distribution, further reducing the potential for administration and bureaucracy. 

Virtual PPAs and sleeved PPAs are almost non-existent in Kenya. This could be because the regulatory framework is not mature/sophisticated enough (see below) and/or because corporate sustainability goals/targets for the use of renewable energy can, in fact, be inadvertently met by reliance on the national grid (more than 70% of Kenya’s energy is already generated from renewable sources). 

We expect further development in this area as the Energy Act imposes obligations on designated factories and buildings to conserve energy and assess energy consumption (ss. 188 and 189). PPAs which give corporates the freedom to choose more efficient energy sources may therefore be an attractive solution to some large manufacturers or industrial groups.

Do the country's regulators allow corporate owners to purchase (1) directly from a facility, or (2) from a choice of suppliers?

The legal and regulatory framework in Kenya does not expressly provide for corporate PPAs, nor does it directly provide for any corporate PPA structure. Parties who enter PPAs, therefore, tend to do so on an ad-hoc basis, structuring the transaction in accordance with the commercial needs of the parties. 

The Energy Act does provide some comfort around the propriety of corporate PPAs in creating the concept of an ‘eligible consumer’. 

An eligible consumer is a consumer that is permitted to choose any licensee to be a supplier and with whom the consumer may contract for the purchase of electrical energy for the consumer’s own use, in accordance with regulations made under the Act. There are presently no regulations which speak to this issue. 

A consumer is any person supplied or entitled to be supplied with electrical energy or petroleum.

Other than the generator and the off-taker, are any third parties commonly party to the PPA structure (e.g. a utility or other market agent)?

In a PPA with KPLC, the parties to the agreement are the power-generating company (KenGen or an IPP) and KPLC itself as the offtaker. 

EPRA is required to approve the PPAs but is not a party to the agreement itself.  

The Kenyan Government is not party to these PPAs and does not give any sovereign guarantee of such PPAs, but in some cases will provide a Letter of Support to the lenders and sponsors to cover the perceived political risks in the project.  However, the scope of these Letters of Support has been reduced over time and is now subject to strict government guidelines.

Is a generator permitted to sell electricity directly to an end user? If so, do they require a licence or other form of authorization?

If a generating entity has obtained a generating licence, it is permitted to operate the generating plant and to connect to a distribution network in accordance with the provisions of the Energy Act. 

While the Energy Act does not provide for how a generating entity should sell directly to an end-user, it appears open for the generating entity to sell electricity directly to an end-user who is an ‘eligible consumer’ within the meaning of the Energy Act (see our response on Regulators above).

By definition (section 2 of the Energy Act), an eligible consumer may contract ‘persons authorized to generate electrical energy’ for the purchase of electricity. Accordingly, a generator must be authorised to generate energy (i.e. licensed) even if selling electricity directly to an end-user. 

If the energy needs to be distributed or transmitted to reach the end-user, the generator will also have to be properly licensed to carry out those activities (ss.136 and 140 of the Energy Act). It is expected that the Regulations to the Energy Act will provide more detail on this, once established. KENGEN (the state-backed) generator has already announced its intention to supply industrial consumers once clear Regulations are in place.

Last modified 18 Feb 2021

Kenya

Kenya

What are some of the technical, political, financial or regulatory challenges to corporations adopting green energy in the short/medium term in your country and how have these challenges been overcome (or how can they be overcome)?

  • Green energy sources tend to be intermittent/unreliable such that corporations are rarely able to rely exclusively on a green solution to meet their power needs. This is particularly the case for solar power, which, in the absence of affordable storage facilities, can only provide a solution during daylight hours. Many corporates adopt a hybrid approach and will also explore how to use net-metering to sell back excess supply.
  • Most technologies require significant space to be efficiently developed. Unless corporates or generating entities own their premises or land on which to develop a generating plant, corporations and/or generating entities have to lease or acquire the required space. This can be a significant challenge, particularly for foreign-owned corporations. Acquisition of land for the purposes of generating power also requires significant engagement with the local community to ensure the investment/development is well received.
  • High upfront costs for most technologies in terms of equipment and personnel. Difficulty with logistics and some supply networks can mean equipment is difficult to maintain, and spares may not be readily available or properly stored.
  • The corporate PPA market is only now opening up in Kenya, and the regulatory controls are untested and somewhat ambiguous. It is seemingly likely that regulatory reform will follow in the next few years as stakeholders interpret the applicable legislation. This uncertain and/or changing regulatory landscape can sometimes make it difficult for corporates to commit to PPAs with substantial terms.   
  • Emerging local capacity in the development, operation and maintenance sectors coupled with obligations to develop and use local content.
  • Proper enforcement of standards and regulations.  Particularly in the solar space, there is a proliferation of sub-standard solar energy technologies and equipment. There is also a lack of availability of affordable power storage solutions.

Interventions

  • For some time, the Kenya Revenue Authority offered tax exemptions for certain solar-PV equipment (though this was reviewed in 2020). Permanent exemptions which applied to a wider range of technologies would assist in managing the substantial up-front costs.
  • The Energy Act now permits net metering and as a means of opening the market to corporates who may be considering a solar solution, but were previously unable to sell excess generated power back to the grid. Further improvements on this issue would see the government offer/regulate low-cost wheeling arrangements to facilitate wheeling of power where there is excess supply from a corporate.
  • KPLC could explore how to use virtual PPAs and sleeved PPAs to increase revenue and maintain market position.
  • Regular review of standards for energy technologies and equipment and genuine and consistent enforcement of regulations and standards.
  • Implementation of programs and initiatives to develop local capacity. Incentives could also be offered to corporates to provide training and/or upskill individuals.

Last modified 18 Feb 2021

Kenya

Kenya

Are there any anticipated regulatory changes which will alter the regulatory landscape for corporate green energy and corporate PPAs?

As highlighted in other answers, changes to the Energy Act in 2019 mean that energy generators may now obtain distribution licenses, empowering them to increase their offering and sell electricity directly to consumers. 

While this is expressly permitted under the Energy Act, the regulations necessary to give effect to these provisions have not yet been put in place, and therefore very few generators have taken steps towards expanding their offering. As indicated above, however, KenGen, announced in late 2020 that it plans to sell power directly to large consumers once the required regulations are put in place.  It is not, however, clear when the regulations will be published.

The government is also currently developing an energy auction plan for wind and solar energy. The auction system is supposed to help with price discovery, thus facilitating the procurement of electricity at the lowest possible price.

Last modified 18 Feb 2021

Kenya

Kenya

What is the corporate appetite for green energy, including any political or financial incentives available to corporates to adopt green energy?

Various corporates in Kenya are adopting green energy. These include:

  1. Mumias Sugar Company: generates 34MW of electricity from its bagasse-based co-generation plant;
  2. Kenya Breweries Limited: plans to generate at least 9.3MW at its Ruaraka plant and 2.4MW from solar power in Kisumu; and
  3. Kenya Tea Development Agency: has set up various hydropower plants throughout the country to reduce the significant energy costs associated with processing and manufacturing tea.

The primary reasons for this growing corporate appetite for green energy solutions include the need to:

  • reduce rising operation costs which are largely attributed to rising energy costs;
  • improve reliability of power supply;
  • obtain new sources of revenue; and
  • meet sustainability goals imposed by foreign-owned parent companies.

Beyond the incentives that are generally available in the market (e.g. tax exemptions for the importation of solar products) there are presently no specific incentives being made available to corporates as a means of encouraging the use of green energy.

What are the key local advantages of the corporate PPA model which can benefit our clients?

As the corporate PPAs market in Kenya is yet to be widely developed, the advantages of using this model tend to mirror the advantages of corporate PPAs on a general level:

  • energy security (particularly reduction of black/brown outs and surges if direct-wire solutions are used);
  • discretion to use specific energy sources or exclusively renewable energy as a means of satisfying CSR requirements;
  • avoiding high (and increasing) costs of power supply from a state-owned utility and/or passing on the pricing risk;
  • for direct-wire solutions, excess power sold back to the grid may create a source of revenue; and
  • direct-wire PPAs may be the only means of generating and accessing in some instances as the national transmission network does not always cater for very remote connections. 

What subsidies are applicable to the generation and sale of renewable energy?

While many subsidies have been the subject of recent potential revision, there are currently still various tax incentives for involvement in renewable energy, including:

  • VAT exemption on specialized equipment for the development and generation of solar and wind energy, including deep cycle batteries which use or store solar power;
  • VAT exemption on inputs or raw materials supplied to solar equipment manufacturers for the manufacture of solar equipment or deep cycle-sealed batteries which exclusively use or store solar power;
  • exemption from tax on interests to be paid on loan from foreign sources for investing in the energy sector - pursuant to Legal Notice 91 of 2015;
  • exemption from tax on payments made to a non-resident for services rendered under a power purchase agreement - pursuant to Legal Notice 165 of 2015; and
  • exemption from payment of stamp duty on instruments executed in respect of loans from foreign sources received by investors in the energy sector.

Does your country implement a national support scheme with tradable green certificates (such as guarantees of origins)?

No.

Last modified 18 Feb 2021

Kenya

Kenya

To the extent corporate PPAs are deployed, how are prices, terms and risks affected?

Do prices tend to be floating or fixed?

Corporate PPAs: while there are currently limited examples, for direct wire PPAs, prices tend to be fixed and subject to escalation. 

PPAs with KPLC: the tariff applicable per kW/h is fixed, and KPLC is obliged to accept up to a certain capacity for the term of the PPA (take or pay basis).

What term is typically agreed for the PPAs?

Corporate PPAs: unknown but likely negotiated on a commercial basis.

PPAs with KPLC: 20 – 25 years.

Are the PPAs take-or-pay or limited volume?

Corporate PPAs: unknown but likely negotiated on a commercial basis.

PPAs with KPLC: previously always take or pay (but see above re: movement towards take and pay).

Are there any other typical risks?

Corporate PPAs: unknown but likely negotiated on a commercial basis.

PPAs with KPLC: political risks are typically accepted by the offtaker and backstopped by the Government (but see our note above re: this changing landscape).

To the extent corporate PPAs are deployed, in whose favour will the risks typically be balanced?

Corporate PPAs in Kenya do not currently have a prescribed form, such that a number of these risks can be negotiated on a commercial basis.

Volume risk

Unknown – in traditional PPA would sit with offtaker.

Change in law

Unknown – in traditional PPA tends to sit with offtaker up to a certain threshold.

Increase / reduction of benefits

N/A as benefits are not readily available. In a traditional PPA, where a change in law or change in tax would result in an increase/reduction in costs, this typically results in an adjustment to the tariff.

Market liberalization (if applicable)

Unknown – in a traditional PPA would sit with offtaker.

Credit risk

Unknown – in a traditional PPA would sit with IPP.

Imbalance power risk

Unknown – in a traditional PPA would sit with offtaker.

Production profile risk

Unknown and also not covered by traditional PPAs.

Last modified 18 Feb 2021

Kenya

Kenya

Does your country operate a balancing responsibility scheme?

No formal scheme is in operation, however, there are entities which are responsible for balancing supply and demand.

If your country operates a balancing responsibility scheme, who is the balancing authority and do the generator and offtaker typically undertake balancing themselves?

Kenya’s national transmission network is owned and operated by two utilities, i.e. Kenya Electricity Transmission Company Limited (KETRACO), and KPLC. KETRACO independently owns the majority of the lines, and particularly the high voltage lines, while KPLC has historical ownership of several lower voltage lines. 

KPLC is currently the main distributor and retailer such that it accepts responsibility for balancing supply and demand needs and ensuring the power is safely transmitted through the network to its end users.  Balancing in Kenya is carried out in accordance with the Kenya Electricity Grid Code, and it follows that responsibility for balancing the system is allocated to the offtaker in a traditional PPA.

Last modified 18 Feb 2021

Kenya

Kenya

What significant transactions/deals have taken place in the last 12-18 months?

More than 140 Petrol stations of a leading provider have been adapted to incorporate rooftop solar arrays as a means of generative solar energy.

Moi International Airport is also set to install a 500 KW solar power system. This trend is also being followed by Ecobank, Africa Logistics Properties and the International Centre of Insect Physiology and Ecology, who have recently commissioned solar units on their properties.

Many other corporates are also investing in rooftop technology.

What transactions/deals are anticipated to come to market in the next 12-18 months?

KenGen made a public announcement of its intention to become an energy distributor as soon as the relevant enabling regulations have been published.[1]

[1] Edwin Okoth KenGen now plans to sell power direct to consumers, Published, 25 November 2020

Last modified 18 Feb 2021

Kenya

Kenya

Beatrice Nyabira

Beatrice Nyabira

Partner, Projects, Energy & RestructuringIKM Advocates
Cynthia Olotch

Cynthia Olotch

Legal Director, Projects, Energy & RestructuringIKM Advocates