The power industry in Kenya is fully vertically unbundled, with the most vibrant participation from the private sector in the generation segment. The last five years have seen increasing growth of private power distribution and, most recently, the transmission segment is looking to introduce private players through public-private partnerships on identified priority transmission lines.

The principal law governing the ownership and structure of the power industry in Kenya is Energy Act No 1 of 2019, which was enacted to align the energy sector with the Energy Policy, 2018 and the devolved functions of the national and county governments in accordance with the Constitution of Kenya 2010.

Assets in the generation segment are primarily state-owned through the Kenya Electricity Generating Company PLC (KenGen), which produces approximately 63% of the power generated in Kenya.

Independent power producers (IPPs) account for another 36%, with a further 1% coming from off-grid systems under the Rural Electrification Programme.

The transmission segment is presently 100% state-owned, with the Kenya Electricity Transmission Company Limited (KETRACO) mandated to operate high-voltage transmission lines; KETRACO was recently declared as the System Operator.

The distribution segment is dominated by Kenya Power & Lighting PLC (Kenya Power), which until recently was the sole retailer and system operator in addition to owning and operating part of the transmission infrastructure and the entire distribution network in the country. Over the last few years, this segment has seen the introduction of privately owned distribution and electricity retail players.

Generation, Transmission and Distribution

The principal state-owned players in the generation, transmission and distribution segments include the following:

• KenGen is 70% owned by the government of Kenya, is listed on the Nairobi Stock Exchange and is the largest energy producer in Kenya;
• Geothermal Development Company is wholly owned by the government and was established to carry out geothermal exploration, production drilling and management of steam fields;
• Nuclear Power and Energy Agency is wholly owned by the government and is responsible for overseeing R&D of nuclear electricity generation in Kenya;

• KETRACO is responsible for planning, design, construction, ownership, operation and maintenance of electricity transmission lines (132kV and above), and was designated as the System Operator on 14 January 2022;
• Kenya Power is listed on the Nairobi Stock Exchange, and the government of Kenya holds a 50.1% stake in the entity. It is also charged with purchasing power from neighbouring states through bilateral agreements; and
• Rural Electrification and Renewable Energy Corporation (REREC) replaced the former Rural Electrification Authority, and its mandate has now been expanded to include rural electrification and serve as the lead agency responsible for development of renewable energy resources (other than geothermal and large hydropower).

Independent Power Producers

IPPs currently generate power on a large scale and are also extensively involved in the development and operation of mini-grids and captive power generation, mostly for commercial and industrial customers. IPPs currently account for approximately 976 MW of generated power. Key players include:

• BidCo (2.1 MW biothermal);
• Biojoule Kenya (2 MW biogas);
• Cummins (8.4 MW biomass);
• GenPro-Teremi Falls (5 MW hydro);
• Gikira Small Hydro (0.5 MW hydro);
• Gulf Power (80.3 MW thermal);
• Gura KTDA (2 MW hydro);
• IberAfrica Power Company (52.5 MW thermal);
• Imenti Tea Factory Ltd (0.283 MW hydro);
• Kipeto Energy Limited (100 MW wind);
• Kleen Energy (6.0 MW hydro);
• KTDA Metumi (3.6 MW hydro);
• Lake Turkana Wind Power (300 MW wind);
• Orpower 4 Inc. (150 MW geothermal);
• Rabai Power (88.6 MW thermal);
• Regenterem (5.2 MW hydro);
• Strathmore Solar (0.25 MW solar);
• Thika Power (Melec) (87 MW thermal);
• Triumph Power (83 MW thermal); and
• Tsavo Power Company Limited (74 MW thermal – retired);

Licensed Captive Power Generators

These presently account for approximately 140.8 MW and include:

• Butali Sugar Mills Limited (11 MW cogen);
• Cemtech Limited (30 MW coal);
• Chemelil Sugar Co Limited (3 MW cogen);
• Devki Energy Co Ltd (15 MW waste heat recovery);
• James Finlay (6.7 MW hydro and thermal);
• Kaimosi Tea Estates Ltd (1.5 MW solar);
• KTDA – GURA (5.8 MW solar and diesel);
• Kwale International Sugar Co Ltd (18 MW cogen);
• Ofgen Power Limited (0.455 MW solar);
• Nzoia Sugar Co. Limited (7 MW bagasse);
• Oserian Development Co Ltd (1 MW solar);
• Pwani Oil Products Ltd (1.5 MW biomass);
• Sony Company Ltd (8.7 MW bagasse);
• Sotik Highlands (1.06 MW thermal);
• Sotik Tea (1.5 MW thermal);
• Tatu City Power Company SEZ Ltd (30 MW solar);
• Two Rivers Power Company Limited (12 MW solar and diesel); and
• Unilever (4.66 MW hydro and thermal).

The Energy & Petroleum Regulatory Authority (EPRA) holds a Register of Licences for Electric Power Undertakings, which lists several other licensees (as of February 2022) that have yet to commence/complete construction of their generation facilities.

Sellers of Electricity to End-Users

Kenya Power is the principal state-owned authority that sells electricity to end-user consumers, while investor-owned entities (ie, those with generation and retail licences to supply commercial and industrial customers, or distribution and supply licences) include:

• BE Africa C&L Limited;
• CP Solar Resources Limited;
• Crossboundary Energy Kenya Limited;
• Ecolico Limited;
• Enkai Limited;
• Kudura Power EA Limited;
• Lean Energy Solutions Limited;
• Nal Offgrid Limited;
• Ofgen Limited;
• Renewvia Energy Kenya Limited;
• SES Microgrids Kenya Limited;
• Talek Power Company Limited;
• Tatu City Power Company SEZ Limited;
• Tilisi Power Company Limited; and
• Two Rivers Power Company Limited.

Foreign Investment Restrictions

Both foreign and local investors are entitled to apply for an Investment Certificate if they meet certain thresholds of investment (USD100,000 and KES1 million, respectively). “Foreign assets” are defined in the Foreign Investments Protection Act to include:

• foreign currency, credits, rights, benefits or property;
• any currency, credits, rights, benefits or property obtained by the expenditure of foreign currency, the provision of foreign credit, or the use or exploitation of foreign rights, benefits or property; and
• any profits from an investment in an approved enterprise.

Review Process

A foreign entity seeking a licence under the Energy Act is required to establish an office in Kenya and provide EPRA with an electronic, postal and physical address of said office. The licensee is also required to maintain such office until the expiry of the licence.

Any entity that executes a project agreement under the Public Private Partnerships Act, including projects in the power sector, is required to establish a project company in accordance with the Companies Act.

Local Content Plan

While there are no mandatory thresholds for local content in the energy sector, the Energy Act requires licensees to comply with the local content obligations, which include the preparation of a Long-Term Local Content Plan. The term “local content” is defined in the Act as the added value brought to the Kenyan economy from energy-related activities through systematic development of national capacity and capabilities and investment in developing and procuring locally available workforce, services and supplies, for the sharing of accruing benefits.

As such, the Local Content Plan should ensure that consideration is first given to services provided within the County and goods manufactured in the country, where the goods meet the relevant specifications as prescribed by the Kenya Bureau of Standards or, in the absence of a Kenyan standard, any other internationally acceptable standards. The Local Content Plan should provide for qualified and skilled Kenyans to be given first consideration for employment at all levels of the value chain, and adequate provision should be made for the training of Kenyans on the job.

Land Ownership

A key restriction on land ownership is that foreign nationals can only have a leasehold of up to 99 years over non-agricultural land. However, it should be noted that, prior to the installation of power generation infrastructure, development permission would need to be obtained under the Physical and Land Use Planning Act and agricultural land would need to be rezoned with a change of user effected from agricultural to industrial (eg, solar power plant) purposes.

Protection of Foreign Investments

The Constitution of Kenya protects all persons from deprivation of property and provides that no property of any description shall be compulsorily taken possession of, and no interest in or right over property of any description shall be compulsorily acquired, except where it is necessary in the interests of defence, public safety, public order, public morality, public health, town and country planning or the development or utilisation of any property in such manner as to promote the public benefit.

Compensation should be made promptly and in full, and the Constitution provides that courts may grant relief in the form of an order for compensation where it is determined that there has been a denial, violation or infringement of a right or fundamental freedom enshrined in the Bill of Rights, or a threat thereto.

These provisions are reiterated in the Foreign Investments Protection Act, which provides that no approved enterprise or any property belonging to such enterprise shall be compulsorily taken possession of, and no interest in or right over such enterprise or property shall be compulsorily acquired, except in accordance with the relevant law and the prompt payment of full compensation.

Finally, the Land Act guides the process to be followed for compulsory acquisition and compensation upon the exercise of due diligence, which shall include a final survey and the determination of acreage, boundaries, ownership and value. Notably, the Land Act clarifies that the National Land Commission should make payment of the compensation to all persons interested in the land before taking possession of the land.

Applicability of International Law

Private parties are at liberty to choose the applicable law governing their contractual arrangements. Agreements with the government of Kenya as a counterparty are usually required by the State Law Office to be amended to reflect the governing law as the Law of the Republic of Kenya.

The Public Private Partnerships Act specifically requires that the applicable law governing project agreements executed for the implementation of PPPs in Kenya shall be the Law of the Republic of Kenya.

Dispute Resolution

The Constitution of Kenya encourages alternative forms of dispute resolution, including mediation and arbitration.

Arbitral proceedings in Kenya are governed by the Arbitration Act and the Nairobi Centre for International Arbitration Act. Kenya is also a signatory to the 1958 New York Convention on the Recognition and Enforcement of Arbitral Awards and has acceded to the International Convention on the Settlement of International Disputes.

Following various international arbitrations relating to infrastructure projects in Kenya, including the power sector, since 2018 the government of Kenya has tried to ensure that the applicable rules of arbitration are the NCIA Rules.

Incentives or Protections to Encourage Foreign Investment

These are contained primarily in the Foreign Investments Protection Act and the Investment Promotion Act. “Investment” is defined to include contributions of local or foreign capital by an investor, including the creation or acquisition of business assets by or for a business enterprise, covering the expansion, restructuring, improvement or rehabilitation of a business enterprise.

Investment Certificate holders are entitled to an easier licensing regime, including:

• support from the Kenya Investment Authority for various licence applications from various national and sub-national governments and agencies; and
• certain categories of work permits and dependant passes for expatriate staff and their families.

Subject to EPRA’s prior approval, entities in the power sector are permitted to dispose of any of their assets by any means, including sale, transfer, merger and lease.

The sale of generation, transmission and distribution assets is governed by the following principal laws and regulations.

• The Energy Act, Energy (Electricity Licensing) Regulations and Licence Conditions require a licensee to obtain EPRA’s prior approval before:
1. disposing of assets through a sale, transfer, merger, lease or any other means;
2. taking any action that may lead to a decrease in the licensee’s share capital;
3. allowing any acquisition by a third party of more than 25% of the licensee’s share capital;
4. implementing a change in control of the licensee; and
5. any increase or decrease of its authorised or paid-up share capital.
• The provisions of the Companies Act, the Competition Act and the Capital Markets Act would be applicable to mergers, amalgamations and acquisitions of private and publicly listed companies, as the case may be.
• The Public Procurement and Asset Disposal Act and the Public Finance Management Act would also be applicable to the disposal of assets by a state-owned corporation.
• The Income Tax Act would impact the proceeds of the sale of the investments.

Regulators and Review Process

The regulator responsible for mergers is the Competition Authority of Kenya (CAK). Where a merger is proposed, each of the undertakings involved is obliged under the Competition Act to notify the CAK of the proposal in writing; the CAK will then make a determination in relation to the proposed merger and may either decline or give an approval for its implementation with or without conditions. The CAK is also responsible for determining thresholds for transactions that require the mandatory merger notification, in which case mergers below the specified thresholds would not need to be notified to the CAK.

Where assets are owned by state-owned entities, the Public Procurement Regulatory Authority is charged with overseeing public asset disposal under the Public Procurement and Asset Disposal Act.

Minimum Requirements for Purchasers or Acquirers

As part of the licence application process, the applicant is required to submit documentation evidencing its financial, technical and operational qualifications to undertake the proposed generation, transmission or distribution activity. The licensee is also obliged to submit the following to EPRA:

• an annual performance report incorporating financial and technical performance within 180 days of the end of the licensee’s financial year;
• financial statements for each financial year, together with the report of an external auditor; and
• any other financial data that EPRA may specify with reasonable prior notice.

Licensees are also obliged to notify the regulator of any event that threatens their financial capacity to perform their obligations under the licence.

Any new purchaser of electricity assets or acquirer of a business would be required to demonstrate its financial and technical capabilities to EPRA, and to comply with the reporting obligations in the specified licence.

The Energy Act establishes the role of a System Operator, which is responsible for matching consumer requirements or demand with electrical availability or supply, maintaining electric power system security and arranging for the dispatch process. Kenya Power has historically been central to the electricity demand planning process and also served as the System Operator until KETRACO’s designation in January 2022; the transfer of this function is presently underway.

The designation of KETRACO as the System Operator is in line with the provisions of Section 138 (9) of the Energy Act, which requires the System Operator not to be involved in the direct or indirect buying or selling of electrical energy, which is Kenya Power’s core business.

Long-term planning is a collaborative effort between the two levels of government led by the Ministry of Energy, which is mandated to prepare the Integrated National Energy Plan (INEP) that incorporates fossil fuel, renewable energy and electricity master plans and is intended to serve as an energy sector inter-governmental document to guide the short, medium and long-term energy requirements of the country. The MOE’s Draft INEP Framework, 2020 sets out the procedures for preparation of the energy plans at both levels of government.

County governments are charged with the preparation of County Energy Plans incorporating petroleum, renewable energy and electricity master plans. They are also required to undertake physical planning relating to energy resource areas such as dams, solar and wind farms, municipal waste dumpsites, agricultural and animal waste, ocean energy, woodlots and plantations for production of bio-energy feedstock, as well as the facilitation of energy demand by planning for industrial parks and other energy-consuming activities.

Finally, the Least Cost Power Development Plans (LCPDPs) have historically been prepared as a collaborative effort between the MOE, the regulator and utilities within the power sector in Kenya and present a 20-year plan for the power sector in the country, with the most recent being the 2021–2040 plan published in April 2021.

Functions and Powers

The System Operator’s key functions include:

• managing and operating the National Control Centre and other infrastructure;
• giving directions and exercising supervision and control as may be required for ensuring the stability of network operations and for achieving the maximum economy and efficiency in the operation of the electric power system;
• optimal scheduling and dispatch of electrical energy and ancillary services throughout the county;
• keeping records of the quantity and quality of electrical energy supply on the national grid; and
• co-ordinating with system operators of the countries whose power systems are interconnected with the Kenyan system so as to ensure efficient operations.

Draft Energy (System Operations) Regulations 2021 are currently under review, and are intended to apply to the System Operator and Licensees.

Following the enactment of the Energy Act in 2019, a taskforce was appointed to develop regulations to give effect to and operationalise various provisions of the Act. These regulations include the following:

• the Energy (Electricity Licensing) Regulations, 2020;
• the Energy (Complaints and Disputes Resolution) Regulations, 2020;
• the Energy (Geothermal Resources) Regulations, 2020;
• the Energy (Solar Water Heating) Regulations, 2020;
• the Energy (Energy Management) Regulations, 2020;
• the Energy (Solar Photovoltaic Systems) Regulations, 2020;
• the Energy (Appliances’ Energy Performance and Labelling) Regulations, 2020;
• the Energy (Electricity Market, Bulk Supply and Open Access) Regulations, 2021;
• the Energy and Petroleum Tribunal (Procedure) Regulations, 2020;
• the Energy (Electricity Tariffs) Regulations, 2020;
• the Energy (Feed-in-Tariffs) Regulations, 2020;
• the Energy (Undertakings Inspection and Investigation) Regulations, 2021;
• the Energy (Mini Grids) Regulations, 2020;
• the Energy (Electricity Regulatory Accounts) Regulations, 2020;
• the Energy (Integrated National Energy Plan) Regulations, 2020;
• the Energy (Electricity Supply) Regulations, 2021;
• the Energy (Local Content) Regulations, 2021;
• the Energy (Electricity Reliability, Quality of Supply and Service) Regulations, 2021;
• the Energy (Consolidated Energy Fund) Regulations, 2020;
• the Energy (Rural Electrification Programme Fund) Regulations, 2021;
• the Energy (Decisions to the Authority) Regulations, 2021;
• the Energy (System Operations) Regulations, 2021; and
• the Energy (Net Metering) Regulations, 2022.

One set of regulations that has been the subject of some confusion in the market is the Electricity Reliability and Quality of Supply Regulations, which were promulgated on 30 April 2021 and published in May 2021 by the Ministry of Energy, a few weeks before the publication of the Draft Electricity Reliability, Quality of Supply and Quality of Service Regulations, 2021, which were published for public consultative purposes by EPRA. It is envisaged that the latter set will supersede the former once approved in Parliament as these have gone through the mandatory public participation process.

New policies include the Renewable Energy Auctions Policy (2021) and the Feed-In-Tariffs Policy on Renewable Energy Resource Generated Electricity (Biomass, Small-Hydro and Biogas), 2021 (FiT Policy, 2021), the latter of which replaces the 2012 FiT Policy.

The scope of the FiT Policy, 2021 is now limited to small-scale biomass, biogas and small hydro projects (of up to 20 MW), with all solar and wind power projects – as well as other renewable energy projects larger than 20 MW – to be procured under the Auctions Policy rather than the FiT Policy, as was previously the case.

Another policy expected to be finalised is the Policy on Licensing of Geothermal Greenfields. Once this policy is in effect, it shall apply to geothermal projects larger than 20 MW, which will be procured under it instead of the Auctions Policy.

More recently, the regulator has held public consultations for the development of a Net-Metering Policy based on a Study on the Regulatory Impact of Net Metering in Kenya.

Other non-policy-based developments that have impacted existing market players based on recommendations made in the Report of the Presidential Taskforce on the Review of Power Purchase Agreements, 2021 include the reduction of consumer power tariffs by 15% in January 2022, with a further 15% targeted before the end of the year. In order to achieve the second reduction, negotiations have been initiated with IPPs to vary the terms of existing power purchase agreements; discussions are ongoing.

A unique feature of Kenya’s power industry is its reliance on renewable energy sources, with a target of 100% by 2030 from the current 75%, including geothermal, wind, solar and hydro power.

Kenya was the first African country to tap into its geothermal resources and KenGen recently commissioned a further 83 MW of geothermal power at its Olkaria 1 Unit 6, which increased its installed geothermal capacity to 42% of its total installed capacity, up from its present 39%.

The Energy Act does not specifically list wholesale supply as a licensed activity, and the Energy Policy 2018 only references the wholesale electricity market once in recognition of Kenya’s undeveloped legal, regulatory and institutional framework for a competitive wholesale electric power market.

However, the definition of the electricity market in the Energy Act includes the sale of electrical energy to retail licensees for resale to consumers, while “Bulk Supply” is defined to mean the supply of electrical energy by a licensee to another licensee for the purpose of enabling the supply of electrical energy to consumers. The Energy Act also provides for the execution of Bulk Supply Agreements and Electricity Supply Contracts, and requires EPRA to review the electricity market on a regular basis with a view to enhancing competition, improving efficiency, increasing reliability and security of supply and improving the quality of service by all licensees.

In line with the above, the Draft Energy (Electricity Market, Bulk Supply and Open Access) Regulations, 2021 provide that the electricity market shall consist of a wholesale and a retail market, with the former being comprised of generation licensees and other licensees who will trade through the intermediary of an operator while the retail market shall purchase from the wholesale market and supply to consumers.

Competitive Wholesale Electricity Market

Kenya recently completed the Power Market Study in the Electric Power Sub-Sector, 2021, which provides a roadmap for the phased introduction of a wholesale electricity market in four phases, as follows:

• Phase 1: Bilateral Trading and Centralised Dispatch, where energy will be traded through bilateral contracts or through a centralised economic dispatch determined on a day-ahead basis;
• Phase 2: the Day Ahead Market, which will allow multilateral trading among market participants and produce 24-hourly schedules for the production and consumption of electricity the day before the operating day;
• Phase 3: the Real Time Market and Trading, in which the real time market will be introduced, based on offers presented by generators or loads at request of the system market operator, and a real time price based on the accepted offers for upward or downward regulation and introduction of traders as market players; and
• Phase 4: Other Players and the Introduction of a Power Exchange Platform, as well as the introduction of transmission rights for bilateral contracts that will allow the optimisation of available transmission capacity and the allocation of available capacity to bilateral contract parties through auctions.

Imports and exports of electricity are permitted, subject to licensing by EPRA.

Kenya imports power from Tanzania’s Electric Supply Company (TANESCO), Uganda’s Electricity Transmission Company (UETCL) and Ethiopia’s Electric Utility (EEU). The country also exports power to Uganda and Tanzania.

Exports typically occur where there is a surplus in generation. Imports occur when there is a shortage and are regulated under bilateral/cross-border power purchase agreements and network contracts.

KETRACO is engaged in the construction of the following new regional power interconnector projects:

• the Kenya–Uganda Interconnector (Lessos-Tororo transmission line) – a 400 kV, 120 km line with a capacity of 1,700 MW;
• the Kenya–Tanzania Power Interconnection – a 400 KV, 505 km with a capacity of 1,700 MW; and
• the Kenya–Ethiopia Power Interconnection – a 500kV, 1045 km line with a capacity of 2,000 MW.

The total generation is 2,800 MW, with geothermal being the leading contributor of power to the national grid, accounting for 45.6%, followed by hydropower (36.2%), wind (9.6%), fossil fuels (6.7%) and solar at below 1%.

There are presently no concentration limits regarding the percentage of electricity supply that is controlled by one entity.

The majority of consumers are currently supplied by Kenya Power.

EPRA is mandated to monitor, in consultation with the Competition Authority, the conditions of contractors’ trade practices and to review the electricity market on a regular basis with a view to enhancing competition.

The Energy (Electricity Licensing) Regulations of 2012 empower EPRA to issue directives for the purpose of preventing any practice or arrangement that has the object or effect of preventing, restricting or distorting competition within the energy sector, and require that all licensees comply with its directives.

The Draft Energy (Electricity Tariffs) Regulations, 2020 propose that EPRA will ensure the avoidance of undue discrimination between users and suppliers of services and abuse of dominant position or undue restriction of competition by any licensee.

The CAK is mandated to investigate any economic sector it has reason to believe may feature one or more factors relating to unwarranted concentrations of economic power, and may require any participant in that sector to grant it access to records relating to patterns of ownership, market structure and percentages of sales.

The Competition Act No 12 of 2010 is the principal law that prohibit anti-competitive behaviour and establishes a market surveillance and enforcement process.

Authority with Responsibility for Market Surveillance and Enforcement

In addition to the general powers referenced above, the CAK has power to:

• carry out an investigation following receipt of a complaint related to restrictive trade practices, abuse of dominance or abuse of buyer power;
• enter and inspect any premises of any entity believed to be in possession of relevant information and documents required for the purposes of undertaking investigations;
• receive in evidence any statement, document, information or matter during an investigation;
• conduct inquiries or a sectoral study on its own initiative, at the request of a regulatory body or the Minister of Finance;
• investigate any economic sector it has reason to believe may feature one or more factors relating to unwarranted concentrations of economic power; and
• require any participant in that sector to grant it or any person authorised in writing by it access to records relating to patterns of ownership, market structure and percentages of sales.

Enforcement Procedures

The CAK is obliged to make a determination upon the completion of investigations, and may take any of the following measures:

• declare that the conduct under investigation constitutes an infringement of the prohibitions in the Competition Act;
• restrain the undertaking from engaging in that conduct;
• direct any action to be taken by the undertaking to remedy or reverse the infringement or the effects thereof;
• impose a financial penalty of up to 10% of the immediately preceding year's gross annual turnover in Kenya; or
• make an order directing any person whom it deems to hold an unwarranted concentration of economic power in any sector to dispose of such portion of their interests in the production, distribution or supply of services as it deems necessary to remove the unwarranted concentration.

Kenya’s Ministry of Environment and Forestry projects that the energy sector will be the leading contributor to emissions by 2030 because of increased consumption of fossil fuels in generating electricity, meeting domestic, commercial and industrial heating demand and for transportation.

The Climate Change Act, 2016 was enacted to provide a regulatory framework to enhance Kenya’s response to climate change in line with the National Climate Change Framework Policy (Sessional Paper No 5 of 2016). Several county governments have also developed climate change legislation to guide their implementation of various measures to meet their obligations regarding climate change.

The Climate Change Act mandates the Cabinet Secretary in charge of climate change affairs to formulate a National Climate Change Action Plan (NCCAP) every five years; the one currently in place covers the period 2018–2022. The NCCAP prescribes measures and mechanisms that will guide the country toward the achievement of low carbon, climate-resilient, sustainable development and is required to have measures to enhance energy conservation, efficiency and the use of renewable energy in industrial, commercial, transport, domestic and other areas.

The Climate Change Act establishes a Climate Change Council, of which the Cabinet Secretary in charge of energy is a member. The Cabinet Secretary for climate and environment, in conjunction with the Cabinet Secretary for finance, is mandated with offering incentives to persons who put in place measures to reduce greenhouse emissions and for the use of renewable energy.

Kenya has ratified the Vienna Convention on Substances that Deplete the Ozone Layer, the United Nations Framework Convention on Climate Change, the Kyoto Protocol and the Paris Agreement.

Laws or Policies Directed at Limiting Carbon Emissions from Generators

While there are no specific carbon taxes or cap-and-trade policies yet in place, the Climate Change Act empowers the Climate Change Council to impose duties relating to climate change on both public sector and private entities if doing so is recommended by the Cabinet Secretary in charge of matters relating to climate change. The Act is also aimed at providing incentives and obligations for private sector contributions to achieving low carbon, climate-resilient development and promoting low carbon technologies, improving efficiency and reducing emission intensity by facilitating approaches and the uptake of technologies that support low carbon and climate-resilient development.

The National Climate Change Framework Policy obliges the government to implement regulatory mechanisms that mainstream low carbon growth options into the planning processes and functions of the national and county governments in order to attain low carbon growth.

Emission Limits or Thresholds

Kenya submitted its initial Nationally Determined Contribution in December 2016, setting out both adaptation and mitigation contribution intended to abate greenhouse gas emissions by 30% by 2030 compared to the business-as-usual scenario. These were revised in 2020, with a more ambitious target of 32% by 2030.

Kenya intends to use voluntary co-operation under Article 6 of the Paris Agreement and to develop further domestic legislation and institutional frameworks to achieve these targets.

There are no programmes currently targeted at encouraging or requiring the early retirement of early carbon-based generation. The Energy Act provides a comprehensive licensing and regulatory framework for persons undertaking electricity generation using coal, subject to compliance with environmental, health, safety, planning and other relevant legislation and guidelines. It also makes provision for the Cabinet Secretary to undertake the provision of financing, procurement, storage, maintenance and management of strategic stocks of coal for electricity generation.

Coal mining (open pit mining in particular) is planned for the Mui Basin and coal is still being considered as a fuel option in the expansion of power generation in Kenya, due to its widespread deposits, production experience and relatively low costs.

In the 2022/2023 Budget Statement, the Minister for Finance proposed the setting aside of KES91.5 billion (approximately USD80 million) to support the production of reliable and affordable energy, including KES2 billion (approximately USD17 million) allocated specifically for the development of nuclear energy and the exploration and mining of coal.

There are currently no requirements or timelines for the early retirement of carbon-based generation in Kenya.

The Energy Act encourages the development and use of renewable energy. Other key policy and strategic documents include the following, which are all aimed at pushing Kenya towards attaining its target of 100% clean energy by 2030:

• the LCPDP;
• the draft INEP (2020);
• the Bio-Energy Strategy (2020);
• the Renewable Energy Auctions Policy (2021);
• the Kenya National Energy Efficiency and Conservation Strategy (2020);
• the FiT Policy (2021); and
• the Baseline Study on the Potential for Power-to-X/Green Hydrogen in Kenya (Hydrogen Report, 2022).

Capacity Targets for Alternative Energy

Based on the LCPDP, committed projects under construction will add an additional 853 MW by 2030 as follows:

• geothermal – 83 MW (commissioned in June 2022);
• hydropower – 10 MW;
• solar PV – 160 MW;
• wind – 100 MW;
• battery energy storage systems (BESS) – 250 MW; and
• bioenergy – 50 MW.

A further 1,552 MW is expected for candidate generation projects with valid power purchase agreements approved by EPRA, as follows, by 2030:

• geothermal – 498 MW;
• hydropower – 139 MW;
• solar PV – 244 MW;
• wind – 251 MW;
• LNG – 200 MW; and
• bioenergy – 19 MW.

Procurement Process

Current programmes are financed through a combination of the exchequer, international development partners and commercial finance.

Under the FiT Policy and Auction Policy, the government of Kenya guarantees a technology-based fixed price (in USD) for power feeding into the national grid, and EPRA sets the indicative FiT tariffs and benchmark tariffs for reverse renewable energy auctions, with the most recent having been published in November 2021.

Current FiT tariffs include:

• small hydro: 0–5 MW at USD0.09/kWh and 10–20 MW at USD0.076/kWh; and
• biomass and biogas: USD0.95/kWh up to 10–20 MW.

Benchmark renewable auction tariffs include:

• wind: USD0.597/kWh;
• solar: USD0.575/kWh;
• small hydro (over 20 MW): USD0.056/kWh; and
• biomass and biogas (over 20 MW): USD0.084/kWh.

The Auction Policy provides for a two-stage bidding process:

• the pre-qualification stage during which preliminary evaluation will be undertaken; and
• the request for proposal stage, which will entail a detailed technical and financial evaluation of the project’s deliverability.

The costs of interconnection, including for construction, upgrading transmission/distribution lines, substations, associated equipment and wayleave acquisition, are to be borne by the developer.

EPRA has also published Guidelines for the Computation of Allowed Return on Equity and Return on Investment for generation, transmission and distribution projects within the country. The following mechanisms are used for calculating the Return on Equity:

• the Capital Asset Pricing Model (CAPM) shall be the preferred approach;
• the risk-free rate shall be the rate earned in government-issued long-term bonds, and shall be 12.8%;
• the market premium shall be the difference between the market return and risk-free rate;
• the beta shall be determined for each company individually; and
• the Return on Equity allowed for public utilities shall be 10.5% after tax.

The following mechanisms are used for calculating the Return on Investment:

• the return on investment shall be the weighted average cost of capital;
• the weighted average cost of capital shall be the average of the cost of equity and debt, weighted by the proportions of equity and debt that an efficiently financed company can be expected to use to fund its activities;
• the cost of equity shall be as determined by EPRA using the CAPM approach;
• the cost of debt shall be the actual cost of debt supported by term sheets; and
• the optimal capital structure shall be 75:25 (debt: equity).

The tax rate shall be the income tax rate as prescribed by the Income Tax Act.

Kenya receives substantial support from international organisations and development partners towards renewable energy development. The current programmes include the following.

• the Kenya Off-Grid Access Project (KOSAP) is financed by The World Bank to provide electricity to parts of the country that are not served by the national grid. The project started in July 2017 and is expected to end in June 2023.
• The German Energy Solutions Initiative run by Deutsche Gesellschaft für Internationale Zusammenarbeit GmbH (GIZ) commenced in 2019 and is expected to run up to 2023, with the main objective of facilitating technology transfer and capacity building between the two nations, developing solutions to advance market development, and promoting climate-friendly energy solutions. GIZ has also partnered with other organisations such as Energy 4 Impact to offer renewable energy solutions to communities in some remote parts of Kenya.
• In September 2020, Kenya signed a grant agreement with the Japanese International Co-operation Agency (JICA) aimed at improving the power distribution system in Nakuru and Mombasa cities. The project is being implemented over the course of 40 months.
• In September 2021, the African Development Bank’s sustainable Energy Fund for Africa (SEFA) announced a USD1 Million grant issued to the government of Kenya to support the creation of a Super Energy Service Company (ESCO) to be run by Kenya Power to develop and implement energy-efficient projects for both the public and private sectors.

The Kenya Association of Manufacturers in partnership with Agence Française de Développement (AFD) started the Sustainable Use of Natural Resources and Energy Finance (SUNREF) East Africa Programme in 2011, with the objective of promoting the development of a low carbon economy in the region by financing renewable energy and energy efficiency solutions in the private sector. The concessional loans under this programme are characterised by low interest rates, long tenor, and a long grace period with various local commercial banks such as Cooperative Bank of Kenya, Diamond Trust Bank and Commercial Bank of Africa having enlisted as partner banks.

More recently, Kenya Commercial Bank signed the Accreditation Master Agreement with the Green Climate Fund in October 2021, making it the first financial institution in the country to receive accreditation, which will allow it to finance eligible green projects from the Fund.

Finally, Kenya has developed a framework for, and encourages, the issuance of Green Bonds, with the Capital Markets Authority having issued its Policy Guidance Note on Green Bonds and the Nairobi Securities Exchange issuing its Green Bond Listing Rules in 2019. The National Treasury has also published the Kenya Sovereign Green Bond Framework under which it is expected that eligible green assets and projects identified from the national budget by Parliament will be financed in whole or in part from the proceeds of Sovereign Green Bonds. Identified projects include those aimed at developing local renewable energy production and/or achieving energy savings.

Mechanisms for Providing Incentives or Subsidies

Incentives through the KOSAP programme include Results-Based Financing (RBF), which is a donor-funded mechanism that sees the disbursement of funds to a recipient only when a pre-agreed set of results has been achieved. RBFs under KOSAP have seen the provision of Stand-Alone Solar Homes Systems for Households and clean cooking solutions to several remote areas in Kenya.

Other fiscal incentives effected under the Finance Act 2021 that became effective on 1 July 2021 include the exemption from Value Added Tax (presently levied at 16%) for specialised equipment for the development and generation of solar and wind energy, including PV modules, direct current charge controllers, direct current inverters and deep cycle batteries that use or store solar power.

The Energy Act is the principal law that governs the construction and operation of generation facilities, and became effective on 28 March 2019.

Other relevant legislation and regulations include:

• the Energy (Electricity Licensing) Regulations, 2012;
• the Public Private Partnerships Act;
• the Public Private Partnerships Regulations;
• the Public Procurement and Asset Disposal Act;
• the Physical and Land Use Planning Act;
• the Public Finance Management Act;
• the National Construction Authority Act;
• the Competition Act;
• the Civil Aviation Act;
• the Environmental Management and Co-ordination Act;
• the Income Tax Act;
• the Land Act;
• the Computer Misuse and Cybercrimes Act;
• the Employment Act;
• the Occupational Safety and Health Act; and
• the Scrap Metal Act.

Key applicable policies include:

• the Energy Policy, 2018;
• the Renewable Auctions Policy, 2021; and
• the Feed-In-Tariffs Policy 2021.

The Energy Act requires any person who wishes to generate electrical energy exceeding 1 MW to obtain a licence from EPRA, with an exemption where power generated is below 1 MW and is intended for the generator’s own use.

Further detailed licensing processes are captured in the Energy (Electricity Licensing) Regulations, which cover procedures for the application, issuance and suspension or revocation of the licence.

Applicants are expected to submit their application together with financial information, a business proposal, details of their technical expertise and proof of environmental approvals issued by the National Environmental Management Authority (NEMA) in the form of either an Environmental Impact Assessment Licence or an Acknowledgement of receipt of the Environmental Audit Report. Applicants are also expected to include a statement of the extent (if any) to which they consider it necessary for powers of compulsory acquisition of land to be given through the licence.

Key considerations for EPRA include:

• the cost of the undertaking and financing arrangements;
• the ability of the applicant to operate in a manner designed to protect the health and safety of its employees and users of the service;
• the technical and financial capacity of the applicant to render the service for which the licence is required;
• the proposed tariff; and
• any representations or objections made by the public following a public advertisement of the applicant’s intention to apply for the generation licence.

Developers for renewable energy projects not exceeding 20 MW in biomass, biogas and small hydro technologies to be undertaken under the FiT Policy, 2021 should first submit an Expression of Interest (EOI) to the Ministry of Energy for approval.

In addition to the generation licence discussed above, the following permits will also be required prior to constructing a generation facility:

• an electrical installation permit issued by EPRA for any person who wishes to carry out electrical installation work;
• an Environmental Impact Assessment Licence and Noise Permit issued by NEMA;
• registration of the contractor and the work site with the National Construction Authority;
• development permission issued by the county government; and
• approval for the height of any structure from the Civil Aviation Authority.

Public Participation

The principle of public consultation is enshrined in the Constitution of Kenya, which recognises the participation of the people as one of the national values and principles of governance and further provides that the State shall encourage public participation in the management, protection and conservation of the environment.

The Energy Act requires a person intending to make a licence application to place a 15-day public notice in at least two newspapers of nationwide circulation. The notice should inform the public of their right to make representations and objections to the grant of the licence, and to address these to EPRA.

All applications for generation licences should be accompanied by an Environmental Impact Assessment Licence issued by NEMA. The Environmental (Impact Assessment and Audit) Regulations, 2003 specifically require that public participation is mandatory during the process of conducting an EIA Assessment Study and the project proponent is obliged, in consultation with NEMA, to seek the views of persons who may be affected by the project. This impacts all projects that may have a significant adverse environmental impact (including power and infrastructure projects), whose proponents must prepare and submit a comprehensive project report that should include a strategic communication plan incorporating public participation during the study.

Most recently, the Physical and Land Use Planning Act (Development Control for Strategic National Projects) Regulations 2021 published under the Physical and Land Use Planning Act require a developer undertaking a strategic national project (which includes designated energy projects) to consult, publish, consider national security and hold stakeholders’ meetings before and during the development of the project. 

The general terms and conditions contained in the licence for electric power undertakings address the following key issues:

• provisions for bulk and retail tariffs or charges for electrical energy and capacity for different types of licensees and classes of consumers;
• provisions for the determination of charges for use of the transmission and distribution network services;
• the term of the licence;
• the maximum capacity of supply of the undertaking;
• the area of supply of the undertaking;
• a requirement to comply with all applicable environmental, health and safety laws;
• a stipulation that the licensee is subject to liability under tort and the contract laws;
• change of control, merger and disposal restrictions;
• financial and performance reporting obligations; and
• incident reporting obligations.

A generation licence also requires the licensee to comply with laws applying to the development, building, operation or maintenance of the undertaking. The generation licensee is further required to co-ordinate with the transmission or distribution network operator for the conveyance of electrical energy produced by it from its generating station or plant and to comply with the instructions, if any, of the system operator.

Amendment or Relaxation of a Term/Condition of Approval

The Energy Act prohibits EPRA from altering, revising or modifying a term or condition of the licence without the consent of the licensee.

The Form of Licence addresses circumstances when the licensee’s obligations may be relaxed, such as when the licensee is prevented from performing any of its obligations under the licence or permit due to force majeure. In this case, the licensee is obliged to notify EPRA of the obligations they are prevented from performing as soon as reasonably practicable, and EPRA has discretion to suspend those obligations for so long as the force majeure continues, subject to certain conditions.

The Energy Act provides that a person may develop energy infrastructure on, through, over or under any public, community or private land, subject to the provisions of relevant written law.

The applicant for a generation licence must demonstrate rights to the land on which the generation plant will be installed, either through ownership of the land or through a long-term lease or licence for the land. The same is applicable for solar rooftop projects, where the generator must demonstrate rights of access to the property owner’s rooftop if it is not the owner.

The Energy Act recognises that, for purposes of promoting energy investments, the national and county governments should facilitate the acquisition of land for energy infrastructure development. The Cabinet Secretary is therefore empowered under the Energy Act to apply for the compulsory acquisition of land where it is demonstrated that a licence holder reasonably requires such land for the purposes of constructing or operating energy infrastructure and has failed to acquire it by agreement after reasonable attempts to do so. To this end, the Energy (Electricity Licensing) Regulations require the applicant to state whether there will be a requirement for compulsory acquisition of land to be given through the licence.

Rights to the Surface of Land

The acquisition of surface rights to land that is privately owned is based on a willing buyer/lessee – willing seller/lessor basis. Parties negotiate the compensation based on existing market rates, subject to such premiums or discounts as they may deem necessary.

The Energy Act requires any person intending to develop any energy infrastructure to seek the prior consent of the landowner and, where such person cannot be traced, to place a public advertisement and announcements on local radio stations. If the owner of the land cannot be traced, the licensee is then obliged to deposit the compensation for such land into a special compensation fund.

The Land Act defines “compulsory acquisition” as the power of the State to deprive or acquire any title or other interest in land for a public purpose subject to the prompt payment of compensation. It is important to note the obligation under Article 40 of the Constitution, which recognises the rights of untenured occupants and records that provision may be made for compensation to be paid to occupants in good faith of land acquired even where they do not hold title to the land.

Another key piece of legislation is the Prevention, Protection and Assistance to Internally Displaced Persons and Affected Communities Act, which requires the government and any other organisation to prevent internal displacement, including in situations resulting from development projects. Any displacement and relocation due to development projects is only considered lawful if it is justified by compelling and overriding public interests and is conducted in accordance with the Act and the Great Lakes Protocol on Protection and Assistance to Internally Displaced Persons, of which Kenya is a signatory.

Finally, the Physical and Land Use Planning (Development Control for Strategic National Projects) Regulations, 2020 provide for instances where public land that is required for strategic national projects by a public body may be reserved. In these circumstances, the reservation of public land is required to be undertaken during or after the preparation of a national physical land use development plan or county physical land use development plan.

The Energy Act requires the removal of all infrastructure and the rehabilitation of the land, and all decommissioning activities must meet any good practices that may be prescribed by the Cabinet Secretary in regulations. Where energy infrastructure is removed, the surface of the land should be restored to its former condition as far as possible by the licensee; failure to do so may result in the restoration being carried out by the owner of the land, with costs recoverable from the licensee. The Draft Abandonment and Decommissioning Regulations, 2021 are expected to further provide guidance on decommissioning generation facilities.

NEMA may issue an environmental restoration order requiring the person on whom it is served to restore the environment as near as it may be to the state in which it was before the taking of the action that is the subject of the order. Any person who fails or refuses to comply with an environmental restoration order commits an offence and is liable to imprisonment or a fine.

The Scrap Metal Act was recently amended to provide for the disposal of critical national infrastructure, including physical and virtual assets or facilities related to electricity generation, transmission and distribution. The state entity responsible for the critical national infrastructure is now required to dispose of scrap metal from critical national infrastructure to the Numerical Machining complex and the Kenya Shipyard Limited for smelting into billets; where there is inadequate capacity at either of these facilities, the state entity is required to seek approval to partner with a local smelter directly.

Funding Decommissioning

The Energy (Electricity Licensing) Regulations require that an application for a generation licence shall include details of any expected subsequent substantial capital outflows, including major decommissioning costs.