Kenya is the economic powerhouse of the East African Community (EAC), which comprises Burundi, Kenya, Rwanda, South Sudan, Tanzania, and Uganda. The EAC by design is meant to be an East African version of the European Union (EU).
Kenya is on an ambitious quest to provide electricity for all its citizens by 2022. This article examines how solar power is helping to achieve this universal access goal. It does so by discussing policies and incentives Kenya is using to both encourage local consumption of solar energy and attract private sector solar investment in Kenya.
UNBUNDLING THE ENERGY SECTOR: STRUCTURE AND REGULATION
Like most countries, Kenya’s energy sector broadly comprises the Petroleum Industry, the Electricity Subsector, and the Renewables Energy Industry.
The Ministry of Energy and Petroleum (MoEP) sets policy for the entire energy sector.
MoEP has less than 100 employees and in the fiscal 2020/2021 budget unveiled in June 2020, the energy sector was allocated KSh 63.3 billion out of a total budget of KSh 2.7 trillion.
In terms of regulation, the Energy Act of 2019 created the Energy & Petroleum Regulatory Authority (EPRA) to succeed the Energy Regulatory Commission (ERC).
The Energy Act of 2006 Act created the ERC in 2007, but the ERC’s mandate did not cover upstream petroleum activities and coal.
Therefore, the 2019 Act expanded EPRA’s regulatory mandate to cover upstream petroleum and coal. This made EPRA the sole, independent regulator for the entire energy sector.
The Energy Act of 2019 supersedes all previous energy-related legislation and is now the main regulatory act for all energy-related matters.
Petroleum Industry
Before Kenya discovered commercial oil in 2012, its petroleum industry centered on upstream exploration and downstream activities.
Following a pilot oil production scheme in 2020, the government expected full oil production to commence in 2024, depending on the construction of the pipeline needed to export the oil.
The 100 percent government-owned National Oil Corporation of Kenya (NOCK) is the state agency involved in all petroleum upstream and downstream activities except wholesale transportation.
The government is currently mulling how to save the debt-ridden company from collapse.
The state-owned Kenya Pipeline Company (KPC) handles wholesale transportation of petroleum products through its network of pipelines and depots.
Electricity Subsector
Before the Energy Act of 2006, Kenya Electricity Generating Company (KenGen) was the state-owned utility responsible for power generation while state-owned monopoly Kenya Power (KP) was responsible for transmission, distribution and retail of electricity.
The 2006 Act carved out transmission from KP and transferred it to the Kenya Electricity Transmission Company (KETRACO) in 2008.
The electricity sector is now restructured into:
- Generation: Kenya Electricity Generating Company (KenGen)
- Transmission: Kenya Electricity Transmission Company (KETRACO)
- Distribution: Kenya Power (KP)
KenGen
KenGen, responsible for power generation, is a limited liability company listed on the Nairobi Securities Exchange (NSE). It is 70% state-owned and 30% privately-owned. KenGen is the biggest electricity producer but not the only power generator, it is competing with private companies in generation. Kenya allows Independent Power Producers (IPPs) to sell bulk electricity to Kenya Power under power purchase agreements. IPPs account for about 28% of Kenya’s installed power generation capacity. .
KETRACO
100 percent government-owned KETRACO is responsible for transmission from new transmission infrastructure.
Kenya Power (KP)
KP, formerly Kenya Power and Lighting Company (KPLC), is responsible for distribution and retail of electricity, and transmission from legacy transmission infrastructure. KP is 50.1% government-owned, the rest is listed on the Nairobi Securities Exchange (NSE).
According to a World Bank report, in 2018, KP had 11,270 staff, of whom 32 percent had short-term or contract status; about 20 percent of the staff were women (World Bank 2019).
Renewable Energy Industry
The Energy Act of 2006 created the Rural Electrification Authority (REA) in 2007 to accelerate Kenya’s rural electrification drive. Before the creation of the REA, KP reportedly did a poor job of electrifying the rural areas.
Then in 2019, the Energy Act of 2019 created the Rural Electrification and Renewable Energy Corporation (REREC) to succeed the REA. REREC’s mandate is to spearhead Kenya’s renewable energy drive, in addition to electrifying the rural areas.
UNBUNDLING THE ENERGY SECTOR: DATA AND POLICY
According to the latest audited financial results of KenGen, as of June 2020, Kenya had a total installed power generation capacity of 2,832 MW with a system peak demand of 1,926 MW, which implies a surplus generation capacity.
Furthermore, about 74% of this installed capacity came from renewables – primarily geothermal, hydro, and wind.
The launch of the Garissa solar plant in December 2019 added solar generation capacity to the mix.
Renewable Energy Mix
In December 2018, Kenya launched the National Electrification Strategy (NES), which is an ambitious roadmap developed in conjunction with the World Bank to provide electricity for all Kenyans by 2022.
At the time of the launch the government said 75% of Kenyas had access to electricity from both grid and off-grid connections.
Given that the government is poised to reduce reliance on fossil-fuel power generation, it will likely rely heavily on renewable energy to achieve this 2022 universal access goal.
As at April 2020, the renewable energy mix was reportedly the following:
- Geothermal: 48.4%
- Hydro: 35%
- Thermal: 4.2%
- Wind: 10.4%
- Imports: 1.1%
- Solar: 0.9%.
Feed-in-Tariff Policy
FiT tariffs are guaranteed prices that an offtaker pays an IPP over the term of the Power Purchase Agreement (PPA) for the renewable power the IPP produces.
FiT “provides investment security to renewable electricity generators, reduces administrative and transaction costs and encourages private investors in establishment of IPPs (Institute of Economic Affairs, 2015).
Kenya was the first country in Africa to introduce a FiT system in April 2008. The 2008 FiT Policy covered wind, small hydro and biomass sources, for plants with capacities not exceeding 50 MW, 10 MW, and 40 MW respectively, but it did not include solar.
The policy was first revised in 2010 to incorporate grid connected solar, and the latest revision in December 2012 incorporated off-grid solar.
The current tariffs are stated in Table I below.
Table 1. Feed-in Tarrifs (FiTs) <10 MW On-Grid Installed Capacity| Technology | Installed Capacity | Standard FiT (USD/kWh) | Inflation-linked Portion of Tariff | Minimum Capacity (MW) | Maximum Capacity (MW) |
|---|---|---|---|---|---|
| Wind | 0.5-10 | 0.11 | 12% | 0.5 | 10 |
| Hydro | 0.5 | 0.105 | 8% | 0.5 | 10 |
| Hydro | 10 | 0.0825 | - | - | - |
| Biomass | 0.5-10 | 0.1 | 15% | 0.5 | 10 |
| Biogas | 0.2-10 | 0.1 | 15% | 0.2 | 10 |
| Solar (Grid) | 0.5-10 | 0.12 | 8% | 0.5 | 10 |
| Solar (Off Grid) | 0.5-10 | 0.2 | 8% | 0.5 | 1 |
| SOURCE: Ministry of Energy and Petroleum (MoEP) | |||||
Given that the costs of solar and wind power generation have crashed in recent years, the government is reportedly considering replacing the FiT tariffs for solar and wind power with auction based tariffs. Another reason why the government is mulling auction based tariffs may be the surplus power generation capacity in the system.
Electricity Sector Challenges
According to the National Electrification Strategy (NES) launched in 2018, the key challenges to achieving universal access to electricity by 2022 are:
- High (national) grid connection costs
- High costs of supplying grid electricity to rural and peri-urban households
- Lack of appropriate incentives to attract private investors
- Inappropriate technical standards given the nature of settlements
- Difficulties and delays in obtaining rights of way and demands for high compensation
- Weak policy implementation capacity.
Kenya’s push for private sector investment in solar power is to tackle the grid connection challenges.
Solar Power Policy and Investments
Kenya’s hydroelectric and geothermal resources are much more developed than the country’s equally vast solar potential. To correct this situation the MoEP’s 2014 National Energy Policy Draft unveiled 20 policies and strategies to accelerate the consumption of solar energy in Kenya.
These strategies were to be implemented in three stages: Short Term (2014-2018), Medium Term (2018-2023), and Long Term (2014-2030). One long term policy is to “facilitate generation of electricity from solar by among others, funding, setting aside land, fast-tracking issuance of permits and licences, as well as acquisition of data and information so as to realise at least 100MW from solar by 2017, 200MW by 2022 and 500MW by 2030.”
However, Kenya currently has less than 100 MW of installed solar power generation capacity. Furthermore, many observers believe the 2022 universal access goal cannot be achieved without massive investment in off-grid solar power solutions. This is because a majority of rural households are still not connected to the national grid.
Therefore, the government is keen to attract more multilateral and private sector investment in four main areas: grid-connected solar power generation, off-grid solar power solutions (mini and micro grids), solar home systems (SHS), and solar equipment import substitution.
On-Grid Electricity Generation
Given the wide gap between currently installed solar generation capacity and the government’s 2030 target, there are considerable investment opportunities in independent power generation, which is typically fed into the national grid. The FiT policy and investment risk guarantees are the two major government incentives for IPP investment.
However, the much touted replacement of FiTs with auction based tariffs could discourage some IPP investment. As at 2018, there were 11 IPPs supplying almost 30% of total installed generation capacity.
Off-Grid Electricity Generation
Fourteen of Kenya’s 47 countries are mostly rural, low income, areas not connected to the national grid. The Kenya Off-Grid Solar Access Project (KOSAP) is the government’s five-year (2018-2023) master plan to electrify these 14 counties, which constitute about 20 percent of the country’s population. KOSAP is supported by the World Bank to the tune of USD150 million.
Incentivized opportunities exist for investors to participate via public-private partnerships (PPP) in the construction of mini-grids under a build, operate, and transfer (BOT) model – 157 mini-grids are planned. According to a World Bank Study, most privately developed mini grids in Kenya have installed capacity below 100kW (World Bank, 2017).
Solar (PV) Home Systems (SHS)
Typically, SHS can be large grid-tied systems or small portable, off-grid systems. The grid-tied systems may incorporate battery storage while the small systems may be fixed or movable. Worldwide, net metering is a retail electricity billing mechanism increasingly incorporated into SHS.
The Energy Act of 2019 introduced net metering in Kenya, and the Act limited it to SHS with a maximum capacity of 1 MW. Net metering has encouraged households and small businesses to embrace grid-tied SHS, and this has created sale and leasing opportunities for SHS equipment manufacturers and suppliers.
Even monopoly distributor Kenya Power (KP) is reportedly considering becoming a SHS contractor.
Local Manufacturing of Solar Equipment
According to the Energy and Petroleum Regulatory Authority (EPRA), Kenya imports over 90% of solar equipment used in the country due to lack of local production technology and capacity.
In order to correct this situation, the government offers two key fiscal incentives: Zero Import Duty and Zero VAT. There is zero rate on import duty for supply/import of temporary and permanent materials and equipment required for the construction of renewable energy projects.
Then under the Amended VAT Act (2014), there was no VAT on renewable energy equipment and accessories. However, in July 2020, perhaps in response to concerns voiced by local manufacturers about cheap imports, the Kenya Revenue Authority (KRA) re-introduced the pre-2014 VAT rate of 14 percent on off-grid solar equipment imports.
Despite all the incentives to boost solar power generation and consumption, there are concerns about emerging regulatory threats to the uptake of solar energy.
REFERENCES
Learning From Power Sector Reform: The Case of Kenya
By Catarina Godinho and Anton Eberhard,
World Bank Policy Research Working Paper 8819, April 2019; see http://documents1.worldbank.org/curated/en/451561555435655366/pdf/Learning-from-Power-Sector-Reform-The-Case-of-Kenya.pdf.
Situational Analysis of Energy Industry, Policy and Strategy for Kenya
Institute of Economic Affairs, April 2015
Nairobi, Kenya.
Mini Grids In Kenya: A Case Study of A Market At A Turning Point
The International Bank for Reconstruction and Development / THE WORLD BANK GROUP, November 2017
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