KENYA: ENERGY SECTOR UPDATE – CABINET LIFTS THE PPA MORATORIUM
On 29 March 2021, H.E. Hon. Uhuru Kenyatta, the former president of the Republic of Kenya, appointed a Taskforce for the Review of Power Purchase Agreements. The core mandate of the Taskforce included undertaking a comprehensive review and analysis of the terms of all Power Purchase Agreements (PPAs) between Kenya Power and Lighting Company Limited (KPLC) and developing a strategy for engagement with the independent power producers (IPPs) in order to achieve a reduction in the cost of electricity.
A moratorium was additional placed on the renewal of expiring PPAs and all PPAs not concluded as of 29 March 2021, including any related letters of support and legal opinions pending issuance by the Attorney-General.
The Taskforce completed its mandate and submitted its recommendations to the President on 29 September 2021 and a committee to oversee the implementation of the recommendations was also appointed.
Two years after the formation of the Taskforce, the Cabinet has now published a dispatch confirming that it has resolved to lift the moratorium.
Lifting of the moratorium: a welcome development but many questions remain unanswered
While the lifting of the moratorium is a welcome development for the energy sector in Kenya, there are several unaddressed questions that arise with the lifting of the moratorium.
- Is the intention to “suspend” or do-away with the Feed-in-Tariffs Policy (FIT)?
The dispatch explains that Cabinet has approved a framework for the ‘transparent engagement of independent power producers in keeping with the Renewable Energy Auction Policy [REAP]’ and ‘that this is a break from the current negotiated procurements or feed-in-tariffs’.
Seeing as an update to the 2012 Feed-in-Tariff policy was published in January 2021, it is unclear how biomass, biogas and small hydro projects will be procured if the intention is to “suspend” or do-away with the 2021 FIT. Also, what happens in relation to FIT approvals issued to projects with signed PPAs procured pursuant to the now defunct 2012 FIT regime?
- What steps are to be taken to ensure Kenya does not find itself in a generation capacity deficit?
The 2021 FIT was published together with a Renewable Energy Auction Policy (REAP). REAP has not yet been operationalized and will require significant preparatory work before KPLC and the Government can invite bids on potential renewable projects. There is therefore little clarity on how Kenya will ensure that it continues to meet its rapidly growing energy needs in the short term.
Taskforce process: positives outcomes
- KPLC and the Government approached the PPA review and renegotiation exercise within the framework of the signed PPAs. This is a win for the rule of law and a testament to the maturity of Kenya as a country that upholds the principles of contractual agreements.
- Win-win outcomes. The Government and the Taskforce have engaged IPPs, the public and other stakeholders throughout this process and efforts are being made to engage IPPs on a bi-lateral basis to explore win-win outcomes that will result in lowering the cost of electricity but will not disrupt the fundamentals of the signed PPAs.
- KPLC reforms. There have been tangible steps and progress made towards reducing losses at KPLC. The government has also formally declared that KPLC will operate as a commercial entity and that its previous social mandates, such as the last mile programme, will be the responsibility of other state entities.
Taskforce process: The flip side of the coin
- The Taskforce process has done some damage to Kenya’s image as an investor-friendly jurisdiction. Private capital has a long memory and the steps taken by the Government during this process will remain at the back of the minds of investors and potential investors for many years to come. This may result in more stringent bankability requirements being imposed on future projects.
- The moratorium slowed down the development of power projects. Kenya’s demand for power has been on the rise as the economy recovers from the effects of the COVID 19 pandemic while many developers scaled down operations during the moratorium or were forced to abandon their projects. Developing power projects is a difficult and lengthy task and the balance between demand growth and the time it takes to develop and onboard new projects has been upset. The Government will have to accelerate the development of new generation capacity to ensure that economic growth does not suffer due to the undersupply of electricity. However, it remains to be seen whether developers will be willing to engage with the Government and do what they can to fast-track projects.
- Uncertainty caused by the Taskforce stalled the development of policies, laws and regulations meant to give effect to the Energy Act, 2019. For example, the market is still waiting for the implementation and enactment of regulations of the REAP and the 2021 FIT Policy. Another long-awaited piece of legislation is the enactment of regulations to allow the implementation of wheeling arrangements. Wheeling can enhance the accessibility of affordable and environmentally friendly electricity. Wheeling also has the potential of creating opportunities for developers whose projects will not be required by the grid going forward to have a way of monetizing their investment.
In conclusion, the lifting of the moratorium on PPAs is a step in the right direction to enhance Kenya's energy security. However, it will be important to address the negative consequences and accelerate the development of power projects to meet Kenya's growing demand for power and reduce the cost of electricity for consumers.
You can read our previous alerts on the establishment and recommendations of the Taskforce here and here.