Over the last three years, Kenya’s energy sector has been subject to a series of reviews and has been subject to two moratoriums on Power Purchase Agreements (PPAs). The process began in 2021 with the Presidential Taskforce on PPAs which imposed a moratorium on new PPAs to prevent further commitments while the sector recalibrated. In its report, the Presidential Taskforce recommended the cancellation of unsigned PPAs. Next came the 2023 Senate inquiry, initiated to examine the issues raised by the Taskforce in greater detail. Most recently, the National Assembly imposed a moratorium on new PPAs in April 2023, as part of its inquiry into the energy sector.
The National Assembly’s Departmental Committee on Energy (the Committee) tabled its report titled “Report on the Inquiry into the Matter of the Reduction of Electricity Costs in the Country” on 25 November 2024 before the National Assembly.
The Committee’s report recommends lifting the PPA moratorium under strict conditions.
This article examines some of the Committee’s key recommendations, questioning their potential to effectively reduce electricity costs and foster sustainable growth and investment in Kenya’s energy sector.
Bold moves or missteps? A critical look at the Committee’s recommendations
Below, we summarize key recommendations and assess whether they are practical and likely to be effective in solving the challenges currently facing the electricity sector in Kenya.
Committee recommendation: Lifting the moratorium on new PPAs, subject to specific conditions
The lifting of the moratorium presents an opportunity to re-open Kenya’s energy market. However, the conditions attached to its lifting may be a challenge for private capital. These include the mandatory integration of battery energy storage systems (BESS) for all future wind and solar projects, the discontinuation of mid-lifecycle amendments without National Assembly approval, the requirement for new PPAs to be denominated in Kenyan Shillings, and the adoption of competitive procurement under an auction system modelled on South Africa’s Independent Power Producer Procurement Programme (IPPPP). As discussed later in this article, some of these conditions may inadvertently hinder the objectives they aim to achieve.
While the moratorium will be officially lifted once the Committee’s report is formally adopted by the National Assembly, it will not have a practical effect until there’s more clarity on the prescribed conditions precedent. This delay creates continued policy uncertainty for the sector.
Committee recommendation: Mandatory integration of battery energy storage systems in all wind and solar projects
Per the Committee’s recommendations, all wind and solar projects must integrate BESS to address intermittency and maintain supply-demand equilibrium. Existing wind and solar power producers must also upgrade their plants with BESS within 24 months of the report’s adoption, or face termination of their PPAs.
While aimed at addressing intermittency, this recommendation presents several challenges:
- Traditionally, the state through Kenya Power and Lighting Company (KPLC) and Kenya Electricity Transmission Company (KETRACO) was responsible for the national power grid. However, this recommendation shifts the costs of grid management and upgrades to Independent Power Producers (IPPs). This shift likely stems from underinvestment in the grid by the public sector. Consequently, potential investors of new projects will factor this increased risk into their pricing, potentially leading to higher electricity costs.
- The proposed 24-month timeline for existing plants to comply with the new grid requirements is unrealistic. This is due to several factors, including:
- Financial constraints: Significant capital investment would be needed for upgrades;
- Supply chain limitations: Procuring necessary equipment and materials within this timeframe may be challenging;
- Technical complexities: Conducting the required studies and implementing the changes takes time;
Furthermore, most existing PPAs already include contractual protections against changes in law and political events. Forcing these changes would likely trigger these provisions, leading to claims against KPLC and the government for cost recovery. It is crucial to recognise that PPAs have established scopes and tariffs. Unilateral adjustments cannot be imposed on IPPs.
- The blanket mandate for BESS fails to consider the viability of alternative grid stabilisation methods, such as demand-side management, grid reinforcement, or pumped hydro storage. These alternatives might be more cost-effective and environmentally sustainable in certain contexts.
Committee recommendation: All new PPAs must be denominated in Kenyan Shillings
The Committee’s desire for PPAs to be denominated in shillings presents significant challenges in attracting and retaining private investment in the energy sector for the following reasons:
- Currency risk: The primary challenge is the volatility of the Kenyan shilling against the US dollar and other foreign currencies. Investors and lenders who primarily operate in USD face the risk of their investments and returns being eroded if the shilling depreciates. This makes projects less financially viable and increases the perceived risk for investors;
- Increased financing costs: To mitigate currency risk, investors and lenders may demand higher returns or interest rates on shilling-denominated PPAs. This increases the overall cost of financing for energy projects, potentially making them more expensive than those denominated in USD;
- Limited local capacity and hedging options: Developing economies often face challenges in securing affordable, long-term local currency financing for energy and infrastructure projects due to financial systems that lack the capacity to provide the necessary sizeable and long-term funding. This is compounded by limited and expensive hedging instruments available to mitigate currency risk. This makes it difficult for investors to protect themselves against potential losses from exchange rate fluctuations;
- Reduced investor confidence: Mandating local currency PPAs can create uncertainty and discourage foreign investment. Investors may perceive this as government intervention and become hesitant to commit capital to projects with increased currency risk.
While the government’s intention to promote the use of local currency is understandable, it is crucial to carefully consider the potential impact on investor confidence and the overall development of the energy sector. Striking a balance between promoting local currency usage and ensuring a conducive investment climate is vital for the long-term sustainability of Kenya’s energy market.
Committee recommendation: Indicative tariffs for both FIT and auction systems and all PPAs must be ratified by the National Assembly
Subjecting tariffs to Parliamentary ratification could expose the process to political influence, paradoxically reducing transparency and predictability for investors. This level of micromanagement by Parliament undermines the efficiency and expertise of legally established regulatory bodies, jeopardising the delicate balance between consumer needs and investor confidence. This intrusion risks delaying critical projects, discouraging private investment, and ultimately stifling the growth of the energy sector.
Committee recommendation: Energy projects to be competitively procured under an auction scheme within 6 months
The Committee’s recommendation for mandatory competitive auctions for all energy projects within a six-month timeframe is a premature and potentially counterproductive measure. While auctions can promote transparency and cost-efficiency, a rapid shift without careful consideration of existing projects and the broader energy landscape could create significant challenges for Kenya’s energy sector.
It is important to acknowledge that auction outcomes are heavily influenced by investors’ risk assessments and the allocation of risks between the public and private sectors. The Committee should be cautious about comparing Kenya’s renewable energy auction outcomes with those of other countries, as low tariffs are often achieved through a more equitable distribution of risks. The government cannot impose additional requirements, such as mandatory battery energy storage or changes to tax policies, without considering the impact on tariffs. A balanced approach to risk allocation is essential to attract private investment and achieve competitive tariffs in renewable energy auctions.
The recommendation also overlooks the existing 2021 Renewable Energy Auctions Policy (REAP). Requiring the Ministry and EPRA to draft a new REAP within six months risks redundancy and rushed policymaking, potentially compromising the framework’s quality and effectiveness. Instead, building upon the existing REAP and refining it based on the Committee’s recommendations would be a more efficient and informed approach.
Furthermore, not all renewable energy projects and technologies are well-suited to auctions. Feed-in Tariffs (FiTs) still have a vital role to play, particularly for small-scale projects and less competitive technologies such as biomass and mini-hydro. These niches may not attract robust competition in an auction-based system, yet they are critical to diversifying Kenya’s energy mix and supporting localised energy solutions.
While auctions can be a valuable tool for procuring energy projects, a mandatory shift without addressing the concerns raised above could negatively impact Kenya’s energy sector in the short term. A more measured approach is necessary, one that balances cost efficiency with the need to foster private investment, support local developers, and ensure a smooth transition for existing projects.
Conclusion
The Committee’s review and recommendations raise critical concerns about their practical implications for reducing electricity costs and fostering a conducive investment environment. Many of the proposed reforms risk exacerbating the very issues they aim to resolve. For instance, measures such as the proposed parliamentary ratification of tariffs and PPAs may create additional bureaucratic hurdles and investment uncertainty, potentially increasing project costs and delaying implementation.
While auctions for energy procurement have been proposed as a key solution, they are not a silver bullet. Auctions can enhance transparency and drive cost reductions for mature technologies like wind and solar. However, without a phased approach that includes maintaining incentives for emerging technologies and ensuring timely grid upgrades, auctions risk sidelining small-scale developers, delaying renewable integration, and undermining longer-term energy security.
Despite these concerns, the sector still offers significant opportunities for private investors and developers. Initiatives like bulk procurement of heavy fuel oils, transitioning to LNG, and prioritising transmission infrastructure through PPPs offer clear investment pathways, promise reduced system losses, and unlock regional power trade opportunities. Additionally, emerging areas like green hydrogen and captive power plants present opportunities for forward-thinking developers to drive innovation and sector growth.
Policymakers must engage in further consultations with investors and industry experts to refine the recommendations made by the Committee, ensuring a balance between cost reduction, investor confidence, and sustainable energy development. Without these measures, the reforms risk deterring investment and exacerbating Kenya’s energy challenges rather than addressing them.
