Africa has tremendous opportunities for the growth of renewable energy technologies in the coming decades. The key to mobilizing these opportunities is to de-risk and attract private sector investments in renewable energy. This can be achieved by governments introducing new legal instruments and enforcing institutional changes to bridge market gaps, thus effectively accelerating and attracting investments in the African renewable energy field. This paper focuses on Kenya, an African nation which has successfully achieved this accelerated growth in renewable energy technologies. The paper briefly discusses the energy reforms that took between 2006 and 2019 and draws a comparative analysis between Karl Mallon’s “Ten Features of Successful Renewable Markets” and the legal instruments and institutional changes implemented by the Kenyan government, with a focus on the specific financial and regulatory instruments that have fostered an environment conducive to investment in renewable energy, such a feed-in-tariff, tax-relief, guarantees, net-metering and long-term commitments.
Africa is home to some of the world’s largest natural resources. It accounts for over 11% of the world’s crude oil and natural gas reserves and ranks 18 in the regions with the largest renewable energy resources (Nduta, 2019) yet, it also accounts for half of the world’s power deficit, with an average electrification rate under 30% (Tagliapietra, 2018). With a current population of over 1.2 Billion, Africa’s population is expected to double by 2050 (World Population Prospects 2019, n.d.) and to comprise 39% of the world population – a significant increase from the current 17%. This substantial demographic growth, combined with an increasing energy demand to satisfy Africa’s socio-economic growth needs, will exert unprecedented stress on the national energy capacity of most African countries. One of the aims of African energy policy must be to ensure universal access to affordable electricity and the critical policy to bring this aim to reality is to invest in clean energy sources
In the literature it is frequently stated that the availability of reliable and affordable electricity has a major effect on development (Associates, 2014). As one researcher stated, lack of energy access presents a formidable, but not insurmountable, challenge to African development (Amadou Sy, 2017).
While this may sound like a grim portrayal of the energy security outlook on the African continent, there is a silver lining. To address their current energy shortage and to grow their energy supply to accommodate forecasted demand, many African countries are turning to renewable energy and exploiting their abundant renewable resources. Countries like South-Africa, Kenya, Nigeria, Morocco, Ghana, and Ethiopia have developed national energy policies and plans to meet their ambitious vision of satisfying their national energy demands almost entirely from renewable energy sources and are making head-way in delivering on their vision of electrifying their nations. This vision is welcome and supported by developed and industrial countries currently locked-in to their intense carbon-emitting socio-economic realities, unable to be afforded a similar clean-slate renewable energy opportunity as the one that exists on the African continent.
2. Africa has a high renewable energy potential despite its low electrification rate and lack of funds
The abundance of Africa’s renewable energy resources (i.e. solar, wind, hydro, geothermal and biomass) provides a tremendous potential and opportunity to achieve energy security and to electrify the continent using renewable energy technologies. In fact, a study shows that the potential for solar energy in Africa is 1 TW (Terawatt), 350 GW for hydroelectric, 110 GW for wind and 15 GW for geothermal (Atlas of Africa Energy Resources, 2017) and exploiting this potential has already started, with numerous large-scale renewable energy projects being operational across the continent. For example, Morocco houses the “Noor Solar Complex”, the largest concentrated solar power plant project in the world, located in Agadir and producing 500MW (The biggest solar projects in Africa, 2019). In Angola sits the “Lauca Hydropower Plant” in Africa with an operating power capacity of 2,070 MW (Mbogo, 2018). Whereas further afield along the East Africa Rift System, Kenya developed the “Lake Turkana Wind Power Project”, the largest single installation on the African continent, producing 310MW of wind power (Lake Turkana Wind Power Project, Loyangalani, 2018), as well as the “Olkaria 5 Project” generating a sizeable 140MW of geothermal power, (Kiruti, 2019) and the “Gorge Farm Energy Park” in Naivasha, producing 2 MW of electricity from biomass (Kamadi, 2017).
Despite the numerous renewable energy projects completed and currently underway, Sub-Saharan Africa suffers from the lowest electricity access rate at only 24% (Ifelebuegu & Ojo, 2018), proving that Africa’s renewable energy potential remains significantly unexploited. While the main obstacle in Africa’s renewable energy ambitions is cost, and while most African countries are generally unable to finance large-scale renewable energy projects on their own, certain African countries have been successful in attracting high levels of investment and in raising policy interest from the private sector. The latter’s decision to invest in renewable energy projects is sustained profitability, or secured return on investment, assessed in conjunction with the host country’s renewable energy policy, guarantees, and renewable energy plans for each type of renewable energy technology.
Kenya: a renewable energy champion in Africa
With renewable energy making up a staggering 70% of Kenya’s energy mix in 2018
(Onyango, 2018) and as high as 87% as of January 2020, (Zarembka, 2020) one would be curious to see what steps Kenya took to shape its renewable energy landscape and attract private sector investment. Upon analysis, it becomes evident that the legislative framework and institutional changes Kenya put in place are conducive to foreign investment and allowed it to become at the forefront of the renewable energy transformation for on-grid, off-grid and micro-grid projects.
Driven by a general lack of funds, Kenya has had a history of relying on external sources of financing in the form of loans and grants from donors. These have reached about 42% of Kenya’s national spending budget in 2001 (Njeru, 2003). The disbursements of such funds were conditioned on the Kenyan government fulfilling several reforms, including to its energy sector. These donor funds would be withdrawn if the government failed to fulfil these reforms.
The roadmap to Kenya’s energy reform can be said to have started in 1996 when power generation was unbundled from transmission and distribution, generation was liberalized, and reasonable tariffs were introduced. This was mainly driven by the need to separate policy and regulatory functions from commercial activities as a precondition to releasing large donor funds from the International Monetary Fund (IMF) and the World Bank (Godinho & Eberhard, 2019).
At the time, Kenya’s electrification rate stood at less than 10%, much like the majority of African countries at the time (Kenya – Access to Electricity, 2020), but a series of significant governmental and institutional reforms between 1996 and 2008 were fundamental to set the scene for Kenya to further its electrification ambitions in general and to achieve them using renewable energy resources in particular.
3.1. Roadmaps of energy reforms in Kenya
Up until 2006, Kenya’s energy sector had been governed by the Energy Act (2006) which had consolidated previous regulations in force (i.e. Electric Power Act (1997), Petroleum Act Cap 116) and had established the Energy Regulatory Commission (ERC) and the Rural Electrification Agency (REA). Back then, the Energy Act provided for licensing Independent Power Projects (IPPs) connected to the national grid but did not provide for off-grid or microgrids.
In 2008, Kenya launched its Kenya Vision 2030 (Kenya, 2008), which had identified “Energy” as a key foundation to meeting its vision and one of the key enablers to economic, social and political growth. It is not a coincidence that in the same year, Kenya reformed its Kenya Power and Lighting Company (KPLC or Kenya Power), its main power company. It separated the functions of generation, transmission, and distribution of power and assigned the Kenya Electricity Generation Company (KenGen) the responsibility for power generation, the Kenya Electricity Transmission Company (Ketraco) the responsibility for transmission and infrastructure development, and maintained for KPLC its existing responsibility for distribution. This institutional power overhaul achieved successful results. In less than 6 years from its founding, Ketraco managed to add over a 1,000 km of transmission lines, which allowed Kenya to efficiently distribute the power generated from large-scale projects such as the Lake Turkana Wind Power Project, the largest single wind power installation on the African continent, producing 310MW of wind power. Working in sync with other power stakeholders, Ketraco is on its way to meeting its part of Kenya’s Vision 2030 by adding 8,000 km of transmission lines.
In March 2019, Kenya passed The Energy Act (2019), which sets out the laws relating to the production, transmission, distribution, and sale of energy, outlines the responsibilities of the various governmental bodies and authorities, and regulates the exploitation of renewable energy sources, petroleum and coal.
As evidenced in Part 6 of the Energy Act, which deals with renewable energy, the concept of net-metering was adopted. This came at an attractive time when the cost of solar photo-voltaic (PV) panels reached an all-time low globally at USD 0.03/kWh (Falling Renewable Power Costs Open Door to Greater Climate Ambition, 2019), thereby lowering the cost of a grid-supplied solar PV project. According to Section 162 of The Energy Act (2019), net-metering allows Kenyans to generate their own electricity and to offset the power they utilize from the national grid during peak hours, from the excess power they generate to the grid during off-peak periods. The Energy Act has capped the net-metering system to 1MW, beyond which it would consider the electricity producer large enough to enter into a Purchasing Power Agreement (PPA) with Kenya Power. The drive behind the net-metering system is to further encourage households and businesses to invest in renewable energy technologies as a reliable and uninterrupted source of energy.
The Energy Act also dissolved the Rural Electrification Authority (REA) and replaced it with the Rural Electrification and Renewable Energy Corporation (REREC) which is mandated to “spearhead Kenya’s green energy drive, in addition to implementing rural electrification projects” and the Renewable Energy Resources Advisory Committee (RERAC), which is in charge of regulating the development of the renewable energy policy.
Under the Energy Act (2019) the REREC has a wider responsibility compared to those of the REA which only addressed rural electrification problems in the past. The REREC is also a key entity in the development of policies, conducting research and development efforts, promoting international cooperation, and encouraging renewable energy in all of Kenya.
This division of responsibility was helpful for renewable energy investors and players interested in promoting their businesses in Kenya as either expert consultants, developers, contractors or suppliers of renewable energy technological components.
To further attract foreign investment in renewable energy in Kenya, Section 74 of the Energy Act mandated the Ministry of Energy & Petroleum to develop an “inventory and resource map for renewable energy resources” which would be made available to interested investors and would save time and cost that would have otherwise been taken up in self-performing resource exploration and assessment efforts.
3.2. Kenya satisfied private investors’ requirements
Being part of the Sustainable Energy for All Initiative (SE4All) launched by the United Nations, Kenya developed in 2016 an Investment Prospectus (Sustainable Energy For All – Kenya Investment Prospectus, 2015) targeted to foreign investors, in which it highlighted the reasons Kenya was an attractive renewable energy investment destination.
The report acknowledged the importance of the ease of doing business as a metrics to attracting foreign renewable energy investors, as well as tax regimes and incentives (e.g. “exemption from VAT on plastic bag biogas digesters; Zero rate on import duty and no VAT on renewable energy equipment and accessories”), enforceability of laws and contracts, ability to repatriate profits, existence of bilateral trade agreements, Multilateral Insurance Guarantee Agency (MIGA) – insurance cover for investment which provides political risk insurance, and fair dispute resolution forums (e.g. the Nairobi Centre for International Arbitration).
This sentiment can be analyzed independently by comparing Kenya’s renewable energy policies and actions to lessons learned from other countries.
In his book, Karl Mallon studied numerous failed renewable energy policies across different countries and devised a list consisting of “Ten Features of Successful Renewable Markets” (Mallon, 2006). Each of the ten features below is assessed in conjunction with Kenya’s renewable energy policies.
- Transparency: Kenya’s support schemes and policy frameworks are visible and accessible. The size of the market, the prices paid for renewable energy, and the duration of the support schemes are known.
- Well-defined objectives: Kenya’s particular objective is to increase the electrification rate especially in rural areas, by encouraging the implementation of off-grid and micro-grid renewable energy. This is evident in Kenya’s Vision 2030 and Kenya’s National Electrification Strategy (2018).
- Well-defined resources and technologies: Kenya has promoted equal use of wind, solar, hydropower and geothermal power in the policies it has developed and enacted. The support schemes did not offer an advantage for the use of one renewable energy technology over another. Kenya has however gradually lowered its interest in hydropower at the expense of geothermal power as a result of the draughts it had been intermittently experiencing due to global warming.
- Appropriately applied incentives: Kenya first introduced its Feed-in-Tariff policy in 2008 and had evolved it in 2010 and 2012, allowing new technologies to be included and to accommodate financial market trends, without affecting existing PPAs.
- Adequacy: Kenya’s policies have proven successful in leveraging private sector investment. The investment periods are long enough for project investors to get a return on equity. Until 2015, the country had received private investment in excess of US$2.3 billion through the completion of 12 Independent Power Projects with a total capacity of 1,106 MW.
- Stability: Kenya’s support scheme environment seems to be avoiding a “boom-bust” cycle and is therefore regarded as stable. First, there are large amounts of unexploited resources in geothermal, solar, wind, hydro, and biomass which provide for an ample and steady supply of resources. Second, the support schemes in Kenya have historically been successfully fulfilled and have not had a time restriction. Third, there is not a single target/cap which would result in development rushes followed by an abrupt halt. Rather, Kenya’s Vision 2030 in relation to energy and power is to achieve 100% electrification rate across the country from renewable energy sources. Further, there are continuous developments which are organically creating longer-term targets such as replacing combustion engine vehicles to fully electric-vehicles, a move Kenya is considering (Kuhudzai R. J., 2020), which would require a new power infrastructure program to electrify cars in addition to the current focus on electrifying households and small businesses. Forth, the support schemes in Kenya did not stipulate a number of off-takers, which would have otherwise created excessive competition.
- Contextual frameworks: Kenya has an overarching national policy objective to guide all policymaking, one that is designed to fulfill its Vision 2030. To that end, Kenya enacted consistent laws, drafted consistent strategies, and implemented plans that were conducive to and promoted an environment for investment in renewable energy. These policies and measures were consistently implemented at all tiers of government agencies as can be demonstrated below:
- Recognizing that climate change is a threat to its national development, in 2010, Kenya developed a National Climate Change Response Strategy (NCCRS) which included a suite of strategies to respond to the challenges climate change is posing to its socioeconomic development.
- The Geothermal Development Company (GDC) was established as a semi-state company responsible for the exploration of geothermal sites and the development of steam energy. The establishment of the GDC has helped investors minimize risks and costs associated with identifying thermal sites and allowed them to enter the steam market at a more advanced stage.
- In 2015, Kenya presented its Intended Nationally Determined Contribution (INDC) to the United Nations, in response to decisions adopted at the 19th and 20th sessions of the Conference of the Parties to the United Nations Framework Convention on Climate Change (UNFCCC) and as set out in Article 2 of the Convention.
- In the same year, Kenya issued its National Energy Policy (2015) to “ensure affordable, competitive, sustainable and reliable supply of energy to meet national and county development needs at least cost, while protecting and conserving the environment”. Kenya then enacted the Climate Change Act (2016) which provided for “a regulatory framework for enhanced response to climate change; to provide for mechanism and measures to achieve low carbon climate development, and for connected purposes”.
- In line with Kenya’s Vision 2030, Kenya developed a National Electrification Strategy (2018) which included a detailed roadmap to achieving universal access to electricity.
- In 2019, the Energy Act (2019) was enacted. The Act was designed to “consolidate the laws relating to energy, to provide for National and County Government functions in relation to energy, to provide for the establishment, powers and functions of the energy sector entities; promotion of renewable energy; exploration, recovery and commercial utilization of geothermal energy; regulation of midstream and downstream petroleum and coal activities; regulation, production, supply and use of electricity and other energy forms; and for connected purposes.”
- Energy market reform: Suitable certification and licensing requirements were developed for renewables in Kenya. Also, the costs of generation, infrastructure, losses, and taxation needed to deliver power to any locale are transparent, thus allowing fair pricing comparison to renewable energy.
- Land use planning reform: Section 74 of the Energy Act (2019) mandated the Ministry of Energy & Petroleum to develop an “inventory and resource map for renewable energy resources” which would be made available to interested investors.
- Equalizing the community risk and cost–benefit distribution: This is a societal issue that was not clearly addressed by Kenya. Though the acts, strategies, and plans include the creating of job opportunities, training and new career paths for the local communities in which renewable energy projects are implemented, Kenya has not clearly mandated that policy frameworks provide incentives for local employment content, nor has the potential impacts for local and regional communicates been maximized within the policy frameworks.
3.3. The renewable energy policies that mobilized private investment in Kenya
The Renewable Energy Policy Network for the 21st Century (REN21) has indicated in its annual report issued in 2018 that Kenya has renewable energy targets for its power sector as well as an Intended Nationally Determined Contribution (INDC). Its regulatory policies in support of renewable energy include feed-in tariff and net metering, whereas its fiscal incentives and public financing policies include tax incentive, reductions in VAT, energy production payment, as well as public investments, grants, and capital subsidies.
In order to assess which of these support schemes and instruments helped Kenya attract foreign investment, we turn to a study undertaken in 2019 (Polzin, Egli, Steffen, & Schmidt, 2019) which looked at the effect of 18 different renewable energy support instruments such as fiscal, market-based and regulatory instruments on the investments’ risks and returns. The general conclusion is that support instruments that reduce risk have a stronger positive impact on foreign investment.
Of these 18 support instruments, research shows that Kenya has undertaken the following six instruments which were effective in minimizing risk and in increasing returns for private investors:
- Financial/Fiscal Instruments: Feed-in-tariff, Tax relief, guarantees, Subsidized investment funds
- Regulatory instrument: Net-metering
- Other: Long-term targets/commitments.
Feed-in-Tariff, which is a financial policy that offer a long-term agreement remunerating the sale of renewable energy electricity at a fixed above-market price (Abolhosseini & Heshmati, 2014), is the most widely implemented renewable energy policy instrument globally. It reduces price risk for investors and guaranteed a stable return on investment over a specific duration, which is why FITs are said to lower financing costs. Elements of the FIT policy such as duration, tariff level, premium, cap and grid-connection are important elements of the FIT policy. In 2008, Kenya’s Ministry of Energy introduced the “Feed-in-Tariff (FIT) policy”. This was one of the key milestones that catalyzed foreign investment in the renewable energy arena. This encouraged local and foreign enterprises to develop renewable energy projects and sell the power generated through the national grid or a micro-grid at a tariff fixed for an agreed period. The certainty of price has enabled investors to accurately forecast their costs and profit margins. The duration of the FIT policy in Kenya is 20 years, which lowers investment risk significantly compared to other countries with a 10 to15 year FIT policy. The tariff is fixed rather than variable and thus eliminates risk completely and improves the return on investment. Kenya’s FIT policy also guarantees grid access, thereby lowering capital cost and increasing returns to investors.
3.3.2. Tax relief
This financial policy allows for the full or partial deduction of tax obligations on renewable energy investments (Criscuolo & Menon, 2015). There are mostly positive evidence supporting this instrument which increases return on investment. Under Kenya’s VAT Act (2013) and amended VAT Act (2014), investors in renewable energy are exempted from value added tax and import duties for supply/import of temporary and permanent materials and equipment required for the construction of renewable energy projects. According to the Act (IEA/IRENA, 2016):
- “Solar cells and modules that are not equipped with elements such as diodes, batteries or similar equipment are free from import duty and exempt from VAT;
- PV semi-conductor devices including PV cells and light-emitting diodes, together with wind-powered generating sets that have already been assembled, are subject to a 5% import duty and 16% VAT;
- Wind engines (wind mills) are free from import duty and exempt from VAT; and
- Hydraulic turbines and water wheels are free from import duty but pay 16% VAT.”
3.3.3. Subsidized investment loans/funds
Policies that provide ad-hoc financing subsidies to investors reduce cost of debt and risks and thereby increase return on investment. Between 2005 and 2017, Kenya has received close USD to 2.5 billion in investment loans and funds from various organizations (OECD, n.d.). Most of the investments were diverted to wind and geothermal projects, as well as transmission and distribution.
This financial instrument offers guarantees to renewable energy investors that all the electricity generated will be purchased (Becker B, 2013). Although it does directly increase return on investment, it reduces risk. Working in conjunction with the African Development Fund (ADF), Kenya has provided a fair share of Partial Risk Guarantees. These are risk mitigation instruments that protect private investors from the risk of the government defaulting on its contractual obligations. These guarantees are utilized in Kenya and have previously supported the Kenyan Government’s on-time delivery of a transmission line and helped it reduce the risk of it being unable to meet payment obligations (AfDB, 2013).
Net-metering is a regulatory system that allows two-directional electricity to flow between the national grid and the customers. When power from the customers’ renewable energy resource feeds into the national grid, the meter registers power credit for the customers to use from the grid at a later date, thereby “netting” the electric meter (C, et al., 2011). In Kenya, this support scheme was introduced in 2019 and was welcome by the local community. Though it is considered as a threat to investors aiming to take advantage of the Feed-In-Tariff, as it would reduce power demand, it increased demand for small-scale micro-grid and household renewable energy projects, and hence renewable energy business, as it would allow for increased power consumption, reduce price, and provide uninterrupted power.
3.3.6. Long-term targets
The effectiveness of long-term commitments made by policymakers is measured by analyzing how prior commitments were translated into actual targets. Naturally, the commitment of a certain government in growing its renewable energy base is one of the most crucial policy which indirectly reduces investor risk. The credibility of policymakers in achieving long-term targets is further reinforced by past conduct. As of January 2020, Kenya’s renewable energy has reached a staggering 87% of the energy mix generation (Kuhudzai R. J., 2020), which is in line with the Kenya Vision 2030. With this proven credibility by the Kenyan leadership, and with further ambitious plans to direct renewable energy growth into the transportation sector, investors are encouraged in setting up businesses and seizing opportunities in Kenya.
4. Conclusion and Policy Implications
By implementing institutional changes and by applying the right legal instruments, Kenya succeeded in promoting a renewable energy environment conducive to foreign investment. It attracted international renewable energy stakeholders and investors and grew the renewables’ share of Kenya’s energy mix to nearly 90%. This journey, which was made possible by a strong Kenyan leadership and lack of bipartisanship in political decision-making, underwent the following remarkable milestones:
- The government did not hesitate to enact legislations designed to reform the power sector and revising them as needed to maintain attractiveness and diversification of renewable energy technologies (Eberhard, 2018).
- The government drafted and implemented its ambitious long-term Vision 2030 which included energy targets achieved by improving electricity connectivity and growth in the off-grid solar power sector. This has largely contributed to an increased electrification rate from 20% in early 2010 to 70% in late 2018 and as high as 87% in 2020.
- As with every plan, frequent monitoring and controlling is key in maintaining course. The government ensured continuous displacement of carbon-emitting energy sources through a diversified renewable energy mix, shifting focus from hydropower to geothermal power which, as of 2018, contributed to 48% of Kenya’s energy generation.
Kenya continued to offer favorable policies and a receptive legal and investment environment that accommodates the requirements of the private investor in the power sector. Private investors can properly structure their projects due to an investor-friendly legal, regulatory and tax environment. Kenya’s feed-in-tariffs, tax reliefs, guarantees, net-metering, subsidized investment funds, and long-term renewable energy targets have proven to be effective at attracting investment and minimizing risks. These risks are properly mitigated through sovereign guarantees, bilateral trade agreements, access to financing from multilateral development banks and international financial institutions, while courts respect and uphold the rights of the private investor. Simultaneously, Kenya maintained a transparent and predictable licensing and tariff policy and has not defaulted on payments. This case study highlighting Kenya’s roadmap to success in the renewable energy arena, revealed some key initiatives to enhance renewable energy usage in Africa. Among these are:
- Energy policies, the regulatory framework, and incentives need to be synchronized with a coordinated effort between the implementing ministries (e.g. Energy, Finance, Agriculture, Infrastructure)
- Market-driven support schemes such as feed-in-tariffs should be prioritized to encourage investment, and they must be guaranteed for at least 20 years to provide comfort to investors.
- Within the electrification strategy, grid networks should be upgraded and expanded to accommodate rising supply and demand for renewable energy generated electricity. This would need to be assessed in conjunction with decentralized local grids.
- As in many countries in Africa, a plethora of previous and frequently changing policies and legislation have frequently caused investor hesitation and confusion. These should be coordinated and incorporated into a single “Energy Act”.
Kenya has now become more than a self-sufficient energy producer – it is capable of producing more energy than it can consume, which is in a stark contrast with its scarce power generation capabilities back in 2000 (F.Y.O, 2000) before meaningful reforms were made, and in contrast with the hydropower crisis it had experienced due to draught in 2010 (Burnham & Groneworld, 2010). Kenya’s introduction of its first-ever Green Bond into its Nairobi Stock Exchange in January 2020 and its successful attraction of more than US$ 42 million from environment-conscious investors (Miriri, 2020) is a testament to the accelerated route Kenya’s renewable energy is witnessing and the behavioral transformation among investors towards clean, green and renewable energy.
Although it may be rather audacious to generalize, because of the huge disparity between cultures and economies, geography, topography, water resources etc., across 54 African countries, Kenya has proven that other developing countries in Africa can also achieve a notable growth in renewable energy technologies – one that is supported by foreign investment, by following a similar roadmap of reforms and changes as the one charted by Kenya, led by strong leadership, guided by a vision, and nurtured by a commitment to prosper.