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An Overview of Kenya’s Energy Sector: Good Winds Ahead

Kenya's long-term development programme dubbed Vision 2030 aims to transform Kenya into a middle income country by the year 2030. Under Vision 2030, energy has been identified as one of the infrastructural "enablers" upon which the economic pillars of this long-term development strategy will be built. Kenya therefore seeks to increase its power production through a 5000+ MW programme, which is focused on delivering new electricity generation infrastructure to support the Vision 2030 program.

It is intended that the majority of this new generation will be derived from projects developed by independent power producers with a focus on renewable energy sources. The emphasis on renewable energy has seen the traditional hydro-electric and thermal power sources get overtaken by geothermal power which now accounts for over 50% of the electricity consumed in Kenya. It is believed that Kenya has more than 7,000 MW of undeveloped geothermal energy resources in the Rift Valley. The new focus on renewable energy has also underpinned the development of several flagship solar and wind power projects, including the Lake Turkana wind power project and the Kipeto power project.

Given rapid changes in the sector, the Government has recognised the need to review the existing legal regime to facilitate growth. The Government has therefore embarked on a review of the existing laws with the publication of the draft Energy Policy, the Energy Bill, 2015 (the Energy Bill), the Draft Local Content Regulations under the Energy Bill (the Regulations) and the Petroleum (Exploration, Development and Production) Bill, 2015.

The Energy Bill, currently in its first reading in Parliament, intends to consolidate the laws relating to energy by repealing the current Energy Act, 2006 and the Geothermal Resources Act, 1982. The Bill will also align the legal and regulatory framework of the energy sector with the Constitution of Kenya, 2010, with attempts to clarify the roles of the National and County Governments in relation to energy. The Energy Bill, unlike the current Energy Act, 2006, recognises the existence of renewable energy and other forms of energy such as nuclear energy and coal. While these efforts are welcomed, the Energy Bill also creates a number of regulatory authorities under the umbrella of the Energy Regulatory Authority, including the Energy and Petroleum Tribunal, the Rural Electrification and Renewable Energy Corporation, the Energy and Petroleum Institute (successor to the Kenya Nuclear Electricity Board) and the Renewable Energy Resource Advisory Committee and it remains to be seen whether this will improve service delivery.

New Local Content Regulations have also been published. The Energy Bill will become effective once the Energy Bill is enacted into law. The Energy Bill requires any person undertaking energy work to comply with local content requirements in all of its operations. The Regulations establish the Local Content Development and Monitoring Unit to monitor compliance and implement the Regulations. It is important to note that the Regulations propose a local participation requirement for non-indigenous contractors. The new legislation is expected to set out further detail on local content requirements in the energy sector generally.

The enactment of the Public Private Partnerships Act (Act No. 15 of 2013) (the PPPA) has also changed the energy landscape in Kenya. The PPPA has now created a unified framework for the implementation of PPPs in Kenya and the recently promulgated PPP Regulations, 2014 have provided operational details on how PPP projects should be prepared, tendered, approved and implemented. The PPP Unit website lists several ongoing projects with independent power producers currently being undertaken under the PPP framework. When completed, these projects are expected to add 750 MW into the national grid.

Another issue garnering importance is local community benefit sharing and public participation; both of which are now enshrined in the Constitution of Kenya, 2010. A number of projects have stalled after protests by neighbouring communities or legal actions filed by locals. For instance, construction on the proposed 61MW Kinangop Wind Park, was halted after violent protests from locals who declined to offer their land for the project. Investors must work together with local communities to ensure success of their projects.

From a tax perspective, the Government of Kenya has recently put in place various tax incentives to support investments in the energy sector. In June 2015, the Cabinet Secretary for the National Treasury issued Legal Notice 91 of 2015 which exempts interest on loans advanced from foreign sources from tax, provided the funds are utilized for investing in infrastructure. Soon thereafter, through Legal Notice 165 of 2015 (issued in August 2015), the Cabinet Secretary for the National Treasury also granted an exemption from withholding tax on payments made to a non-resident person for services rendered under a power purchase agreement. Withholding tax is normally charged at the rate of 15% on interest and 20% on management /professional fees when paid to a non-resident person and in the absence of a double tax treaty.

With regard to stamp duty, Legal Notice No. 106 of 2015 which was issued in June 2015 granted an exemption from stamp duty on the registration of security documents relating to loans from foreign sources utilised in investing in infrastructure. The primary aim of the Kenyan Government in granting these exemptions is to attract more investments in the energy sector for the purpose of lowering the cost of energy.

Relative to most countries in sub-Saharan Africa, Kenya has a fairly robust regulatory framework, and offers an enabling environment for investment. Notably, there are many closed and ongoing projects, some of which involve key international players. Some of the closed and ongoing projects that Anjarwalla & Khanna has been involved in include a 90MW heavy fuel diesel power plant project in Rabai, a 300MW wind power project in Lake Turkana, Triumph's 81MW thermal power plant project in Athi River, three geothermal power projects in Menegai for a combined 100MW, the 100MW wind powered generation facility in Kipeto, and Biojule's 2.6MW biogas electricity production plant, amongst others. All indications suggest that this sector will continue to generate significant interest for investors.