The study analyzes constraints to investment in renewable energy in Kenya, focusing on the influence of political economy on these barriers. Key findings indicate issues such as unattractive investment conditions due to low rural demand and poor access to finance, compounded by inadequate planning and regulatory frameworks. Proposed solutions include subsidies for connections, development programs to increase electricity demand, and reforms in land acquisition policies.

1. Green Growth Diagnostics Study
Constraints to Investment in
Renewable Energy for Electricity
Generation in Kenya
Energy Political Economy Brief
January 2017

2. Context and scope
• This political economy analysis seeks to identify
how constraints to development of renewable
energy projects come to be and who is driving or
opposing policies to address them.

3. Key methodologies
• A detailed review of the energy policy and
political environments
• Stakeholder interviews

4. 1. Introduction
• The study examines constraints that are holding
back investment in renewable technologies in
Kenya where the economics would support
this investment.
• Through literature review and interviews with
various energy stakeholders, the study identified
the political economy of binding constraints
and investigated the political feasibility of
policies to remove these constraints.

5. 1. Introduction Cont..d
• There are many different actors involved in
Kenya’s energy sector: local, national and global.
• They have different priorities; among them:
climate change mitigation, universal access to
energy, energy security, competitiveness; job
creation; profit, etc.

6. 1. Introduction Cont..d
• In general the stakeholders can be categorised
into the following groups and priorities:

7. 1. Introduction Cont..d
• These actors may support or oppose an
energy policy depending on the policy’s potential
impact on the achievement of their objectives
and fulfilment of their priorities.
• This support or opposition is not always
explicitly expressed; there is significant
unspoken positioning and lobbying.

8. 1. Introduction Cont..d
• The Government is the largest and most
influential actor among all.
• This influence emanates from:
 Constitutional mandate -> Authority
 Legal dispensation –> Structure and organs
 Financial and political control -> Clout

9. 2. Background
• Kenya has a vast renewable energy resources
which can be exploited economically and
(potentially) in a financially viable manner.
• Key among them are: Hydropower | Geothermal
| Wind | Solar PV technologies
• BUT the penetration of electricity has
historically been low, with most gains having
been achieved in recent times.

10. 2. Background Cont..d
Table 1: Potential and exploited renewable energy resources in Kenya
Renewable
Energy
resources
Geothermal Hydro Wind Solar Biogas Biomass
- Municipal
Waste
- Bagasse
Large Small
Potential in MW 10,000 3,000 3,000 4,000 4-6
kWh/m²/day
30 230
Exploited in
MW by 2016
590 812 25 25 3.21 2.2 62 (incldg
Mumias – 38,
Kwale – 18,
Mathenge – 6)
Total exploited: 1,519.41 MW
Source : The Draft National Energy and Petroleum Policy 2015

11. • Since the year 2000 to 2015, the Ministry of
Energy approved has 178 power generation
projects out of which 46 (14 fossil and 32
renewable) plants (26%) are connected to the
grid.
2. Background Cont..d

12. 2. Background Cont..d
Source: Approved Proposals Under The Renewable Energy Feed-In-Tariffs
Energy Regulatory Commission

13. • Hence the question on dominant constraints –
to what extent are they caused, propagated or
sustained by the political economy?
2. Background Cont..d

14. • Kenya’s constraints to investment in RE are varied,
but the most critical ones can be divided into two
distinct categories, with causative sub-categories.
• The two are:
a) Unattractive investments and
b) Access to finance.
3. Introduction to constraints

15. a) Unattractive investments
• The key contributing factors are low returns and high risks.
• There are three core drivers of low returns viz;
(i) Low rural demand; (ii) High system installations and
maintenance costs; and (iii) Planning/procurement induced
dis-incentives.
• There are two leading risk factors making up for high risks and
negatively affecting the appetite of RE investors;
(i) Poor access to land and (ii) High levels of social opposition.
3. Constraints Cont...d

16. a) Unattractive investments
3. Constraints Cont...d

17. b) Poor Access to finance
• The single most influential factor negatively affecting financial
closure of RE projects is the lack of appropriately structured
financing mechanisms.
• This draws a wedge between demand and supply of RE finance
types. These are summed up as “poor intermediation.”
3. Constraints Cont...d

18. b) Poor Access to finance
3. Constraints Cont...d

19. Constraint 1-1: Unattractive investments from low returns
attributable to low rural demand
Typical scenario
4. Constraint Analysis
1. Time lag between the investment
and the commencement of
connections
2. Revenue growth adjustment as
the rate of new connections
levelizes
3. Deficit
4. Low monthly revenue

20. Constraint 1-1: Unattractive investments
from low returns attributable to low rural
demand
Underlying causes
• low disposal income in rural areas. (affordability)
• For those who cannot afford the upfront cost electrical
power connectivity, the power consumption is on average
5 kWhr per month (The power is consumed mainly for
lighting and running electronic media).
4. Constraint Analysis

21. Constraint 1-1: Unattractive investments from low returns
attributable to low rural demand
Elaboration > For on-grid projects
4. Constraint Analysis
• Effectively, connecting new customers leads to higher costs for the
entire system.
• Servicing costs are high relative to the benefits and revenue
generated.
• Important: most cases higher consumption customers are ordinarily
already connected, and therefore new efforts are directed to the
unconnected but low demand customers.

22. Constraint 1-2: Unattractive investments from low returns
attributable to system costs/curtailment
Origins of the constraint
4. Constraint Analysis
• Power transmission is highly regulated by Government and is
related mainly to Govt-planned projects, not private sector plans.
• Transmission carries heavy capital investments, and the Govt. has
constraints raising requisite funding due to competition for
development resources across and within key sectors funded by
Treasury.

23. Constraint 1-2: Unattractive investments from low returns
attributable to system costs/curtailment
Elaboration
4. Constraint Analysis
• Renewables are intermittent, hence demand grid enhancement and
a smart grid system that can sense fluctuations of energy in the
system brought about by the intermittent renewable energy sources
and give a corrective signals.
• This also demands more expertise and more of the manpower that
can attend to challenges. This is against an industry that lacks
specialised human resources in the areas of smart grids.

24. Constraint 1-2: Unattractive investments from low returns
attributable to system costs/curtailment
Elaboration
4. Constraint Analysis
• Deliberate curtailment of RE projects: Since wind and solar PV are
intermittent, there is a limit to which they can be incorporated in
the electricity power mix. Hence curtailment of these kind of
projects to avoid destabilising the grid network.

25. Constraint 1-3: - Unattractive investments from low returns
attributable to regulation (planning and procurement)
4. Constraint Analysis
Underlying causes
• Generation and transmission masterplan not linked to rural
electrification planning – Does not include off-grid options;
• Overestimation of demand and lack of transmission capacity
have led to overcapacity – future constraints to financial viability
of KPLC;

26. Constraint 1-3: - Unattractive investments from low returns
attributable to regulation (planning and procurement)
4. Constraint Analysis
Underlying causes
• At the same time large shares of population are not connected;
• Unclear minigrid planning and regulations: What are the
obligations of KPLC when the grid reaches a village with a private
minigrid? When will the national grid reach a village?

27. Constraint 1-3: - Unattractive investments from low returns
attributable to regulation (planning and procurement)
Origins of the constraint
4. Constraint Analysis
• There is lack of local capacity to develop the specialised elements of
projects and power infrastructure. At the same time, foreign
experts are relatively expensive and do not provide the long term
capacity solution that is required. Nevertheless, this has led to most
energy project resource persons being procured from Europe, China
and India.

28. Constraint 1-3: - Unattractive investments from low returns
attributable to regulation (planning and procurement)
Example cases:
4. Constraint Analysis
• Despite reduction in electricity connection fee from KES 35,000 to
KES 15,000 less wiring cost, many households still find it
unaffordable. Thus there are many households who are not
connected though they have access to the national grid. These
factors seem not to have been considered before the grid was
extended in those areas. Therefore ideas and programmes for
connection are being designed long after power lines were installed.

29. Constraint 1-4: Unattractive investments from high risks
attributable to poor access to land
4. Constraint Analysis
Underlying causes
• The first sign that land is relatively inaccessible for RE projects in
Kenya is price. Overpricing of land follows almost immediately the
land owner realises that the procurement of the land is meant for
such a project.
• In order to reap maximum benefit from the investors, impostors
and speculators invade proposed sites before or even after a land
transaction – whether sale or lease – is completed. No policy exists
to handle land speculation.

30. Constraint 1-4: Unattractive investments from high risks
attributable to poor access to land
4. Constraint Analysis
Underlying causes
• Another indicator to inaccessibility of land is road networks.
Physical access to land in frontier regions is made impossible by
lack of roads and supporting infrastructure such as proper drainage.
All-weather roads are limited to highways and major feeder roads,
with the bulk of the network being unpaved and susceptible
damage by rain water run-off.

31. Constraint 1-4: Unattractive investments from high risks
attributable to poor access to land
4. Constraint Analysis
Underlying causes
• Lack of clarity about land acquisition process and rights of
population currently using land for their livelihood
• One of the strategies employed by locals to protest a project is
encroachment and settlements on lands where beacons have been
installed for purposes of energy projects. The locals and their
leaders thereafter demand compensation for “displacement”. This is
specifically common in areas that are not demarcated for private
use.

32. Constraint 1-4: Unattractive investments from high risks
attributable to poor access to land
4. Constraint Analysis
Underlying causes
• Lack of clear consultation guidelines; County administration, even
though not directly involved in the approval process for energy
projects, has influence on the acceptability of a project by locals.
There have not been any guidelines on the consultation processes
for public participation. However, in 2016 these have been
developed.

33. Constraint 1-4: Unattractive investments from high
risks attributable to poor access to land
Origins of the constraint
4. Constraint Analysis
• There is a perceived “danger” of foreigners “invading” and buying
all agricultural land hence leaving the natives with no land for
farming.
• Uncontrolled escalation in cost of land in high energy demand
regions.

34. Constraint 1-4: Unattractive investments from high
risks attributable to poor access to land
Origins of the constraint
4. Constraint Analysis
• There is heavy interference by the local authorities and politicians.
Engagement with the senators, governors and local communities
does not easily bear fruit.
• Lack of clarity about land acquisition process and rights of
population currently using land for their livelihood.

35. Constraint 1-4: Unattractive investments from high
risks attributable to poor access to land
Origins of the constraint
4. Constraint Analysis
• Before the new constitution and devolution, it was easier to
implement energy projects. Under the new constitution compulsory
land acquisition is not allowed. Only the National Land Commission
can acquire land in this manner – and even then it may also be
challenged in court. Counties now hold public land in trust on behalf
of the residents.

36. Constraint 1-4: Unattractive investments from high
risks attributable to poor access to land
Example cases:
4. Constraint Analysis
• The cost of acquisition of way leaves increases significantly as the
power lines approach high density and high energy demand
regions.
• This is accompanied by increasing expectations of both the land
owners and consumers of power, pushing the costs even higher.

37. Constraint 2: Constrained access to finance
attributable to poor intermediation
4. Constraint Analysis
Underlying causes
• Finance for small-scale renewables is too expensive
• Uncompetitive financial terms
• Lack of local equity partner
• Foreign exchange fluctuations
• An unpredictable fiscal regime

38. Constraint 2: Constrained access to finance
attributable to poor intermediation
Origins of the constraint
4. Constraint Analysis
• Given these circumstances, many projects fail to reach financial
closure due to unwillingness on the side of the government to
provide even a letter of comfort.
• Most financiers request for guarantees from the government before
agreeing to fund RE projects, in order to secure government
compensation if the projects fails as a result of the Country-specific
risks.

39. 5. Political economy factors
behind the constraints:
• The key issue to note when it comes to energy sector focus is that
the Principal Secretary at the Ministry of Energy and Petroleum is
the common administrative denominator across all state energy
agencies.
• Planning and implementation is therefore highly influenced by the
PS.
• The previous regime had an economist for an energy PS, while
currently the PS is an engineer. The mindset of the PS plays a
major role in the direction of the Country’s energy investments.

40. 6. Proposed solutions/policies
• Several options can be advanced to resolve low rural
demand.
• The most desirable solution – yet the hardest of them all – is to
create development programs that will enhance productive uses of
electric power.
• Economic development would result in higher incomes and
consequently demand for electricity would increase a the local
population acquire more energy intensive appliances.

41. 6. Proposed solutions/policies Cont...d
• Huge lifestyle lifts and significant advances in productive uses of
electricity would have to come through integrated development
programmes linking energy interventions with rural development
interventions: first create demand, then electrify.
• Another possible solution is the provision of subsidies for
connections.
• Lastly, promotion of new technologies and business models that are
adapted to low ability to pay: pay-as-you-go, standalone systems.

42. 6. Proposed solutions/policies Cont...d
• However, off-grid solutions face a major marketing hurdle >
politicians and opinion leaders. In general, Kenyan politicians do not
yet fully subscribe to the narrative that solar power is “total
electricity.” Grid connected power is.
• The Kenyan renewable energy auction: Government intends to
publish regulations for the tendering. They will replace the current
feed-in-tariff (FiT) as investors seeking licenses for generation of
electricity will have to use tariffs approved by the Energy
Regulatory Commission (ERC).

43. 6. Proposed solutions/policies Cont...d
• Kenya is reviewing the national grid code to enhance the country’s
capacity to absorb additional renewable electricity. The grid code
stipulates rules and regulations that various players in the
electricity production chain are expected to abide by for efficient
operation of the system.
• The need for review has come with the rise in the number of
investments in renewable energy, especially in wind and solar
projects, whose specific needs are not largely covered under the
current code.

44. 6. Proposed solutions/policies Cont...d
On land matters:
• Develop a policy to handle land speculation
• Clear definition of population with rights over the land
• Clear consultation guidelines
• Clear compensation requirements for land and way leaves
• Capacity building to local population
• Clear land property rights
• Policies to avoid speculation with land targeted for power
generation or transmission

45. 7. Efforts that have been made to
tackle the constraints
• The government is determined to create demand for electricity
consumption, including the new industries coming into the power
demand structure like the Konza City, electrification of the SGR, the
special economic zones in all the counties, and growing middle class
with people having more equipment as envisaged under the Kenya
Vision 2030.
• Last mile connectivity

46. 8. Forces that block or support
these efforts
• National government: the enactment of the new energy policy
which will operationalize the proposed institutions i.e. RERAC,
RERC.
• County government: the adoption of the new policy will result to
establishment of the county energy centres and will foster county
energy planning which is a legal requirement for every county to
prepare and submit the plan for consolidation into National
Integrated Energy Plan.

47. • Lack of transparency especially within the agencies charged with
the mandate of implementing the projects.
• Corruption that is manifested in land speculation, overpricing of
land and demands for a stake from investors.
• Land cartels who make land very expensive, making it difficult to
access way leaves and hindering development of potential sites.
8. Forces for/against Cont...d

48. 8. Forces for/against Cont...d
• Local politicians who incite the local communities against
government projects.
• Judiciary systems which places court injunctions and prolonged
rulings in court cases.
• It is generally believed among stakeholders, that Kenya Power is
opposed to licensing of power producers to sell directly to
customers. It is also opposed to policies like power wheeling, net-
metering and usage of the distribution network by companies
willing to generate and sale power directly to the consumers.

49. 8. Forces for/against Cont...d
• Kenya Power is also seen as causing unnecessary delays in signing
of power purchase agreements and lacking the will to promote the
FiT policy.
• Ministry of Energy and Petroleum is believed to be unwilling to give
a cost reflective tariff. The argument is that the FiT policy tariff is
higher than the Government target.
• Energy laws and regulations do not oblige the Government or its
energy agencies to buy power from the independent power
producers.

50. 8. Forces for/against Cont...d
• Independent power producers who are proposing tariffs and
demands more incentives from the government for them in invest in
the country. They also what to have quick returns on their
investment.
• Government formulates policies and influences land access for
energy infrastructure, as well as compensation for the local
communities in case of displacement.

51. 8. Forces for/against Cont...d
• With respect to planning, most of the efforts have not been
successful because of lack of coordination between various
government agencies in the energy sector. The agencies continue to
work independently sometimes leading to conflicting laws, and poor
implementation of energy projects.
• There is lack of will power on the side of the government to enforce
the policies and regulations.
• Also there is delay in the disbursement of funds from the National
Treasury which leads to poor implementation of government plans.

52. 8. Forces for/against Cont...d
• With respect to land, the Ministry of Land and Physical Planning has
failed to plan and allocate land for energy projects, give direction on
compensation and enforce forceful acquisition of land.
• County governments cite lack of consultation on development on
energy projects within their counties by the Ministry of Energy and
Petroleum.

53. 8. Forces for/against Cont...d
• Local Politicians incite the local against development of energy
projects within their locality.
• Land Cartels collude with government officers to make the price of
land unaffordable for investors in the energy sector.

54. 8. Forces for/against Cont...d
• With respect to energy financing, the interest rates historically
offered by local banks have been high. Banks also prefer a short
period for their returns on the investment.
• This makes borrowing loans for development of renewable energy
projects unaffordable.
• The National Treasury has failed to establish infrastructure bank or
national energy fund which can lend money to investors in
renewable energy projects at a lower interest rate.

55. 9. Ongoing or proposed policies to
tackle the constraints
• Ministry of Energy and Petroleum has been responsible for
development of guidelines and regulations in favour of accelerating
energy demand. Some of the programs include;
• Rural Electrification Programme;
• Zero-rated VAT and reduced duty on PV Panels;
• Exemption from VAT on the first 200Kwh consumed has
ensured that low-income households benefit; and
• Photovoltaic Market Transformation Initiatives of the GEF
Programme;

56. 9. Ongoing or proposed policies to
tackle the constraints
• Creation of a Rural Electrification Authority to accelerate the pace of
rural electrification in the country, a function currently undertaken
by the Ministry of Energy;
• Promoting privately or community owned vertically integrated
entities either operating renewable energy power plants or hybrid
systems, to co-exist with licensed electricity distributors;

57. 9. Ongoing or proposed policies to
tackle the constraints Cont...d
• The implementation of the Sustainable Energy for All (SE4All)
Action Agenda with key focus on the productive use of energy as a
priority area for both the National and County government.
• Green Energy Facility to pool donor contributions to help finance
Government equity participation and loan contributions to help
firms and other institutions to develop clean energy projects.
• Designed incentive packages to promote private sector investments
by zero rating import Duties and Taxes on energy equipment and
accessories.

58. 9. Ongoing or proposed policies to
tackle the constraints Cont...d
• Liberalisation of the power retail chain: The retail function is
currently exclusively undertaken by Kenya Power & Lighting
Company.
• Based on this, KPLC has continued to be the single buyer of
electricity signing Power Purchase Agreements with generators of
electrical energy. In the draft energy policy 2015, the government
will regularly review the electricity market to allow for competition
in retail of electricity.

59. 10. Level of success...
• Implementation is on course although the targets are seen
by many as too ambitious and politically aligned.
• Funding limitations of Vision 2030 flagship projects has
slowed down the rate at which these projects are being
implemented meaning that power demand is still limited.

60. END
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