Increasing number of commercial and industrial power purchase

In a nutshell:

In February 2018, Cabinet Secretary for Energy and Petroleum, Charles Keter, announced that one of Kenya‘s largest hydropower dams would have to be closed due to low water level if the prevailing drought continued. If the dam was closed, the electricity would have to be generated by more costly diesel-powered thermal power plants or by geothermal power plants, which would result in higher energy costs for consumers. Besides, the press and the public fear that this might lead to power failures.

In a nutshell:

In February 2018, Cabinet Secretary for Energy and Petroleum, Charles Keter, announced that one of Kenya‘s largest hydropower dams would have to be closed due to low water level if the prevailing drought continued. If the dam was closed, the electricity would have to be generated by more costly diesel-powered thermal power plants or by geothermal power plants, which would result in higher energy costs for consumers. Besides, the press and the public fear that this might lead to power failures.

The consequences of power failures and rising energy costs would be a disaster for both the commercial and the industrial sector since this would lead to a rise in the products‘ final costs, as well. A possible solution – already applied by some manufacturers – are solar power plants. With their help, it is possible to produce energy in a cost-effective and reliable manner.

In March 2018, one of Kenya‘s largest tea producers Unilever Tea Kenya announced its plans to install solar power plants on its tea farms in Kericho. The solar power plant is due to be commissioned by mid 2018 and should produce 600 kWp. This is a landmark development as it is expected to be Unilever‘s first commercial and industrial (”C&I”) power purchase agreement (”PPA”) in Africa. In November 2017, one of Kenya‘s largest and oldest distillers, London Distillers Limited, announced that it had installed photovoltaic modules from JinkoSolar Holding Co. Ltd with the capacity of 924 kW. The rooftop photovoltaic power station is the largest of its kind in East Africa. In February 2017, one of the largest salt producers in East Africa, Krystalline Salt Limited, installed a 991 kWp photovoltaic (”PV”) diesel hybrid plant, which will generate 1.6 GWh per year.

These large-scale industrial projects indicate that PV technologies are finally establishing their presence on the market there. The technology has become a reliable and low-cost energy source for stakeholders from Kenya‘s commercial and industrial sector. 

Power purchase agreements

The transition to solar energy is mainly due to lower costs and the increasing efficiency of PV technologies. Nevertheless, PV technologies are still a thing of the future for many C&I enterprises despite a decrease in the costs of those technologies. Out of those three above-mentioned examples, only London Distillers Limited has purchased their PV power plants in full. The other two business transactions were supported by some form of funding, which is often the case in most transactions.

A power purchase agreement (”PPA”) is a form of financing of this kind. A PPA is a long-term contract between a seller of sustainable energy (typically solar energy) and a power purchaser (user). Based on this agreement, the seller installs power production facilities, such as solar cells, on the purchaser‘s land plot and, thus, supplies the customer with electricity at a lower price than would be available through the national grid at its typically fixed prices. At the same time, the seller usually does not charge anything for the installation and commits to provide maintenance during the period of the contract. This is why this type of an arrangement is economically feasible.

In this process, purchasers double their benefit. On the one hand, they can procure cheaper and green power; on the other hand, they do not need to make any heavy investments in equipment and maintenance. In order to overcome the existing barriers to the expansion of renewable energy, most C&I stakeholders use PV solutions on a PPA basis.

Cross Boundary Energy, a market player from the industrial sector, has set up Africa‘s first dedicated fund for C&I applications. With the Solar Africa investment platform, the fund finances C&I companies which lack funds to fully implement their PV solutions. Cross Boundary Energy and Solar Africa have financed the majority of C&I solar projects in Kenya, including the recently announced Unilever tea farm project. Another major stakeholder is Azimuth Power which offers its customers fixed prices based on PPAs. Their solar generators are deployed in containers and can be installed in a single day. They have installed, among others, a 1000 kWp C&I solution for Williamson Tea, being another large market player in Kenya‘s tea industry.

Factors limiting acceptance and acquisition

PPAs are basically long-term financing arrangements where industrial stakeholders have the same concerns with regard to financing as in other sectors of industry. Due to their nature, contracts are in most cases drawn up in the interest of PV suppliers and funders. Because of the limited number of projects and the correspondingly limited market experience, the identified risks tend to be overcompensated and conditions overstated in lengthy and complex contracts. This discourages some C&I market players, especially those from the SME sector. Those companies form the basis of Kenya‘s commercial and industrial sector; they are, however, not familiar with the PPAs.

Most SMEs would not be willing to enter into such long-term supply contracts, whereas all PPAs are concluded on a long-term basis. A typical PPA has a term of 10 to 20 years. In the light of their uncertain future, a commitment of 10 to 20 years seems to be an impossible undertaking. Due to cash flow issues, many SMEs are not able to foresee their own long-term financial stability and, thus, are not able to make monthly or quarterly payments under PPAs. Because, in most cases, they are short-term commercial tenants, it is difficult for them to predict how long they will stay in the rented business premises. For power producers and financing providers, entering into a contractual relationship with such a customer involves too much risk. They prefer rather lower-risk long-established C&I companies, such as those mentioned above. 

The regulatory burden on businesses seeking to engage in renewable energy sources in Kenya may also be overwhelming. The compliance requirements laid down in Part III of the Energy Act (”Act”) vary depending on technology, capacity, location, intended purpose of the power plant, and on whether the power plant is connected to the grid or not. The body responsible for ensuring compliance with this Act is the Energy Regulatory Commission (”ERC”) established under Section 4 of the Act.

Pursuant to Section 27 of the Act, licenses and permits are required for the importation or exportation, transmission or distribution of electrical energy, or for supply of electrical energy to consumers. Licences are necessary in respect of undertakings involving a capacity exceeding 3,000 kW, and permits – for projects with a capacity below 3,000 kW. Operation of a power plant without a permit constitutes an offence within the meaning of the law.

In order to obtain such a licence or a permit, an application containing a letter of interest and a detailed feasibility study for the project must be submitted to the ERC. Upon confirmation, the applicant is required to conduct an Environmental Impact Assessment (EIA) and submit the report to the National Environment Management Authority (”NEMA”). Depending on the power plant‘s location and the planned technology, the applicant will be required to obtain further permits from other state authorities, e.g. water abstraction permit from Water Management Agency in the case of geothermal installations, and a permit from Kenya Civil Aviation Authority, in particular for projects involving wind turbines. If it is planned to connect an installation to the grid, a feed-in tariff-based PPA must be negotiated with a licensed purchaser, Kenya Power and Lighting Company, in order to ensure that the contract is concluded in the interest of the end consumer. In addition, the applicant must apply at that stage for a power generation permit before obtaining a permit from the local government.

This process is time-consuming, complex and costly since experts must be involved at its every stage. Although, under a PPA, this process is handled mainly by the seller, the associated costs are usually transferred to the purchaser.

The ERC closely monitors the market and its participants for compliance. Recently, in March 2018, the ERC raided a mini-grid operator Dream Green Power (K) Ltd in its power plant in Homa Bay County on Remba Island. During the raid, an employee was arrested for operating a power generation and distribution business without the requisite permit. The power plant was disconnected from the grid and the arrested employee was indicted in court.

In order to promote growth on the C&I PPA market, the compliance requirements should be drastically simplified. A possible solution to be considered is full deregulation in respect of off-grid PPA applicants with a capacity of e.g. below 1000 kW. Currently, it is possible to revise the requirements and to replace the Act of 2006 within the Energy Bill 2017. The bill has been recently passed to Kenya‘s National Assembly for consideration. In its current version, the law would uphold the permit requirements, but it is expected that the market players from this sector of industry will campaign for this issue no later than when the National Assembly submits the bill for public review. Resistance of the government is expected in this matter. This is because the government fears that independent private power generation will result in low demand for electricity produced by public utilities, which would mean lower revenues for the state and a decline in jobs for Kenyans.

Conclusion

Renewable energies are the future of energy production in the entire world. It is gratifying to see that Kenya‘s C&I sector promotes green power, thereby setting a good example for environmentally friendly, sustainable energy production in the manufacturing of goods. The decreasing costs of the technology let us hope that more and more C&I market players will decide to transition to renewable energy systems. C&I projects such as Cross Boundary Energy should receive appropriate recognition since this type of funding, being provided under PPAs, allows us to benefit from the advantages of renewable energy sources today and in the future. Simplified permit procedures and deregulation of power generation are needed to a certain extent to make the market more accessible and effective for all stakeholders.

The consequences of power failures and rising energy costs would be a disaster for both the commercial and the industrial sector since this would lead to a rise in the products‘ final costs, as well. A possible solution – already applied by some manufacturers – are solar power plants. With their help, it is possible to produce energy in a cost-effective and reliable manner.

In March 2018, one of Kenya‘s largest tea producers Unilever Tea Kenya announced its plans to install solar power plants on its tea farms in Kericho. The solar power plant is due to be commissioned by mid 2018 and should produce 600 kWp. This is a landmark development as it is expected to be Unilever‘s first commercial and industrial (”C&I”) power purchase agreement (”PPA”) in Africa. In November 2017, one of Kenya‘s largest and oldest distillers, London Distillers Limited, announced that it had installed photovoltaic modules from JinkoSolar Holding Co. Ltd with the capacity of 924 kW. The rooftop photovoltaic power station is the largest of its kind in East Africa. In February 2017, one of the largest salt producers in East Africa, Krystalline Salt Limited, installed a 991 kWp photovoltaic (”PV”) diesel hybrid plant, which will generate 1.6 GWh per year.

These large-scale industrial projects indicate that PV technologies are finally establishing their presence on the market there. The technology has become a reliable and low-cost energy source for stakeholders from Kenya‘s commercial and industrial sector. 

Power purchase agreements

The transition to solar energy is mainly due to lower costs and the increasing efficiency of PV technologies. Nevertheless, PV technologies are still a thing of the future for many C&I enterprises despite a decrease in the costs of those technologies. Out of those three above-mentioned examples, only London Distillers Limited has purchased their PV power plants in full. The other two business transactions were supported by some form of funding, which is often the case in most transactions.

A power purchase agreement (”PPA”) is a form of financing of this kind. A PPA is a long-term contract between a seller of sustainable energy (typically solar energy) and a power purchaser (user). Based on this agreement, the seller installs power production facilities, such as solar cells, on the purchaser‘s land plot and, thus, supplies the customer with electricity at a lower price than would be available through the national grid at its typically fixed prices. At the same time, the seller usually does not charge anything for the installation and commits to provide maintenance during the period of the contract. This is why this type of an arrangement is economically feasible.

In this process, purchasers double their benefit. On the one hand, they can procure cheaper and green power; on the other hand, they do not need to make any heavy investments in equipment and maintenance. In order to overcome the existing barriers to the expansion of renewable energy, most C&I stakeholders use PV solutions on a PPA basis.

Cross Boundary Energy, a market player from the industrial sector, has set up Africa‘s first dedicated fund for C&I applications. With the Solar Africa investment platform, the fund finances C&I companies which lack funds to fully implement their PV solutions. Cross Boundary Energy and Solar Africa have financed the majority of C&I solar projects in Kenya, including the recently announced Unilever tea farm project. Another major stakeholder is Azimuth Power which offers its customers fixed prices based on PPAs. Their solar generators are deployed in containers and can be installed in a single day. They have installed, among others, a 1000 kWp C&I solution for Williamson Tea, being another large market player in Kenya‘s tea industry.

Factors limiting acceptance and acquisition

PPAs are basically long-term financing arrangements where industrial stakeholders have the same concerns with regard to financing as in other sectors of industry. Due to their nature, contracts are in most cases drawn up in the interest of PV suppliers and funders. Because of the limited number of projects and the correspondingly limited market experience, the identified risks tend to be overcompensated and conditions overstated in lengthy and complex contracts. This discourages some C&I market players, especially those from the SME sector. Those companies form the basis of Kenya‘s commercial and industrial sector; they are, however, not familiar with the PPAs.

Most SMEs would not be willing to enter into such long-term supply contracts, whereas all PPAs are concluded on a long-term basis. A typical PPA has a term of 10 to 20 years. In the light of their uncertain future, a commitment of 10 to 20 years seems to be an impossible undertaking. Due to cash flow issues, many SMEs are not able to foresee their own long-term financial stability and, thus, are not able to make monthly or quarterly payments under PPAs. Because, in most cases, they are short-term commercial tenants, it is difficult for them to predict how long they will stay in the rented business premises. For power producers and financing providers, entering into a contractual relationship with such a customer involves too much risk. They prefer rather lower-risk long-established C&I companies, such as those mentioned above. 

The regulatory burden on businesses seeking to engage in renewable energy sources in Kenya may also be overwhelming. The compliance requirements laid down in Part III of the Energy Act (”Act”) vary depending on technology, capacity, location, intended purpose of the power plant, and on whether the power plant is connected to the grid or not. The body responsible for ensuring compliance with this Act is the Energy Regulatory Commission (”ERC”) established under Section 4 of the Act.

Pursuant to Section 27 of the Act, licenses and permits are required for the importation or exportation, transmission or distribution of electrical energy, or for supply of electrical energy to consumers. Licences are necessary in respect of undertakings involving a capacity exceeding 3,000 kW, and permits – for projects with a capacity below 3,000 kW. Operation of a power plant without a permit constitutes an offence within the meaning of the law.

In order to obtain such a licence or a permit, an application containing a letter of interest and a detailed feasibility study for the project must be submitted to the ERC. Upon confirmation, the applicant is required to conduct an Environmental Impact Assessment (EIA) and submit the report to the National Environment Management Authority (”NEMA”). Depending on the power plant‘s location and the planned technology, the applicant will be required to obtain further permits from other state authorities, e.g. water abstraction permit from Water Management Agency in the case of geothermal installations, and a permit from Kenya Civil Aviation Authority, in particular for projects involving wind turbines. If it is planned to connect an installation to the grid, a feed-in tariff-based PPA must be negotiated with a licensed purchaser, Kenya Power and Lighting Company, in order to ensure that the contract is concluded in the interest of the end consumer. In addition, the applicant must apply at that stage for a power generation permit before obtaining a permit from the local government.

This process is time-consuming, complex and costly since experts must be involved at its every stage. Although, under a PPA, this process is handled mainly by the seller, the associated costs are usually transferred to the purchaser.

The ERC closely monitors the market and its participants for compliance. Recently, in March 2018, the ERC raided a mini-grid operator Dream Green Power (K) Ltd in its power plant in Homa Bay County on Remba Island. During the raid, an employee was arrested for operating a power generation and distribution business without the requisite permit. The power plant was disconnected from the grid and the arrested employee was indicted in court.

In order to promote growth on the C&I PPA market, the compliance requirements should be drastically simplified. A possible solution to be considered is full deregulation in respect of off-grid PPA applicants with a capacity of e.g. below 1000 kW. Currently, it is possible to revise the requirements and to replace the Act of 2006 within the Energy Bill 2017. The bill has been recently passed to Kenya‘s National Assembly for consideration. In its current version, the law would uphold the permit requirements, but it is expected that the market players from this sector of industry will campaign for this issue no later than when the National Assembly submits the bill for public review. Resistance of the government is expected in this matter. This is because the government fears that independent private power generation will result in low demand for electricity produced by public utilities, which would mean lower revenues for the state and a decline in jobs for Kenyans.

Conclusion

Renewable energies are the future of energy production in the entire world. It is gratifying to see that Kenya‘s C&I sector promotes green power, thereby setting a good example for environmentally friendly, sustainable energy production in the manufacturing of goods. The decreasing costs of the technology let us hope that more and more C&I market players will decide to transition to renewable energy systems. C&I projects such as Cross Boundary Energy should receive appropriate recognition since this type of funding, being provided under PPAs, allows us to benefit from the advantages of renewable energy sources today and in the future. Simplified permit procedures and deregulation of power generation are needed to a certain extent to make the market more accessible and effective for all stakeholders.