In this second part of our Power to Africa Kenya instalment, we examine the main challenges of investing in the power industry in Kenya before reviewing the opportunities that are also available to investors.


Power Infrastructure

Kenya's demand for electricity should rise at an annual average of 7.9% over the next decade. Despite Kenya's positive economic outlook, steady growth (5-7% annually) and a growing middle class, power supply and generation has lagged behind this demand. Infrastructure has not kept pace with demand as in other emerging African economies.

Indeed, the existing power infrastructure requires both an upgrade and ongoing maintenance. The Mombasa-based Kenya Petroleum Refineries, dormant since September 2013, are set for a SH1.5 billion makeover to store crude oil from Liokichar Basin in Turkana for export, the GOK announced in October 2016. The Kenya Pipeline Company has taken over the storage facilities at the refinery in a 3 year lease agreement ahead of a planned programme to export the crude oil.

Whilst Kenya has celebrated the opening of the new Mombasa-Nairobi railway, it remains to be seen whether the Government of Kenya's (GOK) plans to upgrade the Eldoret-Lokichar road will go ahead. Without this, transport to Mombasa (and therefore to the rest of the country) is extremely difficult. The GOK aims to transport up to 4,000 barrels of oil per day by road and rail to Mombasa. However, companies like Tullow Oil have experienced difficulties with both local communities and securing an efficient means of transporting the oil.

A major setback in meeting the demand is insufficient transmission infrastructure or major delays to its instalment, which we will touch further on when discussing the opportunities for investment.

Land ownership and regulatory issues

Kenya's complex regulations concerning land rights were added to by the 2010 Constitution. The Land Act 2012 sets out the process for dealings with land, with most project companies requiring the use of land categorised as "agricultural". Disputes over land ownership, environmental issues and usage with local communities are compounded by overlapping mandates of local and national governments, often causing delays to resolving disputes. The possible introduction of additional regulatory bodies under the Energy Bill 2015 and the Petroleum (Exploration Development and Production) Bill 2015 will not alleviate this problem.

A joint venture between Macquarie and Old Mutual Investment Group had to abandon plans for a $144 million 60.8 MW wind power project in Nyandarua County in central Kenya in early 2016 because of disputes with local land owners over compensation for land.

Political tensions and security

The 2007 general elections resulted in ethnic violence, which impacted upon Kenya's economic growth and damaged the attractiveness of the country to external investors. Kenya has also not escaped the blight of terrorism with high profile attacks in Nairobi and Garissa further reducing its investment appeal.

Political rivalries and national issues also hinder cross-border transmission and power pooling, while the fact that the majority of the key players in the power sector are state-owned may be off-putting to potential investors in the sector.

Similarly, corruption allegations in various organisations, including the Geothermal Development Corporation, do little to help Kenya move up the global corruption indices (currently sitting 145th out of 176 countries in the Transparency International's Corruption Perceptions Index 2016).

Foreign exchange and ability of Kenya Power to pay

A weakening shilling against the dollar has resulted in higher borrowing costs on loans that KPLC and IPPs have taken out, adding to pressure on their margins which are passed onto consumers as price increases, therefore increasing the rate of inflation.

Customers are already subject to high bills with energy costs up to 4 times more expensive than in South Africa. There have been recent issues with customer bill payments and so systematic meter reading are being carried out with customers being encouraged to settle unpaid bills as soon as possible. Combined with the foreign exchange pressures, this affects the off-taker's ability to service its obligations under its existing PPAs.



Following the inaugural UN Environmental Assembly in 2014, Kenya was praised by then UN Secretary General Ban Ki-Moon for its forward-thinking policy and action on increasing the generation and use of renewably sources of energy. It is now ranked second (behind South Africa) for clean energy investment in Africa according to an Oxford Business Group report from 2016.

Kenya's potential for solar power generation is vast, with a daily average solar insolation estimated at 4-6 kilowatt hours per square metre. A suitable strategy for placing solar projects needs to be developed further to fully capture Kenya's promising conditions for this source of energy.

The same is true for wind energy. Kenya boasts one of the continent's largest wind farms at Lake Turkana. The 300MW project covers 162km and as of October 2016 almost half of the wind turbines were installed. However, a delay in building transmission lines has caused tension between the parties to the PPA, which has had an impact on completion of the overall project.

Moving away from relying on hydro power as a result of unpredictable rainfall patterns and costs, there is an ever growing focus on the geothermal potential in Kenya. According to the BMI Research Kenya Renewables Report, 40% of renewable output could be sourced from geothermal by 2026, with geothermal energy expected to be the main contributor to the grid. Kenya is also ranked fourth on a global scale for new geothermal power capacity (REN21 GSR Report 2016).

Creative thinking

A recent Africa Progress Panel report urged creative thinking in respect of regional power pooling and off-grid solutions. This enables a shift away from a singular focus on grid expansion which cannot keep pace with demand. It suggested more investment in off-grid and mini-grid solutions; Kenya has ambitious plans to expand access to electricity through minigrids.

This goes together with creative thinking to reduce reliance on biomass by the majority of the population. Better regulation and oversight together with reforestation with quick growing tree types may help to relieve the pressure on existing resources.

Increasing cross-border energy trading and grid interconnection would also reduce the need to build conventional power generation infrastructure, lowering the impact on the environment at the same time. There is enormous potential for electricity trade in East Africa as the example below shows.

Eastern Africa Interconnector

The Ethiopia Kenya Power interconnection project was conceived in 2006 and is pioneering the idea of a regional power market to enhance the East African Power Pool (EAPP).

The 500 KV transmission line will have a transmitting capacity of 2,000 MW and will run for 1,045Km. Construction began in 2016. The line allows for power to flow in each direction but will initially only provide a total of 400MW Ethiopian generated hydro power down to Kenya.

Regulatory environment

Kenya Power and Lighting Company (KPLC) is one of the continent's more financially viable distribution and supply companies with a track record better than most.

Fiscal incentives and additional protection for investors are also in place:

  • priority purchase obligation by KPLC and guaranteed access to the national grid;
  • an obligation on KPLC to enter into a PPA with a project company once the criteria under the Feed-in Tariff (FiT) programme has been met;
  • a 20 year FiT for renewable resources; and
  • Kenya is party to the ICSID Convention and the New York Convention.

In our experience, early engagement with local communities should also help ensure that a project is successful in the long term.

The recent developments related to several projects, however, make some investors question the enforceability and reliability of the letters of support provided by the GOK to IPPs covering political risk and termination compensation in the recent past. It is hoped that these issues can be resolved and will not have a negative impact on the market.


Poor existing power infrastructure, land disputes and a complex regulatory environment together with political tensions and foreign currency pressures all make doing business in the Kenyan power sector a challenge. However, no more so than many other countries in Sub Saharan Africa and these challenges are the price investors pay for the economic opportunities available.

Kenya itself has some encouraging prospects for the future of its power sector: a growing demand through a young population hungry for a better future, an expanding renewable energy sector and a government willing to encourage cleaner energy thinking. If you combine this with greater investment in power infrastructure and regulatory reform, the country's macro-economic outlook looks good and investors will be encouraged to turn towards Kenya.