By Geoffrey Muchiri
26th May 2012 is a date that will forever remain etched in the minds of Kenyans as it is the day when the announcement was made that vast quantities of oil had been discovered in Turkana County. Commercial viability of those discoveries had not been determined but from that date Kenya became a new petroleum province of great interest to all in the global oil and gas industry. It is in the context of this discovery that Kenya’s numerous oil blocks are seeing a renewed interest from International Oil Companies(IOC) (be they: small independents or the oil majors/seven sisters and their successors in title) or National Oil Companies from other countries.
The exploration and production of oil and gas is a very expensive capital intensive undertaking as the preliminary shooting of seismic and the drilling of exploratory wells in an oil block in accordance with the work programme agreed with any Government in any country may cost between US$1 million to over US$ 15 million and Kenya is no exception (this is coupled with the attendant risk that there is always a great possibility that the oil(if any that is found) may not be in commercial quantities). The development and production phase may involve the construction of the infrastructure necessary to transport the oil from the wellhead to the port of Mombasa or Lamu and may cost hundreds of millions of dollars.
For that reason any IOC that seeks to sign a Production and Sharing Contract (PSC) with the Kenyan Government in respect of the available oil and gas blocks (be they onshore or offshore) would like to ascertain up front what taxes if any are applicable during the exploration phase as well as the production before the IOC can proceed to make any contractual commitment by signing and sealing the PSC. This accords with what Lord Mansfield stated in 1774, that in all mercantile transactions the great object should be certainty. This aphorism holds true to this day especially in the oil and gas sector.
The taxes applicable to the oil and gas company undertaking exploration and production of oil in Kenya are as follows:
Ring-fencing is applicable to the upstream oil and gas sector in Kenya. This means that losses from one oil block cannot be used to reduce the taxable income in respect of another profitable oil block.
The Kenyan Government is currently at an advanced stage of concluding the preparation of new legislation that will govern the upstream oil and gas sector in Kenya.
2015 started with some good news for Kenya’s renewable energy sector; M-Kopa, a system that has helped increase access to affordable solar energy across East Africa, won the 2015 Zayed Future Energy Prize. M-Kopa is a pay as you go system allowing users to access a solar power system that includes a panel, three lamps, radio and mobile phone charging kit at a minimal fee. Most Kenyans are able to pay for the whole system in 1 year.
Geothermal power’s contribution to the national energy mix increased to 51% in early February 2015 following the commissioning of two new plants with a combined capacity of 280 MW, Olkaria 1 and Olkaria 4 in the Rift Valley. Geothermal power is a renewable source of energy that is generated from natural steam from the earth from as far as 3 kilometeres underground and, unlike hydro, its output is not affected by the vagaries of the weather. Supported by the World Bank, Olkaria 1 is one of the largest single geothermal investment projects in the world. Other partners in the Olkaria project include the Japan International Cooperation Agency, the European Investment Bank, Agence Française de Développement and Germany’s KFW. Kenya aspires to produce at least 1900 MW of geothermal energy by 2017 and 5,000 MW by 2030, presenting great investment opportunities.
Towards the end of February 2015, Amu Power, a company formed by a consortium of Centum and Gulf Energy, announced plans to construct a coal-fired thermal power station in Lamu County. The 981.5 MW power plant is projected to cost USD 1.7 billion and will be the biggest single producer of energy in Kenya. It will also be the most cost-effective and efficient power plant in the country. Construction was expected to begin in September 2015 and last 21 months but is now expected to commence at the start of this year. The delay was occasioned by an objection from the losing bidder in the tender who challenged the tendering process but the Public Private Partnership Committee has confirmed that the tendering had followed due process. The bodies involved include the Ministry of Energy and Petroleum (MoEP), the National Land Commission (NLC) and the National Environment Management Authority (NEMA).
In late June 2015, Kenya Power (the country’s main power utility company) announced that it would for the first time reduce tariffs across the board for households consuming between 51 and 1500 KWh per month. The price cuts are the direct result of Kenya’s prioritization of renewable energy sources, including the launch in late 2014 of KenGen’s 280 MW Olkaria geothermal power plant, the largest facility of its kind in the world. KenGen is currently responsible for 80% of the country’s electricity generation.
President Uhuru Kenyatta met with investors led by world renown entrepreneur Sir Richard Branson, Founder of Virgin Group at his Harambee House office in Nairobi on July 11, 2015. The meeting explored how to make the most of Kenya’s abundant potential for green energy. The proposed renewable energy projects aim at displacing a percentage of diesel generation in off-grid stations and raise the supply of clean energy for productive use in support of Vision 2030 (the country’s main development blueprint).
Still in July, the President officially launched the Lake Turkana Wind Power Project. The project is expected to be the largest such project in Africa, generating 310 MW of electricity equivalent to 20% of Kenya’s current generation capacity. The USD 694 million project achieved full financial close in December 2014. It is expected to generate USD 150 million a year in foreign currency savings to Kenya. An international consortium of lenders and producers, including the African Development Bank, British Company Aldwych International and Standard Bank, aims to install 365 wind turbines. The 52-metre blade span windmills will take advantage of high winds in the remote area.
Kenya Power, which remains the country’s sole electricity distributor, announced in July 2015 that it had installed 170 new dedicated lines to ensure steady power supply for industrial customers. Kenya Power also plans to build 98 new substations and refurbish 12 others by the end of 2016 to create a greater degree of flexibility on the national grid.
At the July 2015 Global Entrepreneurship Summit held in Nairobi, the Ministry of Energy signed a KES 220 billion (USD 2.2 billion) deal with a North American company, SkyPower, to develop 1000 MW of solar energy in the country.
The East African Power Industry Convention (EAPIC) was held in Nairobi in August 2015 and gave delegates a chance to share knowledge, pinpoint investment opportunities and explore best practical solutions. The EAPIC aims to look into the energy industry’s challenges and find solutions to ongoing issues such as failing infrastructure and rising electricity demand.
In October 2015, global tech-giant Google announced its intention to invest KES 4 billion (USD 40 million) in the Lake Turkana Wind Power project for a 12.5 per cent stake.
Zambia, Tanzania and Kenya signed an Inter-Governmental Memorandum of Understanding in December 2015 to guide them in the implementation of the ZTK project, which creates opportunities for the reinforcement of grids in the three countries and the application of economies of scale in the development and exploitation of renewable energy resources.
Amu Power confirms construction of coal fired power plant in Kenya, Construction Review Online
Energy Bill 2015, Energy.co.ke
Kenya’s fast-growing energy industry powers on, and is hungry for more, Mail & Guardian Africa
Kenya looks to greater generation capacity, Oxford Business Group
Kenya Power to compensate users for blackouts under new Bill, Business Daily
New Energy Bill in Kenya table – the good and the bad, Polity.org.za
New Kenyan Law to Regulation Oil, Gas Exploration, Business Daily
Renewable energy as a catalyst of economic development in Kenya, Blue & Green Tomorrow
Zambia-Tanzania-Kenya Power Interconnector (ZTK) Project, Energy.co.ke
Co-authored by Angela Ogang
• The Royal Court of Jersey made a confiscation order in February 2016 to seize approximately USD 4.7 million and USD 540 thousand from Jersey-registered Windward Trading Ltd, which was owned by former Kenya Power and Lighting Company ((KPLC), now Kenya Power)) Chief Executive Samuel Gichuru after Windward pleaded guilty to four counts of money laundering between 1999 and 2001. The Attorney-General of Jersey expressed optimism that Kenyan authorities would conclude the ongoing extradition proceedings of Gichuru and former energy minister Chrysanthus Okemo so that they are handed over “to face money laundering charges in connection with Windward’s activities.”
• Kinangop Wind Park (KWP), which is owned by Norway’s Norfund and the African Infrastructure Investment Fund II (and managed by African Infrastructure Investment Managers), announced in February 2016 that development of its 60.8 MW wind farm would cease implementation after nearly two years of delays due to persistent civil unrest which ran down the funds available for the project. The pair had invested USD 66 million in equity, to cover project costs. In a statement, KWP said that local groups opposed to the project first caused construction to be halted in May 2014.
• In February 2016, New York Stock Exchange-listed Ormat Technologies announced that it had reached commercial operation of Plant 4 in the Olkaria III geothermal complex in Kenya, increasing the complex’s total generating capacity by 29 MW to 139 MW. The company said that Plant 4 will sell its electricity to Kenya Power under a 20-year power purchase agreement, which was amended in October 2015 to allow for the future increase in phases of capacity at Plant IV to 100 MW. Ormat brought the first phase of Plant I online in 2000 and the second phase in 2009.
• Kenya’s president, Uganda’s president and oil company executives met on 21st March 2016 to hold further discussions on a route for a proposed pipeline to transport the two countries’ oil. Resolving the route of the pipeline is crucial to helping oil companies involved in Uganda and Kenya to make final investment decisions on developing oilfields. However, the discussions were deferred to the technical teams of the two countries after President Uhuru Kenyatta and his Ugandan counterpart Yoweri Museveni failed to agree after a lengthy meeting. In March 2016, the Tanzanian and Ugandan governments announced that the pipeline would go via Tanzania to the port of Tanga and that Total had raised the funds it needed to finance it. After recent talks, however, both options still seemed to be on the table, along with a third route through southern Kenya that passes further from Somalia than the Lamu option. The two countries seem to concur that the least cost solution for construction of the pipeline remains the best option. The cost breakdown shows that the most expensive route is Hoima to Tanga, whose cap stands at about USD 5.5 billion, while a joint one with Kenya through the southern route will cost USD 4.4 billion. Kenya favours the northern route through Lokichar, which will cost USD 4.2 billion, because as part of the Lamu Port, South Sudan, Ethiopia Transport (LAPSSET) project, it would transform infrastructure and the way of life of the people in the towns and counties across its path. However, Total has raised security concerns about the Kenyan route because sections of the Kenyan pipeline could run near Somalia, from where militants have launched attacks on Kenya. It has recently emerged that Uganda is also uneasy about the Kenyan government’s ability to acquire the land needed for the pipeline. In March 2016, Kenya and Japan signed a KES 41 billion (USD 408 million) loan agreement that will go towards building a 140 MW geothermal power plant. The Olkaria V power plant will be built by Nairobi Securities Exchange-listed Kenya Electricity Generating Company (KenGen). Construction is expected to begin in July 2016, with the plant arriving on the grid by the end of 2018. The plant is part of KenGen’s plans to add 720 MW of electricity to the grid between this year and 2020, at a cost of just over USD 2 billion.
• The Lake Turkana Wind Power Project will face delays in supplying electricity to the grid when Africa’s largest wind farm goes live in October 2016 because transmission lines may not be in place, the company said. State-owned Kenya Electricity Transmission Co. Ltd has begun construction of the 428 kilometers of power lines. However, wayleave challenges in Nyahururu and upper Naivasha and security issues in Samburu are delaying completion. The developers of the 40,000-acre site in Marsabit county, northern Kenya, plan to have the first 90 turbines installed by September 2016 and begin generating power the following month. The Business Daily announced on 2nd March, 2016 that the first batch of turbines for the 310-megawatt Lake Turkana Wind Power Plant have arrived at the Mombasa port. The shipment of the 30 turbines lays the ground for the expected injection of the first 50 MW of wind power to the national grid in September 2016. UK-based company Aldwych International is the single largest investor in the KES 70 billion wind project with a 30.7% stake. Google has a 12.5% stake after pumping in KES 4 billion last October. Lake Turkana Wind Power Limited, the company developing the wind farm, will sell electricity to Kenya Power at KES 8.6 per unit under a 20-year power purchase agreement.
• Mkopa Investments, a Kenyan company has sued Safaricom, a leading mobile network operator in Kenya, M-Kopa Solar and its parent firm Mobile Ventures Kenya Limited, claiming the firms have infringed on the trade name it has owned since December 1997. Patrick Kimani Kamau, who owns Mkopa Investments, wants Safaricom and Mobile Ventures stopped from using the M-Kopa Solar name. The businessman also wants Safaricom and M-Kopa to pay him all profits they have made by using the disputed name in the course of business. However, Safaricom in its response says Kamau’s company did not raise an objection when Mobile Ventures registered M-Kopa Solar as a trademark, and that the businessman is simply trying to cash in on the multi-million shilling solar energy business. Furthermore, Safaricom says it is not in the same line of business with Mkopa Investments, which deals in import and export of leather, macadamia and groundnuts and that it has never passed itself off as Kamau’s firm. Safaricom in its filings reveals that it has made KES 314 million between 2012 and 2014 from its partnership with Mobile Ventures Kenya in the M-Kopa Solar project.
• The World Bank is seeking bids from consultants to help Kenya’s Ministry of Energy and Petroleum prepare a national geothermal strategy. According to the World Bank, Kenya has an estimated geothermal potential of between 7,000 MW and 10,000 MW. Geothermal is the country’s least-cost base load option. The current least-cost power development plan has set an ambitious target of over 5,000 MW by 2030 as part of Kenya’s Vision 2030 economic development program.
• A USD 2 billion coal-fired thermal power station is set to be constructed at the small village of Kwasasi in Lamu County. It will be Kenya’s first coal-powered plant and is expected to add 985 MW to the grid. However, the project has been opposed by community-based organizations, such as Save Lamu (a coalition of several community groups), whose concerns regarding the plant include environmental and health hazards. The county government’s head of health, sanitation and environment, Mohamed Abubakar, is hoping that an environmental and social impact assessment will lay out how Amu Power, a company formed by a consortium of Centum (a leading Kenyan investment company listed on the Nairobi Securities Exchange and the Uganda Securities Exchange) and Gulf Energy, will mitigate against the damaging effects of the plant.
• Kenya’s Geothermal Development Company is inviting bids for the provision of various services for the Menengai Geothermal Phase I project.
Amu Power , Amu power
African infrastructure investment fund 2 , Old Mutual Investment Group
African Growth and Opportunity Act (AGOA) , International Trade Administration
Cement Sustainability Initiative (CSI), Cement Esia
Chinese firm CMEC to build Sh 30bn wind farm in Kenya , Kenya Business Review
China firm wins Sh22.6bn tender to build Kipeto wind power plant , Business Daily
East Africa: Kenya Doubles Power Exports to Uganda, Tanzania , The East African
Google to invest Sh4bn in Lake Turkana Wind Power project , Daily Nation
Gichuru firm found guilty of graft , The Standard
Gesto signs contract for geothermal power plant with kengen , Gesto Energy Consulting
Inside Gichuru’s Sh20bn empire , Daily Nation
Japan loans Kenya Ksh 41 Billion towards KenGen’s Olkaria V Project , Kenyan Wall Street
Kenya and Uganda stall on talks over oil pipeline route , Energy Global
KETRACO , Kenya Electricity Transmission Company
Lake Turkana Wind Power receives first turbine shipment , Business Daily
Menengai Geothermal Development Project , Climate investment Funds
Ormat Begins Commercial Operation of Plant 4 of Olkaria III Geothermal Project , Renewable Energy World
Sh15bn Kinangop wind park halted as land protests swirl , Business Daily
Tenders , Geothermal development Company
UK now moves to seize Gichuru and Okemo hidden cash , Business Daily
World Bank request for EOI: consulting work on Kenya Geothermal Strategy , Think Geo Energy
As is now well-known, Kenya has signed on to the multi-lateral framework for the sharing of financial information that enables tax authorities detect those seeking to use international borders to avoid paying tax. The Multilateral Convention on Mutual Administrative Assistance in Tax Matters established the Common Reporting Standards (CRS) that were approved by the Organisation for Economic Co-operation and Development (OECD) in July 2014, and which have made it possible for tax authorities of participating countries to access financial information of their tax residents.
While it has been a great international success story, CRS’s full potential is still being undermined by tax-payers who, with assistance of their advisers, are still able to hide their assets and income under various cross-border devices, taking advantage of gaps within CRS to avoid detection. For example, CRS is limited to financial institutions that are located in participating jurisdictions. It is therefore easy to avoid its ambit by restricting one’s dealings to financial institutions located in nonparticipating countries which are not required to report any financial information in regards to a reportable person – a boon to aggressive tax planners hatching tax avoidance schemes.
The Model Rules
In line with their continuing programme of improving mutual disclosure requirements which are uniform but sensitive to local needs, on 9th March 2018, the OECD published the Model Mandatory Disclosure Rules for Common Reporting Standard Avoidance Arrangements and Opaque Offshore Structures (the Model Rules) which specifically target all categories (compendiously referred to as intermediaries) tax advisers. The OECD recognises detecting and deterring offshore tax avoidance schemes “is key both for the integrity of the CRS and for making sure that taxpayers that can afford to pay advisors and to put in place complex offshore structures do not get a free ride.”
As with other rules by the OECD on collection and access of relevant financial information for tax purposes, the Model Rules were developed so as to give a shared model for countries on the contents and structure of their own local regulatory framework in respect to professional service providers such as accountants, tax and financial advisors, banks, lawyers “to inform tax authorities of any schemes they put in place for their clients to avoid reporting under the OECD/G20 Common Reporting Standard (CRS) or prevent the identification of the beneficial owners of entities or trusts.”
The Model Rules are targeted at CRS Avoidance Arrangements or Opaque Offshore Structures. The former is ‘...any arrangement where it is reasonable to conclude that it has been designed to circumvent, or has been marketed as or has the effect of circumventing CRS legislation...” while the latter “…a passive offshore vehicle that is held through an opaque structure” and passive vehicle defined as “legal person or legal arrangement that does not carry on a substantive economic activity supported by adequate staff, equipment, assets and premises in the jurisdiction where it is established or is tax resident.” Whilst not exactly crystal clear from the various examples provided, it is possible to get a sense of what activities and/or structures the Model Rules have in mind. CRS avoidance relates to efforts to exploit gaps within the relevant legislative or administrative framework to avoid disclosure of the information required under CRS.
An opaque structure may also be described as the application of the well known commercial purpose test of an entity to CRS. The idea here is to isolate genuine financial arrangements serving an identifiable commercial purpose from those designed for concealing income and assets and thus avoid disclosure under the CRS regime.
Inquiry is directed at whether the structure has the effect of not allowing the accurate identification of the beneficial owners and specifically identifies well recognised tax planning techniques that can be used to achieve this outcome, such as the use of nominee shareholders, indirect control arrangements or arrangements that provide a person with access to assets held by, or income derived from, the offshore vehicle without being identified as the beneficial owner.
The Model Rules define “intermediaries” as those persons responsible for the design or marketing of CRS Avoidance Arrangements and Opaque Offshore Structures “promoters” as well as those persons that provide assistance or advice with respect to the design, marketing, implementation or organisation of that Arrangement or Structure “service providers”.
The knowledge and actions of an intermediary include those of their employees acting in the course of their employment, as well as contractors working for an employer, and the disclosure obligation and the penalties for a failure to disclose are imposed on that employer.
To be subject to the obligations imposed by the Model Rules, intermediaries must have a connection – “sufficient nexus” – with the reporting jurisdiction which extends to intermediaries operating through a branch located in that jurisdiction as well as one who is resident in, managed or controlled, incorporated or established under the laws of that jurisdiction.
An intermediary is required to file disclosure in respect of a CRS Avoidance Arrangements or Opaque Offshore Structures at the time the Arrangement is first made available for implementation, or whenever an Intermediary provides services in respect of the Arrangement or Structure. This ensures that the tax administration is provided with early warning about potential compliance risks or the need for policy changes as well as ensuring that it has current information on the actual users of the scheme at the time it is implemented.
There may be certain instances where the user of a CRS Avoidance Arrangement or Opaque Offshore Structure may have disclosure obligations under the Model Rules. More specifically, in instances where the intermediary is not subject to disclosure obligations as well as those cases where the intermediary is unable to comply with its disclosure obligations under the Model Rules either because it has no nexus with that jurisdiction or because it is relying on an exemption from disclosure such as professional secrecy.
The information required to be disclosed includes the details of the Arrangements or Structures, as well as the clients and actual users of those Arrangements or Structures, and any other intermediaries involved in the supply of the Arrangements or Structures. The requirements under the Model Rules are designed to capture the information that is likely to be most relevant from a risk-assessment perspective and to make it relatively straight forward for a tax administration to determine the jurisdictions with which such information should be exchanged.
The Model Rules do not require an attorney, solicitor or other recognised legal representative to disclose any information that is protected by legal professional privilege or equivalent professional secrecy obligations but only in respect to the scope of such protected information.
All relevant non-privileged Arrangements or Structures that are within the legal representative’s knowledge, possession or control should still be provided. While understandable and correct for legal professional privilege is now accepted as a component of the fundamental right to privacy, this might limit the Model Rules’ efficacy as more and more reliance is placed on practitioners in respect to whom such privilege attaches i.e. lawyers. Efforts by accountants to have legal professional privilege extended to them while giving legal advice, have thus far failed.
Striking a Balance
The information requirements of the model rules seek to strike a balance between the compliance burden on intermediaries to a minimum and still capturing the information that is likely to be most relevant. The requirement to separately identify the jurisdictions where the scheme has been made available for implementation and to specify the tax details of all the intermediaries, clients and reportable taxpayers in connection with that arrangement is intended to make it relatively straightforward for a tax administration to determine the jurisdictions for whom the disclosed information will be relevant for information exchange purposes.
The rules have put in place punitive measures for non-disclosure in the form of penalties. However the same are not cast in stone but are to be determined by each jurisdiction depending on its unique circumstances. However it is expressly stipulated that such penalties are to be set at a level that encourages compliance and maximises their deterrent effect.
The Model Rules are a continuation of concerted international efforts to tighten the noose around tax cheats or dodgers seeking to exploit international borders. As Arthur Vanderbilt remarked “taxes are the lifeblood of government and no taxpayer should be permitted to escape the payment of his just share of the burden of contributing thereto.” While the problem of crossborder tax avoidance affects most countries, the less developed countries are, by a significant factor, the most affected and disproportionately so. It will therefore come as no surprise if Kenya adopts the Model Rules as part of its CRS regime.
Even as the Government moves to implement CRS, a national debate on our entire tax system may well be warranted. It is a recurring question on which no answers are available and, as far as we can tell, has never fully engaged us as citizens despite the constant complaint that we are being overtaxed. It may well be possible that our tax system is inhibiting economic activity and thus, ironically, undermining rather than boosting revenue collection.
Full of activity: A review of developments in Kenya’s Energy Sector (Q1-2016)
May 2016 saw flurry of activity in Kenya’s renewable energy sector. We have set out below some of the industry’s key highlights:
• The Kenyan government signed a Memorandum of Understanding (MOU) with the government of the UK to bolster Kenya’s renewable energy sector. A press release disseminated from the British High Commission in Nairobi and published on 17th May 2016, stated that UK Export Finance has, as an integral part of the MOU, “affirmed its interest in considering requests for export financing or insurance for eligible renewable energy projects in Kenya, drawing on a risk appetite of up to at least GBP 250 million (USD 323.7 million)”. No information has been released as yet on what constitutes an eligible project.
• The African Development Bank indicated that the construction of the first phase of the Menengai Geothermal Power Plant will be complete by July 2016. The first phase of the project is expected to produce up to 400 MW. The overall project has a potential of producing 1600 MW once fully commissioned.
• The Cabinet Secretary for Energy, Charles Keter relayed the government’s enthusiasm for the participation of private investors in the geothermal space at a geothermal consultative forum held in Nairobi on 22nd May 2016. He emphasised the importance of fast-tracking the Energy Bill 2015, currently before the Senate. The proposed law includes enabling regulatory structures for the participation of independent power producers.
Kenya’s vast renewable energy resources remain largely untapped. One of the principal reasons for this is the financing gap in projects conceived by the government. To remedy this, the government has sought to both collaborate with friendly countries, such as the UK and the overhaul of the country’s energy regulatory structure to make it more attractive to investors. The Energy Bill will end Kenya Power and Lighting Company’s electricity distribution monopoly and create a leeway for independent power producers to participate in the sector.
Solar firm seeks nod to challenge Kenya Power monopoly, Business Daily
State keen on ending KPLC’s monopoly, The Star
State moves to woo geothermal investors, Mediamax.
On matters energy: A review of some key developments in Kenya’s Energy Sector (Q2-2016)
Full of activity: A review of developments in Kenya’s Energy Sector (Q1-2016)
If passed, the Energy Bill, 2015 (the Energy Bill) will see Kenya Power (the country’s national electricity utility company) compensate consumers for financial losses and physical injuries due to power outages. The Energy Bill provides that “a licensee shall be liable to compensate a consumer due to power outages or surges…that exceed a cumulative three hours within a 24-hour period”. Furthermore, “where a consumer incurs financial loss, the licensee shall compensate the consumer by incorporating the compensation into the consumer’s bill by way of a subsidy which shall, be an equivalent amount to the loss incurred as presented by the consumer and agreed by the licensee.” This is intended to spur a faster response from Kenya Power in the event of blackouts. The Energy Bill also seeks to establish the Energy and Petroleum Tribunal as the successor of the Energy Tribunal (established by the Energy Act No. 12 of 2006).
To get a copy of the Energy Bill, click here
Among other objectives, the Energy Bill, 2015 (the Bill) seeks to end Kenya Power and Lighting Company’s over fifty (50) years near monopoly, over power distribution and retailing of electricity in Kenya, entrenched under the soon to be repealed Energy Act No. 6 of 2006 (the Energy Act). Power distribution in the energy sector plays a crucial role in the government’s efforts to ensure that every Kenyan has access to electricity by the year 2020 so the statute is of great national importance. Below is a brief analysis of the measures introduced in the Bill to meet this objective:-
Currently, the Energy Act only defines “distribution” to mean the ownership, operation, management or control of facilities for the movement or delivery of electrical energy to enable supply to consumers; and “distribution licence”, to mean any document or instrument authorising a person to distribute electrical energy in the manner described in such a document. In addition to the meaning of distribution and a distribution licence, the Bill has now introduced the terms below:-
Any person that wants to distribute electricity must apply for a licence to the Energy Regulatory Authority (the Authority) provided that the person will not require authorisation to generate electrical energy for their own use of a capacity not exceeding one MW. If any person carries out any electricity undertaking without a licence, they commit an offence and will be liable upon conviction, to a fine not exceeding KES 1 million or to an imprisonment of not more than one (1) year or to both.
The form and manner of applying for a license will be provided in the Regulations of the Bill; however, the Cabinet Secretary is yet to set them. The Authority can also invite applications for a licence through a fair, open and competitive process in accordance with procedures to be prescribed by the Cabinet Secretary in the regulations.
An applicant must give fifteen (15) days’ notice by public advertisement in at least two newspapers of nationwide circulation, before making an application for distribution that they intend to make the said application. Thereafter, the Authority will notify the applicant whether the application was received. The Bill has provisions that allow members of the public to also make objections to the application.
The Authority will consider the following factors in granting or objecting the application
Within sixty (60) days of notifying the Applicant the application was complete, the Authority will inform the applicant if they were successful. Conversely, where the application was unsuccessful, the applicant will be notified within seven (7) days of refusal. An aggrieved applicant will have the right to appeal to the tribunal within thirty (30) days of the decision of the Authority.
There are expressed obligations and rights given to a distribution licensee; some of which include the power to plan, build, operate and maintain the distribution system necessary for the transfer of electrical energy from generating stations or plants either directly or indirectly for purposes of enabling supply to consumers as stated in the licence.
Despite the rights accrued under the distribution licence, it does not relieve the licensee or anyone else from complying with laws applying to the development, building, operation or maintenance of a distribution network. Some of them include the following;
Unless the licence states otherwise, the distribution licensee must ensure as far as technically and economically practicable, that the distribution system is operated with enough capacity to provide network services to persons authorised to connect to the network.
In order to ensure there is reliability and quality of supply and quality of service, the licensee will be required to collect, analyse and maintain such data, information and statistics relating to his undertaking to enable him monitor and report to the Authority on the reliability and quality of supply & service, as would be prescribed in regulations.
A licence can be revoked by the Authority where;
The Authority must however give a thirty (30) day notice to the licence-holder to show cause why their licence should not be revoked.
There are also additional duties pertaining to extending the network to persons who wish to be supplied with electrical energy.
A distribution licensee will be required to plan and construct the requisite electric supply lines to enable any person in the licensee’s area of supply, receive a supply of electrical energy either directly from the licensee, or from a duly authorised electricity retailer, as the case may be.
A person in need of the supply of electrical energy must apply to the duly authorised retailer, but where there is no such retailer, to the distribution licensee. If the supply is to be provided at medium or high voltage the retailer can advise the applicant to apply directly to the distribution licensee. Further, the person who needs the supply must specify the premises in respect of which the supply is required and the maximum power required to be supplied and a reasonable date when the supply is required to commence.
Upon receipt of the application to be supplied with electrical energy, the retailer or the distribution licensee, as the case may be, must within the period specified in the licence and any regulations, notify the person by whom the application is made, of the terms and conditions, which may include payments of whatever nature, to be complied with by the applicant before the supply is availed. (Provided that the licensee may in its discretion allow an applicant under this sub-section to pay the cost of the installation in installments over such periods and on such terms and conditions as may be agreed upon between the licensee and such person).
Regardless of any payments made during the application to be supplied with electrical energy, the electric supply lines will remain to be the property of the distribution licensee and could be used to supply other persons, provided that such use does not prejudicially affect the supply of electrical energy to the person who first required such electric supply lines to be laid down.
They will be entitled to reimbursement by the licensee of a fair and just proportion of the cost originally paid from payment made by each person subsequently connected to electric supply lines, provided that a claim for reimbursement is made within six (6) years. The licensee will determine the fair and just proportion of the cost to be reimbursed in accordance with regulations of the Bill. If any difference arises as to the amount to be reimbursed by any person, that issue will be determined by the Authority upon an application. A licensee must keep at its office forms of requisition and a copy will, on application, be supplied free of charge to any person within the area of supply and any supplied requisition be deemed valid in point of form.
Article 71 of the Kenyan Constitution provides that a transaction is subject to ratification by Parliament if it:
a) involves the grant of a right or concession by or on behalf of any person, including the national government, to another person for the exploitation of any natural resource in Kenya;
b) is entered into after the effective date (in accordance with Article 263 that is, 27th August 2010).
According to Article 93(1) of the Constitution, the Kenyan Parliament is comprised of both the National Assembly and the Senate. In accordance with Article 71(2) Parliament has enacted the Natural Resources (Classes of Transactions Subject to Ratification) Act 2016, which was assented to by the President on 13th September 2016 and came into force on 4th October 2016.
Under the said Act, the class of transactions set out in Section 4(1) and set out in the Schedule to the Act will require Parliament’s ratification in order to give effect to the transaction. The class of transactions which require ratification touch on: authorization to extract crude oil and gas (excludes exploration permits), mineral agreements with a threshold of US$500 million; water resources (the extraction of sea water within the territorial sea for private commercial use), underground water resource ( the extraction of underground steam within a water conservation or other water resource protected are), wildlife (export and re-export of endangered wildlife species as well as the extraction of oil, gas and minerals within a wildlife protection area), forests ( long term concession of a gazetted forest resource as well as any excision or change of boundaries of gazetted public forests or nature reserves) and lastly any other transaction subject to ratification under an Act of Parliament.
Section 4(2) lists the transactions which have been exempted from the need to obtain any ratification by Parliament, namely: grant of a concession or right to exploit a natural resource through a permit, licence or other authorisation issued in accordance with the requirements of national or county government legislation (subject to the threshold set by the Cabinet Secretary under sub-paragraph (e), grant of a concession or right by a private person to exploit a natural resource through an agreement or a contract, the grant of a concession or right to exploit a natural resource for scientific purpose, educational or other non-commercial purposes unless the exploitation involves taking the natural resource or any portion of it outside Kenya; the exploitation of a natural resource by a Kenyan for subsistence purposes (in circumstances in which the law does not require that a permit, licence or other authorization be obtained; and lastly the exploitation of a natural resource in quantities falling below a threshold prescribed by the Cabinet Secretary by notice in the Gazette.
A beneficiary of a transaction (touching on a natural resource subject to ratification) has a duty to submit the agreement or other instrument evidencing the transaction within fourteen (14) days to the Cabinet Secretary responsible for the natural resource.
The Cabinet Secretary has seven (7) days to then submit the agreement for ratification to Parliament (which is supposed to be an open process, unless the Cabinet Secretary has acceded to a request for portions of the agreement to be treated as confidential in nature in which said case the ratification process will be conducted in camera).
An agreement subject to ratification shall only take effect once it is so ratified (although the transitional provisions provide that agreement which was entered into after the effective date but before the coming into force of this Act shall be deemed valid - which is a welcome relief for all beneficiaries of such agreements who were concerned about the legality of such agreements in light of Article 71 of the Constitution).
The timelines within which both houses of Parliament are to ratify those classes of transactions is sixty (60) days of receiving the agreement in accordance with the laid down procedures.
Lastly, the Act provides an interesting challenge to the Cabinet Secretary’s request for confidentiality of an agreement, as in line with Article 35(1) of the Constitution (as read with the Access to Information Act 2016). The Act does allow a person to challenge in the High Court the decision of the Cabinet Secretary on the request for confidentiality.
Kenya has recently discovered several blocks of natural gas and oil spanning several counties. However, most of these counties are poor, including Turkana which is known to have the most promising oil fields that could be exploited as early as June, 2017. Lamu and Wajir also have natural gas.
It has been observed that countries which are rich in natural resources, specifically non-renewable resources like minerals and fuels, somewhat paradoxically tend to have slow economic growth, little or no democracy leading to authoritarian rule, sluggish development and are more prone to conflict as compared to countries with fewer natural resources. This situation has been coined the “resource curse” or the “paradox of plenty”.
The term resource curse was first used by a British economist, Richard Auty, in 1993 to describe how countries rich in mineral resources were unable to use that wealth to boost their economies and how contradistinctively, these countries had lower economic growth, than countries without an abundance of natural resources.
Avoiding the resource curse was one of the key issues raised by the public in 2012 after the Kenyan government announced that commercially viable oil had been discovered in Turkana. Several members of the public were apprehensive as they did not want Kenya to suffer the same resource curse suffered by several African countries such as Equatorial Guinea, Liberia, Libya, Nigeria, Republic of Congo, Sierra Leone and Sudan.
The Local Content Bill, 2016
Cognisant of the above, the Senate Committee on Energy, Roads and Transportation introduced the Local Content Bill in July 2016 (the Bill). The Bill is intended to avert the conflicts that have rocked communities in oil and gas rich areas by ensuring that the majority of poor Kenyans in those areas are assured of enjoying the benefits of natural resources.
The Bill is premised on Article 69(1) of the Constitution which imposes an obligation on the State to among other things, ensure the sustainable exploitation, utilisation, management and conservation of the environment and natural resources and ensure the equitable sharing of the accruing benefits and to ultimately utilise the environment and natural resources for the benefit of the people of Kenya.
Objectives of the Bill
The Bill seeks to provide a framework to facilitate local ownership, control and financing of activities connected with the exploitation of gas, oil and other mineral resources. It also seeks to make provision for an increase in local participation along the value chain in the exploration of gas, oil and other mineral resources.
The Bill also seeks to ensure that local content is entrenched in every aspect of the extractive industry through the involvement of local communities which should lead to the enhancement of the income received by local communities following their involvement in the extractive processes, for example, by ensuring that landowners and owners of resources receive the revenue due to them following use of their land and resources.
Further, the Bill looks to facilitate the development of local economies through the creation of employment opportunities and by ensuring the procurement of goods and services that are produced locally. Additionally, the Bill aims to stimulate local industrial development, capacity building and to increase the local capability to meet international standards in the supply of goods and services.
Local Content Committee
The Bill establishes a Local Content Development Committee (the Committee) whose functions include overseeing, coordinating and managing the development of local content in Kenya; making recommendations and advising the Cabinet Secretary in the Ministry of Mining (the Cabinet Secretary) on formulations of policy and strategies for the development and implementation of local content; making recommendations to the Cabinet Secretary on the minimum standard requirements for local content and the development of the local content plans; appraising, evaluating and approving local content plans and reports submitted to the Committee; overseeing, in consultation with the county governments, the implementation of local content policies and strategies by operators and collaborating with county governments in the implementation of strategies to improve the capacity of local persons, businesses and the capital markets to fully leverage the objectives of the intended Act.
Local Content Plan
Under the Bill, oil and gas companies will now be required to state how local communities will benefit from the proceeds of the extractive processes before they are licensed. The companies are required to submit a Local Content Plan (the Plan) to the Committee in which they should set out information regarding the procurement and utilisation of locally produced goods and services, the qualification requirements and employment of local persons to be engaged in the extractive industry, workforce development strategies in relation to locals and strategies for the support of local participation in the activities of the operator.
The operator is also required to set out in the Plan the strategies through which it intends to give priority to goods produced and services delivered locally and to also give priority to qualified local persons with respect to employment opportunities.
Skills and Technology Transfer
The Bill requires oil and gas exploration companies to commit to a skills and technology transfer agreement with local firms and individuals. This will ensure more Kenyans are employable and have the skills required for job opportunities in the extractive industry.
An operator is also required to submit to the Committee, a succession plan for any position not held by a local person within a period of six (6) months from the commencement of its operations. This provision seeks to ensure that where a certain position is held by an incumbent expatriate, the role will be taken up by a local person within a specified time.
The Bill also requires the Cabinet Secretary for Environment and Natural Resources to issue guidelines and contracting standards on thresholds to be attained by each operator with respect to the percentage of local equity ownership of companies engaged in the extractive industry.
Local Content Training and Development Fund
The Bill established the Local Content Training and Development Fund (the Fund) and requires the extractive industry players to remitsuch percentage of their net revenues to the Fund as will be determined by the Cabinet Secretary in consultation with the Committee for the purpose of training locals. This provision is aimed at ensuring that in the future, local content requirements are fully implemented as required under the Bill.
A Nigerian Perspective
It is arguable that the discovery and exploitation of oil in Nigeria has been more of a curse than a blessing. The oil has benefited only a few people and this has resulted in frequent conflicts amongst communities, particularly in the oil-rich Delta region.
The Nigerian Oil and Gas Industry Content Development Act, 2010 (the Nigerian Act) on local content was thus enacted with similar intentions as the Kenyan Bill. The Nigerian Act seeks to increase indigenous participation in the oil and gas industry by prescribing minimum thresholds for the use of local services and materials and to promote transfer of technology and skills to the Nigerian labour force in the industry.
Like the Kenyan Bill, the Nigerian Act provides for preferential treatment of local ventures and workforce. It also provides a host of requirements designed to ensure workforce development of and technology transfer to Nigerians as a first option. It requires that, whenever possible, operators should hire Nigerians. When the operators are unable to find skilled workers, the Nigerian Act then requires that they put in place programs and procedures for training workers and to make periodic progress reports to the Nigerian Content Monitoring Board.
In addition, the Nigerian Act mandates that operators provide a succession plan for all positions filled by expatriates, except for five percent (5%) of management positions, which may be permanently held by foreigners, with Nigerians taking over after a maximum of four (4) years of apprenticeship under incumbent expatriates.
While the Memorandum of Objects and Reasons of the Kenyan Bill states that one of its objectives is to provide a framework to ensure that landowners and owners of resources receive the revenue due to them, it would appear that the Bill does not have express provisions on exactly how the proceeds of the extractive industry are to be shared with the local community.
The Bill seems to place more focus on the involvement of the local community in the mechanical processes of the extractive industry through the provision of goods and services required for the industry and less on actual distribution of the income generated from the extractive industry.
It may therefore be concluded that while the Bill provides a good starting point on addressing the concerns of the public regarding the direction Kenya is taking to safeguard local interests in the extractive industry, the question as to how effective the Bill will be in achieving its stated intention will be answered once the Bill is passed into law and with the passage of time.
No doubt, Kenya offers one of the fastest growing and dynamic markets for renewable energy in Africa. In 2015, the Climatescope Index ranked Kenya 6th out of 55 countries that invest in the generation of renewable energy. The country’s renewable energy flagship projects include the Lake Turkana Wind Power Project which aims to provide 310 MW of reliable, low cost windpower to the Kenyan grid. This is equivalent to approximately 20% of the current installed electricity generating capacity. As the single largest private investment in Kenya, the Project will replace the need for Kenya to spend approximately KES13.7 billion (USD 135 million) per year on importing fuel for electricity generation. Construction of the power plant commenced on 25th October, 2014. 50 MW to 90 MW of capacity will be ready for commissioning in September 2016. It is notable that when fully operational in April 2017, the windfarm will be the single largest one of its kind in Africa.
Smaller windpower projects such as a 90 MW windpower project in Mpeketoni, Lamu County have been proposed. Regulatory approvals have been granted for this KES 20 billion (approximately USD 200 million) project sponsored by Electrawinds, a Belgian company, in partnership with International Finance Corporation and a Kenyan company, Kenwind Company Holdings. In Kajiado County, the Kipeto windpower project is set to generate 100 MW of electricity. The project results from one of the most substantial United States foreign direct investments in Kenya. A Chinese firm was recently contracted to construct the plant at the cost of KES 22.6 billion (approximately USD 223 million). The construction phase has been estimated to be two (2) years.
In addition, SkyPower, the developer and owner of various utility-scale solar photovoltaic energy projects, signed an agreement in July 2015 with the Ministry of Energy and Petroleum for the development of 1 GW of world-class solar projects to be built in four phases in Kenya over the next five (5) years.
Centum Investments, a Kenyan investment company, together with three other foreign firms have also sponsored the construction of the 140 MW Akiira geothermal power plant at a projected cost of KES 30 billion (approximately USD 296 million). The project will be developed in two phases; it is estimated that 70 MW will be connected to the national grid.
The above projects have been facilitated by Kenya’s extensive regulatory framework which supports the growth of Kenya’s renewable energy sector.
The Energy Act, 2006 defines renewable energy to mean “all non-fossil sources including but not limited to biomass, geothermal, small hydropower, solar, wind, sewage treatment and plant gas”.
The Sessional Paper No. 4 of 2004 on Energy, which is the foundational document for energy liberalisation in Kenya, provides for the government to undertake pre-feasibility and feasibility studies on the potential for renewable energy sources and for the packaging and dissemination of information on renewable energy sources to create investor and consumer awareness on the economic potential offered by renewable sources of energy.
The Energy Act, establishes the Energy Regulatory Commission (ERC). The ERC’s key functions include the regulation of production, distribution, supply and use of renewable and other forms of energy. The ambit of its functions covers the protection of interests of consumers, investors and other stakeholder interests. To compound this, the Energy Act obligates the Cabinet Secretary to promote the development and use of renewable energy technologies.
In a bid to attract private investment into the renewable energy sector, the Government issued a policy on renewable energy feed-in-tariffs in 2008. The feed-in-tariffs were originally introduced for electricity generated from wind, biomass and small hydropower sources but after revision in 2010, they also provide support to geothermal and biogas sources as well as solar electricity generation. A feed-in-tariff as described in the policy is an instrument that allows power producers to sell renewable energy-generated electricity to an offtaker (the buyer of electrical energy for the purpose of selling the electricity to customers connected to the national or mini-grid systems) at a pre-determined tariff for a given period of time.
The objectives of the feed-in-tariffs system as outlined in the policy are: to facilitate resource mobilisation by providing investment security and market stability for investors in electricity generation from renewable energy sources; reduce transaction costs, administrative costs and delays associated with the conventional procurement processes. Another objective is to finally encourage private investors to operate their power plants prudently and efficiently so as to maximise returns.
The policy provides that small renewable energy projects with a capacity of up to 10 MW shall have a standardised power purchase agreement which shall incorporate certain features such as no bidding for renewable sites and resources. Feed-in-tariff values for small renewable projects are provided in the policy which further outlines principles that underline the calculation of the said values which include as stated in Section 25, a calculation on a technology specific basis using the principle of cost plus reasonable investor return.
The policy further provides that renewable energy projects which are larger than 10 MW of installed capacity shall meet load flow or dispatch and system stability requirements. The policy gives the feed-in-tariffs for each of the renewable energy sources it covers and one of the common features is that the feed-in-tariff is to apply for twenty (20) years from the date of the first commissioning of the respective power plants.
The developer is to bear the costs of interconnection including the costs of construction, upgrading of transmission lines, substations and associated equipment. The off-taker is to recover from electricity consumers 70% of the portion of the feed-in tariff, except for solar plants connected to off-grid systems, where the off-taker recovers 85%. Finally, the policy provides that renewable energy generators feeding into the grid will require a power purchase agreement and further that the project sponsor for such renewable generation projects must be an entity legally registered in Kenya.
The promulgation of the Constitution of Kenya, 2010 changed the governance structure of the country by creating a decentralised system of government with functions that were formerly exercised by the National Government being devolved to Counties. The roles of the National and County Governments in relation to energy have been clarified and hence this necessitated the review of the energy sector framework which led to the Draft National Energy and Petroleum Policy, 2015 as well as the Energy Bill, 2015 (the Energy Bill).
The preamble of the Energy Bill provides that it aims to achieve among other things the promotion of renewable energy. The Energy Bill describes obligations of the National Government and the Cabinet Secretary is mandated to develop a conducive environment for the promotion of investments in energy infrastructure development. The Energy Bill further provides that the National and County Governments shall, in their effort to promote energy investments, facilitate the acquisition of land for energy infrastructure development in accordance with the law.
The Energy Bill establishes the Energy Regulatory Authority whose functions shall be to regulate the production, distribution, supply and use of renewable and other forms of energy as well as to protect the interests of consumer, investor and other stakeholder interests.
The Energy Bill additionally establishes the Rural Electrification and Renewable Energy Corporation, whose functions shall include undertaking feasibility studies and maintaining data with a view to availing it to developers of renewable energy resources. Also to develop and promote the use of renewable energy and technologies.
The Energy Bill also establishes an inter-Ministerial Committee known as the Renewable Energy Resource Advisory Committee. This Committee is charged with the task of advising the Cabinet Secretary on amongst other things, the criteria for allocation of renewable energy resources, licensing of renewable energy resource areas, management of water towers, water catchments and management (and development) of renewable resources e.g. multi-purpose dams and reservoirs.
Lastly, the Energy Bill establishes a renewable energy feed-in-tariff system with the objective of catalysing the generation of electricity through renewable energy sources and encouraging locally distributed generation, thereby reducing demand on the network and technical losses associated with transmission and distribution of electricity over long distances, among other objectives.
Although Kenya has attracted notable large scale energy projects and has sought to streamline the regulation of its renewable energy sector, the country’s renewable energy potential remains largely untapped. This could be attributed to amongst others, a focus on large scale energy projects. Efficient licensing procedures and the ease of access to information on the same would therefore bolster the growth of smaller scale renewable energy projects in Kenya.
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