Key changes in comparison to the 2012 FiT Policy

The FiT Policy - a brief introduction

The FiT Policy is an instrument for promoting generation of electricity from renewable energy sources by guaranteeing a pre-determined tariff for producers for a period of 20 years.

Exclusion of medium to large scale projects from 2021 FiT Policy

• Previously, the 2012 FiT Policy prescribed FiT thresholds for wind, solar, small hydro, biomass, biogas and geothermal energy plants for small projects (of up to 10MW) and medium projects (of up to 70MW) as applicable.
• The 2021 FiT Policy has now been limited to small scale biomass, biogas and small hydro projects (of up to 20 MW).
• All solar and wind power projects, as well as other renewable energy projects larger than 20MW will be procured under the Auctions Policy rather than the FiT Policy.
• The exception to the above is geothermal projects which will be procured under the Policy on Licensing of Geothermal Greenfields. We have yet to sight a copy of this Policy.

What happens to existing approved projects (larger than 20MW) whose PPAs have not been signed?

• All solar and wind projects approved under the 2012 FIT Policy, whose PPAs have not been signed shall be transitioned to the Auctions Policy framework.
• In a similar manner, we expect that all other renewable projects (e.g., biomass, biogas) larger than 20MW whose PPAs have not been signed, shall be transitioned to the Auctions Policy framework while the geothermal energy projects are likewise, transitioned to the Policy on Licensing of Geothermal Greenfields.

Cumulative capacity limit for FiT projects in Kenya

• The cumulative contracted capacity contribution by FiT projects of up to 20MW is prohibited from exceeding 10% of system-wide generation capacity.
• When the total contracted capacity of the embedded generators approaches the 10% limit, the Government will review the capacities based on the existing system technical capabilities and national requirements.

Standardised PPAs

• Projects procured under the 2021 FiT Policy shall be contracted under Standardised PPA with the following features:

1. the PPA term shall be a maximum of 20 years;
2. the plants may not be despatchable (non-despatchable plants cannot be despatched by offtaker and are instead fed into the network as and when the energy is available. All renewable energy sources save for dam-based hydro power projects are non-despatchable); and
3. the standardised PPA shall be offered to projects that demonstrate technical and economic viability, meet the grid connection requirements and are able to secure all necessary legal and regulatory approvals and financing within the timeframe specified in the Application and Implementation Guidelines (available at www.renewableenergy.go.ke).

• Previously, the template standard PPA offered to developers was subject to significant amendments based on negotiations between the parties particularly in terms of tariff structures, provision of the Government letter of support, impact of changes in law and tax, termination remedies etc.
• It remains to be seen whether the proposed template standard PPA under the 2021 FiT Policy shall be subject to substantial changes following negotiations amongst the parties.

Capacity Payments and Deemed Generated Energy (DGE) Payments

• Capacity payments shall not be payable for projects procured under the 2021 FiT Policy.
• Capacity payments allow developers to recover capital costs and fixed operating costs in relation to a plant - regardless of whether a facility is despatched or not. Investors will now be required to assess and recover all their costs from the energy charge component which has been computed to take into account a reasonable return on investment.
• Deemed Generated Energy (DGE) payments shall be paid if the grid availability falls below the guaranteed levels as specified under the standard PPA at a rate equivalent to 75% of the applicable tariff values.
• DGE payments are payable where the offtaker curtails production of energy due to constraints on the grid or for other reasons.
• Previously, the rate of DGE payments was not fixed and was determined by negotiations between the offtaker and the developer.

Pass through to consumers on part of the offtaker

• The offtaker shall be entitled to recover the FiT values from electricity consumers as may be directed by EPRA at the time of approval of the applicable PPA or review thereafter to make the offtaker whole.
• Recovery of cost from FiT power plants contracted prior to tariff review shall be done as a pass-through cost such that the offtaker remains revenue neutral.

No Government letter of support

• All projects approved for implementation under the FiT policy shall not require any form of security or guarantee from Government including Government letter of support.

FiT Values

The applicable FiT values under the 2021 FiT Policy as compared with the 2012 Fit Policy values are tabulated below:

• As you will see, the tariff values have been revised downwards perhaps in recognition of, among other factors, technological advancements for the equipment used in such projects, which should consequently reduce the capital costs incurred by sponsors and developers of such projects.

Application

• The 2021 Fit Policy shall only apply to renewable energy power plants developed after its publication.
• As indicated above, approved projects which no longer qualify for FiT and whose PPAs have not been signed shall be transitioned to the Auctions Policy framework.
•  The 2021 FiT policy shall be subject to review every 3 years, but a review may, in exceptional cases, be undertaken earlier.

Developer incorporation requirements

• Developers of renewable generation projects undertaken under the 2021 FiT policy must be entities legally incorporated in Kenya.
• In the event the initially approved developer cedes some shareholding in order to accommodate new equity partners, the developer shall retain at least 30% of the shareholding.
• Previously, there was no limit as to the equity stake that developers could dispose in a project (e.g. for purposes of raising capital for a Project) subject to approval from EPRA.

General Comment - impact on projects

• The 2021 FiT Policy has significant implications for approved solar and wind projects (and other renewable projects larger than 20MW) whose PPAs have not been signed as such projects which will now be transitioned to the Auctions Policy framework.
• The sponsors/developers of such projects will be forced to compete against other developers on price and volume in an auction context - notwithstanding any sunk predevelopment costs incurred.  This may adversely affect the economics of a project thus forcing the sponsors/developers back to the drawing board in relation to their proposed projects.
• Based on the updated LCPDP, the approved projects pipeline indicates that we can expect fierce competition amongst participants in the auctions, notwithstanding the prevailing grid capacity/demand challenges.
• Further, it is noticeable that the 2021 FiT Policy is silent on the ‘take or pay’ issue, although the same can be inferred given the now prescribed (lower) DGE payments. In the recent past, KPLC has been insisting on the ‘take and pay’ approach in PPAs. We are also aware that one of the obligations of the Taskforce appointed by the President is to ‘review of the Take-or-Pay approach applied under the PPA structure and recommend a viable Pay-when-Taken (merchant plant) approach, or any other viable payment structure, for use in independent power generation projects.’

Key Highlights

Legal basis and Objectives

• The Auctions Policy is issued pursuant to the Act which provides that EPRA may run a competitive process before awarding a generation licence under the Act.
• The primary objective of the Auctions Policy is to procure renewable energy capacity at competitive prices aligned to the LCPDP and the Integrated National Energy Plan (INEP).

Application

• The Auctions Policy applies to all solar and wind power projects, as well as other renewable energy projects larger than 20MW.
• Auctions will be announced by MoE, upon advice by the LCPDP/INEP Committee on the appropriate timing and targeted capacity.
• The MoE through the Renewable Energy Auctions committee, will be responsible for the implementation of the Auctions Policy.

Site Selection

• According to the 2021 FiT Policy, the MoE will outline requirements for site selection to participate in the auctions.
• It is unclear as to whether the auctions will be site specific based on the requirements given by the MoE or whether bidders will be free to bid based on their preferred locations. We however note that as part of the prequalification process, interested bidders will be required to demonstrate land rights/access for the project and interconnection infrastructure.

Auction Process

• The auction mechanism will comprise of a two - stage bidding process, namely:
• a prequalification stage; anda request for proposal (RfP) stage.

• During the prequalification stage, bidders will be required to demonstrate, among other things, requisite experience to implement the project, financial capability, that the preliminary design/configuration is viable, land rights/access consistent with site requirements for the project and the proposed grid connection route etc.
• During the RfP stage, a bidder will be required to submit a detailed technical proposal and a sealed price bid which will only be opened after passing the technical evaluation stage.
• Financial bids will be on a USD/kWh basis and will be stacked in ascending price order until the target volume of capacity is achieved.
• Upon the conclusion of successful negotiations, bidders will be required to enter into a Project Agreement with the MoE.

Project Agreement obligations

• Developers will be required to carry out a grid connection study which shall take into consideration existing and other approved generation projects as well as planned infrastructural projects likely to impact on the grid in the same locality. The study shall require the approval of the Renewable Energy Auctions Committee.
• The costs of interconnection, including the costs of construction, upgrading of transmission/distribution lines, substations, associated equipment and wayleave acquisition, will be borne by the developer.
• Developers will also be required to obtain all the relevant approvals in relation to the development of such projects.

Revision of the Auctions Policy

• The Auctions Policy shall be subject to review every 5 years from the date of publication (or earlier in exceptional cases).
• Any changes shall only apply to projects that are developed after the revised Auctions Policy is published.

General Comment

It appears that the Auctions Policy provides a general framework within which auctions shall be undertaken in the Kenyan renewable energy sector. It is likely that the Auctions Policy shall be updated and beefed up once initial projects stress-test the implementation of the same.