EXPANSION OF ELECTRICITY ACCESS IN KENYA: PROPOSED NEW REGULATIONS ON MINI-GRIDS

By Matthew Arrumm,Edwin Baru,Aleem Tharani Wednesday, July 28, 2021
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In line with the Government’s objectives of achieving universal electricity access, the Kenya National Electrification Strategy (KNES) identifies mini-grids as a decentralized solution of scaling up electricity supply. The recently published 2021 – 2030 Least Cost Power Development Plan (LCPDP) highlights the Government’s intention to prioritize the development of geothermal, wind and solar energy plants as well as solar-fed mini-grids for rural electrification.

It is against this background that the Energy and Petroleum Authority (EPRA) has developed the draft Energy (Mini-Grid) Regulations, 2021 (the Draft Regulations) intended to provide a clear regulatory regime for mini-grid development to support the growth of this electrification segment.

Key highlights of the Draft Regulations include the following:

Application

The Draft Regulations if enacted, will apply to all mini-grids with an installed capacity of up to 1MW.

As such, projects above 1MW will remain subject to the Energy (Electricity Licensing) Regulations, 2012, the recently published Renewable Energy Auction Policy and the 2021 FiT Policy.

General Principles

A person who wishes to undertake a mini-grid project with an installed capacity of up to 1MW will be required to apply to EPRA for: 

  1. a Mini-Grid Construction Permit (a construction approval to be issued by EPRA to the Mini-Grid Developer to acquire wayleaves and carry out design and construction of the Mini-Grid Project); and
  2. a Licence (any document or instrument in writing granted to any person authorizing the generation, distribution and/or retail supply of electrical energy in the manner described in such document or instrument) to operate the generation and distribution infrastructure.

A Mini-Grid Developer and a Mini-Grid Operator will be responsible for obtaining all necessary requirements for the feasibility, site acquisition, development, approval, financing, engineering, procurement, construction, commissioning and operation of the Mini-Grid Project. Mini-Grid Developers will further be responsible for the location of the Mini-Grid Project site.

As such investors wishing to undertake Mini-Grid projects will be required to obtain a Mini-Grid Construction Permit to design and construct the Mini-Grid Project and a Licence to operate the infrastructure as a Mini-Grid Operator should the Draft Regulations be enacted as currently drafted.

Also worth noting is that Mini-Grids may be developed by: (i) developers who respond to a call by the Cabinet Secretary for bids to develop a Mini-Grid in a particular site through a fair, open and competitive process or; (ii) by a developer who initiates Mini-Grid projects in sites that are not the subject of a call for bids by the Cabinet Secretary. The Draft Regulations do not stipulate under which framework bids or private proposals would be initiated under. However, they also provide that Mini-Grid Developers who propose to undertake a Mini-Grid Project pursuant to the provisions of the Public Private Partnerships Act, 2013 (PPP Act) to provide evidence of compliance with the PPP Act when submitting their EOI (discussed further below). In this regard considerations will be necessary as to whether the public private partnership framework will be useful for projects in this sector, particularly in line with ongoing energy sector developments and possible changes to the public private partnership framework as highlighted in the Public Private Partnerships Bill, 2021.

Exclusive Site Reservation and Allocation

A Mini-Grid Developer will be required to submit an Expression of Interest (EOI) to the Cabinet Secretary for Exclusive Site Reservation and Allocation and development of one or more Mini-Grids projects. The EOI shall include inter alia:

  1. the description of the site(s);
  2. proposed technology of the generation;
  3. pre-feasibility study report;
  4. future plans to integrate with the Main Grid where applicable;
  5. demonstration of the technical and financial capacity to undertake the project;
  6. demonstration of initial engagement with the Local Community with evidence of the consultation including documented written minutes, signed attendance registers and photographs;
  7. a letter of no objection from the Host County Government – no guidance has been provided with respect to the procedure of obtaining such a letter. The Draft Regulations only stipulate that the Host County Government shall consider:
    • site availability;
    • alignment of the Mini-Grid Project to County development plans;
    • the Mini-Grid Developer's technical and financial capability; and
    • the Mini-Grid Developer's engagement with the community;
  8. an indicative tariff and how the proposal is aligned with the Kenya National Electrification Strategy and the Integrated National Energy Plan.

It is not clear on what basis an EOI with the above details will be practical or necessary, where a project is the subject of a call for bids by the Cabinet Secretary – for instance bidders obtaining a no objection from the Host County Government before winning a bid. 

It may also be useful for EPRA to consider a standardized letter of no objection from Host Counties, which would streamline the no objection process and ensure consistency of this approval across all projects in the different counties in the country.

Additionally, Mini-Grid Developers who propose to develop a Mini-Grid Project pursuant to the PPP Act will be required to provide evidence of compliance with the PPP Act when submitting their EOI. It is not apparent what such evidence would be - EPRA suggests that this will entail approval from the PPP Unit. However, given the extensive process required for initiating a PPP project under the PPP Act providing such evidence at this early stage may prove to be a challenge for investors particularly where a project is the subject of a bid. It is also unlikely that investors would go through a PPP process, with no guarantee of EPRA approval for the necessary licence to undertake the project, no guarantee of winning a bid (for projects subject to a call for bids) and no guarantee of successful entry into the various agreements contemplated under the Draft Regulations. Whilst the PPP proposal presents a viable option it will require thought and development with the involvement of the private sector.

Upon approval of the EOI and Exclusive Site Reservation and Allocation by the Cabinet Secretary:

  1. the Local Community and the Mini-Grid Developer shall enter into a Community Contract for each site for the development of the Mini-Grid valid for 12 months from the Effective Date (date of execution of the Community Contract or the date of grant of approval for the EOI and Exclusive Site Reservation and Allocation, whichever is the later). The Community Contract shall also be submitted to EPRA with a document endorsing appointment of the Community Representative as well as minutes and attendance register of the meeting confirming the appointment. Key issues to note:
    • the Mini-Grid Developer and the Community will be required to jointly identify suitable land within the Community for the Mini-Grid Project which the developer will at its own expense This may possibly result in conflict and may be considered impractical by investors considering the Draft Regulations already provide that they will be responsible for the location and acquisition of the Mini-Grid Site. The Developer is further required to provide a description of the Site in order to obtain approval for the EOI and Exclusive Site Reservation, produce proof of land ownership when making an application for a Construction Permit;
    • the draft contains a declaration to the effect that there is no existing conflict of interest that could have an effect to the project. The term “conflict of interest” is undefined and may create an avenue for unnecessary disputes between investors and the Local Community which may negatively impact a potential project;
    • the ambiguity in the definition of Local Community also creates ambiguity for investors in their community engagements – particularly in who would be considered the Local Community and whether they are effectively represented. Considering stakeholder/community engagement is still required as part of any project’s environmental impact assessment, EPRA may perhaps consider consolidating engagement with the Local Community with this process to avert what may amount to unnecessary duplication of similar procedures.
  2. In the case of an Interconnected Mini-Grid Project (a Mini-Grid Project connected to a Distribution Network which is operated by a third party under a separate licence) the Mini-Grid Developer shall enter into an Energy Supply Agreement with the Distribution Licensee and submit a copy of the same to EPRA. 

Tariff approval, review and adjustment

A Mini-Grid Developer shall be required to submit to EPRA an application for tariff approval and an application for a Mini-Grid Construction Permit for one or more sites within 11 months of the Effective Date (date of execution of the Community Contract or the date of grant of approval for the EOI and Exclusive Site Reservation and Allocation, whichever is the later). Failure to observe these timelines or obtain an extension will lead to the Mini-Grid Developer losing the Exclusive Site Reservation and Allocation.

The tariff review and approval by EPRA shall involve detailed analysis of the submitted tariff model, detailed analysis of the feasibility study and stakeholder consultation.

Mini-Grid Construction Permit and Mini-Grid Licence

A Mini-Grid Developer will be required to apply for a Mini-Grid Construction Permit to develop the generation and distribution infrastructure.

A Mini-Grid Developer may apply for a Licence to operate the generation and distribution infrastructure concurrently with the respective application for a Mini-Grid Construction Permit and tariff approval.

It is instructive to note that a Mini-Grid Developer is defined as a person who has applied or intends to apply for a Licence or Mini-Grid Construction Permit to develop a Mini-Grid. As such Developer’s will be required to obtain separate licences to construct and to operate the Mini-Grid project.

A Mini-Grid Developer shall be granted a Licence when:

  1. The generation plant and distribution infrastructure which can serve at least 30% of the site’s target consumers have been constructed, tested and commissioned; and
  2. Commissioning Reports prepared by an Engineer are submitted to EPRA.

As currently drafted it remains to be seen how investors will view the above from a bankability perspective considering they will be required to commission at least 30% of their projects before obtaining the Licence. Whilst EPRA argues that this is intended to ensure the term of the licence does not commence running before the project has been completed, its practicality will require to be assessed, particularly considering whether lenders will be willing to finance such projects without such a key permit being in place.

A Mini-Grid Operator shall enter into a Consumer Supply Contract with every consumer who willingly accepts to connect to the Mini-Grid in accordance with the Mini-Grid Operator’s connection terms.

Interconnection

A Mini-Grid Operator operating under a Mini-Grid Licence who has built a distribution system to the requirements of the Kenya National Distribution Code that allows interconnection with the Main Grid may in the event of the Main Grid arriving at the Mini-Grid Area apply to EPRA for modification of their licence to operate as:

  1. a power producer selling to the Distribution Licensee;
  2. a power distributor that purchases power in bulk from the Distribution Licensee and resells that electricity to the consumers under an Energy Supply Agreement;
  3. a Mini-Grid Operator that remains the power distributor for the area and purchases power from the Distribution Licensee in addition to its existing generation and sells power to the consumers; or
  4. any other operating model as approved by EPRA.

As such investors will need to ensure their system meets the requirements of the Kenya National Distribution Code, in order to minimize any negative impact occasioned by the Main Grid arriving in their area of operation. While the above may present worthwhile options, investors may be discouraged from making investments in this sector if the national grid (which is subsidized by the Government) is still allowed to encroach in an area where a developer has received Exclusive Site Reservation and Allocation.

Conclusion

The impact of the proposals in the Draft Regulations will require careful consideration concurrently with other recent energy sector developments. EPRA is engaging stakeholders and has been receiving comments on the Draft Regulations, a process Bowmans has participated in. As a key play in the Energy Sector in Kenya Bowmans will continue to keep an eye on these developments.