Background and timeline

Lifting of the PPA Moratorium by the Cabinet – February 2023

On 28 February 2023, the Cabinet of the Republic of Kenya (Cabinet) approved the lifting of the moratorium on power purchase agreements (PPAs) (PPA Moratorium). At the time, the decision was aimed at enhancing Kenya’s energy security through opening up the energy sector for continued investments. Cabinet further approved a framework for the transparent engagement of IPPs which was a potential break from the then negotiated procurements or feed-in tariffs (FITs). The reform was also seen as an enabler for the state to procure clean energy at prices that reflect those prevailing in the market, giving consumers the benefit of competition in pricing.

The National Assembly Approves the Lifting of the PPA Moratorium – November 2024

On 25 November 2024, the National Assembly’s Departmental Committee on Energy (Committee) tabled its report and subsequent addendum report that looked into reducing electricity costs in Kenya before the National Assembly in which the Committee approved the lifting of the PPA Moratorium. Cabinet’s decision to lift the PPA Moratorium was approved by Parliament on the following conditions:

• Compromise on the denomination of PPAs: Despite proposals to have all PPAs denominated in Kenyan shillings, the National Assembly approved the new provision that all new PPAs may be denominated in either Kenyan shillings, a foreign currency or a mix of currencies. This model allows local taxes to be considered in Kenyan shillings while debt and financing costs may be denominated in foreign currencies.
• Ownership disclosures: The National Assembly approved the lifting of the PPA Moratorium subject to the Business Registration Service submitting to the National Assembly by May 2026 ownership reports of all IPPs including details of their ultimate beneficial owners. Henceforth, PPAs may only be entered into by entities that have complied with beneficial ownership requirements as set out in the Kenya Companies Act, 2015, as amended from time to time.
• Attorney General oversight: The National Assembly also significantly elevated the role of the Attorney General of Kenya in the negotiation and execution of PPAs in Kenya. Going forward, all amendments and variations to PPAs are to be reviewed by the Attorney General, who is expected to provide legal guidance, advice and support as needed within 30 days of receiving any proposed changes.
• Competitive procurement of energy projects: Among the other conditions imposed by the National Assembly, the Kenya Ministry of Energy and Petroleum and EPRA are required to implement competitive procurement of energy projects under an auction scheme. This is to be implemented by December 2026.

EPRA Revocations

In line with Cabinet’s decision in February 2023, and following the National Assembly’s approval of the lifting of the PPA Moratorium, EPRA revoked the following guidelines:

EPRA Guidelines for Allowed Return on Equity (the ROE Guidelines)

The ROE Guidelines set out how the EPRA would calculate the allowed return on equity (ROE) for generation, transmission and distribution projects, designating the Capital Asset Pricing Model (CAPM) as the preferred approach. The guidelines specified the risk-free rate as the long-term government bond rate fixed at 12.8%, required company-specific betas, and set a post‑tax ROE of 10.5% for public utilities.

Revoking these guidelines allows returns to reflect current financing realities, improving bankability for capital-intensive projects when rates or risk premia change. By enabling case-by-case assessments or market-tested returns (for example, via competitive tenders or negotiated offtake reflecting contemporary capital markets), the Revocations reduce the risk that allowed returns to become either too low (deterring investment) or too high (raising consumer prices).

EPRA Guidelines for Allowed Return on Investment (the ROI Guidelines)

The ROI Guidelines established the allowed return on investment as the weighted average of the cost of equity and cost of debt for an efficiently financed company. The cost of equity was determined via CAPM, while the cost of debt had to be evidenced by term sheets. The guidelines assumed an optimal capital structure of 75:25 debt-to-equity.

This one-size-fits-all approach was too prescriptive for diverse sponsors, technologies and financing structures. Removing the standardised capital structure and methodology allows sponsors to optimise leverage, tenor and pricing to current market conditions rather than conforming to a predetermined template. This flexibility supports more financially efficient bids and lower all-in tariffs and reduces the risk of regulatory mismatch when tax rates, debt margins, or equity risk premia move.

Indicative FITs for Small Hydro, Biomass, and Biogas

These indicative feed-in tariffs set specified rates by capacity tranche for small hydro, biomass and biogas projects, with an annual review mechanism. The FITs applied up to a 20 MW cap per technology, above which procurement was to be competitive.

While FITs provide price certainty, they can misprice technology cost curves, especially when costs fall rapidly leading either to overcompensation (burdening consumers) or under-compensation (deterring supply). Abolishing indicative FITs accelerates the transition to competitive procurement where prices are discovered in the market rather than set administratively, attracting efficient, cost-competitive developers and lowering long-run tariffs.

Benchmark Tariffs for Reverse Renewable Energy Auctions

These set benchmark ceiling tariffs for use in reverse auctions for solar, wind, small hydro, biomass and biogas, and set out an annual review mechanism.

While benchmark tariffs can discipline bids, they can also unintentionally anchor prices or exclude bids where local conditions justify temporarily higher prices (for example, grid constraints, foreign exchange risk, or supply chain disruptions). Removing administrative benchmarks permits truly market-clearing pricing and more nuanced bid parameters (such as indexed components or risk-sharing mechanisms) that better reflect current costs and risks, thereby increasing participation and capacity realised.

Benchmark Generation Tariff for Geothermal Power (the Geothermal Benchmark)

The Geothermal Benchmark published a benchmark tariff for geothermal generation, subject to annual review, with final capacity to be determined during procurement

Geothermal carries distinct resource and drilling risks, which means that a single benchmark tariff may not suit different reservoirs and development profiles. Removing the benchmark allows tailored procurement structures (e.g. risk‑sharing, staged drilling programmes, or blended finance) and price discovery responsive to site‑specific risks, which can unlock investment that benchmarks might crowd out.

Practical implications for stakeholders

The Revocations present significant opportunities for power investments in Kenya and align with the implementation of Cabinet’s decision to lift the PPA Moratorium in 2023. The Revocations create the architecture for more bankable projects, deeper capital pools and competitive prices for stakeholders and consumers. The key practical implications are as follows:

• For IPPs and project developers: The Revocations create scope for negotiating more commercially attractive terms. The flexibility to denominate PPAs in foreign currencies or hybrid structures also reduces foreign exchange risk.
• For lenders and financiers: Greater flexibility in tariff-setting and return structures may improve project bankability but will also require more detailed due diligence on individual PPA terms. The removal of the prescribed 75:25 debt-to-equity structure allows for financing arrangements tailored to specific project risks.
• For consumers: The National Assembly’s conditions are designed to ensure that efficiency gains from the liberalised framework are passed on to consumers through reduced tariffs. The competitive procurement model is expected to drive down electricity prices over time.