A new report from The Oxford Institute for Energy Studies (OIES) compares the two largest economies in the region – Ethiopia and Kenya – to show how government policy impacts the decision on renewable energy investment.

Both countries have ambitious renewable targets and have created favourable policies for the sector. Equally, both have strong resources that span renewable energy types. Despite these similarities, the investment experience in the two countries is vastly different. In Ethiopia’s case, there are significant advantages to on-grid investments, whereas in Kenya, off-grid solutions present lower risks.

The paper explains these differences in investment as well as some of common obstacles that affect both solutions, from financing challenges to the 100 per cent renewable debate.

Key findings

Ethiopia summary

Although the government is partially liberalizing the power sector, state dominance will remain unchanged. In this environment, large, on-grid projects are likely to be given preference.

Regulations across the energy sector are underdeveloped, introducing a degree of uncertainty for future investors and lengthening negotiation times. Once the government produces key documents – like a standardized PPA – and makes further progress on discussions over the feed-in tariff, it will be easier for projects to apply for financing. Despite these regulatory obstacles, the government is likely to prove an amenable partner. It offers investors a generous incentive package and has a reliable track record on infrastructure development. Equally, the relatively stable security environment means that there are limited risks to physical assets in the country.

However, there are still major obstacles for off-grid solutions. In order to achieve universal access by 2025, the government aims for 35 per cent of electricity to be provided off-grid. However, its attempts to dominate the sector have stifled the innovation seen elsewhere on the continent. As a result, the off-grid and micro-grid sector still does not have the required legislation, and some of the commercially-proven models used elsewhere may not be replicable.

Kenya summary

Unlike Ethiopia, many of the major challenges in Kenya fall outside the regulatory environment, making them harder to control through government policy. The government has welcomed the private sector and built a relatively strong legislative and regulatory framework. Although there is some uncertainty due to the delayed Energy Bill 2017, the changes are likely to be positively received by investors.

These regulatory efforts are undermined by bureaucratic inefficiencies and high levels of corruption that are likely to affect a significant proportion of interactions with the government. Further, the level of tribalism within the political system means cyclic disruption associated with elections, and a complex social environment for investors to navigate. Land politics is a particularly high risk, with many large-scale projects facing either protracted litigation or violent protests in connection to their physical assets. Kenya’s biggest strengths as an investment destination lie in off-grid and micro-grid solutions. These projects are less affected by the operating challenges outlined above. Contrary to Ethiopia, where the level of state control reduces scope for private sector growth, Kenya’s welcoming environment has turned it into an innovation hub for these projects.

Download the full report