Geothermal Transparency Guide
An overview of regulatory frameworks for geothermal exploration and exploitation
An overview of regulatory frameworks for geothermal exploration and exploitation
The Geothermal Transparency Guide is an online database, initiated and overseen by BBA law firm, which is intended to provide an insight into the legal frameworks governing exploration, exploitation and production of electricity from geothermal resources, in countries where geothermal capacity is being harnessed or is available for harnessing. The regulatory framework in respect of the exploration and development of geothermal energy is in many countries either not existing or fragmented with provisions located in the various sectors of legislation. Many countries rely on laws relating to other energy sources, such as mining. Furthermore, in certain cases no particular administrational authority is entrusted with geothermal matters.
This has in some instances resulted in substantial complications for developers when dealing with public authorities and municipalities, in the attempt to secure exploration licenses and exploit the reservoir. A lack of clarity in respect of the legal framework governing licenses can also be detrimental to public authorities, municipalities and other owners of land containing geothermal resources, as it is critical for such parties to maintain adequate control over the utilization of the reservoirs and make sure that environmental and administrational requirements are being met.
When the terms of a prospective license are not transparent and clear, the risks for financing parties and investors is also increased, therefore making the financing of geothermal activities more time consuming and expensive than necessary.
It is therefore of great importance to explore the possibility of creating certain industry standards for licenses and agreements in the field of geothermal exploration, utilisation and the production of electricity from geothermal resources. If such industry standards are successfully created on an international platform, they could facilitate and increase the development of geothermal energy in the world, which is of the utmost importance, from both an economical and environmental point of view.
We hope that this overview of geothermal regulatory frameworks in the countries included in this database provides a useful insight into certain aspects of the applicable rules in these countries. Such insight can be of importance for the purposes of increasing transparency and awareness of some of the rights and obligations governing applications for licenses to explore, exploit and produce geothermal energy. We also hope that this database can serve as a first step in an eventual international cooperation for the purposes of creating industry standards in this field.
In order to provide an overview of the rules and regulations governing geothermal development, we opted to set forth a list of questions to the most prominent law firms in the field of energy in the countries involved. We acknowledge and stress that neither is this an exhaustive exercise nor does this database provide solutions for public or private parties involved in geothermal energy activities. It can however be useful in gaining a better understanding of the rules applying to such activities. We hope that the information contained herein will be a small contributor in driving us towards a sustainable future.
We emphasize the fact that all contributing law firms have provided their contributions free of charge and for this, we are deeply thankful.
It is finally of vital importance to underline that no information contained herein is supposed to form any legal opinion or statement of facts or circumstances on behalf of the contributing law firms, but merely an overview of the various rules applicable in each country. In this respect, we refer to the Disclaimer, to be found in the database.
Sign up here to receive regular notifications on updates and regulatory framework changes, as our online database continues to expand.
The Geothermal Transparency Guide is intended as a practical guide to the general principles and features of the basic legislation and procedures in countries included in this database and is for general purposes only. The information contained herein does not purport to provide comprehensive full legal or other advice and is not expected to form basis of any advice provided to any parties whatsoever. BBA and the contributors accept no responsibility for losses that may arise from reliance upon information contained in this database. This database and the information provided therein is intended to give an indication of legal issues upon which you may need further advice.
JULIANA N. APOPO
2. May 2018
1.1 What are the rules on ownership of geothermal resources? Can private parties hold ownership of geothermal resources?
Under the laws of Kenya, geothermal resources are natural resources. The Constitution of Kenya, 2010 (the Constitution) provides that natural resources vest in the people of Kenya and gives the Government of Kenya (the GOK) power to regulate and administer the same on behalf of the public. Further, the Geothermal Resources Act (No 12 of 1982) (the GRA), which regulates the exploitation and use of geothermal resources, provides that “all un-extracted geothermal resources under or in any land shall be vested in the Government subject to any rights which, by or under written law, have been or are granted or recognised as being vested in any other person”.
Whereas the GRA provides for the ownership of “un-extracted” geothermal resources, there are no provisions in relation to the ownership of “extracted” geothermal resources or on the transfer of title to the geothermal resources from the GOK to the holder of a geothermal resources license (the Geothermal License).
The GRA states that the Geothermal License confers upon the holder of the Geothermal Licensee (the Geothermal Licensee) the right to “utilize the resources”. The Geothermal Resources Regulations, 1990 (the GRA Regulations) promulgated under the GRA, provide that the Geothermal License may be accompanied by or be conditional on the execution of a Geothermal Resources Contract by the Geothermal Licensee and the relevant Government department or other body designated by the Cabinet Secretary for the Ministry of Energy and Petroleum (the Cabinet Secretary). Such contract is to provide for the utilization of the geothermal resources.
The model license set out in the GRA Regulations (the Model Geothermal License) provides that the Geothermal Licensee has the “exclusive right to take and use or apply the geothermal resources” in accordance with the geothermal contract”. In this regard, it can be inferred that the ownership in the extracted resources remains with the GOK subject to the Geothermal Licensee’s exclusive rights to apply the resources in accordance with terms agreed under the GRA.
Currently, there is no standard amount or specific percentage value for the royalty’s payable by the Geothermal Licensee. Clause 3(2) of the Model Geothermal License states that a royalty of a percentage value of each kilowatt hour shall be payable. The Model Geothermal License does not state what the percentage value is, but states that the value will be negotiated by the Geothermal Licensee and the Cabinet Secretary, taking into account expenses incurred by the Geothermal Licensee during the exploration phase. The GRA Regulations do not provide any indication on the calculation of this percentage value.
The legal landscape in respect of energy projects in Kenya will change in the near future when the Energy Bill, 2017 (the Energy Bill) is passed into law. The Energy Bill provides that royalties between one percent (1%) and two and a half percent (2.5%) of the value of the geothermal energy at the wellhead produced from the geothermal resources during the first ten (10) years of production are payable by the Geothermal Licensee. After the initial ten (10) year period, royalties of between two percent (2%) and five percent (5%) are payable during each year after the ten (10) year period. The Energy Bill contains a provision providing the Cabinet Secretary with the power to exercise his discretion to waive, suspend or reduce any royalty in the interest of encouraging the greatest utilization of geothermal resources, however such waiver may be subject to approval by Parliament.
 Article 260 of the Constitution of Kenya, 2010 provides that ”natural resources“ means the physical non-human factors and components, whether renewable or non-renewable, including-
 Section 3, GRA.
 Section 8(1)(iv), GRA.
 Regulation 3(2), GRA Regulations.
 Paragraph 1(3), Model Geothermal License.
 Clause 84(2) provides that the value of geothermal energy at the wellhead is a value calculated by subtracting from the price that could reasonably be realized on sale of the energy to a genuine purchaser at arm‘s length from the producer, all reasonable expenses, reasonably incurred by the producer in getting the energy to the point of delivery to the purchaser.
1.2 Who can grant access to geothermal resources, only state or also landowner?
According to the GRA, the Cabinet Secretary has the power to declare any area of land where geothermal resources have been discovered or which is a source or is believed to be a source of geothermal resources as a “geothermal resources area”.
The Cabinet Secretary is therefore responsible for granting access to a geothermal resources area for the purposes of investigating, prospecting for or extracting geothermal resources through the issue of an authorisation or a Geothermal License.
A private landowner does not have the power to grant rights in respect of the exploration or exploitation of geothermal resources located on his land.
Where private land is required to be procured by the GOK for a power project, the compulsory acquisition process as prescribed in the Constitution, the Land Act, 2012 (Land Act) and the Land Registration Act (No. 3 of 2012) (LRA) will have to be followed.
For the GOK to compulsorily acquire private property the following conditions are required to be followed and satisfied:
The Land Act sets out further detailed procedures under which the GOK can compulsorily acquire private land.
Any grant of rights in relation to community land would be subject to the provisions of Community Land Act, No. 27 of 2016 which requires, inter alia, for the entry into of a community benefits agreement between the private investor and the community with respect to the extraction of natural resources from community land.
 Section 28 of the LRA provides for the right of compulsory acquisition as an overriding interest on all registered land in Kenya.
1.3 Is exploration/exploitation open to foreign investment?
Yes, exploration and exploitation are open to foreign investment and both foreign and local entities may apply for an Exploration Authorisation or Geothermal License. In this regard, there are currently no local shareholding restrictions applicable to an applicant for an Exploration Authorisation or Geothermal License. Further, there are no local shareholding requirements under the Energy Bill.
It is worth noting however that under the Energy Bill there is a requirement that every person carrying out an undertaking or works falling within the scope of the Energy Bill, to comply with local content requirements in all of its operations. Local content is defined in the Energy Bill as “the use of Kenyan local expertise, goods and services, people, businesses and financing for the systematic development of national capacity and capabilities for the enhancement of the Kenyan economy”. A person is required to, inter alia, prepare and submit an annual and long term local content plan to the Energy Regulatory Authority, the regulatory body that will be established under the Energy Bill. Together with the provisions of the Energy Bill, there is a draft Local Content Bill, 2016 which sets the framework for local content application in entities undertaking exploration, development and extraction activities with respect to natural resources.
2.1 Which administrative bodies (ministry and/or governmental agencies) are involved in the licensing of geothermal resources, including licensing and developing?
This process is driven by the Ministry of Energy and Petroleum.
2.2 Do administrative bodies assign any of their respective roles to a third party, including but not limited to a peer review, during the period of exploration, exploitation and/or production of geothermal resources?
2.3 Is there a government policy in place concerning geothermal resources? If so, what is the object and to what end?
Pursuant to the draft National Energy Policy, 2015, the Government commits to undertake the following with respect to geothermal resources:
 http://www.erc.go.ke/images/docs/National_Energy_Petroleum_Policy_August_2015.pdf accessed on 22 March 2018
3.1 Is exploitation of resources subject to licensing? Do landowners have the right to exploit recourses without a license? If yes, to what extent?
No person may exploit geothermal resources without a license acquired under the GRA.
It is important to note that the Constitution requires any agreement providing for the grant of a right or concession by or on behalf of any person, including the GOK, to another person for the exploitation of any natural resources to be ratified by Parliament. However, the grant of a concession or right to exploit a natural resource through a permit, license or other authorization issued in accordance with the requirements of national or county government legislation is not intended to form part of the class of transaction required to be ratified by Parliament (save where this relates to extraction of underground steam within a water conservation or other water resource protected area).
 Article 71, the Constitution.
4.1 Does the landowner or any “project affected people” have a role in the process of granting a license for:
(ii) exploitation, and
(iii) power plant (generation license)?
Exploration: Under Section 6 of the GRA, the Cabinet Secretary may authorise any person to make surveys, investigations, tests and measurements in search of geothermal resources and to carry out such activities including sinking any bore on the land in connection with the surveys, investigations, tests or measurements (the Exploration Authorisation). There is no provision in the GRA or the GRA Regulations which gives private landowners or occupiers the right to be consulted prior to the grant of the Exploration Authorisation or the opportunity to object to the grant of the Exploration Authorisation. However, please note our comments below in terms of the rights afforded to all citizens of Kenya under the constitution to a clean and healthy environment and how such rights may be used to prevent the development of a project.
Exploitation: Under Section 7 of the GRA, the Cabinet Secretary has the power to grant the Geothermal License to any person for the purposes of exploiting the geothermal resources and specifically to enter upon the land to bore and to extract geothermal resources and do all such things necessary for the conduct of those operations.
The GRA Regulations promulgated under the GRA, set out in greater detail the application procedure for both the Exploration Authorisation and the Geothermal License, however these do not include any express rights in favour of any landowner.
Similarly, to the grant of an Exploration Authorisation, there is no formal provision which requires private landowners or occupier to be consulted on or the right to object to the grant of the Geothermal License.
Following the grant of the Exploration Authorisation and Geothermal License, landowners or occupiers would however, be entitled to:
Power Plant: Generation Licenses are issued by the Energy Regulatory Commission (ERC) in accordance with the terms of the Energy Act and the Energy (Electricity Licensing) Regulations, 2012 (Electricity Regulations). Pursuant to the provisions of the Energy Act and Electricity Regulations, a landowner would be entitled to object to the grant of a Generation License. An applicant for a Generation License is required to give notice to the public of their intention to apply for a license. Any person who may be directly affected or is in the area that is likely to be affected by the applicant’s undertaking may object to the issue of the license by writing to the ERC. The ERC may hear such objections at a public hearing attended by the applicant and the objector. The views of the objector will be taken into consideration by the ERC in granting or rejecting the application.
Environmental Laws: In addition to the above, landowners, owners of adjacent land and persons most affected by a geothermal project will have the opportunity to comment on a geothermal project since public participation or public comments is required prior to the grant of a Generation License and an Environmental Impact Assessment (EIA) License issued in accordance with the Environmental Management and Conservation Act 1999 (EMCA). It is possible that the lack of proper public participation may result in a project being found to be in violation of the constitutional right to a clean and healthy environment.
 Section 6(2).
 Section 18, GRA.
 Section 19, GRA.
 Section 20, GRA.
4.2 Will an opposition of a landowner or any “project affected people” have a bearing on the process of granting a license for:
(ii) exploitation, and
(iii) power plant (generation license)?
Please see our response to Question 4.1.
4.3 Are the terms of land lease agreements regulated and if so, (i) what is a general timeframe of land lease agreements and (ii) what are the obligations for decommissioning at the end of the term?
In general, parties are free to negotiate the terms of land lease agreements on the basis of the principle of freedom of contract.
The Constitution regulates land held under leasehold tenure from the government. Land held by non-citizens via leasehold tenure can only be held for a term not exceeding 99 years. Foreigners cannot hold any freehold interest in land. Furthermore, there are restrictions against foreigners holding any right, title or interest in any land which is designated as “agricultural land” under Kenyan law.
The Land Act, No. 6 of 2012 regulates private leases and sets out default provisions on the administration and management of private land (where contrary provisions are not set out in the private lease negotiated between parties).
We are not aware of any statutory provisions that provide for obligations on decommissioning at the end of the term. It is however our experience that there will be obligations on decommissioning set out in the power purchase agreements and the Environmental Impact Assessment Licence issued to the project by the National Environmental Management Authority’s (NEMA).
It’s worth noting the Energy Bill, 2017 proposes to include a statutory decommissioning requirement on power plants.
5.1 Which documents need to be submitted and what is the criteria for obtaining a license for:
(ii) exploitation, and
(iii) power plant (generation license)?
(i) Exploration: Under the GRA, any person (including a public officer) may apply to the Cabinet Secretary for an Exploration Authorisation. The applicant will be required to provide the following information: (i) name, nationality, nature of and the principal place of business of the applicant; (ii) name and nationality of every director and the name of the person(s) who beneficially owns more than five percent (5%) of the issued share capital; (iii) the delineation of the area proposed to be covered by the Exploration Authorisation; and (iv) the work and minimum expenditure proposed to be carried out in the area covered by the Exploration Authorisation and a statement on significant adverse effects on the environment by such works and how such effects will be controlled. The Cabinet Secretary has the discretion to request the applicant to provide him with additional information. According to the GRA Regulations, the application should be accompanied with an application fee of Kenya Shillings fifty thousand (K.Shs. 50,000) (approximately USD $ 500).
(ii) Exploitation: Under the GRA, any person may apply to the Cabinet Secretary for the Geothermal License over part or the whole of a geothermal resources area. The applicant will be required to complete the prescribed form and provide the following information: (i) the name, nationality, nature of and the principal place of business of the applicant; (ii) the name and nationality of every director and the name of the person(s) who beneficially owns more than five percent (5%) of the issued share capital; (iii) a statement on the applicant’s financial status, technical competence and experience; (iv) the delineation of and a plan of the area proposed to be covered by the Geothermal License; (v) a general statement of the proposed program of exploration including a comprehensive report on the location, nature and characteristics of the source of geothermal energy to be explored; (vi) the terms on which the applicant proposes to negotiate; (vii) the proposals with respect to the employment and training of citizens of Kenya; (viii) the goods and services required for the production operations which can be obtained within Kenya and the applicant’s intention in relation thereto; and (ix) details of expected infrastructure requirements. The Cabinet Secretary has the discretion to request the applicant to provide him with additional information. The GRA Regulations provide that the application should be accompanied with an application fee of Kenya Shillings one hundred and twenty thousand (K.Shs 120,000) (approximately USD $ 1,200).
(iii) Power Plant: The applicant is required to complete the application form as per the prescribed form and accompanied by the documents set out in the Second Schedule to the Electricity Regulations and provide a license fee of Kenya Shillings ten thousand (K.Shs. 10,000) (approximately USD $ 100) payable to the Rural Electrification Authority. Some of these supporting documents include copies of the applicant’s most recent audited annual report and accounts, statement of the business proposal for the five (5) years following the application, statement of the applicant’s expertise, the Environmental Impact Assessment Geothermal License or acknowledgment of receipt of Environmental Audit Report and statement on the proposed undertaking setting out, amongst other things, a description of the proposed locations of the generating stations, description of how the stations shall be driven and the expected commissioning date.
(iv) Generation license: in line with specified in the Second Schedule of the Energy (Electricity Licensing) Regulations, 2012, the following documents are required to make an application for an electricity generation license:
 It should be noted that the Geothermal License term includes a five (year) exploration period.
6.1 What is the maximum duration of a license for:
(ii) exploitation, and
(iii) power plant (generation license)?
(i) Exploration: The Exploration Authorisation is granted for a period of one (1) year from the date of issue but is renewable for a further period of one (1) year.
(ii) Exploitation: The Geothermal License is granted for a term not exceeding thirty (30) years and may be renewed by the Cabinet Secretary for a term not exceeding five (5) years subject to such terms and conditions as he thinks fit. The Geothermal License is to be negotiated on the basis of the Model Geothermal License. According to the Model Geothermal License, rights granted under the license shall be for a term of thirty (30) years from the date of the license and, provided the licensee has complied with the terms of the Geothermal License, the term may be renewed, at the option of the licensee, for two further periods of five (5) years each.
(iii) Power Plant: Generation Licenses are generally issued for a term of twenty (20) to twenty-five (25) years. This is usually linked to the terms of the power purchase agreement negotiated by the generator with the off-taker.
 Section 9(a), GRA.
7.1 What are the general terms of the license for:
(ii) exploitation, and
(iii) exploration drilling and other drilling,
(iv) power plant (generation license)?
(i) Exploration: Section 6(2) of the GRA provides that the Cabinet Secretary has the discretion to authorise any person (including a public officer), in writing, to search for geothermal resources by:
(ii) Exploration and Exploitation: Section 8 of the GRA confers upon the licensee the following rights:
(iii) Drilling: Regulation 11 of the GRA Regulations requires a 30 day notice to be sent to the Cabinet Secretary before drilling commences.
Regulation 10 of the GRA Regulations also requires the licensee to maintain a driller’s log.
All drilling operations must comply with the second schedule of the GRA Regulations which sets our regulations on drilling activities which include:
(iv) Power plant (generation licence): The terms of this license are prescribed in the model generation licence in the fifth schedule of the Energy Act, Electricity Licensing Regulations 2010). The licence includes terms that expound on the following: name of licensee, duration of the license, renewal clause, the licensee’s obligations, liability of tort and contract law in Kenya, requirement to have an office in Kenya, events of which licensee must promptly notify the Energy Regulatory Commission (ERC) in writing, environmental, health, insurance and safety obligations, handling of complaints, revocation of licence.
7.2 Are exploration license holders granted pre-emptive rights with regards to exploitation or do exploration licenses automatically convert into exploitation licenses if the resource has been substantiated? If so, are there any conditions?
The GRA Regulations provide that the Cabinet Secretary when granting the Exploration Authorisation may also grant, on application, a “geothermal resources license” in respect of all or parts of the area covered by the Exploration Authorisation. In this regard, the holder of an Exploration Authorisation may obtain the Geothermal License on or around the same time they receive the Exploration Authorisation.
Further, under the Geothermal License, the Cabinet Secretary may allow an exploration phase for a period not exceeding five (5) years. If at the end of this period no geothermal resources of a potential commercial interest are discovered, the Cabinet Secretary may require the licensee to surrender the licensed area.
 Regulation 2(3), the Regulations.
 Regulation 3(3), the Regulations.
7.3 Is an exploitation license included in a power plant license or are these licenses separate?
As discussed above, these are separate licenses. An exploitation license will be issued under the GRA and the generation license under the Energy Act.
7.4 Are there any encumbrances in place for the licence holder to keep a license, once granted?
The Cabinet Secretary has the right to forfeit a licence where the licence holder is in breach of the provision of the Licence or the GRA. In this regard, please see our responses in Section 8 (Termination and revision of licenses).
8.1 What actions by the license holder would warrant revision of exploration-, exploitation- and power plant (generation) licenses?
(i) Exploration and Exploitation: Section 9(b) of the GRA provides that the Cabinet Secretary has the discretion to, wholly or partly, remove all or any of the terms and conditions contained in any license where, owing to special circumstances, compliance with such terms and conditions would be impossible or great hardship would be inflicted upon the Geothermal Licensee. The Cabinet Secretary may also extend time to the Geothermal Licensee to comply with the terms and conditions of his license in such manner as he may think fit.
(ii) Power Plant: The Energy Act and the model electricity generation license annexed to the Electricity Regulations (the Model Generation License) provide for the revision or alteration of the Generation License by the ERC provided that the consent of the licensee has been given.
8.2 Does the license granting authority license have the power to revoke or terminate licenses? If yes, what actions of the license holder would warrant the termination of the license?
(i) exploration license,
(ii) exploitation license,
(iii) power plant (generation license)?
i) Exploration: The Cabinet Secretary is entitled to revoke an Exploration Authorisation where:
(ii) Exploitation: The Cabinet Secretary may, by notice to the Geothermal Licensee, declare the Geothermal License forfeited where:
(iii) Power Plant: The ERC may revoke a Generation License where:
The revocation provisions of the Model Generation License re-state the circumstances of revocation set out under the Energy Act and Paragraph 7.2.3 as well as providing for the following additional grounds for revocation:
 Section 6(6), GRA.
 Section 11, GRA. See also Clause 7 of the Model Geothermal License.
 Under the revocation provisions of the Model Generation License which are subject to the Energy Act, there is an exception where the delay is the execution of works is as a result of events beyond the reasonable control of the licensee.
8.3 Can the license granting authority set forth conditions into licenses which provide for (i) stricter terms and conditions of licensees or (ii) more lenient terms and conditions for licensees, when such terms and conditions (whether stricter or more lenient) are not otherwise provided for by law?
Under section 7 of the GRA, the Cabinet Secretary has the authority to grant the Geothermal License under such terms and conditions as he may determine. In this regard, the Cabinet Secretary may issue a license subject to stricter or more lenient terms and conditions than those set out in the Model Geothermal License. Further, under section 9 of the GRA, upon the renewal of an existing Geothermal License, the Cabinet Secretary has the discretion to inter alia: (i) renew the Geothermal License subject to such terms and conditions as he may think fit; (ii) excuse compliance with, all or some of, the terms and conditions of the Geothermal License where, owing to special circumstances, it is in the opinion of the Cabinet Secretary that compliance with such terms and conditions would be impossible or inflict great hardship on the Geothermal Licensee; and (iii) extend time to the Geothermal Licensee for complying with the terms and conditions of the Geothermal License upon such terms and conditions as he may think fit.
8.4 What remedies does the License granting authority have in order to enforce compliance to the terms and conditions of a license, other than by revoking the license?
According to the Model Geothermal License, in addition to the forfeiture of the Geothermal License by the Geothermal Licensee in accordance with the terms of the Model Geothermal License (including the right to remedy the breach within the specified cure period), the remedies available to the Cabinet Secretary will be limited and include the following:
9.1 Briefly outline the surveillance carried out by the regulatory authorities during the license period, e.g. with regards to reporting duties and/or on-site visits.
(i) Exploration and Exploitation: Under Regulation 16 of the GRA Regulations, the Cabinet Secretary or an authorised representative may inspect any geothermal operations and any records of a Geothermal Licensee. The Geothermal Licensee is required to provide to the inspectors, where available, facilities similar to those applicable to its own staff or to its subcontractor’s staff for transport to the geothermal operations, subsistence and accommodation expenses and to pay all reasonable expense directly connected with the inspection.
(ii) Power Plant: During the license period, the ERC or any person authorised by the ERC may at all reasonable times enter the premises of a Generation Licensee and inspect any plant, machinery, books, accounts and other documents and make copies of the same. The ERC may also require the Generation Licensee to provide it with such books, accounts, records and other documents in a form the ERC may demand and to verify the accuracy of their contents. Under the Model Generation License, the Generation Licensee is also required to give ERC officers access to its works for the purposes of the ERC ascertaining if the provisions of the Energy Act and the Generation License are being complied with.
9.2 Which information is required to be submitted to regulatory authorities during the license period for the holder of a license for:
(iii) power plant (generation license)?
(i) Exploration and (ii) Exploitation:
Under Regulation 17, the holder of an Exploration Authorisation is required to provide to the Cabinet Secretary an annual report in respect of the preceding year specifying: (i) the progress of operations, the results obtained, events of significance, occurrences, accidents and like matters; (ii) the number of persons employed indicating each category; and (iii) at the end of each stage of geological or geophysical operations and at the end of every boring operation, a report on that stage of operations together with a copy of the logs relating to the bore. On the other hand, the Geothermal Licensee is required to provide the Cabinet Secretary within the first fifteen (15) days of every year, a report in respect of the preceding year, specifying in respect of each month in the year:
The Geothermal Licensee is also required to provide the Cabinet Secretary, in triplicate and within the month following every annual general meeting, the report of its Board, its auditors, the statement of accounts relating to the previous year and copies of resolutions, if any, adopted at the general meeting.
Further, there is an obligation on Geothermal Licensees to maintain at the site a register of, amongst other things, the progress of operations specifying all important matters relating to the operations, geological and geophysical records and logs of all past and current bores and a register of the names of all persons employed. It is also required to maintain a register of production with daily entries including the quantity of geothermal fluids extracted and their physical characteristics, the quantities and characteristics of geothermal fluids delivered for consumption and the amount of energy transmitted to cables from the power station. These registers are to be presented, on demand, to an inspector or any person authorised by the Cabinet Secretary.
(iii) Power Plant: According to the Model Generation License, the Generation Licensee is required on request by the ERC, to provide it with any information relating to its activities conducted in connection with the Electricity Generation License. Further, the Generation Licensee is required to submit to the ERC: (i) an annual performance report at the end of each financial year, indicating the quality of service and performance of the license during the previous year against the Performance Standards set out in the license; (ii) annual reports on the financial and technical aspects of the undertaking’s performance within one hundred and eighty (180) days of the end of the Generation Licensee’s financial year or such other period approved by the ERC and such other reports or information as may be required by the ERC; and (iii) the Generation Licensee’s financial statements for each financial year together with the report of an external auditor and any other financial data as the ERC may specify.
10.1 Are general terms and conditions, such as duration of Power Purchase Agreements regulated? If no, are there any soft law or general recommendations in place in your jurisdiction?
Standardised power purchase agreements (PPAs) have been provided for in relation to projects approved under the Feed in Tariff Policy (December 2012) (FiT Policy). In this regard, small renewable energy projects (i.e. with an installed capacity of 0.2 – 10MW), will be based on the standard power purchase agreement published under the FiT Policy. For larger renewable projects (i.e. with an installed capacity of greater than 10MW), the standard PPA is used as a basis of negotiations with the off-taker, the Kenya Power and Lighting Company Limited (KPLC).
With respect to geothermal projects the minimum permitted capacity under the FiT Policy is 35 MW and as such the standard PPA would form the basis of negotiations between the Project Company and KPLC.
 First FiT published in March 2008 and revised in January 2010 and again in December 2012. 2012 FiT Policies are required to be revised every three (3) years.
10.2 What is the permitted or general duration of PPA's?
The PPA for a project approved under the FiT Policy applies for a duration of twenty (20) years from the date of first commissioning of the geothermal power plant.
10.3 Are public and/or national regulatory authorities involved in any way in forming the terms of PPA's, either directly or indirectly?
Pursuant to Section 43 of the Energy Act, the ERC has the power to review the PPA and give its approval prior to its execution by the Parties. In this regard, the ERC may suggest changes to the PPA, review the terms of the PPA to ensure that the tariffs thereunder are just and reasonable, satisfy itself that the application for approval meets the minimum requirements of the regulations under the Energy Act and take into account any other issues which may have a bearing on the operations of the proposed undertaking.
11.1 Is there any governmental support or funding available for exploration activities?
The Government of Kenya announced that it had set aside KES 16.4 billion (around $155 million) to support exploitation of geothermal, wind and solar resources in the Treasury Budget for the financial year 2017/2018. Further, the government in the 2017 program based budget has set targets relating to the carrying out of Geothermal and Geo technical studies, feasibility study reports and the sinking of geothermal wells.
 Page 20 http://www.treasury.go.ke/component/jdownloads/send/175-budget-statement/518-budget-statement-2017-18.html?option=com_jdownloads accessed on 22 March 2018.
 Page 483-484 http://treasury.go.ke/component/jdownloads/send/120-program-based-budgets/489-program-based-budget-2017-2018.html?option=com_jdownloads accessed on 22 March 2018
11.2 Are there any incentives offered by the government or local authorities for utilization of geothermal energy? If yes, in what form (e.g. tax and/or feed-in tariffs) and what are the maximum amounts permitted?
We are not aware of instances where the incentives are subject to recovery.
11.3 What requirements must the project fulfil in order to be eligible to receive such incentives?
A foreign investor qualifies for an investment certificate from KenInvest where the minimum value of his proposed investment is United States Dollars one hundred thousand (US$ 100,000) or the equivalent in another currency. When issuing the investment certificate, KenInvest will consider the extent to which the investment will contribute to the Kenyan economy and specifically in increasing the number and quality of jobs in Kenya, offering training to Kenyans in new skills or technology, encouraging economic development, allowing the transfer of technology, adding to tax revenue or affect foreign exchange.
11.5 In the case of production of electricity from geothermal, are there any incentives/rewards for utilizing the geothermal energy for other than producing electricity, such as waste heat?
We are not aware of any incentive for utilizing geothermal energy other than producing electricity.
12.1 Are the rights of indigenous peoples in connection to geothermal resources regulated?
Currently, there are no specific provisions on the rights of indigenous people to geothermal resources. As stated above, under the Constitution, all natural resources, including geothermal resources, vest in the people of Kenya and the GOK has the power to regulate and administer the same on behalf of the public. Similar to the right to compensation owed to private landowners for any disturbance, injury or damage caused to land by a holder of Exploration Authorisation or a Geothermal Licensee, the county government would be entitled to receive compensation on trust and for the benefit of indigenous communities where such disturbance or damage is caused on trust land. Section 20(3) provides that the term “owner” used in Sections 19 and 20 means:
The Constitution provides for the recognition of community rights to land. Article 63(1) stipulates that community land shall vest in and be held by communities identified on the basis of ethnicity, culture or similar community of interest. Any unregistered community land is to be held in trust by county governments on behalf of the communities for which it is held. Community land is stated to comprise of, amongst others, land that is lawfully held as trust land by the county governments.
It should also be noted that there is a draft National Energy Policy (NEP) proposed by the Ministry of Energy which, when in force, will set out the policy framework for the entire energy sector in Kenya. It is expected that any energy related legislation that will be introduced will be predicated on the policies and principles set out in the NEP. The NEP proposes that for the purposes of fulfilling Article 66(2) of the Constitution which requires investments in property to benefit the local communities and their communities, there should be a framework for sharing benefits from the exploitation of energy resources with the local communities. In this regard, it is proposed that the government share of profits accruing from energy natural resources be shared in the following manner: National Government seventy-five percent (75%), County Government twenty percent (20%) and Local Community five percent (5%).
 Current draft is dated 24th February, 2014.
 NEP, dated 24th February 2015, p. 129-130.
12.2 To what extent are indigenous municipalities involved in the process of granting licenses?
Please see our responses to Question 4 with respect to the grant of exploration/exploitation licenses.
In relation to the grant of a Generation License, members of the public are entitled to object to the issue of the license by writing to the ERC. Please see Paragraph 3(iii).
In addition to considering any objections to the proposed undertaking, the ERC in deciding whether or not to grant the license shall consider: the impact of the undertaking on the social, cultural or recreational life of the community, the economic and financial benefits to the country or area of supply of the undertaking, the economic and energy policies in place from time to time and any other matter that the ERC may consider likely to have a bearing on the undertaking.
13.1 What are the principles regarding retroactivity of laws and regulations, can changes in such rules affect license holders?
In most cases, laws are forward looking and not retroactive. There have been some instances of tax laws being passed on a retroactive basis, however such instances are few and far between. In general, GOK’s approach under the geothermal sector hasn’t been to tax investment. As such, it is unlikely that GOK would pass any laws which would seek to increase taxes applicable on investors during the exploration phase. To mitigate change in tax risk following the entry into of a power purchase agreement, suitable change in tax provisions should be negotiated under the power purchase agreement and (if applicable) the Government of Kenya Political Event Letter of Support.
14.1 How does taxation in the sector affect license holders?
(i) The Ninth Schedule of the Income Tax Act (the ITA) specifically provides for a special taxation regime applicable to entities granted geothermal prospecting licenses (referred to as “licensees”). A licensee is a person who has been issued with or granted a prospecting or extraction right (including a right to search for geothermal resources issued under the provisions of the GRA).
(ii) The Ninth Schedule provides for taxation at the corporation tax rate of thirty percent (30%) where the licensee is a company incorporated in Kenya and thirty-seven and a half percent (37.5%) where the licensee is a permanent establishment of a foreign company.
(iii) The Ninth Schedule provides for the specific taxation regime for licensees which include provisions dealing with exploration expenditure and extraction exploration, among others. In addition, the Ninth Schedule sets out the tax implications of the following transactions (amongst others):
(a) tax arising on direct and indirect sale of shares in a licensee;
(b) tax arising on transfer of participating interest under a license; and
(c) taxation of sub-contractors.
(iv) Sub-contractors: The Ninth Schedule further defines a sub-contractor as a person (other than an employee) supplying services to a licensee in respect of mining operations undertaken by the licensee. Withholding tax at a rate of five decimals six two five percent (5.625%) would be applicable on gross amount of service fees paid by a licensee to a non-resident sub-contractor without a permanent establishment in Kenya.
(v) We would point out that a separate regime applies to entities which hold an Electricity Generation License separately from the prospecting/extraction licenses granted under the GRA. Such an entity would be taxed under the ordinary company taxation regime but would enjoy incentives that apply to all energy generating companies described under paragraph (vi) and (vii) below.
(vi) Power Plant: For a company holding a Generation License, Legal Notice 165 of 2015 provides that payments made to a non-resident person on account of services rendered under a PPA shall be exempt from withholding tax. Further, Legal Notice 91 of 2015 provides that interest paid on loans from foreign sources for specifically investing in energy shall be exempt from tax. This legal notice therefore applies to both prospecting/extracting and generating companies.
(vii) Power Plant: For a company holding a Generation License, Legal Notice 106 of 2015 provides that instruments in respect to the transactions relating to loans from foreign sources received by investors in the infrastructure development sector, including energy, are exempt from the provisions of the Stamp Duty Act.
 Chapter 470 of the Laws of Kenya.
 Please note that under the PPP Act, the company holding the PPA needs to be registered under the laws of Kenya and therefore, the PE scenario would not arise.
14.2 Please describe and provide information on the applicable tax rate and resource tax.
Please see our answer to question 14.1.
14.3 Is the sale of energy subject to VAT?
(i) Power Plant: The sale of electricity by an independent power producer to the national grid would be subject to Value Added Tax (VAT) at a rate of sixteen percent (16%) on the consideration paid for the supply. The provision of electrical or thermal energy is a taxable supply of goods according to the provisions of the Value Added Tax Act, 2013 (the VATA).
(ii) Power Plant: Taxable supplies, excluding motor vehicles, imported or purchased for direct and exclusive use in the construction of a power generating plant, by a company, to supply electricity to the national grid are exempt for VAT purposes. This status is dependent upon the recommendation of the Cabinet Secretary and approval of the Cabinet Secretary for National Treasury.
(iii) Exploration: Further, taxable supplies, excluding motor vehicles, imported or purchased for direct and exclusive use in geothermal prospecting or exploration by a geothermal licensee are exempt from VAT. This is however upon recommendation by the Cabinet Secretary for Mining.
14.4 Is VAT refundable and what is the procedure for VAT refunding?
No VAT refund would be due as all the supplies made by the PPA holder would be subject to VAT at a rate of sixteen percent (16%), but any VAT credit arising from input VAT can be carried forward perpetually.
(In any case where tax is paid in error, a registered person can make an application to the Commissioner, for refund of such tax, within a period of twelve (12) months from the date such tax became due and payable.
Further, where a registered person has made a supply and paid tax on that supply but not received payment from the person liable to pay the tax, he may make a refund application to the Commissioner; either after a period of three (3) years from the date of the supply or from the date such customer becomes legally insolvent. Such application cannot however be made after a period exceeding five (5) years from the date of the supply.
14.5 Is the flow of foreign capital restricted with capital controls? If so, briefly describe the nature of such controls.
Foreign capital inflows are not restricted in Kenya.
15.1 What demands are there regarding environmental impact assessment prior to exploration, exploitation and or production of geothermal energy?
The relevant statute is the EMCA and the subsidiary legislation promulgated thereunder which provides the legal framework on environmental management in Kenya. The EMCA, provides that notwithstanding any approval, permit or license granted under the EMCA or any other current law, prior to the commencement, carrying out or execution of designated projects set out in Schedule 2 of the EMCA by a proponent of a project, an Environmental Impact Assessment (EIA) is to be conducted. These designated projects include the “drilling for the purpose of utilizing ground water resources including geothermal energy” and projects concerning electrical infrastructure such as the set-up of “electricity generation stations, electrical transmission lines, electrical sub-stations, and pumped storage schemes”. The EIA is to be conducted by experts authorised by the National Environmental Management Authority (NEMA). The proponent of a project is required to submit an EIA study report to NEMA in the prescribed form giving the required information together with the application fee. NEMA, if satisfied as to the adequacy of an EIA study, will issue an EIA license within forty-five (45) to ninety (90) days on such terms and conditions as may be appropriate and necessary to facilitate sustainable development and sound environmental management. In addition to carrying out the initial EIA and obtaining the EIA license, according to the Environmental (Impact Assessment and Audit) Regulations, 2003 (Environmental Audit Regulations) internal environmental audits are to be undertaken on a regular basis and the audit report prepared with each audit is to be submitted to NEMA annually or as may be prescribed by NEMA. The proponent of a project is required to ensure that the audit is based on the environmental management plan developed during the environmental impact assessment process or after the initial audit. The proponent of the project would thereafter be required to comply with the recommendations suggested in its audits (if any) to enable it to improve its environmental performance and meet its environmental obligations. Dependent on the environmental implications of the project, additional environmental licenses may be required. These include:
 A proponent is defined to mean a person proposing or executing a project, programme or an undertaking.
 Regulation 34, Environmental Audit Regulations.
16.1 What other licenses are needed in order to commence exploration, exploitation and/or production with geothermal energy?
Key licenses and consents that may be required to undertake a geothermal project include the following:
 Please note that there is a separate registration required by the contractor with the NCA prior to that contractor commencing business as a contractor in Kenya and registration of all skilled construction workers and accreditation and certification of all construction workers and construction site supervisors expected to undertake the geothermal project.
16.2 Which other regulatory requirements are in place, including but not limited to the need to provide insurances or guarantees, in connection with the commencing or continuing of exploration, exploitation and/or production of geothermal energy?
The main license is the “geothermal resource license” which allows the applicant to utilize a geothermal resource. There are however, other key approvals that require to be obtained to undertake a project in Kenya including:
17.1 Have there been any recent amendments to the legislation for licensing, exploration and/or exploitation of geothermal energy in the last 15 years? If so, have these amendments made a noticeable impact on the increase or decrease of production of electricity from geothermal resources?
As far as we are aware there have not been any recent amendments to the Geothermal Resources Act, No. 12 of 1982 and the Geothermal Resources Regulations, 1990 which govern the licensing, exploration and/or exploitation of geothermal energy.
17.2 Have any other factors made a strong impact on the production of electricity from geothermal in the last 15 years? If so, for what reasons.
From a tax perspective, the Government of Kenya has recently put in place various tax incentives to support investments in the energy sector. In June 2015, the Cabinet Secretary for the National Treasury exempted interest on loans advanced from foreign sources from tax, provided the funds are utilized for investing in infrastructure. Soon thereafter, the Cabinet Secretary for the National Treasury also exempted withholding tax on payments made to a non-resident person for services rendered under a power purchase agreement. Withholding tax is normally charged at the rate of 15% on interest and 20% on management /professional fees when paid to a non-resident person and in the absence of a double tax treaty;
With regard to stamp duty, Legal Notice No. 106 of 2015 which was issued in June 2015 granted an exemption from stamp duty on the registration of security documents relating to loans from foreign sources utilised in investing in infrastructure. The primary aim of the Kenyan Government in granting these exemptions is to attract more investments in the energy sector for the purpose of lowering the cost of energy.
17.3 Is there a specific legislation in place regarding geothermal extraction?
The Geothermal Resources Act, No. 12 of 1982 and the Geothermal Resources Regulations, 1990 are the pieces of legislation that explicitly govern the control of geothermal resources.
The Energy Bill, 2017, currently before Parliament for debate, proposes to repeal and replace the Geothermal Resources Act.
18.1 When applying for a licence, is it possible to apply for one license or authorization, which provides for multiple or cascade use of the resource, e.g. direct and indirect utilization (generation of electricity, district heating and cooling)?
The GRA makes a general reference that a licensee may “utilize the geothermal resources”. The GRA is silent on the multiple or cascade use of a geothermal resource. In our experience we have not come across a licence that allowed for multiple uses of a geothermal resource. The manner in which Kenyan geothermal legislation is drafted assumes that the resource will be used for power generation purposes only.
18.2 Could mineral extraction from geothermal fluid be included under such cascade usage clauses?
Section 8 (2) of the GRA states that, “Where any by-product obtained in the production of geothermal resources may be reclaimed for further use or sale and is a mineral within the meaning of the Mining Act (Cap. 306) [now repealed and replaced with the Mining Act, 2016], the licence may be modified so as to allow for the inclusion of a mining lease to enable recovery of that by-product.”
Since the enactment of the Mining Act, 2016, the use of any mineral extracted from geothermal fluid would be subject to the provisions of the Mining Act; which provide specific provisions on the manner in which rights to exploit minerals may be granted.
19.1 Once an exploitation license has been granted for the operation of a power plant, along with access to fresh water for power plant operation, can the licence allow for sales and distribution of fresh water to local communities?
Water resources are governed by the Water Act, No. 43 of 2016 and therefore a separate licence would have to obtained under the Water Act for purposes of undertaking any water supply activities.
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BBA Legal ehf., Katrínartúni 2, 105 Reykjavík, reg. no. 661098-2959 (also referred to as ‘’BBA’’ and ‘’we’’’) is the controller of any personal information that we process in connection to the legal services we provided to our clients.
BBA Legal ehf.
c/o Sara Rut Sigurjónsdóttir
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