How Finance Bill 2025 risks hiking Kenya's clean energy costs

New proposals in the Finance Bill 2025 could slow down Kenya’s transition to  clean energy by raising the cost of key technologies such as electric vehicles, solar power systems and energy storage solutions. 

The Bill has proposed the migration from the list of zero-rated items to that of VAT exempt goods, which analysts say will increase the cost of goods.

Among the goods that are currently VAT zero-rated but will become VAT exempt if the proposals sail through the National Assembly include electric bicycles, solar and lithium-ion batteries, electric buses and bio-ethanol vapour stoves.

Analysts warn that the shift from zero-rated VAT status to VAT-exempt status for several green technologies will increase consumer prices and dampen momentum on crucial climate goals.

This could mean higher costs for electric vehicles, making investments in battery energy storage systems (BESS) unattractive and even slow down the uptake of small-scale solar systems and construction of solar grids that are seen as key in lighting up homes in far flung areas. Such areas are yet to be connected to the national electricity grid.

Kenya has in the recent years been giving incentives to players in the EV industry as it seeks a transition from the heavy reliance on petroleum products, which has over time exposed the country to economic shocks such as sudden spikes in costs globally.

According to Kenya’s National Electric Mobility Policy, it aims to have EVs contribute 30 per cent of all new vehicles that will be registered by 2030.

The VAT shift could also derail Kenya’s ambitions to attract investments in energy storage systems, which are essential for stabilising the grid amid rising solar and wind generation.

The VAT shift, which is set to see high costs of bio-ethanol stoves, could also deal a blow to the government's plans to achieve universal access to clean cooking solutions by 2028.

While Kenya has made strides in promoting adoption of renewable energy and application around it, the proposed tax changes could reverse some of these gains.

The reclassification of zero-rated items to VAT-exempt appears to be part of a broader push by the Treasury to widen the tax base and boost government revenues. Treasury has also been seeking to stop abuse of VAT zero rating, which has in the past resulted in huge and at times undeserving VAT refund claims. 

In explaining the different VAT exempt and zero rated, analysts note that zero rated supplies are cheaper as manufacturers are allowed to claim a refund on input tax. Exempt supplies, on the other hand, are not taxable and any related input tax is therefore not deductible.

“There has been an attempt to focus more on businesses this year. Many items have been moved from zero rating to tax exempt....this will increase the business costs which will eventually be passed on to consumers and slow down the economy,” said Ken Gichinga, chief economist at Mentoria Economics.

“When items are zero rated, it means producers can claim a tax refund and items are cheaper. When they are exempt it means producers cannot claim refunds which means they have to pass it on to customers and reduce other expenses such as work force.”

Kenya has been giving the EV industry incentives as it sought to leap ahead of other countries in the transition from internal combustion engines. The government has in the recent past tried to incentivise Kenyans to transition to electric vehicles through such measures as reducing excise duty on EVs from 20 per cent to 10 per cent.

It also introduced an e-mobility tariff that offers electric vehicle (EV) owners cheaper rates to charge their cars.  There has been growing interest in setting up battery energy storage systems. 

While the country has been eyeing new investors to put up BESS plants, there is also a push to have power producers with solar and wind plants to equip the generators with energy storage systems to reduce the disruptions that such electricity production units have on the grid.  

The National Assembly’s Departmental Committee on Energy in a recent report noted that while the two energy sources provide major advantages, they are unavailable when there is a surge in demand.

This is such that while they offer cleaner and relatively cheap electricity, they have not been able to displace the costly and polluting thermal power plants.

Thus, while the number of wind and solar power plants have been on the rise, they have not had a major impact in reducing the cost of power. Equipping such plants with BESS, the Committee said, would enable them to be used during peak hours and displace thermal power plants.

“All intermittent sources of energy projects, that is wind and solar, being on-boarded to the grid (should) be fitted with Energy Storage Solutions as a mitigation measure to their intermittency as well as to maintain the systems equilibrium between supply and demand for electricity by strategically discharging storage assets during times of peak demand and charging them during times of low demand,” said the Committee in its recommendations in a new report done after an inquiry into the high cost of energy in Kenya.

Wind plants tend to optimally produce power at night when winds speeds are high while solar farms can only produce during the day, both missing the peak hours for electricity consumption in the country at between 7pm and 10pm.

Battery energy storage systems could mean tapping these sources when they are generating optimally and using the power during peak hours.

Wind and solar power plants have over the last six years grown to account for about 20 per cent of the country’s installed capacity. This is in comparison to 2018, when the only power plant connected to the electricity grid was Kenya Electricity Generating Company (KenGen’s) plant on Ngong Hills with a capacity for 25.5 megawatts (MW).

Other power plants using wind to generate electricity are the 310MW Lake Turkana Wind Power plant and the 100MW Kipeto Power in Kajiado County, with the total installed capacity for wind now standing at 436MW.

Solar power production has also grown and in addition to the State-owned Garissa Solar plant with an installed capacity of 50MW, other power plants that have come on board in recent years include Globeleq’s Malindi Solar Plans (40MW), Selenkei (40MW) and Cedate (40MW) and Alten Kenya Solar Farm (40MW).

Enhanced generation from variable renewable sources has been lauded for its potential to displace costly and polluting thermal power. They have however presented challenges to the grid.

These include the fact that they are only available when demand is low such as late in the night for wind and during the day for solar. They are thus unavailable during peak times when the system experiences firm capacity deficiencies and sees power in the country relying on expensive thermal plants.

Among the firms that have plans for a BESS plant include KenGen, which plans to store energy produced at its geothermal power plants in Olkaria when the demand is low and will then be used when demand goes up.

The system is expected to store electricity generated using geothermal power, which according to KenGen is left idle during off peak power consumption hours. This is particularly the case when electricity from wind and solar is feeding the grid and displaces geothermal.