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Proposals for Opening Up the Energy Sector to New Business Models in Kenya

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By Dr. Kariuki Muigua, PhD (Leading Environmental Law Scholar, Sustainable Development Policy Advisor, Natural Resources Lawyer and Dispute Resolution Expert from Kenya), The African Arbitrator of the Year 2022, Kenya’s ADR Practitioner of the Year 2021, CIArb (Kenya) Lifetime Achievement Award 2021 and ADR Publisher of the Year 2021*

It has been argued that ‘the ongoing energy system transformation across the world, and especially in developed world, and the growth of renewable energies are changing the structure and value creation of the energy industry with adopted business model classes showing that traditional business models are affected by the decarbonisation, decentralisation and digitisation of the energy system in all segments and economic sectors. There is a need for the stakeholders in the energy sector to adopt business models that ensure that consumers get value, one that encourages consumers to pay for value, and one that converts those payments to profits. Liberalization and energy system transformation can arguably significantly increase the pace of change and have impact on the business model landscape substantially.

In many countries around the world, especially in the developed world, there has been a trend of liberalization, unbundling and deregulation of the energy sector in order to improve access to energy. The liberalization of the energy market is defined to mean the opening of the electricity and gas market to free competition where existing monopolies are broken and the market is opened to more participants. Liberalization in regard to the energy markets and specifically electricity and gas mainly refers to “the opening up of an industry to more competition, often involving the relaxing of government restrictions to break up existing monopolies and open the market to more participants.” Liberalization has been characterized as involving the introduction of competition (via structural changes such as the removal of subsidies, vertical unbundling of integrated utilities to facilitate non‐discriminatory access to monopoly networks and horizontal unbundling of incumbents to create viable competitors) and the establishment of independent energy sector regulators.

Expressed differently, in electricity and downstream gas supply, liberalization has often involved privatization (and/or the introduction of new private entrants) and structural reform of national industries to create competitive wholesale and retail markets with regulated non‐discriminatory third party access to monopoly transmission and distribution networks. Where liberalization has been achieved such as the European Union energy markets, it was done to benefit consumers through; raising employment levels, increasing business efficiency and increasing a country’s potential economic development and GDP growth. Thus, “opening up these markets to competition allows consumers to benefit from lower prices and new services…more efficient and consumer-friendly than before” and consumers benefit because a breaking up of a monopoly and introducing competition will help give consumers savings in price but also choice of what service they demand.

It has also been argued that ‘potential economic development and GDP growth is likely to occur as shown by the benefits to consumers, employment and efficiency because of increased employment which will cause more people to spend disposable income; an increase in companies also increases employment but also the reduction in market prices will result in consumers having more disposable income to be spent on other goods and services, and this will lead to economic development in other industries and businesses and is likely to increase GDP. It has also been observed that ‘the introduction of competition in downstream energy sectors, such as electricity and gas supply, facilitates competition in upstream gas and coal production sectors; while the general increase in energy trading facilitates the introduction of emissions markets’.

Notably, while Kenya may have attained some milestone as far as unbundling (encouraging private generators of power, and separating generation from distribution) is concerned, the same cannot be said about liberalization (which is visibly missing from the Vision 2030). The electricity sector is unbundled and generation by independent power producers is permitted by law and is regulated, where as at 2018, it was estimated that the private sector produces 28% of Kenya’s centralised electricity supply. This was enabled through Feed-in tariffs (FITs) Regulations which were introduced in 2008 and revised in 2010 and 2012 to enable independent power producers to sell electricity to KPLC at a fixed price for a fixed term of 20 years.

Despite the commendable considerable success of this development, there has been challenges in uptake of this generated power. For instance, it is estimated that Kenya’s Lake Turkana wind farm and its 365 turbines make for a generating capacity of more than 300MW, creating one of the most productive projects anywhere in the world. Wind power has become a key contributor to the national grid to the extent that where there is interruption in its production, consumers have ended paying more for electricity in the country. The Lake Turkana Wind Power (LTWP) has been allocated a maximum production quota of 210MW, against an installed capacity of 310MW.97 While independent power producers have made considerable efforts to produce enough power to run the country, there have been problems with uptake of the same by the Kenya Power and Lighting Company Plc (KPLC). For instance, in the recent times and partly due to the Corona Virus (Covid19) pandemic, there have been reports that measures to contain the pandemic have led to reduced demand for power especially among the commercial consumers who account for over 65% of the power use in the country.

Reports also indicate that KPLC has prioritized the uptake of geothermal at 39.5 per cent, hydro at 33.9 per cent, wind at 14 per cent, diesel at 9.7 per cent with other sources like solar, imports from Uganda and co-generation accounting for about three per cent. This has thus left some of the producers with excess power. This shows that Kenya’s main consumers of electricity are commercial businesses and when these run into difficulties, the independent power producers are left stranded.101 This happens while there are still reports that there are homes in Kenya still not connected to the grid despite the Government’s best efforts to do so.

Thus, even as the Government looks for ways to produce cleaner power, there is also a need to address the disconnect between production and distribution of the power possibly through liberalization of the energy sector. While this has been attributed to the Covid-19 pandemic that afflicted almost the whole world in 2020, it raises a concern as to whether the power producers’ major customers are only the commercial users. This is because, it has already been pointed out that there are households in Kenya that still mainly rely on kerosene and biomass (firewood and charcoal) as their main source of energy for their inability to afford electricity. Even as we vouch for increased transition to renewable energy by way of increased production, this scenario points out the fact that there is more than availability of the renewable energy: the same must not only be made available but must also be made affordable to the local ‘mwananchi’ (citizen).

Affordability of energy is key. While the Energy Ministry had expressed optimism of introducing net metering for customer-sites generation (dependent on the enactment of the energy bill), establish regulations for mini-grids, and had started exploring the idea of local-currency-denominated tariffs in a bid to encourage local commercial banks to participate in energy projects, this was however not achieved after the enactment of the Energy Act, 2019. Liberalization of the sector would make all of these easier to actualize, for the benefit of consumers. Arguably, the current unbundling structure has not achieved a lot for the Kenyan people as the high cost and unreliability of electricity supply in the country are still major issues, as these are greatly affected by state monopoly mainly through Kenya Power, a vertically integrated company.

Liberalization would ensure that for all forms of energy – gas, electricity, coal and oil – industrial and domestic consumers would be free to choose their supplier. Kenya needs to borrow a leaf from some of the most successful countries in this sector such as Sweden and Singapore, among others. In order to improve energy security and affordability, Singapore began to deregulate its electricity market since 2003, with the creation of the National Electricity Market of Singapore (NEMS) allowing for bid-ask offers to be made for the dispatch of electricity supply on the wholesale side and subsequently, the retail market liberalized in tranches, with 80% of electricity consumers currently already given an option to select their electricity retailers since late 2014.

As result, as at 2018, it was reported that ‘supply competition and the retail liberalization efforts had possibly led to a combinatorial decrease in wholesale electricity prices by up to 9.11%, accounting for the influence of oil prices and volatility components’. The country has also attracted investors in the sector making it more competitive for the retail consumer as far as choice of energy supplier is concerned. Notably, 14 electricity providers participated in the pilot phase, including units of infrastructure companies.  Kenya should follow in the footsteps of Singapore and other countries that have liberalized their energy markets in order to address the gap between generation, transmission and distribution of energy and particularly electricity and consequently ensure that all people in the country have access to cleaner, affordable energy.

*This article is an extract from published article Delivering Clean and Affordable Energy for All, by Dr. Kariuki Muigua, PhD, the African Arbitrator of the Year 2022, Kenya’s ADR Practitioner of the Year 2021 (Nairobi Legal Awards), CIArb (Kenya) ADR Lifetime Achievement Award 2021 and ADR Publisher of the Year 2021. Dr. Kariuki Muigua is a Foremost Dispute Resolution Expert in Africa ranked among Top 6 Arbitrators in Kenya by Chambers and Partners, Leading Environmental Law and Natural Resources Lawyer and Scholar, Sustainable Development Advocate and Conflict Management Expert. Dr. Kariuki Muigua is a Senior Lecturer of Environmental Law and Dispute resolution at the University of Nairobi School of Law and The Center for Advanced Studies in Environmental Law and Policy (CASELAP). He has published numerous books and articles on Environmental Law, Environmental Justice Conflict Management, Alternative Dispute Resolution and Sustainable Development. Dr. Muigua is also a Chartered Arbitrator, an Accredited Mediator, the Africa Trustee of the Chartered Institute of Arbitrators and the Managing Partner of Kariuki Muigua & Co. Advocates. Dr. Muigua is recognized as one of the leading lawyers and dispute resolution experts by the Chambers Global Guide 2022. 

References

Muigua, K., “Delivering Clean and Affordable Energy for All,” Available at: http://kmco.co.ke/wp-content/uploads/2021/05/Delivering-Clean-and-Affordable-Energy-for-All-Kariuki-Muigua-Ph.D-24th-April-2021-1.pdf (accessed 25 June 2022).

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The Roles of the Three Parts of the Permanent Court of Arbitration

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H.E. Amb. Marcin Czepelak, the Fourteenth Secretary-General of the Permanent Court of Arbitration (PCA)

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Brief History of the Permanent Court of Arbitration (PCA)

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By Dr. Kariuki Muigua, PhD, C.Arb, Current Member of Permanent Court of Arbitration (PCA) Representing the Republic of Kenya.

The Permanent Court of Arbitration (PCA) is a 124 Years Old Intergovernmental Organization currently with 122 contracting states. It was established at the turn of 20th Century during the first Hague Peace Conference held between 18th May and 29th July 1899. The conference was an initiative of then Russian Czar Nicholas II to discuss peace and disarmament and specifically with the object of “seeking the most effective means of ensuring to all peoples the benefits of a real and lasting peace, and, above all, of limiting the progressive development of existing armaments.” The culmination of the conference was the adoption of a Convention on the Pacific Settlement of International Disputes, which dealt not only with arbitration but also with other methods of pacific settlement, such as good offices and mediation.

The aim of the conference was to “strengthen systems of international dispute resolution” especially international arbitration which in the last century had proven effective for the purpose with number of successful international arbitrations being concluded among Nations. The Alabama arbitration of 1871-1872 between the United Kingdom (UK) and the United States (US) under the Treaty of Washington of 1871 culminating in the arbitral tribunal’s award that the UK pay the US compensation for breach of neutrality during American Civil War which it did had demonstrated the effectiveness of arbitration in settling of international disputes and piqued interest of many practitioners in it as a mode of dispute resolution during the latter years of the nineteenth century.

The Institut de Droit International adopted a code of procedure for arbitration in 1875 to answer the need for a general law of arbitration governing for countries and parties wishing to have recourse to international arbitration. The growth of arbitration as a mode of international dispute resolution formed the background of the 1899 conference and informed its most enduring achievement, namely, the establishment of the PCA as the first global mechanism for the settlement of disputes between states. Article 16 of the 1899 Convention recognized that “in questions of a legal nature, and especially in the interpretation or application of International Conventions” arbitration is the “most effective, and at the same time the most equitable, means of settling disputes which diplomacy has failed to settle.”

In turn, the 1899 Convention provided for the creation of permanent machinery to enable the setting up of arbitral tribunals as necessary and to facilitate their work under the auspices of the institution it named as the Permanent Court of Arbitration (PCA). In particular, Article 20 of the 1899 Convention stated that “[w]ith the object of facilitating an immediate recourse to arbitration for international differences which it has not been possible to settle by diplomacy, the signatory Powers undertake to organize a Permanent Court of Arbitration, accessible at all times and operating, unless otherwise stipulated by the parties, in accordance with the rules of procedure inserted in the present Convention.” In effect, the Convention set up a permanent system of international arbitration and institutionalized the law and practice of arbitration in a definite and acceptable way.

As a result, the Permanent Court of Arbitration (PCA) was established in 1900 and began operating in 1902. The PCA as established consisted of a panel of jurists designated by each country acceding to the Convention with each country being entitled to designate up to four from among whom the members of each arbitral tribunal might be chosen. In addition, the Convention created a permanent Bureau, located in The Hague, with functions similar to those of a court registry or secretariat. The 1899 Convention also laid down a set of rules of procedure to govern the conduct of arbitrations under the PCA framework.

The second Hague Peace Conference in 1907 saw a revision of the 1899 Convention and improvement of the rules governing arbitral proceedings. Today, the PCA has developed into a modern, multi-faceted arbitral institution perfectly situated to meet the evolving dispute resolution needs of the international community. The Permanent Court of Arbitration has also diversified its service offering alongside those contemplated by the Conventions. For instance, today the International Bureau of the Permanent Court of Arbitration serves as a registry in important international arbitrations. In 1993, the Permanent Court of Arbitration adopted new “Optional Rules for Arbitrating Disputes between Two Parties of Which Only One Is a State” and, in 2001, “Optional Rules for Arbitration of Disputes Relating to Natural Resources and/or the Environment”.

Reference

PCA Website: https://pca-cpa.org/en/about/introduction/history/ (accessed on 25th May 2023).

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Former KCB Company Secretary Sues Over Unlawful Dismissal

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Former KCB Group Company Secretary Joseph Kamau Kania who has sued the Bank for Unlawful Dismissal

Former KCB Group Company Secretary Joseph Kamau Kania has sued the lender seeking reinstatement or be compensated for illegal sacking almost three years ago. Lawyer Kania was the KCB Group company secretary until restructuring of the lender in 2021 that saw some senior executives dropped.

Through the firm of Senior Counsel Wilfred Nderitu, Kamau wants the court to order KCB Group to unconditionally reinstate him to employment without altering any of the contractual terms until his retirement in December 2025.

In his court documents filed before Employment and Labour Relations Court, the career law banker seeks the court to declare the reorganization of the company structure a nullity and amounted to a violation of his fundamental right to fair labour practices as guaranteed in Article 41(1) of the Constitution. He further wants the court to declare that the position of Group Company Secretary did not at any time cease to exist within the KCB Group structure.

He further urged the Employment Court to declare that the recruitment and appointment of Bonnie Okumu, his former assistant, as the Group Company Secretary, in relation to the contemporaneous termination of his employment, was unprocedural, insufficient and inappropriate to infer a lawful termination of his employment.

“A declaration that the factual and legal circumstances of the Petitioner’s termination of employment were insufficient and inappropriate to infer a redundancy against him, and that any redundancy declared by the KCB Group in relation to him was therefore null, void and of no legal effect and amounted to a violation of his fundamental right to fair labour practices as guaranteed in Article 41(1) of the Constitution,” seeks lawyer Kamau.

Kamau says he was subjected to discriminatory practices by the KCB Bank Group in violation of his fundamental right to equality and freedom from discrimination as guaranteed in Article 27 of the Constitution and the termination of his employment was unfair, unjustified, illegal, null and void.

Lawyer Kamau further seeks the court to declare that the Non-Compete Clause in the 2016 Contract is unenforceable by the KCB Group as against him and is voidable by him as against the Bank ab initio, byreason of the termination of the Petitioner’s employment having been a violation of Articles 41(1) and 47(1) and (2) of the Constitution, and of the Employment Act.

He also wants the Employment Court to find that finding that KCB’s group legal representation by Messrs of Mohammed Muigai LLP Advocates law firm in respect of his claim for unlawful termination of employment resulted in a clear conflict of interest by reason of the fact that a Founding and Senior Partner at the said firm lawyer Mohammed Nyaoga is also the Chairman of the CBK’s Board of Directors.

“A Declaration that the circumstances of KCB’s legal representation by Messrs. Mohammed Muigai LLP Advocates resulted in a violation of the Petitioner’s fundamental right to have the employment dispute decided independently and impartially, as guaranteed in Article 50(1) of the Constitution,” seeks lawyer Kamau.

Kamau is seeking damages against both KCB Group and Central Bank of Kenya jointly and severally for the violation of his constitutional and fundamental right to fair labour practices.

He wants  further wants court to declare that CBK is liable to petitioner on account of its breach of statutory duty to effectively regulate KCB Group to ensure that KCB complied with the Central Bank of Kenya Prudential Guidelines and all other Laws, Rules, Codes and Standards, and that, as an issuer of securities, it complied with capital markets legislation.

Kamau through his lawyer Nderitu told the court that he was involved in Shareholder engagement in introducing the Group aide-mémoire that significantly improved the management of the Annual General Meetings, including obtaining approval without voting through the Memorandum and Articles of Association of Kenya Commercial Bank Limited among others.

He said that during his employment at KCB Bank Kenya and with the KCB Group, he initially worked well with former KCB CEO Joseph Oigara until 2016 when the CEO allegedly started sidelining him by removing the legal function from his reporting line.

He further claims he was transferred from the Group’s offices at Kencom House to its offices Upper Hill under the guise that the Petitioner was merely to support the KCB Group Board.

He adds that at that point his roles were given to Okumu for reasons that were not related to work demands.  He stated that Oigara at one time proposed that he should leave his role in the KCB Group and go and serve as the Company Secretary of the National Bank of Kenya Limited, a subsidiary of the Group, a suggestion which he disagreed with to Oigara’s utter annoyance.

Kamau stated that his work was thenceforth unfairly discredited, leading to his being taken through a disciplinary process whose intended outcome failed miserably, and the Petitioner was vindicated.

“More specifically, the Petitioner contends that the purported creation of a new organizational structure towards the end of 2020 was in fact Oigara’s orchestration targeted to remove certain individuals by requiring them to undergo interviews in the pretext that new roles were created, and amounted to a further violation of the Petitioner’s fundamental right to fair labour practices under Article 41(1) of the Constitution,” said in his court documents.

He further adds that this sham reorganization demonstrates how the role of the KCB Group Company Secretary purportedly ceased to be and was then very briefly replaced with a new role of the KCB Group General Counsel. The role of KCB Group Company Secretary then ‘resurfaced’ immediately thereafter, in total violation of legal and regulatory requirements.

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