Exploring Hydrogen Markets – Kenya & Uzbekistan

20 December 2023

This episode explores the developing legal frameworks in two emerging hydrogen markets, unveiling some of the issues and opportunities investors should watch out for.

Ashurst’s Yann Alix is joined by Amyn Mussa from Anjarwalla & Khanna (ALN Kenya) and Madina Hamidova from Centil Law Firm. Together, they discuss the hydrogen markets in Kenya and Uzbekistan. With many regulations still new and untested, it’s vital for foreign investors to stay informed on local legal developments.

Amyn describes the emerging landscape in Kenya, including the nation’s Green Hydrogen Strategy, which aims to leverage renewable energy for agricultural, manufacturing, and industrial purposes. He also highlights the main drivers and barriers to investment in Kenya, emphasising the well-established IPP model in the power sector and the importance of credit enhancement structures and robust government support.

Madina describes the growing market in Uzbekistan, and highlights some of the issues investors need to be mindful of. These include guarantees and incentives for foreign investors, government reforms, and moves towards privatisation.

To discover more on the international hydrogen market and opportunities, make sure to visit Ashurst’s interactive hydrogen guide at ashurst.com.

The information provided is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to. Listeners should take legal advice before applying it to specific issues or transactions.


Yann Alix:

Hi everyone, and welcome to Ashurst Legal Outlook. In this podcast, we keep you across the global trends and local issues that are shaping legal landscape and impacting our organisations. My name is Yann Alix and I'm a partner in the projects and energy transition team and head up the Serbs Africa Group. I specialise in corporate and commercial transaction as well as major project development in emerging markets with a focus on the energy resource and infrastructure industries. And I'm pleased to be joined today by two very distinguished guests.

Firstly, we've got Amyn Mussa. Amyn is a partner and the head of the Projects and Infrastructure department at A&K, Anjarwalla & Khanna or ALN Kenya and also co-heads the firms Real Estate and Construction Department. Amyn is generally considered the leading energy and projects lawyer in the region acting for sponsors.

And we also have with us Madina Hamidova. Madina is a senior associate at Centil Law Firm, Uzbekistan focusing on energy, public-private partnership, and foreign investment. She does advise both public and private clients on IPP projects, the power market and the energy legal framework in Uzbekistan.

We're all very keen to kick off the episode, which comes off the back of the recent updates for Interactive Hydrogen Guide, an interactive map to help clients and investors navigate the evolving hydrogen strategies, regulations, incentives, and major projects taking place in country that are focused on this market. We recently added two new chapters, the guide, Uzbekistan and Kenya, which we will be exploring today.

Hi Madina, welcome to the podcast.

Madina Hamidova:

Hello, happy to be here.

Yann Alix:

Hi Amyn, welcome to the podcast.

Amyn Mussa:

Hi, Madina. It's great to be on this podcast and thank you for the opportunity and the invitation.

Yann Alix:

So without further I do, perhaps I can start with you Amyn. Maybe you can just give us a bit of flavour as to what the current landscape is like and what the recent developments have been in relation to the hydrogen market in Kenya.

Amyn Mussa:

Sure. Yeah, so the hydrogen market in Kenya is still at a very nascent stage of development. Kenya has just launched its green hydrogen strategy and roadmap during the Africa climate Summit in 20 twenty-three. And in simple terms, the purpose of the strategy is to deal with the country's decarbonization strategy and looks to harness the country's renewable energy sources to enhance agricultural production, manufacturing, and industrialization. In the first phase, Kenya is looking to put together public policy and regulations and then from then move into pilot projects, whether it is in relation to fertiliser, hydrogen, base load power, and then grow beyond that.

Further, Kenya has just also enacted the Climate Change Act where it'll look to regulate carbon markets in Kenya.

Yann Alix:

Thank you so much, Amyn. And over to you. Madina, would you be able to give us an overview of the current landscape and recent developments in Uzbekistan?

Madina Hamidova:

Yeah. I think similarly to what Amyn said about Kenya, hydrogen energy market in Uzbekistan is still in its infancy and the development of the legal basis for the hydrogen energy sectors in Uzbekistan started in 2021, and in that year the president adopted a resolution on measures for development of renewable and hydrogen energy in Uzbekistan.

And in accordance with this resolution, the president established the Interdepartmental commission for the development of Renewable and Hydrogen energy. And this commission has been tasked with assisting ministries and agencies in conducting research and training in the hydrogen energy sector and also with developing the draught national strategy for Renewable and Hydrogen energy development. The strategy has not been adopted yet. We haven't seen it, but it is currently in the pipeline.

However, although the strategy is not publicly available yet as the government has already disclosed some of its short-term goals to develop the hydrogen deployment in the country. For example, in 2022, there was a strategy adopted for Uzbekistan and it includes the objective of the country to decrease its hydrocarbon dependence by increasing the share of renewable energy sources, including hydrogen energy to 25% by 2026.

And it is also important mentioning that this year the ministry of energy of Uzbekistan negotiators the development of a pilot green hydrogen project with a leading investor from Saudi, Arabia ACWA Power.

Yann Alix:

Fantastic, thanks Madina. So what do the investor opportunities look like at the moment in your respective markets? Let's maybe start with Amyn.

Amyn Mussa:

Thank you, Yann. So in my view, Kenya possesses a very unique and advantageous position due to its significant geothermal energy sources. And further due to the abundant wind, solar and hydro energy sources it has. And so currently more than 90% of Kenya's electricity is generated from hydro, geothermal, wind, and solar, and this percentage is probably amongst the highest in the world.

In addition, we have seen institutions like the European Union member states like Germany, the European Investment Bank, pledging grant and loan funding to support Kenya's development of green hydrogen and the fertiliser sector.

We are also seeing a number of global players in this sector looking at collaborations with the Kenyan government and with state-owned enterprises such as Kenjen and the Geothermal development Corporation. There are also a number of research and development initiatives that we are aware of that are being undertaken to determine specifically how Kenya's geothermal resources which are very unique, can be tapped and utilised for these sectors such as hydrogen and fertiliser.

Yann Alix:

Thanks Amyn. What about you Madina?

Madina Hamidova:

That's a very interesting question because as I already stated, the hydrogen energy market is still in its infancy in Uzbekistan, but what we see now is that the government views hydrogen as a long-term solution in tackling fossil fuel dependence of the country and reduction of carbon emissions in the chemical industry. So the power sector, including electricity generation and the chemical industry are expected to be mostly affected with hydrogen deployment.

And also, as I have mentioned earlier this year, the minister of energy of Uzbekistan negotiated the development of a pilot green hydrogen project with the Saudi investor ACWA Power. And the project is expected to be developed into phases. The first phase includes a three-thousand tonne green ammonia pilot project, and it is already underway because the hydrogen purchase and power purchase agreements have been already signed and upon the project's full implementation 2.4 gigawatt of wind energy will power the production of 500,000 tonnes of green ammonia per year. And it's expected that this pilot green hydrogen energy project will trigger a development of new hydrogen projects in country and also expedite adoption of sector-specific legislation.

Yann Alix:

Thank you both for running through that. Moving on, what would you say are the main drivers to investment in your markets? Amyn?

Amyn Mussa:

So Yann, in Kenya, the power sector over the last two decades has seen significant private investment through what I would call traditional project finance structures that are well-developed and supported by robust regulatory frameworks. So for example, we have had projects such as the Lake Turkana Wind Power Project, which is a 300 megawatt project, Kipeto Energy, which is a hundred megawatt wind project, Olkaria, which is over a hundred megawatts of geothermal and other such projects that have been developed through a very well-established IPP model in Kenya.

And therefore, I feel that the Kenya, IPP, and PPP models would form the foundation of developing the green hydrogen sector. Because through the IPP model in Kenya, we have developed bankable project agreements, government support measures, and these I believe would form the backbone of your contracts with government entities for green hydrogen projects.

Secondly, I believe logistics will play a key role in developing this sector, and thankfully in the last decade, Kenya has invested significantly in upgrading its ports, road and rail network. Lastly, Kenya provides significant tax incentives for renewable energy projects including investment allowances, waiver of import and custom duties and sub waivers of value added taxes and withholding tax. And so I think these will form the backbone for attracting investment to this particular sector.

Yann Alix:

Thank you. Amyn, very insightful. Word about Uzbekistan Madina.

Madina Hamidova:

So Uzbekistan has very well-developed investment in PPP legislation and tested bankable IPP models in the energy sector. So I would say that the key drivers to investment in this area are first of all high green energy potential of the country. And second, a strong political will to diversify the current energy mix in the country.

During recent years, Uzbekistan has become a regional leader in Central Asia in renewable energy, implementing bankable utility scale renewable energy projects, including projects under a PPP modality and also in attracting foreign investments in this sector.

Also, Uzbekistan is currently at the stage of a transition from the state owned and subsidised energy sector model to a competitive energy market with significant private sector participation and liberalised energy tariffs. For instance, this year the country introduced the concept of phased transition to the mechanisms of wholesale and retail electricity markets. And this concept provides for creation of an electricity market based on a supply and demand model and relying on private market players.

In addition, Uzbekistan is a signatory to international investment instruments such as the Energy Charter Treaty, Exit Convention, and various bilateral investment treaties which offer significant protection to international investors involved in projects in Uzbekistan.

Yann Alix:

Thank you so much both. Lots going on in both markets. Finally then, what would you say are the key areas of focus and concerns potentially for investors in the green hydrogen space? Amyn let's maybe start with you.

Amyn Mussa:

Key areas for investors to focus on and make sure they get it right from the beginning. I think the starting one is ensuring that you have a robust government support measure structure and appropriate credit enhancement structure. In my view, these are critical to form a foundation for the success of any project. So for example, ensuring that you have adequate political risk mitigation, you have appropriate short-term and long-term credit enhancement structures are fundamental for bankability and financial viability.

I also believe that in the initial stages of development in this sector, there will be concern and uncertainty about the ability of the local market to take offtake for this product and therefore initial projects that are developed in Kenya will have to rely on robust and bankable international offtake arrangements.

Additionally, for the hydrogen sector, whilst as I have said earlier, Kenya has made significant investments in their infrastructure in port, rail and roads, I believe further investment will be required to ensure that it can support this sector. And in addition to that, adequate and reliable water supply will be a challenge for some of these projects.

The other issue that I find investors don't put initial focus on at the very onset of projects is what I would call cross-cutting environmental, social and land issues. Projects of this size and scale will need to deal with how they're going to acquire the land, what is the impact of the environment, and most importantly, what is the I impact of local communities?

To give you an example, with the very first wind projects we developed in Kenya, it was critical for the sponsors at the very beginning to address community concerns about the impact of such projects and the impact of these new technologies at that time and deal with concerns of the community. And therefore in my view, these ESG issues should be dealt with head on right at the beginning as opposed to leaving them for the end just for a tick box exercise.

Lastly, I think whilst I have said earlier that Kenya has developed very favourable tax incentives for the renewable energy sector, it'll be important for these tax incentives to also apply to the hydrogen sector and therefore appropriate changes in law in my view, will be required to ensure that the entire sector benefits from such tax incentives.

Yann Alix:

Thank You Amyn. All very good points indeed. What's your perspective Madina?

Madina Hamidova:

I will start with the areas of focus for investors planning to invest in Uzbekistan. So in my opinion, the first will be that investors need to utilise guarantees and incentives that are available already there in the legislation for foreign investors. For example, Investment Law of Uzbekistan grants various guarantees and incentives to investors. This include the statutory change in law protection for 10 years and also protection against expropriation and guarantee of free transfer of funds. And the existing investment legislation also allows to provide additional incentives to foreign investors through investment agreements with the government of Uzbekistan. So foreign investors need to be aware of all those benefits that they can use while implementing projects in Uzbekistan.

The second area of focus will be that the government continuously works on enhancing investment climate in Uzbekistan. It introduces various reforms including administrative reforms, simplification of licencing procedures. For example, since 2017, more than 60 licencing procedures were abolished.

And also the government focuses on privatisation of various state-owned companies, which is also beneficial for investors. If we move to concerns that the investors need to pay attention to, the first one will be is that the hydrogen [inaudible 00:20:35] is still developing in Uzbekistan. So regulations in this sector are very new and untested, which might affect bankability of hydrogen energy projects in the country.

And the second concern will be is that there are no incentive mechanisms in place that specifically apply to hydrogen production projects and that would encourage investors and consumers to switch to low carbon hydrogen. However, it is expected that the strategy for renewable and hydrogen energy development in Uzbekistan will reflect the incentive mechanism specific for the hydrogen industry. So the investors need to keep track on the rapidly changing legislation to see what will be those incentives in place for the hydrogen projects in the country.

Yann Alix:

Thanks, Madina and Amyn, all very clear. Thanks for joining us today. Brilliant discussion.

Madina Hamidova:

Thanks a lot. Thanks a lot for this opportunity to be here and it's really great to be here and hopefully maybe in next two years we'll talk about a very well-developed hydrogen energy market in Uzbekistan. Thanks a lot.

Amyn Mussa:

Thank you Yann, for the opportunity. It was actually great to hear also from Madina about the similarities that she's dealing with and we are dealing with in Kenya and it's great to be able to have that context. So thanks a lot for the opportunity and as Madina said, hopefully in a couple of years we'll have a much more interesting conversation about developed projects. So thanks to everybody.

Yann Alix:

Thank you for listening to Ashurst Legal Outlook, a lot of common themes and common ground, which are the projects we're working across various jurisdictions in emerging markets in Africa in particular. And if you would like to learn more, please do take a look at our hydrogen guide on Ashurst.com where you will be able to gather a complete picture on hydrogen strategies, regulation, incentives, and projects around the globe. To ensure you don't miss any future episodes, do subscribe now on Apple Podcasts, Spotify or your preferred podcast platform. While you are there, please leave us a rating or review. We'll appreciate it. Until next time, thanks so much for listening and goodbye for now.

Speaker 4:

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The information provided is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to. Listeners should take legal advice before applying it to specific issues or transactions.