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Identify financing sources for implementing a solar energy project in Kenya. Consider different sources for funding...

Identify financing sources for implementing a solar energy project in Kenya. Consider different sources for funding this global business enterprise. (Large companies may sell stock, issue bonds, and obtain loans. Smaller organizations might make use of personal investors, small business loans, venture capital sources, or government-guaranteed loans.)

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Financialization of renewable energies in Kenya
Since the liberalization and unbundling of energy markets within the 1990s, renewable-energy infrastructures became subject to financialization processes (Klagge and Anz 2014). Renewable-energy projects are interesting for institutional and other financial investors because they generate steady revenue streams and (if large enough for generating economies of scale) have relatively low transaction costs. However, most financial investors aren't able to bear the large (pre-completion) risk related to initial (greenfield) investment in large-scale renewable-energy projects and instead like better to invest during a completed, already revenue-generating project (OECD 2018). This corresponds well with the preferences of developers and technology suppliers who are often major shareholders within the construction phase and have a tendency to sell their shares once the project is operational so as to free-up capital for investment in new projects (Baker 2015). Overall, attracting financial and other private capital to large-scale renewable-energy projects depends on the conditions of the risk-sharing agreements, the combination of investors within the project consortium, and therefore the relevant legal and institutional conditions.

Renewable-energy projects have benefitted from various legal, institutional, and political changes within the context of climate policies and also the financial crisis. The financial crisis in 2008 led to a rise in liquidity thanks to central-bank interventions and decreasing yields in various traditional asset classes; this is often why financial (especially institutional), investors looked for new asset types (Inderst 2011; OECD 2014). Furthermore, the rapid development of renewable energies, supporting policies, and risk-mitigating measures have triggered financial investors’ interest in renewable-energy projects. this is often reflected in various investments by institutional investors and financialized firms, for instance in offshore wind farms and enormous renewable-energy companies but also within the development of renewable-energy indices at various stock exchanges (Klagge and Anz 2014; OECD 2015). Most of those developments are happening and are researched within the Global North, whereas within the Global South financialization of renewable energies, especially in Sub-Saharan Africa , has not (yet) been investigated.

LTWP ownership and financing structure
LTWP was initiated in 2006 as an unsolicited bid by Kemperman Paardekooper & Partners Africa (KP&P Africa), a consortium of Dutch and Kenyan businessmen (KP&P Africa website as of April 28, 2019). In 2010, Aldwych Turkana Limited, a subsidiary of Aldwych International, which is an experienced African power development company registered in England and Wales, joined KP&P Africa as co-developer with the mandate of overseeing the development and operations of the facility plant on behalf of LTWP (KP&P Africa website and Aldwych International website as of April 28, 2019). within the same year the world-leading Danish turbine producer Vestas,16 the Danish Investment Fund for Developing Countries (IFU), and therefore the Norwegian Investment Fund for Developing Countries (Norfund), both government-established DFIs, became equity shareholders within the project. In 2013, another Scandinavian DFI, the Finnish Fund for Industrial Cooperation Ltd (Finnfund) and Sandpiper Ltd, a GIS company incorporated in Kenya, joined the consortium. the entire equity finance was estimated at €125 million The project’s debt raising and arrangement was led by the African Development Bank (AfDB) along side the quality Bank of South Africa and Nedbank Limited as co-arrangers. Debt funding was provided by various development banks, institutions, and facilities (LTWP 2014). After the planet Bank’s withdrawal of in 2012 (see 4.3), the AfDB played a good greater role in building investor confidence on mitigation of environmental and governance risks (AfDB 2013; AfDB interview 2019). AfDB’s prominent role also as that of varied development organizations weren't only associated with the project’s energy-related benefits17 but also justified by the positive impact on local labor markets during construction and therefore the ‘upgrade [of] the agricultural road network, significantly improving access to markets and business opportunities for the local communities, thus catalyzing additional jobs and income-generation opportunities during this poor and remote area’ (AfDB 2013). Additional benefits were expected from the project’s Corporate Social Responsibility (CSR) programme, which supported investments in local health, beverage , and faculty facilities (AfDB 2013; Aldwych International 2014; County Commissioners and County Government representatives interviews 2019).

Equity-debt ratio and therefore the national’s state enabling role
In the financing mixture of renewable-energy (and other) projects, the equity-debt ratio are often interpreted as a signifier of how risky a project is perceived by potential investors (cp. 2.3). Whereas LTWP exhibits an equity share of only 20%, the share within the Menengai (Phase 1) assessment, exploration, and drilling activities is well above 50% (Figure 3) and which may be explained by the good risk related to heat exploration. The so-far relatively low equity share – and overall capital – in Baringo-Silali (Table 2) is said to the first exploration stage and to the very fact that the drilling rigs aren't newly acquired but taken and transported from Menengai after drilling for Phase 1 was completed there. the various risk structures also are reflected within the specific roles the (national) state takes on in both projects.

LTWP doesn't involve direct state investment (Table 3), whereas the geothermal projects in Menengai and Baringo-Silali do. There the Kenyan national state, through GDC, is that the initiator and so far the sole equity investor (Tables 1 and 2). GDC, along side DFIs, absorbs most of the exploration risk before (private) IPPs will build, own, and operate power plants (see 5.1). The IPPs will enjoy FITs for renewable energies in Kenya and associated PPAs with KPLC. within the LTWP project case, the state’s involvement also included providing incentives in sort of a positive PPA with KPLC and by taking the responsibility of constructing the specified circa 400 km high-voltage cable for off-take of generated electricity. In both cases the national state overall has played a crucial and enabling role and without its support none of the projects would have materialized.

Private-sector investment predominantly provided as equity by industry investors
Private-sector participation in infrastructure development within the Global South is increasingly encouraged, and, like within the Global North, often materialized through PPPs (see 2.2). this is often also true for LTWP and geothermal development, albeit in very different forms. In LTWP, private companies are the initiators and main owners of the plant (68% of equity). things is different within the Menengai project and in Baringo-Silali, where private firms don't get entangled as equity investors until after a successful exploration and after steam has been discovered. it's only then that IPPs are selected during a competitive bidding process.

In the case of LTWP project, the four private companies involved within the initial project consortium were industry investors who also took other roles in project development: project managers (KP&P, Aldwych), turbine producer and maintenance services (Vestas)18, and GIS services (Sandpiper). aside from Sandpiper, which is incorporated in Kenya, these firms are international firms from Netherlands , UK, and Scandinavia.

Private-sector investment predominantly provided as equity by industry investors
Private-sector participation in infrastructure development within the worldwide South is increasingly encouraged, and, like within the worldwide North, often materialized through PPPs (see 2.2). this is often often also true for LTWP and geothermal development, albeit in very different forms. In LTWP, private companies are the initiators and main owners of the plant (68% of equity). things is different within the Menengai project and in Baringo-Silali, where private firms aren't getting entangled as equity investors until after a successful exploration and after steam has been discovered. it's only then that IPPs are selected during a competitive bidding process.

In the case of LTWP project, the four private companies involved within the initial project consortium were industry investors who also took other roles in project development: project managers (KP&P, Aldwych), turbine producer and maintenance services (Vestas)18, and GIS services (Sandpiper). apart from Sandpiper, which is incorporated in Kenya, these firms are international firms from Netherlands , UK, and Scandinavia.

Throughout the day, there was agreement that more might be done to enable private financing of unpolluted energy
at a significantly larger scale. Innovative funding mechanisms were seen as a key requirement. In four parallel
groups, participants worked to supply solutions across the subsequent areas:

1. Improving project bankability;

2.Scaling up early stage equity;

3. Credit enhancements, including low-cost debt and loan guarantees for clean
energy project finance;

4. Energy access challenge: unlocking business opportunities.

A series of specific vehicles and instruments were proposed. These include:
1. so as to assist enable the bankability of the PPA, a process of making a uniform PPA was
proposed. On the instance of Lake Turkana and also using a number of the simplest available bankable PPAs
that are becoming closure within the next few months, a typical PPA might be developed. this is able to reduce
uncertainty and would limit the time and money consuming negotiation process. as long as a
standardised PPA could lead on to an outsized increase in applications from project developers, it was
suggested that the appliance process could include a fee structure (linked to the quantity of MW of
the project) to limit applications of under- or unqualified project developers. Payment of the fee,
would give the project developer the proper to develop a project over a previously agreed amount of
time.
2. associated with this, working with the private insurers on concrete proposals – for instance in geothermal
– to work out the “normal” energy market portion of the danger that would be covered commercially,
thereby relieving a number of the general public bill that would go towards enabling private finance.
3. Given the many risks profile of decentralized energy projects, a proposal was made that a risksharing facility might be created to assist banks enter a market of decentralized projects. Through
pooling, an equivalent facility might be used for several transactions and particularly for early-stage risk
sharing. The pool would believe agreed credit assessment / eligibility criteria, with a wholesaling
approach from IFC for instance and with domestic banks originating the business.
4. to extend lending capacity for domestic banks, a refinancing facility on the model of the EBRD in
East Europe or the model of the 30M EUR credit facility by AFD for concessional financing through local
banking system (currently in situ for Stanbic and Co-Operative Bank of Kenya) of selected
investments in renewable energy and energy efficiency projects.
5. as long as local commercial banks cannot lend beyond 5 years which project developers are often
looking for 15 year tenors, a take-out facility might be created during which lenders could prefer to exit the
loan after each consecutive 5 year period. When exiting the loan the bank would transfer the loan to a
separate vehicle (presumably owned or backed by public, DFI or PPP) which might take it on its
balance sheet or transfer it to other interested parties.. The entity would wish to create in margin risk,liquidity risk and project risk insurance. No defaulted (or soon defaulting) clients would be accepted by
the facility. The take-out facility would address the difficulty of liquidity availability but would also help
build capacity of the domestic banks through enabling and scaling deal and cash flows.
6. To seed the market, one among the key elements would be to grow the local banks’ project finance
capacity. One idea was to revive “merchant banking” (or Private banking) – i.e. banks taking over an
idea then selling it back to its clients. Local investors aren't conversant in opportunities within the
renewable energy space and have a tendency to channel all their investments into land . they might be a
suitable source for early stage equity for projects. Similarly, international investors see renewable
energy projects as investments with attractive returns but they are doing not have access to information on
these opportunities.
7. A Kenyan results-based financing (RBF) mechanism could create the visible, long term, “AAA” cashflows needed to leverage significant amounts of personal capital into emission reduction and prodevelopmental projects. this is able to be how of bringing about climate and development outcomes at
least cost, while maximising private sector leverage. An RBF mechanisms could take variety of
forms, from an easy tender for verified outcomes to something more like a true financial
instrument like a put option for emission reductions. All of those would deliver enhanced value for
money for taxpayers and significant private sector leverage.
Other suggestions were made including the necessity for public finance to supply more risk underwriting for
groups to access loans from commercial banks, on the model that's currently provided by the USAID within the
country. additionally , it had been noted that tiny size projects could access financing easier if they were ready to have
a guaranteed cash-flow, within the sort of a “PPA-like” arrangement. Could the agricultural Electrification Authority (REA)
for example somehow guarantee the acquisition of the power? during which case, a public guarantee would probably
be required, since the REA isn't seen as bankable. Another proposal was a survey of risk mitigation needs and
existing tools, so as to raised understand and un-bundle the varied sorts of risks.
Discussions also focused on ways to avoid public finance crowding out private financing. To avoid crowding out
commercial lending, concessional finance might be better targeted for instance towards areas where there's
lack of indigenous capital, re-financing of capital, first loss risk coverage and advanced market commitments /
carbon put options that would help provide cash-flow visibility. To avoid crowding out private equity and instead
facilitate private and institutional investments, more public and development financing might be directed
towards enabling instruments like for instance first loss tranches, funds and guarantees to
commercial banks. These learnings, along side the precise vehicles proposed could also help inform the
forthcoming Kenya climate fund, currently being designed, especially with reference to how those funds could
help catalyse private financing at scale.
Finally, to assist proportion innovation and help project go from innovation to proof of concept to financing, an
incubator might be hosted potentially under the CIC, supported examples from the ICT industry. Developers
could exchange ideas on business models, on accessing appropriate sorts of capital, on educating consumers,
on standardizing production to succeed in scale, among other things.


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