In: Finance
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.)
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.