Funding Channels For Renewable Energy Projects In Kenya


A continental funding challenge

Insufficient funding is flowing into the renewable energy sector in Africa. Commercial and development financiers agree that there are sufficient funds to finance the energy transition in Africa; however the continent faces challenges that are slowing down the rate of capital deployment into the clean energy sector. According to a report by the World Economic Forum and Delloite, the challenges include:

  • Lack of effective collaboration to support project bankability to fast-track finance deals. This slows opportunities to improve energy access.
  • Ineffective planning due to lack of integrated engagement from multiple stakeholders including governments, financiers, businesses, and civil society organizations.
  • Payback risk is extremely high. A rethink of the revenue models is necessary to ensure return-on-investment is beneficial to stakeholders.
  • The maturity duration of financial instruments is sometimes burdensome for African markets.
  • Slow implementation of developed country partnered agreements in line with the Paris Agreement.
  • Lack of stable procurement programmes to promote the sourcing of renewable energy projects to induce local supply from non-traditional producers.

Funding options in Kenya

In Kenya, funding options available for the renewable sector players include public financing, development finance, climate finance and commercial funding.

Public Finance:

The government plays a duo role in renewable energy finance by creating policies that encourage private sector players to invest in the sector; as well as providing access to concessional funding to clean energy projects. In Kenya, the government enacted the Feed-in Tariff policy in 2008 to guarantee a technology based fixed price in US dollars for power feeding into the national grid. This power purchase guarantee provides cash flows certainty to project developers who are then able to access project finance from other sources; on the basis of their lower income generation risk.

Besides gradually adopting favorable policies for the renewable energy sector, the government also plans to establish a Green Energy Fund. The fund will be mandated to provide funding to viable renewable energy projects at concessional rates; through loans disbursed through the commercial banks. Mooted in 2012, the Green Energy Fund is yet to be established; but with the current focus on a green recovery, the idea might be revived to channel climate funding to the clean energy sector.

Development Finance:

The renewable energy sector in Kenya is supported by international development partners through the Kenya Joint Assistance Strategy (KJAS) Working Group on Energy. KJAS consists of 15 major development partners including World Bank, African Development Bank (AfDB), Agence Française De Développement (AFD), European Investment Bank (EIB), United National Development Programme (UNDP), United Nations Environmental Programme (UNEP), German Development Bank (KfW), Japanese International Cooperation Agency (JICA) and the United Stated Agency for International Development (USAID) among others.

Some of the major programmes under the renewable sector that are funded by development partners include: Regional CDM capacity building project for sub-Saharan Africa; Development and Implementation of a Standards and Labelling Programme in Kenya with Replication in East Africa; Cogen for Africa; Greening the Tea Industry in East Africa; LGGE (Low Green House Gas Emission Buildings) Promoting Energy Efficiency in Buildings in Eastern Africa; and Eastern Africa Rift Geothermal Development Facility Project (ARGeo) among others.

Among the development finance partners, Africa Development Bank (AfDB) is playing a leading role with having established several funds targeting the renewable energy sector across Africa. Notable current funds that renewable energy project developers in Kenya can tap into for financing include but are not limited to the following:

  • The Sustainable Energy Fund for Africa (SEFA) is one such fund under the AfDB, which provides catalytic finance meant to unlock private sector investment into the renewable energy sector. According to the AfDB, SEFA was established in 2011 and it offers technical assistance and concessional finance instruments to remove market barriers, build a more robust pipeline of projects and improve the risk-return profile of individual investments.
  • In June 2021, the Africa Renewable Energy Fund II (AREF II) closed its first round of funding of 130 million euros. AREF II is a structured as a private equity fund under the AfDB, and it is managed by Berkeley Energy. The fund invests in wind, hydropower, and solar projects, as well as in battery storage.
  • Still under the AfDB but supported by several other development finance institutions (DFIs), the Facility for Energy Inclusion is a USD 400 million fund that invests in small scale renewables. The fund is designed to finance commercial and industrial captive power projects, mini-grids and small scale Independent Power Producers (IPPs). Priority is given to projects with installation capacity of below 25MW and in countries with lower electricity access rates in Africa. The fund is managed by LHGP Asset Management, part of Lion’s Head Group.

Climate Finance:

For climate finance to achieve the intended impact in the Africa, it has to be premised on the following three main thematic focus areas:

  • Decarbonization: This involves transitioning from fossil fuels to renewable energy sources across the continent; with country specific strategies being implemented and financed based on local dynamics in each country.
  • Decentralization: This involves transitioning from the central control of national grids by power utilities across the continent to scaling up on decentralized systems in order to reach the 600 million people without electricity in the continent; as well as power industries in off-grid areas.
  • Digitization: This involves leveraging digital technologies to support and accelerate the above transitions.

In line with the above thematic areas, there are several climate finance funding available in Kenya, which include the few outlined below:

  • Kenya is one of the countries where the Scaling-Up Renewable Energy Programmes in Low Income Countries Programme (SREP) is being implemented. The programme was established to help align national policies with private sector actions; in order to eliminate barriers that limit private sector investment in the renewable energy sector in the world’s poorest countries. With a budget of USD 50 million allocated to Kenya, the programme seeks to boost the expansion in geothermal development and mini grid capacities.
  • In February 2021, Kenya under the Green Climate Fund (GCF) launched a USD 34 million project to help in mitigation and adaptation to climate change induced by drought. The 5years project targets 11 counties in the Arid and Semi-Arid Lands (ASALs) including Garissa, Tana River, Isiolo, Marsabit, Samburu, Kajiado, Kitui, Makueni, Tharaka-Nithi, Meru and Taita Taveta. Dabbed TWENDE (Towards Ending Drought Emergencies), the project aims at helping 620,000 people in the target counties and restore more than 500,000 hectares of degraded land. The ASALs make up 89% of the land area in Kenya, constitute 36% of the country’s population, has 70% of the national livestock herd and hosts about 90% of wildlife that supports the tourism sector in the country.
  • In October 2021, the World Bank approved USD 150 million credit to support climate resilient projects identified at the community level and that are locally led in rural wards in Kenya. The finance are being channeled through the Financing Locally–Led Climate Action (FLLoCA) Program. The ultimate goal is to strengthen the capacity of national and county governments to manage climate related risks by providing the funding needed to climate resilient actions. The FLLoCA programme is implemented by the Program for Results (PforR) instrument at the county level; which supports community level climate resilient investments. The funding from the World Bank is supplemented by a grant of USD 21.4 million from the Social Sustainability Initiative for All Umbrella Multi-Donor Trust Fund.
  • At the country level, Kenya is implementing the County Climate Change Fund (CCCF). The CCCF is a public fund managed by the county governments and designed to finance local climate change adaptations that are contextualized to the counties. The fund is capitalized from county budget allocations (usually about 1 – 2% of the annual county budgets), the National Climate Change Fund, as well as from domestic and international partners. Established in 2010, by 2020 the CCCF had successfully implemented 100 public good investments in five pilot counties.
  • Established in April 2014 by the African Development Bank, the Africa Climate Change Fund (ACCF) seeks to support African economies to build and strengthen their resilience to the negative impacts of climate change and hasten the transition to clean, renewable and sustainable energy sources for growth. As of 2016 ACCF had received about USD 12.3 million, with an additional contribution of USD 9.274 million in 2020. From the cumulative pool of about USD 21.5 million, to date ACCF has approved 15 small grants totaling USD 8 million and supporting projects in 16 countries across Africa, including Kenya.

Commercial Finance:

Local and international banks operating in Kenya are starting to appreciate the renewable energy sector potential and they are allocating funds for lending to the sector. However, the interest rates offered on the loan facilities are expensive, which lower the Internal Rate of Return (IRR) for the renewable energy sector projects. This high cost of capital discourages project developers from borrowing locally to finance their projects; since they cannot compete with their international peers operating in the market who have access to cheaper funding.

Besides commercial banks, investment companies, private equity and venture capital investors are also targeting renewable energy sector across Africa. Notable investors within the sector include: Actis LLP, AHL Ventures, Ascent Capital, Finnfund, AlphaMundi, DOB Equity, Oiko Credit among others. These investors fund projects through equity or/and debt and have varying criteria and ticket sizes that they each consider when scouting for investor ready projects in Africa.

Author: Jeremy Riro