Access to Green Energy Financing in Kenya: Case Study of Private Energy Projects

Abstract

In Kenya, despite the advanced policy and regulations in place as well vibrant financial services sector the level of investment particularly within the private sector remains low. This is despite the enormous potential by the private sector to substitute government efforts in the production. Financing not only bridges the gap between availability and investment in any industry but it’s a key enabler for growth. The significance of the study is pegged on the capital-intensive nature of the renewable energy industry (estimated at 90% cost of infrastructure of total lifetime costs) with low operating costs. Availability of low-cost financing can reduce clean energy costs by as much as 20% in developed countries and 30% in developing countries hence the significance of conducting the study. The study aimed to investigate access to debt financing of Renewable Energy in Kenya with a focus on solar projects within the private sector. The study focused on; (i) review of the policy and regulatory environment necessary for investment in Renewable Energy (ii) the financial technical capacity available to develop bankable proposals as demand side factors affecting financing and (iii) the business requirements needed by financial institution’s to access funding, and (iv) perceived risks faced by financial institutions as key supply side factors affecting financing in addition to identifying key challenges faced in accessing financing as well as the opportunities available in improving access to financing. The study adopted both the descriptive and cross-sectional research designs, targeting 41 Private Solar Energy Firms and 41 Commercial Banks in Kenya, bringing the total target population to 82. The study adopted a mix of probability and non-probability sampling. Under probability sampling the response rate was 84%. Under non-probability sampling techniques, the study adopted purposive sampling to select key informants who comprised of 4 commercial banks that provide green lending and 3 renewable energy firms that have previously benefitted from green funding. One (1) key informant from each of the 7 firms was selected from a relevant senior management cadre. The study made use of primary data which was both quantitative and qualitative in nature. While quantitative data was collected using a structured questionnaire, qualitative data was collected using a key informant interview guide. Secondary data was also collected from academic papers, historical records, statistical databases and government publications sourced from internet government agencies and library. Employing a mixed-method viii approach, data was analyzed by both quantitative and qualitative data analysis techniques. Quantitative analysis comprised both descriptive and inferential statistics. Descriptive analysis involved frequency counts, percentages, and means while inferential statistics were analyzed using both Pearson correlation and regression analyses. The regression analysis was utilized to establish the association between the predictor and outcome variables and subsequently test the study hypotheses. The qualitative data from both primary and secondary data was on the other hand analyzed through thematic content analysis. Results indicate that demand side finance factors (β = 1.192, sig.=.000<.05), supply side finance factors (β = -.644, sig.=.008<.05), financing challenges (β = .174, sig.=.045<.05) and financing opportunities (β =.300, Sig.=.002<.05) significantly influence access to green energy financing among private solar firms in Kenya at 95% confidence level. The study also revealed challenges and gaps in both the demand and supply side as follows: On the demand side the study revealed issues such as; bureaucratic processes in license approvals, inconsistence and instability in the policy and regulatory environment, monopolies in pricing and distribution of electricity, and limited technical capacity to develop bankable proposals which ultimately creates a noncompetitive environment which puts off private investors hence limits the demand for credit and ultimately Investment for the private sector. On the supply side: the study revealed issues such as: inconstancies across financial institutions on requirements for access to credit including variations in repayment terms, higher cost of credit, limited understanding by financial institutions on financing mechanisms hence poor risk assessment criteria’s and too much documentation by local financial institutions. These factors discourage renewable energy firms hence they seek local credit as a last resort. In addition, the stringent measures put in place by financing institution’s including shorter repayment periods and insistence on collateral as well as high cases of default and poor quality of financial proposals leads to financial exclusion for those who are unable to live up to the requirements, and ultimately leads to limited supply of financing by financial institutions by the private sector. The study also revealed high cases of default and poor quality of financial proposals The following opportunities were identified as an avenue for increasing access: the ever-increasing demand for clean electricity, overwhelming present of International financial institutions (IFIs) in Kenya, new financing mechanisms for renewable energy projects, and decrease in technological cost for Renewable Energy. In conclusion, the study revealed a dominance of government-led financing environment which has suppressed the growth of the private sector by eliminating market-led competition. In consideration of the key finding on the challenges in accessing financing both from a demand and supply perspective, there is need for a financial intermediary that can bridge both the demand and supply gaps, in this regard, the study recommends establishment of an institution that can provide guarantees that cover the high risks involved within this sector as well as provide technical assistance and financial advisory services in order to encourage renewable energy firms to voluntarily seek local debt financing. On example is the Uganda Energy Credit Capitalization Company (UECCC) which provides guarantees, refinancing, cash reserving, liquidity refinance, bridge financing, and interest rate buy down to the energy sector. The study also recommends further academic research on the overall sources of financing of renewable energy project in Kenya by the private sector including equity financing as a buildup of this study