Banks set to reap from new energy management rules

The Energy Regulatory Commission is set to release new energy management regulations for industrial, commercial and institutional organisations in a move that will open new lending opportunities for commercial banks.

The energy management regulations will guide organisations on what investments they should make to conserve energy while producing the same amount of goods, by using efficient machines and diversifying their sources into renewables like solar, biogas and wind power.

According to a study conducted earlier by the Kenya Association of Manufacturers (KAM), organisations in Kenya can save 10 to 35 per cent of the electricity they use if they invest in better machines and engage in co-generation.

The same study found that investments in electricity conservation projects in Kenya have a payback time of two to three years, which is an attractive time-frame for a large-scale venture.

But such projects are rarely implemented by industries because on one hand, they believe they cannot get loans and on the other, local commercial banks have admitted being unable to understand the risks inherent in such projects, which makes it harder for them to lend.

“Loans made for renewable projects are made in the normal way as those of asset financing. Banks have told us they do not understand the market and have no skills to evaluate such projects,” said CIPA-Kenya program manager Paul Kirai, during a recent consultative meeting on energy conservation organised by IFC.

IFC has found that banks also believe there is no demand for loans to finance energy management projects, a factor compounded by the fact that professionals who supply energy solutions to companies in Kenya have not been able to convert their energy solutions into a “business case” that can be used by banks as a guide to lending.

Mr Peter Makau, the head of Wholesale Banking at Ecobank Kenya, said what has been lacking in the banking industry are champions pushing the agenda of financing energy conservation projects within the banks.

The proposed Energy (Energy Management) Regulations, 2010 promise to reverse this trend.

Bernard Osawa, the director of Renewable Energy at the ERC said key requirement of the new regulations are that a company must do its energy audit every three years.

The audit will be conducted by professional energy auditors certified by the ERC to ensure the field is not penetrated by quacks.

The auditor must also have professional indemnity to ensure that they take total responsibility of their audit recommendations while giving banks confidence to lend against those recommendations.

One of the key outputs of the audit will be an energy investment plan that will outline for example, all the interventions required to save a certain amount of energy and what amount of money is required to finance those interventions.

It will be mandatory for all the companies to implement at least 50 per cent of those interventions outlined in the energy investment plan before the next audit is conducted.

“The audit will make its easier for the banks to measure the risk in energy management projects because the investment plan is a structured scientific strategy that shows what is to be invested and the expected rate of return,” said Mr Osawa.

The new regulations will be part of the Energy Policy of 2006 and will therefore be mandatory.

Previous energy audits recommended by the KAM have not been successful, said the association’s chief executive Betty Maina, because companies are slow and disinterested in them.

“Response to energy audits has been slow. There is a need to create awareness,” she said during an energy conservation consultative forum organised by the IFC.

Energy conservation

KAM organises the annual Energy Management Awards in December that rewards enterprises which apply the best energy conservation methods.

This is done through feedback which is given to all participants addressing their individual strengths and weaknesses.

To ensure that firms commit money to finance energy management projects, she said the focus point for pushing such an agenda should be CEOs, rather than the previous approach where the contact person was the production engineer, who may not be able to link energy efficiency with financial implications.

The energy audits are aimed at easing the production cost of goods to make them competitive and ease pressure on the generation.

Kenya’s cost of electricity is higher than that of its key competitors — Egypt and South Africa — yet the growing economy is heaping pressure on the current electricity generation capacity.

Although ERC does not have such regulations for households –they will follow once those meant for industries are gazetted into law – the recent initiative by the government to distribute energy saving bulbs has saved the country 50MW of electricity, the Energy ministry said earlier.

The audits will also save the country foreign exchange spent on buying oil-based fuel.

The regulations are likely to start being implementing by March 2011, said the ERC.

Once they come into force, they will effectively open an opportunity for banks in Kenya to finance climate change investment projects that will enable companies, institutional and even individuals to earn money from the global carbon finance market.

Last month, Ecobank Kenya and the Commercial Bank of Africa became the first banks to finance such a project when they jointly advanced Sh1.6 billion to Mumias Sugar Company to invest in an ethanol production plant.

The plant is a carbon dioxide emission free project and Mumias is expected to sell carbon emission reductions that will be generated when its ethanol is substituted by companies now using petroleum products as sources of energy.

Climate change investment projects are those that help reduce carbon dioxide emission into the environment.

They include wind and solar energy farms, sustainable hydro and geothermal electricity generation, and recycling waste material to tap methane gas for use as biogas among others methods that reduce the need for fossil fuels.

The projects extend to revamping firms’ operations to help achieve energy efficiency by reducing the amount of oil and electricity used to for equal production output.

Carbon dioxide is one of the major causes of global warning which has triggered climate change.

This bears a wide range of risks including a rise in sea levels, severe drought, flooding and food shortages because of a change in rainfall patterns, among other effects.

In Kenya, IFC is co-ordinating efforts to attract banks to lend to climate change investments projects because of their potential to ease global warming, promote a clean environment, cut costs of production and earn extra money from carbon finance market.

IFC has advanced loans to banks for forward lending to such projects.

The money is disbursed under the Climate Change Investment Programme (CIPA-Kenya)

“CIPA-Kenya should enhance the capacity of Kenyan banks to identify, evaluate and finance viable sustainable projects that will secure the country’s future energy needs and boost its capacity to tap the carbons market,” said CIPA-Kenya programme manager Paul Kirai.