Ideas & Debate

Green financing will accelerate the growth of renewable energy

GDC

Summary

  • Kenya is believed to possess more than 7,000 MW of undeveloped geothermal energy resources in the Rift Valley.
  • Renewable energy projects will play a role in improving our energy security by diversifying energy resources.
  • Limited energy resources such as oil reduce the resilience of the economy and make it more prone to price fluctuations.

Provision of clean and sustainable energy is essential for the realisation of Kenya’s Vision 2030 and the Big Four.

As energy is a key driver of development, we must, therefore, secure affordable and reliable energy for all to sustain and grow our economy and improve the lives of our people.

Kenya is believed to possess more than 7,000 MW of undeveloped geothermal energy resources in the Rift Valley.

Renewable energy projects will play a role in improving our energy security by diversifying energy resources.

Limited energy resources such as oil reduce the resilience of the economy and make it more prone to price fluctuations.

Kenya was in 2019 ranked fifth globally in the annual Bloomberg index measuring investments and opportunities in clean energy, underlining the country’s position as the centre of renewable energy in Africa.

The BloombergNEF Climatescope report observed that Kenya’s rise for the first time in the global top five had been backed by the higher contribution of solar, wind and geothermal capacity into the energy mix.

These three now account for up to 65 percent of the country’s energy sources.

The United Nations Environment Programme predicts that real GDP in Kenya under a green economy could exceed a business-as-usual scenario by 12 percent by 2030, pulling 3.1 millon people out of poverty while boosting agricultural yields by 15 percent.

Kenya has traditionally invested in renewable energy sources such as solar, wind and geothermal through multiple sources: public finance, climate finance, development finance and commercial finance.

These funds alone are, however, not enough to meet the scale of investment required, hence the need for innovative and additional sources of financing.

Whereas green infrastructure projects require long -term finance, which presents a challenge for banks due to holding short-term deposits, we need to look for new channels to fill the financing gap.

One possible solution is to stimulate non-bank financial institutions, including pension funds and insurance companies, to invest in green projects.

Insurance companies and pension funds hold long-term financial resources that are suitable for green infrastructure investment.

This will in turn provide the opportunity for a decent return on investment, and enhance growth of the renewable energy sector.

Green financing is another viable option that offers new opportunities for scaling up public and private investments in renewable energy generation.

Green financing is an innovative financing model that focuses on increasing financial flows from private and public sources, using various instruments such as debts, grants, guarantees, etc. for sustainable development priorities, including renewable energy.

Together with addressing energy needs, this form of financing will enable the country to reach its climate change mitigation targets while stimulating foreign direct investment.

Realising the potential of green finance, the government has designed policies that mitigate investment risks.

Investors in the energy sector, for example, enjoy various incentives, including a zero rate of import duty and VAT exemption on renewable energy equipment; exemption from tax on interest paid on loans from foreign sources; exemption from payment of stamp duty in respect of certain instruments; and exemption from withholding tax on payments made to a non-resident for specific services rendered under a power purchase agreement.

It has also put in place incentives for renewable energy generation. For example the Public Private Partnerships Act, Number 15 of 2013, provides a framework for combining public and private financing.

The government also works with development banks to offer letters of support and guarantees to investors in order to ameliorate certain risks, such as those arising from delayed completion of projects.

Kenya’s first green corporate bond, in 2019, succeeded in raising Sh4.3 billion ($41.5 million), underscoring its huge potential.

There are already a number of planned projects which may qualify for funding by the green funds, including geothermal, solar, and wind power facilities.

As the country prepares to meet global players in energy at the 26th UN Climate Change Conference of the Parties (COP26) in Glasgow at the end of October, we have an opportunity to unlock more finance needed to power us towards net zero by the middle of the century.

This event presents an opportunity for Kenya to appeal to a wider pool of investors to tap the abundant renewable energy sources we have to offer in order to meet growing energy demand and facilitate a green transition.

Othieno is the Geothermal Development Company CEO