Multilateral Investment Guarantee Agency has in the past four months committed $229.14 million (Sh29.6 billion) to cover three clean energy projects in Kenya, significantly boosting investor confidence in the sector.
The agency, which is the project guarantee fund of the World Bank— issued a $179.64 million (Sh23.21 billion) to cover Koko Networks’ expansion in Kenya in March this year, two months after it agreed to provide a $49.5 million (Sh6.39 billion) guarantee for the solar and geothermal power projects owned by British firm Globeleq.
The two guarantees are key to easing fears that investors have over the multi-billion-shilling projects they undertake in third world countries.
A guarantee is a financial instrument that reduces the risk profile of a project, by ensuring that investors will be compensated if the borrower defaults or the project suffers other loss that can hinder it from achieving its full potential. The risks include civil wars and adverse government policies such as nationalisation.
“By providing guarantee coverage, we are helping bring reliable, clean, and affordable energy that drives economic growth and supports the broader objectives of Mission 300, by increasing private sector investment and the supply of renewable energy,” Hiroshi Matano, the agency's Executive Vice President said early this year, when the fund revealed the cover for the Globeleq projects.
Koko is fast gaining popularity in the low-income areas of Nairobi and Mombasa, given its affordable yet clean fuel that has come in handy for a population that had for years relied on kerosene and charcoal.
Globeleq owns the 52 Megawatt-peak (MWp) Malindi Solar Power, which has been supplying electricity to Kenya Power since December 2021, in a 20-year power purchase deal. The company is constructing a 35MW geothermal power plant in Menengai, Nakuru County.
The geothermal project had dragged on after the government delayed fulfilling certain undisclosed conditions to attain financial closure of the project. However, construction started last year and is set to be completed by the end of this year.
Koko Networks, which relies on the sale of carbon credits to raise money to subsidise bioethanol cooking fuel and stoves to homes, especially in the low-income settlements, is targeting to add three million customers by 2027. The firm currently has slightly above one million customers.
Kenya, like other developing markets in Africa and Asia, has a high untapped potential but risks are perceived to be high, hindering investors from pumping money in a range of projects.
“Though these regions have several viable investment opportunities, many of them are not coming to fruition for a variety of reasons. One reason for the failure of private capital mobilisation is that investors perceive these risks to be too high,” Convergence, a lobby that raises finance to fund projects to realise the United Nations Sustainable Development Goals says.
Through risk mitigation, guarantees are key to pulling lenders to finance projects that they would otherwise be hesitant to fund, due to the possibility of risks that could lead to significant financial losses.
The guarantee for Koko’s expansion project runs for 15 years while that for Globeleq’s solar and geothermal power plants is valid for 17 years and 20 years respectively.
Election-related violence, the threat of seizure of its land for public use (expropriation of land) and breach of contract, are major headaches that hang over the ambitions of investors willing to risk billions of shillings on an array of projects in the country.
Globeleq’s geothermal plant will add 35MW of clean energy to the national grid, significantly boosting Kenya’s efforts of growing the share of renewable energy in the national grid beyond the current share of 92 percent.
Of this, geothermal is the single biggest contributor, accounting for 42.8 percent as at the end of March this year.
