Solar power breaks the 10 cent barrier
Like the four-minute mile and the two-hour marathon, barriers are there to be broken. Solar power is now setting new standards for energy costs in corporate Kenya. The standard cost of energy in Kenya is high. The majority of corporate Kenya buys electricity at a unit price, or kilowatt hour, (KwH) of between $0.12-15. This commonly accounts for 20 per cent of commercial operating costs. But thanks to the convergence of three factors, solar power has now broken the magical $0.10 per KwH barrier and provides a huge boost to the manufacturing sector, which means the sector can attain improvements in net operating margins exceeding two to three per cent. The first cost-saving factor is obvious. Unlike Europe, where renewable energy simply can't deliver economic sense, in Kenya there is an ambient climate totally suited to renewable energy, and solar in particular. On at least 300 days of the year, we open the curtains in the morning to a day of 10 hours of sunshine. On at least 330 days per year, we have sufficient sunlight to produce power. Quite literally, when the sun shines, you can save money. Secondly, Kenya has received a major boost from the Government through regulatory and fiscal policies that deliberately favour the adoption of renewable energy. Under the fine points of the policies, there is no value- added tax (VAT) on the import of solar power equipment and there are no restrictions or penalties on corporate adoption of captive solar power plants (i.e. totally independent power plants singularly devoted to a specific premises or property). Furthermore, the Government has created an omnibus tax scheme, called the Investment Deduction Allowance, designed specifically to encourage manufacturing through the offer of major tax breaks for Kenyan corporates. The IDA can also be applied to captive solar power plants. Thirdly, there is a major boost from Europe, who, in line with EU Climate Change policy, are channelling huge bilateral credit lines into Kenyan banks specifically for renewable energy projects. Europe's Development Finance Institutions (DFIs) are diverting huge sums away from Europe, where renewable energy makes little financial sense, to countries like Kenya, where both energy consumption is growing exponentially and renewable energy makes perfect financial sense. DFIs like Agence Francaise Developpement (AFD) and the other private institutions like the Global Climate Partnership Fund are major providers of credit facilities totalling over $100 million direct to Kenyan banks to be lent at concessionary rates of 3.5 to 6.5 per cent over a tenor of seven to 10 years. That's enough money to generate 60-70 MW of power nationally—approximately five per cent of Kenya's current installed power supply. These lines of credit have been around for a couple of years but they have been under-utilised because renewable energy projects have largely either been too big or too small for banks to consider lending. Astonfield Solar and Chase Bank Kenya Ltd see things differently, and through the proper packaging of fully-financed captive solar plants, providing corporate customers with cost per KwH in the single digits, there is a direct hit on the bank's lending 'sweet spot' of between $250,000 and $5 millon. Banks mostly desire to lend sums in that range and mostly to corporate organs. Suddenly, the stars have aligned: solar power is desirable, solar power is reliable, applicable and accessible through 100 per cent asset financed loans or leasing finance. With 100 per cent low cost loans, Kenyan corporates don't spend anything to install a captive solar power plant on their property; and with unit energy costs in single digits, corporates save enough money on their electricity bills to simultaneously pay the bank loan interest and accrue additional savings to cash flow from operations i.e. have money left over to invest in other parts of the business. The value proposition is clear and compelling. We estimate that where solar energy replaces 20-30 per cent of GRID energy purchase, corporates in the manufacturing sector can improve operating margins by 1-300 basis points, leading to a more competitive position for our industry. In light of these opportunities and changing dynamics, Astonfield Solar and Chase Bank have combined to package renewable energy finance deals for Two Rivers Mall, Bidco, Ashut Engineering and others. Corporate Kenya is slowly waking up and feeling the sunshine! DFI credit lines are there to help develop our power generation so that industry can flourish and our economy can continue to grow sustainably. Next time you open the curtains and see the sun, you too could be saving money. The astute amongst you may have spotted the mistake in the opening line. The two-hour marathon has yet to be achieved. But with runners like Dennis Kipruto pushing hard, that barrier will be broken very soon, and once again it will undoubtedly be a Kenyan who leads the way. Kenya has received a major boost from the Government through regulatory and fiscal policies that deliberately favour the adoption of renewable energy. —
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