KCB backs solar for schools with low-interest loans

From the newsletter

Kenya Commercial Bank (KCB) and renewables firm Sentimental Energy have partnered to provide solar power solutions to Kenyan schools. KCB will offer collateral-free green loans with a 9.75% annual interest rate, almost half the average commercial bank lending rate. The loans will have a seven-year tenure. Nine schools have already benefited from the pilot phase.

• Despite having a grid powered mainly by renewables, electricity remains expensive in Kenya. This is largely due to power purchase agreements being denominated in foreign currencies and affected by fluctuations in the exchange rate. These costs are passed on to consumers.

• Many consumers are seeking cheaper off-grid alternatives. However, the upfront cost of installing solar power is prohibitive for many. Banks and microfinance institutions are stepping in to provide affordable financing options.

More details

• In the partnership, KCB Bank will provide the financing, while Sentimental Energy is responsible for the technical execution. This includes site inspections, the creation of financial proposals, and the design, provision, installation, and ongoing maintenance of the solar power systems. The repayment plan is structured to align with the financial savings that schools are expected to achieve from their reduced reliance on the national electricity grid.

• Electrification efforts for schools have taken a different direction due to the cost and unreliability of the grid. A report by the European Commission's Joint Research Centre indicates that over 200,000 schools in Africa lack access to electricity. While solar power could sustainably electrify all schools, the financing cost presents a significant limitation. KCB's interest rate, which is even lower than the central bank's rate, has the potential to be a game-changer.

• Electrifying these schools is an urgent need, as approximately a quarter of the world's school-aged children currently live in Africa. It is the continent where most people born this century will be educated. Not having basic things like electricity is a major worry.

• Solar energy use is gaining prominence due to declining prices and its scalability. Business models are also evolving to address the high upfront installation costs, with models such as energy as a service becoming common for electrifying schools. Uganda and Nigeria have recently launched initiatives to connect their schools and universities using this service model.

• Kenya has utilised both grid and off-grid electrification for its schools, achieving over 83% electrification of its more than 30,000 institutions. The majority of the remaining schools are in rural areas far from the grid, making solar power the most suitable alternative.

• Banks are keen to explore this market, but many are hesitant to engage in end-user financing, preferring industrial and commercial clients. This results in a lag in financing for schools and smallholder farmers. However, a few institutions, like NCBA and Equity, are designing targeted products for potential beneficiaries such as schools and small and medium-sized enterprises.

Our take

• Markets and business models are changing, and lending institutions and energy companies should adapt accordingly. Energy companies can explore an energy-as-a-service business model to provide power to schools. This reduces the burden on schools of seeking technical experts whenever challenges arise, passing this responsibility to energy companies who are best suited for it.

• Schools can utilise the savings from solar power and redirect them to acquiring new textbooks and laboratory equipment. For boarding schools, with their extensive energy needs for dormitories, kitchens, and water pumps, the potential savings from solar energy can be even more substantial, freeing up critical resources for core educational purposes.

• There is a need for international lending institutions like the World Bank and the AfDB to provide concessional loans to African commercial banks to facilitate access to cheap credit. This can bridge the lack of access to affordable loans.