Kenya unlocks $61m in first debt for climate swap

From the newsletter
Kenya is building a 300 MW geothermal power plant to settle a $61 million debt it owes Germany in its first debt-for-climate swap deal. The project, currently under construction, is set to be completed by mid-2025. Once completed, it will bring the total geothermal capacity to 1240 MW, a third of the total installed capacity in Kenya.

• In a debt-for-nature swap, a country’s debt is forgiven in exchange for commitments to invest in environmental conservation or sustainable development projects. Other countries that have pioneered its implementation in Africa include Seychelles, Gabon & Congo.

• In the second half of 2024, Kenya allocated approximately 61% of its revenue to debt repayment, leaving limited resources for development projects and other essential expenditures.

More details

• Debt-for-nature swaps primarily happen in third-world nations in a bid to protect natural resources and promote sustainable development driven by the intersection of debt burdens, biodiversity hotspots, and political will.

• Kenya's agreement with Germany’s Federal Ministry of Economic Cooperation and Development enables it to allocate resources toward renewable energy initiatives while alleviating its debt load. It has an estimated geothermal potential of 10,000 MW, but the current installed capacity is less than 1,000 MW, indicating huge untapped potential. These agreements present a leeway for the realisation of this potential.

• The Kenya Electricity Generating Company (KenGen) also plans to drill 42 new geothermal at Olkaria geothermal field in Hell’s Gate National Park over five years, with KenGen estimating that the project will add 200 megawatts (MW) of geothermal power.

• The agreement is backed by the African Development Bank (AfDB) with the International Monetary Fund. AfDB views it as a practical way to implement valuable projects without risking fiscal instability.

• Many African countries struggle with national debt. As of 2022, Africa's public debt sat at $1.8 trillion with the most indebted countries being Egypt holding 14.5% of the amount and South Africa and Nigeria holding 14.3% and 8.4% respectively. This presents an avenue for debt for climate swaps to curb high country debts with sustainable projects in the continent.

• The agreement presents solutions for African countries' untapped potential in the renewable energy space especially in solar and wind energy.

Our take

• African countries are burdened by debts, yet possess immense renewable energy potential. However, harnessing this potential will remain a dream unless Africa receives funding to exploit renewable energy sources. Balancing their current debts and loan demands requires a different approach, such as utilising debt-for-climate swap deals.

• Since governments often lack the necessary funds, the private sector can engage with governments on public-private partnerships to build energy infrastructure and enable countries to secure debt-for-climate swap deals. This way, both the private sector and the country benefit.

• Securing these deals requires agreements with creditor countries, which can be challenging due to differing interests and priorities. However, if developed and developing countries can find common ground, debt-for-climate swaps have the potential to revolutionise Africa's energy landscape.