Q&A: How to finance your solar project

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Kenya's captive power capacity is set to almost double by 2030 from the current 600 MW, according to the industry body, ESAK. Financing will be crucial for this expansion. This week, Renewables Rising interviewed Gumato Golo, a Business Development Officer for energy company Distributed Power Africa (DPA), to shed light on available financing options.

• Gumato has worked in the solar space for over four years. She served in the role of business development for several energy companies, including Ofgen, Raynow Energy, and Central Electricals International Limited, before joining DPA.

• She is optimistic about the sector's future, expecting net metering and power wheeling regulations (currently under development) to significantly alter market dynamics.

More details

Tell us more about Distributed Power Africa (DPA).

Gumato Golo: DPA is an energy solutions provider in Kenya, focused on delivering clean, reliable, and cost-effective power across Africa. Our core business includes solar PV systems, energy storage systems, and hybrid energy systems for commercial and industrial clients. We provide an end-to-end solution, covering project development, financing, engineering, procurement, construction, and ongoing operation and maintenance. All our solutions are fully financed, with no upfront costs for our clients.

Does DPA offer this end-to-end model across all its markets, or is it specific to Kenya?

Gumato Golo:  We offer this solution in all our markets. We have offices in Zimbabwe, South Africa, and Egypt, providing the same comprehensive energy solutions to clients across these regions.

You mentioned that DPA is part of EDF. Could you elaborate on that relationship?

Gumato Golo: Yes, EDF is the majority shareholder of DPA. As one of the world's largest electricity producers, EDF is a significant player in large-scale power generation, including nuclear and wind power, competing with major energy providers globally. DPA serves as the commercial and industrial platform (C&I) arm of EDF.

In these markets, particularly Kenya, do you have competitors offering a similar end-to-end business model in the solar energy space?

Gumato Golo: Yes, several companies in Kenya offer similar services. However, our approach is unique. We focus on acquiring clients through our comprehensive, end-to-end solutions. For instance, if a client's plant roof is unsuitable for solar, we provide in-depth advice and detailed roof assessments. Our focus is on delivering truly holistic client solutions.

Regarding your financing options, you've mentioned Power Purchase Agreements (PPA), solar lease, and asset finance. Could you explain the structure of each and where they are most suitable, or which is most common in Kenya for your business model?

Gumato Golo: We have three financing structures tailored to client preference, requirements, and energy needs. We assess all aspects to provide the best options:

Power Purchase Agreement (PPA)

This is a common financing model where DPA, as the solar PV developer, installs, owns, and maintains the solar system on the client's premises. The client only pays for the electricity consumed at an agreed tariff, which is typically lower than the grid rate. We usually offer a 10-year term, though clients can opt for 15 or 20 years. The client does not own the system; ownership remains with us. Payments are based on energy consumption. 

At the end of the PPA term, clients can buy the system at a depreciated value, extend the PPA, or have the system removed. Most clients prefer to extend the PPA term if they are satisfied. PPAs are ideal for large C&I clients such as manufacturers, telecoms, universities, and hospitals with high electricity consumption who want to switch to solar without capital outlay and prefer predictable, reduced tariffs.

Solar lease (Power lease agreement) 

This option allows the client to rent a solar PV system for a fixed monthly payment over a set period, typically between 5 to 15 years. Clients choosing this option usually intend to own the system at the end of the lease period. We install and own the system on the client's property, and the client pays a fixed monthly fee regardless of the energy output. 

At the end of the lease term, the client can purchase the system at a pre-agreed value, renew the lease, or return the system. This is suitable for clients with moderate capital appetite who are interested in owning the system later, including mid-sized enterprises and smaller institutions.

Asset finance

This model involves the client taking a loan to purchase the solar system outright. The client owns the system from the start and repays the loan over an agreed term, usually three to six years, though it can extend to 10 years. Clients often prefer shorter terms to gain ownership faster and claim tax incentives. 

This is best for clients who desire immediate ownership and have access to financial facilities, or those who want to understand how solar systems work and have a team to operate and monitor them.

If a client decides to own the system at the end of the PPA or lease term, does the operation and maintenance (O&M) responsibility transfer to them?

Gumato Golo:  Yes, once the client owns the system, the O&M responsibility is transferred to them. However, clients can enter into a separate agreement with us to continue operating and monitoring the system for them. This is often preferred by larger companies who want experts to manage their solar assets while they focus on their core business.

For asset finance, does DPA provide the financing directly, or do you just connect clients with financial institutions?

Gumato Golo: We work with EDF, our financiers, and are backed by their financial stability. EDF's revenue for last year was substantial, a clear indication of its financial strength. We have the financial capacity, expertise, and technical capability to deliver fully financed solutions with zero upfront costs.

How do you structure your tariffs? 

Gumato Golo: We provide tariffs in both Kenyan shillings and USD. If we provide a PPA tariff, for example, 10 shillings per kilowatt-hour for a 15 or 20-year period, that tariff remains fixed throughout the contract term. All risks, including inflation and exchange rate fluctuations, are factored in beforehand.

What is the main challenge you experience in the financing space for C&I solar projects in general, not just for DPA?

Gumato Golo: One of the main challenges we face financially is credit risk and counterparty reliability. It can be difficult to assess the creditworthiness of clients, especially when entering into long-term PPAs of 15 to 20 years.

There is also high competition in the sector, attracting many energy companies. And some even use substandard equipment to support their low bidding prices.

We also contend with forex risks. If financing is in USD but the client pays in local currency, devaluation can negatively impact returns.

Finally, client education and buy-in can be a problem. Many clients do not fully understand financial models like PPAs or leases, and there can be resistance to long-term contracts due to a lack of trust in a third party. 

For our case, we provide solutions that guarantee our clients reliability over a long period. We do not compromise on quality, and that way we earn clients' trust.

What are some of the government policies under development that you think might affect the sector?

There are ongoing discussions about net metering frameworks. Wheeling is another attractive solution proposed by the government, though not yet approved here in Kenya. This would allow us to use existing electricity transmission or distribution infrastructure from KPLC or KETRACO to transport electricity from either our plants or IPPs to off-takers in different locations. DPA is in the process of starting the same in South Africa.

What would be the impact if these initiatives were fully implemented?

The benefits are plentiful. To mention a few, net metering would incentivise clients and increase solar adoption, and for the government, the injected power could help reduce grid strain.

On power wheeling, it will enable developers like us to build power plants in optimal locations and maximise potential generation. For clients, there will be competition, leading to lower electricity prices.