Overcoming Financial Barriers to Small Hydro Development in Kenya: The Role of Aggregation and its Policy Implications

Abstract

Small Hydro Power (SHP) generation is an important way to reduce the greenhouse gases and provide electricity to rural areas. To further the dissemination of SHP in order to address climate change and access to energy in developing countries, finance is needed. The Sustainable Energy for All (SEforALL) recommends an annual investment of USD 50 billion to universal access to energy by 2030. Private investment is posed to play a major role in meeting this target. However, underlying market barriers and a perception of high risk constrain the development and financing of SHP projects. Reducing these high financing risks and costs in these investments represents an important opportunity for policy-makers. This thesis seeks to scale up financing of SHP projects in Kenya by identifying the major investment barriers and risks for SHP projects and exploring the potential of aggregation and estimating its de-risking effects by applying LCOE model. Through literature review and interviews, the thesis found that lack of capacity, high transaction costs and small volumes are the key barriers to SHP development in Kenya. Financing structures which aggregate smaller structures under one master facility can certainly take advantage of economies of scale to improve returns and therefore is able to increase the appetite of private investors in these projects. Implications for policymakers in promoting and facilitating the capacity of private sector investors and developers to aggregate SHPs investments is discussed.