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Project Information Memorandum

Project Name: 5 MW PV Plant Location: Magadi, Kajiado District

Country: Kenya Utility: REV Ltd. & CA Ltd. for Magadi Soda

June 2010 © Lahmeyer International GmbH

United Nations Environment Program (UNEP)

German Ministry of Economic Cooperation and Development (BMZ)

Represented by KfW

EMPower Program, Phase II


5 MWp Solar PV Plant

Magadi Soda, Kenya

First Draft

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June 2010 - Page i / iii - © Lahmeyer International GmbH

Executing Agency KfW Development BankAttn. Claudia von FersenDep. L1b2

Postfach 11 11 41D-60046 Frankfurt am MainFederal Republic of Germany

Consultant Lahmeyer International GmbHAttn. Werner Klaus

Dep.: GE5Friedberger Straße 173D-61118 Bad VilbelFederal Republic of Germany

Authors Dr. Alexis Bonneschky

Georg Reithe

Hans-Joachim Kiessling

Thorben Gunkel

Dr. Tim Hoffmann

Woo Lee

Holger Zebner

Anirudda Kumar Gupta

Romeo Pacudan

Checked by Camilo Varas

Werner Klaus

Status First Draft

Place and Date Bad Vilbel, 22.06.2010

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Table of Contents

1 EXECUTIVE SUMMARY 1

2 INTRODUCTION 2

3 FEED-IN TARIFF POLICY 2

4 PROJECT SITE 3

5 SOLAR RESOURCE 4

6 CONCEPTUAL DESIGN 5

7 YIELD ASSESSMENT AND DESIGN OPTIMIZATION 7

8 ECONOMIC BENEFITS 9

9 TARIFF REQUIREMENTS 10

10 FRAMEWORK CONDITIONS FOR RENEWABLE ENERGIES 15

11 RECOMMENDATIONS FOR SUBSEQUENT STEPS IN PROJECTDEVELOPMENT 16

12 GLOSSARY OF FINANCIAL AND ECONOMIC TERMS 19

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List of Abbreviations

BMZ German Ministry of Economic Cooperation and Development

BoP Balance of Plant

CAPEX capital expenditure

CDM clean development mechanism

CO2 Carbon dioxide

COP 15 Climate Change Conference 2009 Copenhagen

DSCR debt service cover ratio

DSRA Dept Service Reserve Account

DUC Dynamic Unit Cost

EPC Engineering, Procurement and Construction

EU-ETS European Union Greenhouse Gas Emission Trading System

EUR Euro

FiT Feed-in Tariff

FLH full load hours

GHI Global Horizontal Irradiation

HV High Voltage

IAB Industry Advisory Board

IDC Interest During Construction

IPP Independent Power Producer

IRR internal rate of return

KES Kenyan Shilling

KfW Kreditanstalt für Wiederaufbau

kV Kilo Volt

kW Kilo Watt

kWh Kilo Watt hours

LEC levelized electricity cost

MV Medium Voltage

MVA Mega Volt Ampere

MW Mega Watt

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MWh Mega Watt hours

MWp Mega Watt peak

NPV Net Present Value

NREL National Renewable Energy Laboratory

OPEX Operational Expenditure

pc-Si Poly crystalline Silicon

PIM Project Information Memorandum

PPA power purchase agreement

PR Performance Ratio

PV Photovoltaic or Present Value (depending on context)

RE Renewable Energy

REC Renewable Energy Certificate

RoE return on equity

SCF Standard Conversion Factor

TES thermal energy storage

TPP Thermal power plant

UNEP United Nations Environment Programme

WACC weighted average cost of capital

Wel Watt electric power

Wp Watt peak, i.e. power rated at standard PV module test conditions

Wth Watt thermal power

YF Yield factor

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1 Executive Summary

This Project Information Memorandum (PIM) is based on a study of 5 MWp solar PV project in MagadiSoda, Kenya. The study was performed on Pre-Feasibility level within the EMPower Program - aninitiative executed by KfW on behalf of BMZ and UNEP – aiming at the identification and theaccelerated development of new markets for large scale solar power generation.

Kenya’s renewable energy was embodied in the Sessional Paper Number 4 on Energy for the period

2004-2023 from the National Energy Policy which commits the government to promote electricitygeneration from renewable energy sources and sets the target of 300 MW to be generated fromrenewable energies by 2015. The Energy Act of 2006 provides the legal basis for the said policy. Topursue the above target, the Ministry of Energy introduced the feed-in tariff (FiT) policy in 2008 settingtariff rates for wind, biomass and small hydropower. A mid-term review of the FiT was carried out in2010 incorporating other renewable energy sources such as geothermal, biogas and solar.

Of the several sites evaluated by the expert team, the site Magadi Soda was selected for theinstallation of solar PV power plants due to its favourable solar irradiation, flat terrain, land areaavailability for potential expansion, ease of site access and proximity to transmission network. Theestimated annual sum of global horizontal irradiation (GHI) in Magadi Soda is around 1,990 kWh/m².

A 5 MWp solar PV plant was designed for the site in Magadi Soda. Mitsubishi’s poly-crystallinemodules with capacity of 185 Wp were chosen in the analysis. A total of 27,030 modules will berequired for the project with total capacity of 5 MWp.

Project benefits identified for Magadi Soda plant includes avoided fossil fuel costs and emissionsreductions from the displaced conventional power generation. The economic analysis demonstratesthat the project is economically feasible with benefit cost-ratio of 1.04 with its IRR higher than thediscount rate. The project’s net present value is positive and typical for large-scale solar PV projects indeveloping countries.

The projects benefits would further improve in case that fossil fuel prices and prices for emissions

reductions rise earlier and steeper than assumed. In addition, there are projects benefits that are notquantified in the study such as employment generation, enhanced energy security, environmentalbenefits and others. The inclusion of these factors would surely make the solar power projectsbeneficial to the Kenyan national economy.

The financial analysis shows that with the reference feed-in tariff of 0.20 USD/kWh (0.15 EUR/kWh)set by the Ministry of Energy, no project is financially feasible under any funding scenarios. The study

estimated the required feed-in tariff in order to achieve the target RoE of 20%. The funding scenariowith favourable soft loan from a development bank (Y1) appears to be the most attractive, leading to aFeed-in-Tariff requirement of 28.64 KES/kWh (0.27 EUR/kWh). Funding Scenarios Y2 and Y3 yield31.13 KES/kWh (0.29 EUR/kWh) and 33.73 KES/kWh (0.31 EUR/kWh) respectively.

The current study was executed on Pre-Feasibility level. All indicators strongly suggest proceedingwith the necessary investigations on feasibility level in order to substantiate the current results which

confirm that the solar PV power plant implementation is beneficial from the point of national sectorplanning.

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2 Introduction

EMPower1

stands for “Enable and Motivate sustainable Power” markets and is an initiative by BMZand UNEP which supports utilities around the world in identifying solar applications and in determiningboth the potential demand and the cost at which solar-based electricity would be cost competitive withother generation sources. One of EMPower’s key objectives is fostering new markets for solar powergeneration technologies in emerging and developing countries. By raising awareness and commitment

on the demand side and providing a sound data base on large-scale solar power projects, theprogramme also aims at reducing generation costs.

EMPower offers utilities from participating countries a special toolkit for facilitating their solar projectdevelopment activities: the EMPower Utility Toolkit “Large Scale Solar Power”. This toolkit comprisesa set of four handbooks, interactive excel tools and simulation software for technical assessment,financial analysis, set-up of PV business models and procurement of large-scale PV and CSP plants.

Furthermore, The EMPower programme provides utilities with the opportunity to:

Receive assistance for project development of large scale solar power projects based on PVor CSP and elaboration of the respective project pre-feasibility study;

Gain support for presentation of key project characteristics to potential investors;

Access the solar industry’s latest developments and knowledge support via the EMPowerIndustry Advisory Board (IAB);

Participate in workshops with policy makers, regulators, industry members, sponsors and

other utilities to exchange about activities and results of the EMPower Programme.

During its first phase, EMPower successfully identified utilities from over ten partner countries fromMENA and other world regions which showed interest in either grid-connected Photovoltaic (PV) orConcentrating Solar Power (CSP) technologies. During the second phase, solar projects have beenanalysed in 15 partner countries and over 20 utilities. EMPower currently is finalizing preparation of apipeline of 12 large-scale solar power projects in Algeria, Egypt, El Salvador, Jordan, Kenya, Libya,

India, Morocco, and the Philippines.

This Project Information Memorandum presents solar PV project in Magadi Soda, Kenya, developed incooperation with Carbon Africa Ltd. and Renewable Energy Ventures Ltd. Data and information weredrawn from the Pre-Feasibility Study reports carried out by Lahmeyer International in 2010.

3 Feed-in Tariff Policy

Kenya’s policy to promote the development of renewable energies was spelled out in the SessionalPaper Number 4 on Energy for the period 2004-2023 which sets a target of 300 MW from renewableenergy sources by 2015. This policy was put into operation by the Energy Act Number 12 of 2006encouraging the implementation of the indigenous renewable energy sources to enhance the country’selectricity supply capacity.

1More project information is available on the EMPower homepage http://www.empower-ph2.com/

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In relation to this policy, the Ministry of Energy established a feed-in tariff (FiT) policy in 2008 coveringwind, small hydro and biomass sources, for plants with capacities not exceeding 50 MW, 10 MW and40 MW respectively. The FiT levels are technology specific and based on i) the plant’s investmentcost, O&M costs, fuel costs (where applicable), financing costs and return of capital, estimated lifetime

of the project, and amount of electricity generated.

The FiT policy was scheduled for review every three years from the date of publication. However, amid-term review was carried out in 2010 to facilitate accelerated investment in generation fromrenewable sources and to incorporate other renewable energy sources such as geothermal, biogasand solar. The current FiT rates are summarized in Table 1.

Table 1: Feed-in Tariff Rates in Kenya

Energy Source Plant Capacity Feed-in Tariff

Solar PV 0.5 – 10 MW 0.20 USD/kWh

Wind Power 0.5 – 100 MW 0.09 – 0.12 USD/kWh

Geothermal < 70 MW 0.085 USD/kWh

Small Hydro Power 0.5 – 10 MW 0.08 – 0.12 USD/kWh

Biogas 0.5 – 40 MW 0.06 – 0.08 USD/kWh

Biomass 0.5 – 100 MW 0.045 – 0.07 USD/kWh

4 Project Site

Among the 17 sites submitted for evaluation, the Magadi Soda site had been selected for this pre-feasibility study as the site showed better conditions due to its favourable topography, high solarresource intensity, access to road network, and medium voltage transmission line.

The Magadi Soda site, located at 1.9244° South and 36.2855° East is close to the Magadi township,which lies on Lake Magadi's east shore, and is home to the Magadi Soda Company, now owned byTata India. This factory produces soda ash, which has a range of industrial uses. Magadi is the centraltown of Magadi division of the Kajiado District Lake Magadi in the Kajiado district at a approximatelytwo hours drive South-West of Nairobi in the Kenya Rift Valley. The site location is shown in Figure 1.

A total of 180 hectares is available in the site. The terrain is flat with a slight slope to the west toward

Lake Magadi. The land is a typical Savanna covered with grass, shrubs and occasional trees. The soilconsists of loose, sandy topsoil with middle sized stones.

Site access is through a privately maintained country road which leads to the Magadi concession withfactory and township. The site is around 3 km from the country road. A 5.5 kV internal grid systemexist on the factory with the nearest line around 3-4 km from the projected site. In addition, a 66 kVnational grid is located 5 km away from the site.

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Figure 1: Magadi Soda site location

5 Solar Resource

The annual sum for global horizontal irradiation (GHI) in Magadi Soda, being used in this study, is1,991 kWh/m² based on Meteonorm’s database which relies on long-term ground measurement fromdistant stations and satellite data. This value is lower than the GHI values of SWERA database whichis 2,228 kWh/m². The University of Nairobi used to maintain a basic meteorological measurementstation that records tremor, temperature, precipitation, and evaporation rate in the area.

Meteonorm’s solar irradiation data show a seasonal pattern decreasing from March to July andincreasing from July to December. This pattern is also consistent with the data for Nairobi from theUniversity of Massachusetts. The comparative GHI from different sources is shown in Figure 2.

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Figure 2: Monthly plot of the radiation data available for the site

6 Conceptual Design

Arrangements of 1 MWp have been selected as the standard size for the PV Projects within theframework of the EMPower Program, which has become more or less a market standard for largescale solar PV power plant. The plant at Magadi Soda is aimed at a size limit of 5 MW DC in capacity;the layout was thus developed for this capacity.

Mitsubishi’s PV-UD185 MF5 poly-crystalline modules with capacity of 185 Wp was chosen in theanalysis due to its suitability to specific environmental conditions in the area. With this module powerrating, the 5 MW power plant will require a total of 27,030 modules.

In line with the EMPower guidelines a string inverter concept was chosen for the Magadi project. AsEMPower is looking at the development of new markets, the concept of small inverters (string or so

called mini central) units provides more reliability at an insignificant investment cost premium2. In this

case defective inverters can be quickly exchanged with new inverters from a small revolving stockthrough local technicians.

2A recent study shows that while string inverter systems lead to a small investment cost premium compared

to central inverter systems O&M costs as well as life cycle cost for string systems are lower. See JürgenReekers, Multi-Megawatt PV power plants with modular topology, Otti PV Symposium 2010.

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The SMA Sunny Tripower 15000TL, a recent inverter model with the special feature of three phasedfeed-in, was chosen for the plant concept as its voltage range goes with the rather low maximumoperating voltage (600 V) of the selected modules.

The module-string concept is also used in the analysis. A single string comprises 17 modulesconnected in series and each inverter covers around 5 strings. The 5 MW plant, therefore, will have318 inverters and 1,590 strings.

The modules are located in two rows per shed and placed in upright position. They are then clampedonto a long-term resistant mounting structure which can consist of materials commonly availablelocally. The plant and module orientation and configurations are summarized in Table 2. The proposed

plant layout is shown in Figure 3.

Table 2: Magadi Soda plant layout and module orientation and configurations

Meteo Data

Data Set

Global Horizontal Irradiation1,991 kWh/m²

Module Orientation

Module Inclination: 10°

Module Orientation: 0°

Plant Layout

Row to row distance 3.3 m

Shading angle 9.8°

Module-Inverter configuration

Installed Module Capacity: 5.000 MW

Module Type: PV-UD185 MF5

Number of Modules: 27,030

Nominal Capacity of the Module: 185 Wp

Number of Modules per String: 17

Number of Strings per Inverter: 5

Inverter Capacity: 15 kWp

Number of Inverters: 318

Installed inverter capacity: 4,770 kW

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Figure 3: Layout of PV plant in Magadi Soda

7 Yield Assessment and Design Optimization

PVSYST software was used in simulating the plant energy yield. PVSYST is one of the most powerfultools for the simulation of grid-connected and stand-alone PV systems. In the project design mode, thesoftware allows a detailed definition of the PV plant, including special geometries, as near shadingobjects or tracking systems. The computer model also contains a huge database of technical and

electrical properties of the most common PV components (modules, inverters) available on themarket.

The PV power plant performance indicators assessed in the study are the following: i) energy yield, ii)yield factor, and iii) performance ratio.

Yield factor (YF) refers to the plant’s specific performance in net kWh delivered to the grid per kW ofinstalled nominal PV module power. This is also equivalent to the number of full load hours for the

plant.

Performance ratio (PR) is defined as the actual amount of PV energy delivered to the grid in a givenperiod, divided by the theoretical amount according to STC data of the modules.

Magadi Soda’s performance indicators are summarized in Table 3. The plant’s monthly performanceratios are shown in Figure 4.

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Table 3: Key Results for Magadi Soda PV Plants

Output Magadi

Peak power [kWp] 5,001

Irradiation on horizontal plane [kWh/m²] 1,989

Irradiation on inclined plane [kWh/m²] 1,991

First Year Performance at Inverter output

Energy Yield [MWh/a] 7,949

Overall YF [kWh/kWp] 1,590

Overall PR [%] 79.8%

Average Performance (25a) at Transformer output

Energy yield, average 25a [MWh/a] 7,478

Overall YF [kWh/kWp] / Full Load Hours 1,496

Overall PR [%] 75%

78.0%

78.5%

79.0%

79.5%

80.0%

80.5%

81.0%

0

50

100

150

200

250

jan feb mar apr may jun jul aug sep oct nov dec YEAR

Monthly Radiation on Module Surface vs. Performace Ratio

Global Inclined Radiation

PR

Figure 4: Monthly performance ratio

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8 Economic Benefits

An economic analysis was carried out for the 5 MWp Magadi Soda project to evaluate whether theproject lead to an efficient allocation of national resources and to assess the net macro economicbenefits of the project. Economic prices on world market level have been used and local pricescorrected for macro-economic distortions by means of shadow exchange rates.

Main project benefits considered in the study stem from avoided fossil fuel consumption and from

credits on CO2 emissions which would have occurred when electricity would have been generated byconventional thermal generation units.

The investment costs used in the analysis represent first quarter 2010 market prices. The costindicated above covers the complete PV power plant including land preparation, control and security,access and grid connection. The PV plant is assumed to operate for 25 years. All individual costcomponents were discounted at a rate of 4%.

The coincidence between thermal power plant (TPP) peak load development and peak PV generationwere analyzed, and the key results are the following: first, the PV plant only replaces about 0.5% ofthe daily peak load

3, which is usually produced from expensive thermal power generation units; and

second, the TPP-peak generation does not fully coincide with the PV peak generation.

Table 4 shows that the total net PV electricity generation replaces 4.3 GWh of thermal powergeneration annually

4. This results in annual savings of 484 tons of gasoil, and 527 tons of kerosene.

The plants’ annual emissions reductions amount to 2,917 tons of CO2 per year.

Table 4: Magadi Soda avoided fossil fuel generation and emission reductions

Displaced Fuel/Emission Reduction Unit

Gasoil tons/year 484

Kerosene tons/year 527

Net CO2 emission reduction tCO2/year 2,917

Table 5: Magadi Soda Benefit Indicators

Generation (Present Value) MWh 121,775

Total Costs (Present Value) TKES 1,796,166

Total Benefits (Present Value) TKES 1,876,312

Levelized Unit Cost KES/MWh 14,750

Internal Rate of Return % 4.48

Benefit-Cost Ratio 1.04

3i.e. (Thermal Generation + HPP + RES generation) – Minimum (Thermal Generation)

4Annual degradation = 0.5%

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The present value of the project benefits (savings from conventional thermal generation over theoperation period of 25 years) corresponds to almost the same capital expenditures (CAPEX). Thisrepresents a cost benefit ratio of around 1.04. The economic levelized unit cost amounted to14.7 TKES/MWh (130.37 EUR/MWh) which is within the typical range for photovoltaic installations in

tropical climates. In addition, the economic rate of return of the project is positive (Table 5).

9 Tariff Requirements

A financial analysis was carried out to determine the project’s required tariff given the target indicatorsfor investor’s financial benefits, using the same cost assumptions and time schedules as in theeconomic analysis.

Three funding scenarios were considered in the analysis and these are summarized in Table 6.

Table 6: Funding scenarios and assumptions

Funding ScenarioDevelopment Bank

(Y1)Magadi Soda (Y2)

Commercial Bank

(Y3)

Equity30% Equity drawn

first

30% Equity drawn

first

30% Equity drawn

first

Loan A Loan B Loan A Loan B Loan A Loan BShare

75% 25% 75% 25% 75% 25%

Repayment Period 15 years 8 years 12 years 8 years 14 years 8 years

Grace Period 5 years 2 years 2 years 2 years 2 years 2 years

Interest during

Construction2.75% 14.58% 4.0% 14.58% 6.3% 14.58%

Debt

Interest during

Operation2.75% 14.58% 4.0% 14.58% 6.3% 14.58%

Working Capital 14.58% 14.58% 14.58%

Interest on DSRA 2.0% 2.0% 2.0%Debt

Service

Reserve

Account

(DSRA)

Minimum DSCR to

distribute dividends1.20x 1.20x 1.20x

Cost of Debt 5.71% 6.65% 8.37%

Cost of Equity 20.00% 20.00% 20.00%

Weighted

Average

Capital

Cost

(WACC)Discount Rate for

NPV Calculation 9.00% 9.49% 10.39%

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All loans were assumed to be based on a debt:equity ratio of 70:30 and were denominated in Euro tomatch the currency requirements of the financial analysis. Equity is to be provided by RenewableEnergy Ventures Ltd. whereas debt funds are expected to consist of two loans: one being aninternational loan covering the foreign component while a local loan covers the local component of

investment cost.

The necessary feed-in tariffs were derived so as to achieve a target return on equity (RoE) of 20%given the technical assumptions and the different capital structures.

Reference Feed-in Tariff

The study carried out a financial analysis based on project revenues derived from the reference feed-in tariff of 0.20 USD/kWh (0.15 EUR/kWh) set by the Ministry of Energy. The results indicate that

under any funding scenarios no project is financially feasible (Table 7). The project NPVs arenegative, the project IRRs are below that the weighted average cost of capital, and there are severalyears where the minimum DSCR is below 1.00x. In addition, the Magadi PV project fails to reach thetarget RoE of 20% under any funding scenarios.

Table 7: Project Financial Indicators based on Reference Feed-inTariff of 0.20 USD/kWh


(Y1)

Magadi Soda

(Y2)

Commercial Bank

(Y3)

Project IRR (Pre-Tax) 3.69% 3.62% 3.25%

Project IRR (Post-Tax) 3.51% 3.62% 3.25%

Project NPV (TEUR) -4,058 -4,370 -5,154

Average DSCR 1.05x 0.78x 0.71x

Minimum DSCR 0.86 0.68x 0.62x

Return on Equity (RoE) 0% 0% 0%

Payback Period, years 0.00 0.00 0.00

Feed-in Tariff

KES/kWh

Euro/kWh16.04

0.15

16.04

0.15

16.04

0.15

Dynamic Unit Costs (EUR/kWh) 0.21 0.21 0.21

Specific Investment on Construction

(EUR/kW) 2,920 2,941 3,036

Required Feed-in Tariff

The study estimated the required feed-in tariff in order to achieve the target RoE of 20%. Thefavourable financing conditions of Funding Scenario Y1 are reflected in achieving the target RoE of20% at the lowest required feed-in tariff of 28.64 KES/kWh (0.27 EUR/kWh) followed by FundingScenarios Y2 (31.13 KES/kWh: 0.29 EUR/kWh) and Y3 (33.73 KES/kWh: 0.31 EUR/kWh) (Table 8).

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In addition, the IRR, NPV, DSCR and payback period show acceptable levels of viability given the lowtechnical risk of a PV power plant.

Funding scenario Y1 constitutes the most beneficial scenario regarding the project’s viability, followedby funding scenario Y2 and Y3. Given the lowest feed-in tariff requirements for funding scenario Y1, a

similar scenario should be pursued with the following conditions: loans with or even without the leastfinancial fees (upfront fee, commitment fee), low interest rates, and long grace and payback periodswill be critical for project viability.

Table 8: Project Financial Indicators based on RoE of 20%


(Y1)Magadi Soda (Y2)

Commercial Bank

(Y3)

Project IRR (Pre-Tax) 14.18% 15.91% 17.08%

Project IRR (Post-Tax) 13.56% 15.26% 16.45

Project NPV (TEUR) 4,540 5,500 5,569

Average DSCR 1.99x 1.62x 1.64x

Minimum DSCR 1.64x 1.40x 1.41x

Return on Equity (RoE) 20% 20% 20%

Payback Period, years 6.00 6.00 6.00

Feed-in Tariff

KES/kWh

Euro/kWh28.64

0.27

31.13

0.29

33.73

0.31

Dynamic Unit Costs (EUR/kWh) 0.21 0.21 0.23

Specific Investment on Construction

(EUR/kW) 2,920 2,941 3,036

Dynamic Unit Cost and Feed-in Tariff

In addition to the required feed-in tariff (FiT), the study also estimates the dynamic unit cost (DUC) ofthe project under different funding scenarios. The results are also presented in the above table (Table8).

DUC comprises capital expenditures (CAPEX) and operating expenses (OPEX) while FiT covers cash

in debt service reserve account and dividends, debt service (capital + interest on term loan + intereston working capital) and OPEX.

Figure 5 below compares the DUC and FiT breakdowns for financing scenario Y1 and 20% targetreturn of equity (RoE).

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0.04 0.04

0.17

0.09

0.14

0.00 €

0.05 €

0.10 €

0.15 €

0.20 €

0.25 €

0.30 €

DUC FIT (LI)

OPEX (NPV) CAPEX (NPV)

Debt Service (Capital+Interest on Term Loan +Interest on WC) (NPV) Cash in Debt Service Reserve Account and Prof it (NPV)

Figure 5: Cost Breakdown of DUC and FiT(0.27 EUR/kWh): Funding Scenario Y1 @ 20% RoE

Grant Requirement

As presented above, with reference tariff of 0.20 USD/kWh (0.15 EUR/kWh) the project fails to reachthe target RoE of 20% under any funding options. Instead of increasing the reference tariff to therequired level in order to meet the target RoE, a cash grant from national or international development

banks could be provided to PV projects.

The study estimated the required grant to bridge the gap between the project RoE with reference tariffand that with required tariff. The most favourable funding option (Y1) was selected for the grantanalysis. The result shows that an upfront cash grant of 8,957 TEUR will be required for a project tomeet the target RoE. This accounts for around 66% of total capital investment cost (including financingfees) under Y1. This is shown in Table 9.

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Table 9: Results of the Cash Grant Analysis

RESULTS Funding Scenario Y1

Financial Indicators

Project IRR (Pre-Tax) % 4.03%

Project IRR (Post-Tax) % 3.76%

Project NPV TEUR -3,711

Average DSCR 3.14x

Minimum DSCR 2.58x

Return on Equity (ROE) % 20.00%

Payback Period years 5.00

Feed-In Tariff KES/kWh 16.04

EUR/kWh 0.15

Dynamic Unit Costs EUR/kWh 0.20

Specific Investment on Construction EUR / kW 2,837

Capital Cost Reduction Analysis

Capital cost reduction analysis was also conducted to evaluate the impact of the expected initialcapital cost reduction for PV plants. Under the assumption that a project is realized with a delay of acertain number of years and the following cost reduction scenario for plant cost projections (Table 10)adopted from Industry Association and Market Analyst, the tariff reductions are shown in Table 11. Fora project delay of 10 years, the costs decline by an average of 8.30% per year. As a result, therequired feed-in tariff after 10 years will be 40% lower than that of the reference year.

Table 10: Capital Cost Reduction of PV plants

Project Delay year +0 +1 +2 +3 +4 +5 +6 +7 +8 +9 +10 Average

Cost Reduction % 100% 91.0% 81.0% 74.0% 68.0% 62.0% 57.0% 53.0% 49.0% 45.0% 42.0% n/a

Cost Development % -9.0% -11.0% -8.6% -8.1% -8.8% -8.1% -7.0% -7.5% -8.2% -6.7% -8.30%

Table 11: Required Feed-In Tariff per year of delay

Project Delay year +0 +1 +2 +3 +4 +5 +6 +7 +8 +9 +10 Average

Feed-In Tariff KES/kWh 28.64 26.77 24.71 23.28 22.04 20.81 19.76 19.05 18.23 17.38 16.77 n/a

EUR/kWh 0.27 0.25 0.23 0.22 0.20 0.19 0.18 0.18 0.17 0.16 0.16 n/a

Feed-In Development % - -6.5% -7.7% -5.8% -5.3% -5.6% -5.0% -3.6% -4.3% -4.7% -3.5% -5.21%

Conclusion

The financial analysis shows with the reference feed-in tariff of 0.20 USD/kWh (0.15 EUR/kWh) set by

the Ministry of Energy, the results indicate that under any funding scenarios no project is financiallyfeasible. The project NPVs are negative and the project IRRs are below that the weighted averagecost of capital.

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The study estimated the required feed-in tariff in order to achieve the target RoE of 20%. The fundingscenario with favourable soft loan from a development bank (Y1) appears to be the most attractive,leading to a Feed-in-Tariff requirement of 28.64 KES/kWh (0.27 EUR/kWh). Funding Scenarios Y2and Y3 yield 31.13 KES/kWh (0.29 EUR/kWh) and 33.73 KES/kWh (0.31 EUR/kWh) respectively.

The study also estimated the required grant to bridge the gap between the project RoE with referencetariff and that with required tariff. The result shows for funding scenario Y1 that an upfront cash grantof 8,957 TEUR will be required for a project to meet the target RoE.

Taking into account the industry’s projection of PV plant cost reduction, the tariff requirement will dropby around 5.21% annually over the next 10 years. This means that the tariff requirement of a similarplant developed 10 years later would be 40% lower than that of the reference year.

10 Framework Conditions for Renewable Energies

The Ministry of Energy (MoE) is the apex body responsible for the formulation of the national energy

policy promoting electricity sector development, exploration and trade of fossil fuels, energy efficiency,renewable energies and the electrification of rural areas. The Ministry also provides oversight to thefollowing institutions: i) Electricity Regulatory Commission (ERC); ii) Kenya Electricity GeneratingCompany Ltd. (KenGen), iii) Kenya Power & Lighting Company Ltd. (KPLC); iv) Rural ElectrificationAuthority (REA); v) National Oil Corporation of Kenya (NOCK); vi) Kenya Pipeline Company (KPC);and vi) Kenya Petroleum Refineries Ltd.

Kenya’s precursor to the current renewable energy policy is the Sessional Paper Number 4 on Energy

for the period 2004-2023 from the National Energy Policy which commits the government to promoteelectricity generation from renewable energy sources. In this Policy, the government sets a target of300 MW to be generated from biomass mainly from the sugar cane bagasse and other renewableenergy sources.

This policy was put into operation through the Energy Act of 2006 encouraging the implementation ofthe indigenous renewable energy sources to enhance country’s electricity supply capacity. The Act

also empowers the Minister to promote development and use of renewable energy technologies. Inaddition, the Act also requires the government to carry out pre-feasibility and feasibility studies for thepackaging and dissemination of information to create investor and consumer awareness.

Pursuant to the above policies, the Ministry of Energy encouraged potential IPPs to carry out feasibilitystudies on wind and biomass generation on the basis of which power purchase agreements withKPLC can be negotiated.

In 2007, MoE issued a position paper proposing to set Feed-in-Tariffs (FiT) for electricity generatedfrom renewable energy sources mainly from wind biomass and small hydropower. As a consequence,the FiT policy was introduced in 2008. A mid-term review of FiT was carried out in 2010 incorporatingother renewable energy sources such as geothermal, biogas and solar.

The National Task Force on Accelerated Development of Green Energy sets a target of 2,000 MWadditional generation in 2012 from renewable energies and energy efficiency measures.

Currently several further mechanisms for promotion of renewable energy are being discussed,amongst other the so-called Green Energy Fund that could be set up in co-operation with the WorldBank. This fund would provide loans to projects from private sector that aim at generating renewable

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energy. Another possible measure would be the introduction of tax incentives such as abolition ofimport taxes on products meant for the generation of RE (independent of the chosen type oftechnology) or tax exemption on income tax and dividend income for several years.

11 Recommendations for Subsequent Steps in Project Development

The pre-feasibility analysis shows technical feasibility of the 5 MW solar PV project underconsideration. Main issues to be addressed by project developers and regulator/policy makers are

described below.

Matters to be addressed by Project Developers

Detailed Study

It is recommended that the project developer carries out the following activities to approach lenders orequity investors:

PoE analysis of yield;

Detailed cost breakdown considering in detail Kenyan PV market prices for equipment andservices, considering also duties, fees, taxes and transport.

Availability and delivery terms of component manufacturers (modules, inverters) for Kenya

o Mitsubishi Electronics currently does not deliver to Africa. This statement needs to beverified. Depending on the supplier and distribution channel, this might be adapted.

o Detailed study on the integration of the PV plant into the Magadi Soda grid in closeco-operation with the electrical engineers of the plant.

Solar Resources Assessment

The global horizontal irradiation (GHI) is the most critical resource for solar PV plant. Unfortunately,there are no ground measurement stations currently existing close the selected site in Magadi Soda.GHI values from two main sources of satellite data, Meteonorm and SWERA, were reviewed in thestudy, and the results show huge discrepancies in GHI values with an uncertainty of roughly 12%.

If a higher GHI value could be proven, the project’s financial indicators would improve andconsequently the lenders risk be reduced.

Due to the central importance of a high quality GHI, measurement on site or close to the site isrecommended. Results will have to be correlated with long term satellite data.

Capital cost

The capital costs assumed reflect first quarter 2010 market prices for EPC contracts and are based onexperience from recent projects under execution in Western and Southern Europe using mediumquality modules. Lower capital cost might also be obtained using a different technology like thin film

modules. It is very likely that under current market conditions for large scale PV projects (several10 MW) sufficient competition of international EPC contractors and local contractors will exist to allowfor a price level which is similar to the more developed reference markets. However, market conditionsfor EPC and equipment supply might change quickly in the highly dynamic PV market making it

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necessary to re-evaluate carefully equipment and EPC price level in the next step of projectdevelopment. The strong trend to declining prices also in emerging PV markets will continue.

Project financing

Three financing scenarios were analysed in the pre-feasibility study and risk from exchange rate

variations i.e. hedging costs were included in case of foreign funding. In order to substantiate thefunding terms assumptions, negotiations with institutions supporting solar projects with soft loans andalso commercial lenders with PV project experience should be initiated to approach the next steps ofproject development. As local as well as regional banks are not familiar with PV project financing,negotiation and familiarization of the lenders is expected to take some time.

Grid connection

The assumed possibility to connect the PV power plant to the transmission grid through transmissionlines next to the plant has to be verified. For the economical analysis of the present study, aninvestment cost for the Grid connection was estimated. Step-up transformer, switch gear and MV linewere considered in the mentioned estimation.

Site conditions

The site under consideration has been visited and analyzed thoroughly. However, the geotechnical

conditions and efforts for site preparation require a more detailed analysis. There is no quantitativebelow surface information for the site has been obtained. In order to refine the cost estimate for plantfoundations this would be essential. The same is true for the cost estimate for site preoperationalworks.

Carbon financing

The study internalized the benefits of carbon emissions reductions through the Clean Development

Mechanism (CDM) to be generated by the project. Project developers must however take note thatdeveloping the PV project into a CDM project requires separate project cycles, with market playersand institutional frameworks different from those of the electricity market. Efficient coordination shouldbe carried out into order to minimize transaction costs and optimize carbon emission reductionbenefits.

Moreover, the study considers only the clean development mechanism (CDM). The failure of COP 15

in Copenhagen last year could jeopardize the continuity of the sustainable mechanisms under theKyoto Protocol and that the carbon benefits may not be realized as planned. On the other hand,project developers should also consider the development of voluntary carbon markets and the EU-ETS as alternative to CDM.

Matters to be Addressed by Energy Sector Policy Makers and Regulators

From the policy side, the government appeared to be effectively addressing key issues related torenewable energy development. It established necessary frameworks through the Energy Act to

provide legal basis to introduced feed-in tariff policy for renewable energy sources. In addition, thecountry’s ratification of the Kyoto Protocol in 2005 complemented the existing policies and provideadditional stimulus to renewable energy investments through the Clean Development Mechanism(CDM).

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The main challenge for the Ministry of Energy is to reset the current target of 300 MW to moreambitious goals and to further refine the instruments (eg. Feed-in tariff) to stimulate acceleratedinvestments on renewable power.

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12 Glossary of Financial and Economic Terms

Average Cost of Debt

weighted interest rate of loans applied. It includes for foreign currency portion costs of hedging.

Average Cost of Equity

assumed to be 15%.

Commitment Fee

Payment by a potential borrower to a lender for a legal promise to make credit available on aspecified future date or for a line of credit.

Debt Service Coverage Ratio (DSCR)

is defined as the ratio of the net income from operations in period n to the total long-term debtservice in period n. In general, it is calculated by:

DSCR =ServiceDebtTotal

IncomeOperatingNet

Debt Service Reserve Account (DSRA)

works as an additional security measure for lenders as it is generally a deposit equal to a givennumber of months projected debt.

Dynamic Unit Cost (DUC)

is defined as

DUC =ProductionEnergyDiscounted

pricesmarketatvaluedOPEX)&(CAPEXCostProjectofValuePresent

The DUC is applied in the financial analysis. The discount rate applied with the DUC is theWeighted Average Capital Cost

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Equipment Costs / Capital Expenditure (CAPEX)

is incurred when a project company spends money either to buy fixed assets or to add to the valueof an existing fixed asset. These costs can be broken down into three categories:

Direct project costs,

Indirect project costs consisting of costs for project development, engineering andcommissioning; physical contingencies, construction insurance, import tax and CDM up-front costs, and

Total investment costs.

The table below gives an illustration for PV and CSP projects.

PV CSP

Civil (Mounting Structure,Fencing, Access, Installation,Security System)

Civil WorksSolar FieldHTF System

Modules Auxiliary HeaterInverter Thermal Energy StorageElectrical (Cable, Plugs,Cabinets)

Power BlockAir-cooled Condensers

Balance of Plant (BOP)Connection to Grid Connection to GridLand Land

IDC (Interest During Construction)Commitment FeesUp-front Fees

CDM Up-front Costs

Total

Investment

Costs

Basic

Project

Costs

Direct

Project

Costs

Import Tax

Project Development, Engineering, CommissioningPhysical Contingencies (Owner)Construction Insurance

Feed in Tariff (FiT)

is a premium electricity tariff to encourage the adoption of renewable energy sources and to helpaccelerate the move toward grid parity. In the LI Financial Model, FiT is defined as required unitrevenue to reach the expected RoE, which is pre-determined by users. In general, it is calculatedas the sum of present values of variables listed below:

FiT =

)GenerationPV(Energy

Dividends)PeriodServiceDebtdringAccountReserviceinCashServiceDebtPV(OPEX

http://en.wikipedia.org/wiki/Renewable_energy

http://en.wikipedia.org/wiki/Grid_parity

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Free Cash

is defined by:

Operating Revenues

- Operating Expenses

+ Interest Income

- Income Tax

- Debt Service (Interest Expenses and Instalments)

= Free Cash

Interest during Construction (IDC)

is an accumulated interest during construction period, which usually equals capitalized interest.

Internal Rate of Return (IRR)

is the discount rate at which the present values of costs (CAPEX, OPEX, taxes) and benefits(revenues) are identical.

Levelized Electricity Cost (LEC)

is defined as:

LEC =ProductionEnergyofValuePresent

costseconomicatvaluedOPEX)&(CAPEXCostProjectofValuePresent

The LEC is applied in the economic analysis. The discount rate applied with the LEC is theopportunity cost of capital.

Net Income

is defined as:

Operating Revenues


+ Interest Income

- Interest Expenses

- Depreciation

- Income Tax

= Net Income

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Net Operating Income

is defined as:

Operating Revenues


= Net Operating Income

Operating Expenditure (OPEX)

is an ongoing cost for running a plant. (e.g. administration costs, wage expenses, service fees ormaintenance costs).

For PV projects operating expenses are fixed expenses, i.e. they do not vary with the generationoutput.

For CSP project also variable costs incur for heat transfer fluid (HTF) makeup, demineralisedwater for mirror washing, cooling water, and HTF heater fuel consumption (inc. anti freeze) as well

as fuel consumption in case of designs with auxiliary heating.

Pay back period

is the period required to recuperate the original investment outlay through the profits earned by the

project

Present Values (PV)

is the value on a given date of a series of future payments, discounted to reflect the time value of

money. PV is calculated as:

=t

t

1 i)(1

C

na

t

Where

t year (starting at 1 and covering the construction period with a years and the operationperiod with n years)

i Discount rate quantified by the Weighted Average Capital Costs; and

Ct Cash flow at year t.

Return on Equity (RoE)

is the amount of dividends distributed as a percentage of shareholders equity. Return onequity measures a corporation's profitability by revealing how much profit a companygenerates with the money shareholders have invested. It is defined as:

http://en.wikipedia.org/wiki/Time_value_of_money

http://en.wikipedia.org/wiki/Time_value_of_money

http://en.wikipedia.org/wiki/Discount_rate

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RoE =drawdownequityofluePresent va

dividendsofluePresent va

Annual dividends are determined as minimum of net income and free cash.

Standard Conversion Factor (SCF)

is an approximation that is used to convert the prices of minor non-tradable goods into border

prices (for larger goods specific conversion factors are used). The standard conversion factor isdefined as:

SCF = esExport taxExportsesImport taxImports

(fob)Exports(cif)Imports

,

= taxesNet tradetradeTotal

TradeTotal

,

Upfront Fee

The fee paid by a borrower to a syndicate of banks for making a loan. The fee is often tiered, withthe agent bank receiving a larger amount as a consideration for structuring the loan and/orunderwriting larger amounts and thereby assuming greater risk. Upfront fees paid to syndicatemembers are almost always a function of commitment size.

Weighted Average Capital Cost (WACC)

represents the minimum return that a project company expects to earn on existing asset base tosatisfy its lenders, owners, and other providers of capital. In general, the WACC can be calculatedwith the formula:

WACC = )1(*ED

E*

ED

Ectdy

y year required or expected rate of return on equity, or cost of equity;

d required or expected rate of return on borrowings before taxes;

ct corporate tax rate

D total debt and leases (including current portion of long-term debt and notes payable)

E total market value of equity and equity equivalents or market cap (number of shares

outstanding X share price)

K total capital invested in the going concern

http://glossary.reuters.com/index.php/Syndicate

http://glossary.reuters.com/index.php/Agent_Bank

http://glossary.reuters.com/index.php/Risk

http://en.wikipedia.org/wiki/Taxes

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