Options available to finance solar electricity

By MUNGAI KIHANYA

The Sunday Nation

Nairobi,

05 December 2021

James is a director at a medium sized manufacturing company based in Embakasi, Nairobi. The business looking for various ways of reducing costs and one of the suggestions on the table installing a solar electric system in order to cut electricity bills to zero.

They called in “a reputable supplier of solar systems” to carry out a survey and give a quote for the system. The quotation came to almost Sh15 million. So, James is wondering: “why are so many companies installing solar electricity yet it is so expensive? Did we miss something?”

I didn’t know exactly what James wanted me to calculate, so, I asked what their average electricity bill was. The answer: about Sh200,000 to Sh250,000 per month. Therefore, it will take about four to five years to recover the cost of the solar system through savings. After that period, they will have free electricity for the next 20 or so years.

That looks like a good investment: you invest Sh15 million and get a return of between Sh2.4M and Sh3M every year through savings. That is, about 16% to 20% per annum. There are very few places where you can get such a high return. Even the most lucrative treasury bond (FXD1/2016/10) pays less than this – 15.039%.

The problem that James is facing is that his company does not have Sh15M lying around waiting to be invested. So, to get into this project, they would have to look for asset finance from a bank. So, the question changes to this: “If we borrowed the Sh15M for five years, how much would we have to pay in monthly installments? Alternatively, with our Sh250,000 electricity saving per month, would we be able to borrow Sh15M repayable in five years?”

James did not say what interest rate his bank would charge, but I will assume it is about 15% per annum. The monthly installment for a Sh15M, five-year loan comes to Sh375,000. This is a lot more than the Sh250,000 that the company will save on electricity bills.

For the alternative question of how much they can get with Sh250,000 installment, the answer is: about Sh10M; which is Sh5M short of the cost of the solar system. So, if they can get Sh5M upfront, they can borrow the remaining Sh10M and, in five years, they will have free electricity. Otherwise, they should look for some one to sell it to them at Sh10M.