11th November 2007 by Eng. Martin O. Ogada Financing of Small-Scale Hydropower Projects & Risks Mitigation for Tea factories A Case for Unilever Tea Kenya Limited

UTKL HYDROPOWER STATIONS KERICHO TOWNSHIP DERBY HOUSE KIMUGU RIVER I.T.C. Drawn: F. Ouko Checked: M. Ogada Date: Nov 2007 CURRENT STATUS: - Present Hydro Capacity2050kW Kerenga420kW Tagabi 800kW Jamji740kW Chemosit 90kW CHEMOSIT HYDRO 0.09 MW KIPTIGET ITARE CHEPKOSIS KITOI JAMJI HYDRO 0.74 MW DIESEL 1.0 MW 4xHYDRO M/C 740 KW 30.5% OF POWER DEMAND AND DIESEL ENGINE 1200KW (STANDBY) 1xHYDRO M/C 90 KW 3.6% OF POWEER DEMAND 1xHYDRO M/C 800 KW 33% OF POWER DEMAND 2xHYDRO M/C 420 KW 16.5% OF POWER DEMAND SAOSA TAGABI HYDRO 0.8 MW KERENGA HYDRO 0.4 MW 5 KM FURROW 3 KM FURROW JAMJI DAM TAGABI DAM KERENGA DAM CHEMOSIT WEIR TOINSOIYET RIVER

TAGABI HYDRO & KIMARI GRID PROPOSAL

Financing Conditions - Unilever All Hydropower projects developed so far were in-house financed. Projects subjected to a financial appraisal & compete 4 funding Discounted Cash Flow (DCF) Method is used Internal Rate of Return (IRR) subjected to a sensitivity analysis, lowest rate that passes is 15% on constant terms. Inflation rate used set by Commercial Department The project is forwarded to functional director Functional Director tables the project appraisal to his colleagues Once approved, it is put in the company annual capital budget A capital proposal is raised which summarises the key objectives of the project, key benefits, highlighting any major risks & the proposed mitigating factors. SHEQ compliance top priority The project goes through an approval process with every approver observing his/her authority limit Project Team is formed for implementation

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Development Costs for Hydro 1989/1990 Vs Today Item1990 Cost Kshs. % of Total Estimate Today Kshs. Site Investigations258, ,035,000 Consultancy2,138, ,200,000 EIA & Licenses/PermitsNegligible0.0200,000 Weir3,863, ,220,000 5Km Furrow & Head pond13,617, ,550,000 Powerhouse Building705, ,300,000 Inlet Pipe (Penstock)1,320, ,834,000 3Km Furrow2,739, ,956,000 Turbine/Alternator9,307, ,000,000 Other Electrical Works (Power line)1,590, ,200,000 Total35,609, ,495,000 NB: Today: Kshs/kW – 143,000 (USD 2100) Civil works: 70%, Electromechanical:30%

DCF Results of 800KW Project Today 6% Inflation11% Inflation16% Inflation IRR Current20.4%24.0%27.3% IRR Constant14.3%13.8%13.4% Conclusion: This project will not qualify for financing in Unilever under normal circumstances Assumptions: Investment – Kshs. 114,495,000 Annual Units generated – 4,555,000 kWh Base Inflation rate – 11% Sensitivity Analysis to inflation done ±5% Average Hydro Cost – Kshs.1.56/kWh Average KPLC Cost – Kshs. 8.06

Project Risks/Pitfalls Cost overruns Poor forecasting of revenues (usually too optimistic) Exchange rate fluctuations Interest rate risk – inflation dependent Poor payment mechanism to contractors Poor cash inflow/outflow arrangement Increased water turbine wear rate due to silt Erratic weather patterns Force Majeure – earth quakes, fires & other unpredictable circumstances

Mitigating Risks in SHP Projects High quality Feasibility Studies Reduce cost of the project development – e.g. procurement Realistic revenue forecasts Government incentives (loans, PPA, guarantees, tax relief) Simplifying legislation procedures – permits/licenses/EIA Joint Developments of projects in one area to reduce costs – collective planning, procurement, negotiations, funding Keeping high quality water flow & rainfall data Use of expert advice from qualified consultants Establishment of advisory resource centres e.g. PMO Establish better sources of equity funding Insurance against natural disasters

Conclusion Local banking institutions need to take advantage of existing opportunities to finance the private sector in SHP development With high quality Feasibility study reports, SHP projects are not high risk projects and the Unilever case shows they are viable. Criteria within private companies may be too tight but it remains attractive to commercial banks. The Governments hold the key to removing many financing barriers to financing SHP projects by: - Introducing incentives (grants, equity capital) Reducing risk to developers & financiers (Govt guarantees, high quality stream flow data) Joint development ventures in one area to reduce development costs By education & resource centres to provide technical support during early stages of development

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