ZCAS UNIVERSITY

MASTER OF BUSINESS ADMINISTRATION

– FINANCE

STUDENT NAME: EVARISTO KATONGO

ZCAS STUDENT NO.: 202401135

MODE OF STUDY: DISTANCE ELEARNING

TOPIC TITLE: Investigation Into the Challenges for Project

Financing of Renewable Projects Case Of Lunsemfwa Hydro
Power Company.

SUBMISSION DATE: 07.05.2024

SUPERVISOR:

WORD COUNT:
Contents
1. Introduc on ........................................................................................................................................ 3
2. Problem Statement ............................................................................................................................. 4
3. Purpose of the study ........................................................................................................................... 5
4. Objec ve ............................................................................................................................................. 6
5. Literature Review ................................................................................................................................ 7
6. Methodology ....................................................................................................................................... 8
7.Theore cal and Conceptual Frameworks............................................................................................. 9
7.1 Sources of data.............................................................................................................................. 9
7.2 Sampling frame ............................................................................................................................. 9
7.3 Sample size .................................................................................................................................... 9
7.4 Reliability & validity..................................................................................................................... 10
8. Research methods............................................................................................................................. 10
9. References ......................................................................................................................................... 12
10. Work Schedule ................................................................................................................................ 13
1. Introduc on
Lunsemfwa Hydro Power Company, LHPC is a Zambia owned hydro power generating
company established in 2001 following the privatisation of the ZCCM assets in the late 1990s.
Lunsemfwa Hydro Power was the first Independent Power Producer in Zambia and operated
in the energy markets for the past 20 years. Lunsemfwa operates two hydro power stations,
Mulungushi, 32 MW and Lunsemfwa, 24MW. LHPC has undertaken a number of expansion
projects to increase its installed capacity from the original capacity of 38MW as at 2001 to
56MW in 2012.

Over the years the company has suffered the effects of the climate change, and this has caused
the company to operate far less than the installed capacity for the larger part of the year. This
has compelled the company to expand its generation capacity through other renewable energy
sources that are not impacted by the weather. Lunsemfwa has conducted a number of
feasibilities studies in an effort to increase in the generation installed capacity to contribute to
the national energy demand and help alleviate the energy poverty in the country. Among the
projects Lusnsemfwa has conducted are the 180MW Muchinga Power Company Project and
the 20MW Solar PV project. With the installation of Solar PV plant, it is expected that it would
help to increase the electricity generation capacity while conserving water as this would be run
conjunctively with the hydro power plants and this will also increase the electricity out.

The motivation to embark on such project is based on the fact that the country has low
electricity connection rates (citation). According to the Agence Francaise De Development,
AFD (2016), only 22% of the Zambian population is connected to the electricity grid; this rate
drops to 5% in rural areas. The vast majority of the population is using polluting and costly
energy sources (gasoil, paraffin oil, and candles) even though electricity in the country is
provided at very competitive rates.

The country has also been faced with the energy crisis in the past 10 years resulting in the
reduced economic activities to a point that the country has had to ration the electricity through
load shedding. “Loadshedding is affecting operators, resulting in loss of business (Michael
Malakata, 2023)

In this paper, I would like to investigate the challenges that developers are faced with regarding
the financing of renewable energy projects such as Solar PV projects in Zambia. According to
the Cambridge Dictionary, by definition, a challenge means (the situation of being faced with)
something that needs great mental or physical effort in order to be done successfully and
therefore tests a person's ability.

It has been observed that most renewable projects such as the Solar PV projects in Zambia
have either delayed or entirely failed to be materialised because of the challenges that are faced
in the acquisition of financing for such projects.

This research project will provide an overview of the challenges that are faced in the acquisition
of project financing for such projects.

2. Problem Statement
It has been observed that the Zambia and the region at large have been grappling with an energy
crisis for quite a long time. In particular Zambia has faced one of its worst energy crises dating
back to 2015 extending to 12 hours of load shedding. Despite having an installed capacity of
2,177 MW, and a potential of over 600MW, Zambia was experiencing a deficit of 200MW
(Chenai Mukumba and Bwalya Mukuka, 2016).

The energy sector in Zambia is dominated by the national utility, Zambia Electricity Supply
Corporation ZESCO. The Copperbelt Energy Corporation, CEC transmits most of the
electricity to the Copperbelt Mining towns and Lunsemfwa Hydro Power also generates and
supplies power to the central parts of Zambia through the Power Purchase Agreements with
both ZESCO and CEC.

There are also two other companies that services the rural parts of Zambia in Northwestern
Province, Zenagamina Hydro Power Company, (ZHPC) which runs a remote rural network in
the and Northwestern Energy Corporation which distributes power in the rural mining
community.

Zambia need to develop its potential energy resources, both the hydro power sites and the
renewable energy sources that have been utilized despite the country grappling with such
abundant resources. Efforts by both government and the private sector have pursued before but
not much has been achieved.

The government of Zambia enacted the Act No. 14 of 2009 Public-Private Partnership with the
view to promote Public Private Partnership. In common with many developing countries,
private sector participation was largely in generation capacity, and this has increased
substantially over the years with the IPPs contributing at least 24% of the total electricity
generated in Zambia (Gabriel Pollen 2021).
However, it has been recognised that financing of renewable energy projects in Zambia has
been problematic and is faced with numerous challenges. However, even those projects that
are able to receive financing would go on to face other challenges such as delays and cost
overruns, which could be traced to ineffective identification and handling of challenges. The
challenges to renewable energy financing are usually categorised into (i) economic and
commercial and(ii) regulatory.

The other aspect is the challenge of longer payback periods and the high upfront capital
investment which in most cases are the severe deal breakers for financing of such projects.

If the challenges are not properly identified during the project scoping, it is possible that the
whole process would be delayed, and finance may not be attained. It has also been observed
that today, projects in renewable energy have become technically and logistically challenging
which has led to complications in completing the projects within the schedule. Compared with
the traditional energy projects, the renewable energy projects in Zambia are still considered to
be new technology has not been tested over time.

3. Purpose of the study

The purpose of the study is to review the challenges that exist in the financing of the renewable
energy projects in Zambia. The study has been motivated by the fact that Zambia has been
grappling with the energy crisis which comes about as a result of the overdependence on the
hydro power generation facilities. “The 2015/2016 drought which the country experienced has
revealed the risks, uncertainties and consequences involved in dependence on the hydropower
generation. This has led to electricity load shedding throughout the country thereby affecting
every sector of the country’s social economy. The impact of load shedding has been
increasingly severe and diverse on all spheres of the country`s economy. There is an urgent
need for Zambia to switch over from conventional hydropower generation to create a diverse
electricity generation (called source mix) by promoting the use of other energy technologies
that are sustainable and can meet the present and projected country`s electricity demand.” (Dr.
Simon Tembo, 2016). Other scholars have also studied the challenges that have come with the
over dependence on the hydro power generation to diversify the generation mix to a more
robust and sustainable renewable energy mix.

The transition from the hydro power generation domination to a mix of various types of
generation sources has not come with challenges especially that due the several cycles of the
drought experienced in the past, the impact of such an energy crisis has left the country’s
economic in the doldrums with a poor balance to guarantee any project finance by the
government. The 2015/16 and the 2019/2020 drought had more or less led to the economy
collapsing. “A lack of electricity has devastating consequences for any economy. Since early
2015, Zambia experienced a 2,100 gigawatt-hours (GWh) power deficit triggering countrywide
power rationing. We assess the impact of power rationing on Zambia’s agricultural sector, and
the costs to firms operating in the agricultural sector. Our analysis reveals economy-wide losses
amounting to ZMW 32,496,100,813 (representing 18.8% of the GDP). Losses to the
agricultural sector are estimated at ZMW 2,827,160,771 (representing 1.6% of the GDP) and
are likely to stifle future economic growth.” (IAPRI, 2016).

It is against this background that I intend to find out why despite having gone through several
drought years with repetitive energy crises over the last 10 years not much has been achieved
in implementing renewable energy projects that would provide more resilient energy sources.

4. Objec ve
The objective of this paper is to investigate the knowledge gap in the challenges that are faced
by renewable energy developers in financing of the renewable energy projects in Zambia.

The study will look into a number of previous studies that have been conducted on this subject
to come up with a comprehensive analysis into the challenges developers face to obtain
financing for renewable energy projects and how such challenges could be overcome.

Particularly, the study has the following sub-objectives:

1. To provide a comprehensive review of sources and characteristics of challenges

typically found in renewable projects.
2. To develop a challenge classification method and review current industry practise in
regard to project financing.
3. Develop a conceptual framework for management of challenges in project financing
challenges.

It is expected that the results of this study will bring valuable information in accessing financing
for projects in the energy sector particularly, renewable energy projects.

A number of developers who have shown interest in developing the renewable projects such as
Solar PV projects have tried to work with the government at various implementation stages. It
has been observed that several project developers face challenges in securing financing eve
when it’s obvious that the demand for electricity high to that point that country cannot actually
meet its daily electricity need and that the trend will continue like that for some time to come.

The expectation is that the findings of this study and hence the recommendation could assist in
the policy formulation that would help facilitate and accelerate the development of such
renewable projects in the country. This will consequently lead to increased generation of
electricity from the diversified generation portfolio and provide the stable security of supply
for the country as well as across the region.

5. Literature Review
The preliminary review of the literature on the past studies indicates that investment in
renewable energy in Africa and Kenya in particular has been underexploited because of the
negative perception and the high investment risk which has led to reduced private capital
penetration1.

In most African countries including countries like Nepal, the governments have launched
policies such as the Public - Private Partnership which has seen increased participation of the
private sector in energy infrastructure project developments such as the renewable energy
projects. Most scholars highlight that one of the challenges faced when sourcing for project
financing in such arrangements was risk management. It is further discussed that failure to
manage such risks might threaten the sustainability of such projects and might eventually lead
to the failure of the project.

Based on a Zambian case, Kennedy Musonda (2023) wrote that; “The growth of project finance
in Zambia is constrained by factors such as; the lack of financial resources dedicated to PPP
projects, unclear guidelines and regulations to both authorities and the private sector, as well
as inadequate expertise in areas such as economics, law and finance in the government
departments Nevertheless, the findings of this research also revealed that the cornerstone of the
success and continued use of project finance depends on political will and policy consistency.”

There has been other scholars that have also investigated this subject before, among such
studies was the challenges in securing financing for hydro power project such as Itezhi Tezhi
Power Station. “The study found that the challenges in securing financing for hydropower
projects in Zambia were related to the non-fulfilment of the key conditions required for
nonrecourse financing of hydropower projects. Those conditions were;
1. Development Mode of the project, 2. Sharing of project unlimited risks, 3. Government
guarantees for project credit enhancement, 4. The Level of electricity tariffs, 5. The Power off-
taker for the project and 6. Provision of escrow arrangements by the off-taker.

The study concluded that the efforts made by Government to support private investment in
hydropower projects did not directly address the risks associated with project finance
mobilisation. It was therefore recommended that Government addresses these requirements
from the lenders and developers in line with the principles of project finance to enable the
hydropower projects secure financing in Zambia” (John C. Phiri,2019).

The World Bank also provided support to the Zambian government in 2015 through the Scaling
Solar Program that was going to see the country rapidly expand the private investment in the
Solar PV in the Sub Sahara region.

The program for the Scaling Solar was designed to promote the utility scale solar power project
development through a transparent auction process and was overseen by the International
Finance Corporation, IFC with sites that were already evaluated, and feasibility studies
conducted and standard contracts with the risk reduction programs.

Under the Scaling Solar programme, Zambia through the Industrial Development Corporation
signed a mandate with the IFC to develop 600MW of Solar Projects (UAID. However, only
80MW Solar projects was developed by 2017. This was developed from the fact that Zambia
was suffering from a hydro-power shortage leading to widespread power cuts and the power
cuts had become significantly a political issue during the lead up to the 2015 presidential
elections.

6. Methodology
The methodology for this research study will mostly be based on the literature review to
identify the challenges that faced when accessing finance for projects. The approach will be
structured in a way that the literature review will be supplemented by the interviews and
questionnaires in that particular industry. The study will review various types of challenges in
the renewable energy industry and their characteristics. Following the investigations, the
challenges will be classified according to the factor for identification and also modelling.

This research will analyse the use of project finance in Zambia’s infrastructure projects such as Solar
PV for Lunsemfwa Hydro Power Company as a case study. The study will adoptthe qualitative
approach and data collection would be done through structured interviews from the key personnel in
the company. The data will be analysed using various methods but mostly through the thematic
analysis. The research will involve a review of the relevant literature, the targeted institution for the
purpose of using the project finance to develop a 20MW Solar PV project. The process will be
extended to a number of financial institutions to understand the conditions and terms that may be
required to finance a project of such a nature. The data to be collected will involve the tenure for such
long-term debt financing, what risk are involved, how such risks could be mitigated, an investment
promotion and facilitation agency, an energy regulatory body, a state energy utility company, and a
unit responsible for Public-Private Partnerships (PPPs) as they all represent government a host to
project finance deals. The research will dig further to understand whether such a project has sufficient
findings to be supported by the use of project finance to close Zambia’s infrastructure gap.

7.Theore cal and Conceptual Frameworks

In this study, securing financing for renewable energy projects have been identified to be a
dependant variable while the independent research variable are those conditions which are
required to be met in order for the lenders and financial institutions to provide financing of the
projects. Going by the literature review, a number of conditions have been identified as the
critical variables which need to be addressed for such project to meet the criteria to secure
funding. The following are conditions; Power Purchase Agreements, government permits and
guarantees for debt, levelized cost of electricity and secure payment arrangements.

7.1 Sources of data

The data is expected to be collected from through respondents from various similar projects in
the country and other stakeholders who are going to be interviewed such as the CEC, Illute
Solar PV Project, Zambia Development Agency (ZDA), Department of Energy (DOE),
ZESCO, Energy Regulation Board (ERB), Rural Electrification Authority (REA), Office for
Promoting Private Power Investment (OPPPI) and also other government agencies.

7.2 Sampling frame

The study is envisaged to collect data from the CEC, Lute Solar PV, ZDA, DOE and lending
institutions for the primary data. As for the secondary data, this will be limited to the Solar PV
projects within Zambia.

7.3 Sample size

The projected sample space for the primary data is expected to be 6 institutions for the primary
data and 3 secondary data.
7.4 Reliability & validity
To guarantee the reliability of the of the data, the respondents that will be engaged will be from
the institutions who are currently involved in such projects within Zambia. These will include
the project developers, financial advisors, experts’ government and experts from the national
electricity utility company and from other independent power producers.

8. Research methods
There are several research methods that have been proposed for conducting a research and for
this case the exploratory study was deemed to be favourable as it is based on a pragmatic
research design. Exploratory research (qualitative research) is employed to develop initial ideas
and insights and to provide direction for any further research needed (Churchill & Iacobucci,
2005; Aakeret. Al. 2007). An exploratory study is essential when a researcher needs to identify
problems, defines the problem more precisely and identifies any specific objectives or data
requirements to be addressed through additional research (Kinnear & Taylor, 1996). The
exploratory research is highly flexible, unstructured and qualitative (Aaker et. al. 2007).
Exploratory research is when a study is undertaken with the objective either to explore an area
where little is known or to investigate the possibilities of undertaking a particular research
study. This philosophy has been adopted because of its flexibility as it can be used to generate
both qualitative and quantitative data when either conducting inductive or deductive analysis
of the research.

Based on the data that expected to be collected, one can decide to use inductive approach to
explain the patterns in the data that would be collected during the course of the study. The
research will also involve collection of sample data from similar projects through the project
documents as well as through interviews. This will generate the quantitative data which can be
categorised in various groups and generate the statistics. “Quantitative research involves a
systematic investigation of a phenomenon through the gathering of numerical data and the
utilization of statistical or computational tools and techniques. Quantitative research measures
various characteristics and applies to phenomena that can be described using quantitative
values. Quantitative methods mainly identify patterns and averages, predict outcomes, test
causal relationships, and generalize results to a group or population” (Margam Madhusudhan
2023). According to Kothari (2004, p.4), “quantitative techniques provide the decision-maker
with a systematic and powerful means of analysis and help explore policies for achieving
predetermined goals”.
The data that will be collected during the research project will include among others, project
development stage, project cost estimates, modes of the project development and also the
estimated tariffs for the project. The study will also seek to obtain the data related to conditions
for financing, information sharing on the unlimited risks, statutory or government guarantees
of for the debt/loan repayments, levelized cost of electricity tariff, offtaker and payment
arrangements, i.e. provision of escrow or line of credit or Letter of credit, payment security,
etc.

The research may explore a number of strategies during the analysis of the data and the
interviews may be semi structured during the collection of data. This is because the sample size
is likely to be small. “Studies, particularly analytical studies, may provide more truthful results
with a small sample because intensive efforts can be made to control all the confounders,
wherever they operate, and sophisticated equipment can be used to obtain more accurate data.”
(Indrayan A, Mishra A, 2021).

The research will employ the mixed research choices in the collecting and analysis of the data,
this simply because the research will have both an analytical and non-analytical data.

As it has been stated earlier that the research study will involve the qualitative and quantitative
approach, the mixed methods research choice will be used for collecting and analysis of the
data (Saunders, Lewis &Thornhill, 2016).
9. References
1. Mechanisms and challenges in financing renewable energy projects in sub-Saharan Africa
https://www.researchgate.net/publication/349343457_Mechanisms_and_challenges_in_financ
ing_renewable_energy_projects_in_sub-Saharan_Africa_a_Ghanaian_perspective
2. Credit Enhancement and Performance of Hydroelectric Energy Projects in Kenya
https://www.academia.edu/48166561/Credit_Enhancement_and_Performance_of_Hydroelect
ric_Energy_Projects_in_Kenya?uc-g-sw=41529337
3. Agence Franaise De Development - Strengthening The Electricity Distribution Network In
Zambia
https://www.afd.fr/en/carte-des-projets/strengthening-electricity-distribution-network-
zambia#:~:text=Only%2022%25%20of%20the%20Zambian,provided%20at%20very%20co
mpetitive%20rates.
4. 3rd International Conference on Development and Investment in Infrastructure Strategies for
Africa
file:///C:/Users/user/Downloads/DII-2016PROCEEDINGS.pdf
5. The Challenges Faced by Private Project Developers in Securing Financing for Hydropower
Projects in Zambia
file:///C:/Users/user/Downloads/The_Challenges_Faced_by_Private_Project%20(2).pdf
6. Quantitative Research Approach and its Applications in Library and Information Science
Research
file:///C:/Users/user/Downloads/Quantitative_Research_Approach_and_its_Application.pdf

7. The importance of small samples in medical research

file:///C:/Users/user/Downloads/JPGMSmall_n.pdf
10. Work Schedule
Task Description Month 1 Month 2 Month 3 Month 4 Month 5 Month 6
Step 1 Preparation of Research Proposal
Step 2: Defining Research Goals
Step 3: Literature Review Phase
Step 4: Methodology Design Phase
Step 5: Data Collection Phase
Step 6: Data Analysis Phase
Step 7: Results Compilation Phase
Step 8: Drafting Proposal Phase
Step 9: Peer Review Phase
Step 10: Final Edits
Step 11: Proposal Submission Milestone