External financing and solar energy investment growth in Kenya: empirical evidence from a vector error correction model

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Original abstract

Kenya's renewable energy agenda has increasingly identified solar power as a cornerstone for addressing growing electricity demand and attaining universal energy access by 2030. Yet the trajectory and sustainability of the solar sector depend substantially on external financial inflows, notably external loans and Official Development Assistance (ODA). This study investigates the nexus between external loans, ODA, and solar energy investment expansion in Kenya, drawing on time-series data spanning 2010 to 2024. The research is grounded in three theoretical lenses—Neoclassical Growth Theory, Financial Market Theory of Development, and Dutch Disease Theory—and adopts a quantitative approach using secondary data obtained from the World Bank, International Monetary Fund, Kenya National Bureau of Statistics, and the International Renewable Energy Agency. The analytical strategy encompasses descriptive statistics, unit root testing, Johansen cointegration analysis, a Vector Error Correction Model (VECM), Instrumental Variable Quantile Regression (IVQR), and System Generalized Method of Moments (GMM), with diagnostic checks conducted to confirm model validity. The results show that all variables are integrated of order one, I(1), and that a stable long-run equilibrium relationship exists between external financing and solar energy investment growth. In the long run, both external loans (coefficient: 0.41) and ODA (coefficient: 0.54) exert positive effects on solar investment, with ODA demonstrating a relatively larger contribution. These relationships remain statistically meaningful in the short run, while the error correction term (-0.58) indicates that roughly 58% of short-term deviations from equilibrium are adjusted within a one-year period. The IVQR estimates further reveal that the influence of external financing intensifies at higher quantiles of solar investment growth, pointing to absorptive capacity as a critical conditioning factor. Diagnostic evaluations confirm that the VECM satisfies assumptions of normality, homoscedasticity, absence of serial correlation, and overall stability. Based on these findings, the study concludes that both external loans and ODA are significant drivers of solar energy investment growth in Kenya. It recommends that the Government of Kenya strengthen transparency and accountability mechanisms in the deployment of external loans and ODA, bolster institutional capacity for effective project execution, ensure donor interventions are coherent with national energy priorities, and adopt prudent debt management frameworks to safeguard long-term energy sector sustainability.

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