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4 Insights on Unlocking Finance for Clean Energy Access in Africa

January heralds the start of not just a new year, but a new decade: the U.N. Decade of Sustainable Energy for All. In declaring the Decade, the U.N. has urged its members to help “make universal access to sustainable modern energy services a priority.”

One of the regions where universal access to clean energy remains a pressing challenge is sub-Saharan Africa, where roughly 590 million people lack access to electricity. Social entrepreneurs could be part of the solution—and a recent meeting revealed some insights that could help African communities get the clean power they need.

Clean Energy Entrepreneurs in Africa

Across sub-Saharan Africa, social entrepreneurs are starting to develop clean energy solutions like solar lanterns—which replace dirty kerosene lamps—and mini-grids powered by clean energy sources. These innovations are low-cost, environmentally friendly, and are capable of delivering enough electricity for microenterprises like hairdressers, mobile phone charging centers, and more.

But while these social entrepreneurs are making inroads—clean lighting alone in Africa has gone from sales of 18,000 units in 2009 to nearly 1.4 million units by the end of 2012--there are still big finance bottlenecks keeping the sector from reaching its full potential. Late last year, together with the DOEN Foundation, WRI gathered East Africa-focused social entrepreneurs and investors in Uganda to identify potential solutions to the finance challenges facing the distributed clean energy sector. Here are a few of the key lessons that emerged from the workshop:

1. Lack of working capital is holding back clean energy entrepreneurs.

The biggest challenge cited by most of the social enterprises was a lack of working capital. While most had been able to put together enough initial funding to develop pilot projects that demonstrate the viability of their business models, securing the financing to scale up operations has proven a challenge. Participants noted that commercial loans in East Africa often come with interest rates above 20 percent, with collateral requirements up to 150 percent of the value of the loan. These requirements are not feasible for enterprises looking to rapidly scale up the delivery of energy services.

Supporting capacity development in local financial institutions to understand the distributed energy sector could help foster more reasonable finance terms, especially as familiarity with the distributed clean energy sector grows. Another tool might be subsidized loans, which can support more rapid growth of enterprises. Grameen Shakti, for example, is a rural-based renewable energy company in Bangladesh that was able to provide loans to customers at preferential rates through loan subsidies provided by the Bangladesh Infrastructure Development Company. These loan subsidies were in turn enabled by multilateral financial institutions like the World Bank and Asian Development Bank, as well as bilateral donors, highlighting the role for international finance. Subsidized loans have spurred the installation of nearly 2.7 million solar home systems in Bangladesh.

2. The sector needs a jumpstart, the same way microfinance did.

Innovative business models— including a variety of “pay as you go” models that allow users to pay for electricity as a service for the amount they use, rather than paying for a renewable energy system upfront — are helping to mitigate risks to consumers and investors. These types of arranges help take the burden of technology failure and maintenance off of the consumer while mitigating risks of non-payment for investors. However, there is still room for innovative financial arrangements to help reduce the level of risk perceived by investors.

Workshop participants pointed to the development of the microfinance sector as an instructive example of what’s needed for the distributed clean energy sector. While microfinance has now achieved considerable scale in many emerging and developing markets, development finance institutions provided an important bridge for the sector. For example, the Inter-American Investment Corporation supported BancoSol, an early microfinance institution, when commercial funding for microfinance was still scarce. In another example, the Overseas Private Investment Corporation (OPIC) played a catalytic role in the sector by providing risk guarantees in an early securities transaction in 2004. This sort of assistance helped microfinance develop a track record that was robust enough to attract commercial investment. Participants made clear that there is a role for development finance in this sector, and educating development finance institutions about the opportunities associated with clean energy entrepreneurs should be a sector-wide priority.

3. It’s not just how much money, but how it flows.

Subsidized loans are just one potential avenue to unlock working capital for distributed clean energy. Using international finance or donor funds to take a “first loss” position, as described in the OPIC example above, could be another effective option. Grants, meanwhile, can provide support for activities that pave the way for clean energy enterprise, like targeted assessments of where these technologies are needed most or the development of new policies that enable distributed energy.

But money can also be used in ways that are counterproductive. Workshop participants pointed out that when not well-targeted, grants can distort the market and undermine the financial sustainability of the sector. For example, some participants shared experiences where donors had distributed free solar home systems in an area they were operating, undercutting their business. Then, when the donor-provided systems needed repair or replacement, there was no ongoing donor support. Plus, existing business that had been operating in the region were pushed out by the donor’s free products.

4. There are existing channels through which money could flow.

Part of the challenge for many funders in an arena as disparate as the distributed clean energy sector is identifying the right place to put their money. Often, development finance institutions, bilateral donors, and philanthropic funders feel the need to start from scratch in identifying enterprises that could deliver high value for money. Workshop participants suggested that existing vehicles – in particular, impact funds with a focus on distributed clean energy –could help channel finance. These funds already have pipelines of projects on which they have conducted due diligence, and participants suggested investments from international public finance sources could have the additional benefit of “crowding in” other investors.

Ultimately, the group concluded that there is a potentially important role for international finance to play in unlocking rapid growth for the distributed clean energy sector—particularly in East Africa, where domestic financing requirements have proven challenging to enterprises. With the growing number of international initiatives emphasizing clean energy access – including the global Sustainable Energy for All initiative – perhaps more opportunities to connect the financing dots will emerge. Only then can clean energy entrepreneurs make a real dent in providing sustainable power to Africa’s communities.

Contact Alex Doukas to obtain the detailed report that summarizes the outcomes of the workshop on financing clean energy access in Africa.

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