Investing in a large-scale wind farm is a better guarantee of profits than multiple, small, off-grid renewables projects but without the latter, argues a recent report, the sustainable development goal of low-carbon energy access for all will never be met.
It is estimated (pdf) close to $50bn a year is needed to achieve universal access to electricity and clean cooking facilities by 2030. Yet traditional forms of climate finance are not working.
The result, according to the report (pdf) from the International Institute for Environment and Development (IIED), is major bottlenecks in funding for many small-scale renewable energy services such as solar home systems, mini-grids and clean cooking facilities.
For the multilateral lenders and UN agencies which control the bulk of climate finance, decentralised projects are “just not as bankable”, says Neha Rai, a senior researcher at IIED and co-author of the report.
But the idea that off-grid projects are not economically viable is misplaced, argues Edward Hanrahan, CEO of climate development finance firm ClimateCare. The delivery of a domestic solar project, for example, also provides an opportunity to sell other low-carbon consumer products to people that now have energy access.
Take Pamoja Life, one of ClimateCare’s investment projects in east Africa. It’s difficult to make the sale of low-energy, efficient cookstoves economically attractive to very poor people, so Pamoja Life provides a distribution line for affordable, off-grid solar lighting and other low-carbon consumer products, alongside affordable cookstoves.
This approach helps spread the cost over a number of goods, says Hanrahan: “It also wraps in non-climate benefits too. We need to think about climate finance as being not just about climate. Something like Pamoja Life is delivering improved development and health impacts too.”
ClimateCare has used this multiple impact argument with investors to give single projects several outcomes. A government agency might be interested in funding a household solar initiative for its impact on emissions reduction, for example, while a private corporation might put in money because of the extra study hours that children gain.
“As a result you’ve got a couple of uncorrelated revenue streams, which improves the resilience of the project and makes it less risky for commercial investors,” says Hanrahan. “You can also have income streams in multiple currencies, thus reducing currency risk.”
Currency volatility is one of the biggest risks for decentralised energy projects, says Hanrahan. Small scale clean-energy companies often take foreign-currency loans to finance the bulk purchase of renewable equipment. They, in turn, sell on locally and the mismatch between the two currencies imposes a potential stress on small businesses and makes planning more difficult.
Major funders can help make sure more off-grid projects are successful, argues Rai, through a greater willingness to make grants rather than just loans.
At present, climate financiers overwhelmingly opt for concessional loans (loans granted to low-income countries at below market interest rates) for utility-scale projects: a low-risk way of assuring short-term returns on their investments. Yet grants can kick-start decentralised projects, Rai says, helping create an initial local market for clean energy products and services. After that, the logic runs, private investment should begin to flow.
Even if carbon finance can’t be made to work, all is not lost for off-grid renewable energy and the SDG target. Indian solar firm Frontier Markets, for example, is working with a number of philanthropic groups to create a low-interest loan which gives them the capital to access finance from local banks and in turn make loans to the people and businesses selling their solar products.
“We have also partnered with non-profits in Rajasthan that have been accessing local government grants and development grants to facilitate rotational loans [which are paid back into a fund to be loaned out again], which enable low-income women to buy our solar products,” says Ajaita Shah, chief executive of Frontier Markets.
Crowdfunding is another increasingly popular financing strategy for grassroots clean energy, although not a particularly certain one. The WindAid Institute, a US-registered charity working for the past decade to bring decentralised wind-generated electricity to remote communities in Peru, relies primarily on income from fees paid by foreign volunteers, plus ad hoc donations and grants. The charity recently ran a $35,000 Kickstarter campaign to complete the construction of a local training facility.
Only about two-thirds of the requested amount was raised. “With Kickstarter, the all or nothing rule meant we got nothing,” says WindAid’s spokesperson Beth Brown. “But many backers have offered to convert to a donation so we already have enough funds to do the next stage of the build later this month.”
