The transformation of the global energy system is happening but still not fast enough to achieve the aims of the UN Sustainable Development Goals or materially reduce the risk of catastrophic climate change. The costs of renewable energy are tumbling, making them competitive, or more than competitive, with traditional energy sources. Fossil fuels are an increasingly risky investment, and our reliance on unsustainable, polluting power plants is lessening by the day. This decentralisation of energy generation is hugely fertile ground for innovation, but energetic enterprises can only bring their ideas to scale and impact if they receive adequate, timely and appropriate funding. The challenge of catalysing new funding is most acutely felt in the “access to energy sector” where off-grid sustainable energy solutions such as mini-grids and solar home systems have game-changing potential for the lives of over 1bn people in the developing world. This most deserving and transformative of emerging sectors currently attracts just 1% of trackable energy finance.
This discrepancy needs to be addressed – and urgently. At the annual Ashden Awards, which takes place in London on June 14th, twenty finalists from the UK and developing countries, are hoping that their sustainable energy initiatives will be merited with a globally recognised and hugely prestigious award. They have been shortlisted from hundreds of entries from right across the world, because they deliver significant carbon savings and other demonstrable benefits to the environment such as cleaner air, they work towards financial sustainability and they have the capacity to reach market-shifting scale.
None of these finalists have made it to this point without experiencing the multiple twists and turns of a complex financing journey. They all fall into the category of ‘specialist green energy companies’ – the asset class that faces the highest hurdles when it comes to raising investment.
Organisations that are actively promoting environmental and climate finance are committed to creating greater awareness of the significant social, economic and environmental benefits of financing energy access. This is particularly so in “frontier markets” (regions and countries with the highest rates of energy poverty), where funding from local banks is hard to find, costs of capital are high and, not to mention unfavourable or non-existent policy environments.The big question for all those involved in raising levels of finance for energy access is how it can be accelerated for exponential scaling up. There is currently a $25.6bn annual deficit in reaching the target of universal access to sustainable energy (SDG7) by 2030. Where there is funding, nearly two thirds of it is going to a tiny number of countries. In 2014, just 33% of energy commitments went to 13 sub-Saharan countries, and this accounts for over half of the global population living without reliable access to electricity.
The hot-topic is whether “blended finance”, a mix of philanthropic or donor finance and private capital, may be the catalyst for liquidity for the sector. We are seeing an increasing number of development finance institutions and government-backed agencies together with family foundations, prepared to see their money being used to lower the risk for commercial capital. Blended finance can guarantee early losses, easing the burden on the private sector.
At a local level, different funding approaches are finding favour. Co-signed loans between SME businesses and investors allow the local business to secure local capital, but this method also minimises local losses. Again, the risk of first loss is guaranteed, and all parties get a seat at the table. We see brave pioneer energy enterprises experimenting with all sorts of strategies such as blended capital, co-signed loans, bridge financing, corporate partnerships and local currency deals but to achieve global sustainable energy targets, a more supportive ecosystem of finance will be required that takes the sector out of the need to work-around or experiment and move to more established modes.
Amongst the Ashden finalists this year, there are some great examples. CREDA is delivering energy security through solar power to hundreds of healthcare centres in India thanks to a cross-agency finance collaboration; Angaza, based in San Francisco and operating in Nairobi, has developed a pay-as-you-go platform to provide affordable clean-energy products to off-grid customers and is being funded primarily through corporate investment; while Energy Local, a UK based community interest company, works through Energy Local Clubs which are funded through modest grants.
Money is flowing to sustainable energy access projects, but the fact is that it’s not enough. We have to dramatically bend the curve towards lowering emissions now and create an energy system where everyone, irrespective of geography has the right and means to power their lives sustainably. There is huge opportunity here for investors, but this might require a level of rapid experimentation and innovation in finance commensurate with this global challenge.
Giles Bristow is Director of Programmes at Ashden.