How to make climate finance a game-changer for the off-grid solar industry
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How to make climate finance a game-changer for the off-grid solar industry
Feb 09, 2022
Sebastien Duquet, Laura Sundblad, Christine Eibs Singer, and Roan Borst.
As part of the Global Off-grid Solar Finance Summit in December 2021, GOGLA organised a virtual boardroom to discuss the potential for climate finance in the off-grid sector, and how we can unlock this capital. The boardroom convened leading off-grid energy investors, lenders, enterprises, and development partners to share perspectives and experiences. This blog presents a write-up of this boardroom with its main conclusions and action points for the sector.
Off-grid solar energy is a powerful tool to deliver on climate adaptation, resilience, and mitigation goals, and directly benefits some of the world’s most climate-vulnerable people. The sector has already brought clean and reliable electricity to an estimated 420 million people whilst improving their health, food security, quality of life, and incomes.
Yet, the flow of capital to the sector has stalled at about $300 million per year, despite growing needs and the emergence of new companies and business models. Climate finance has been notably absent in the sector’s first decade of investment. The lack of sufficient, predictable financing hampers the sector’s capacity to deliver impact for people who urgently need energy.
The off-grid solar sector gained unprecedented prominence on the climate agenda in 2021; it is recognised as a critical element of achieving an inclusive and just energy transition. It also secured the first big investment from a major financial institution dedicated to fighting climate change in what could be a game-changer for the industry. There is real optimism that the off-grid solar sector can tap into the vast sums of climate finance being mobilised to support climate goals, but to do this it needs to up its game and effectively demonstrate the solar sector’s contributions to climate action.
Off-grid solar sector is low-carbon and boosts adaptation and resilience
A recent study shows that achieving universal electricity access with decentralised renewable energy technologies would avoid 268 million tons of carbon dioxide emissions over the next decade compared to a high-carbon business as usual scenario . This is approximately equivalent to the annual emissions of 68 coal-fired power plants. While the scale of mitigation from the off-grid solar sector is less than from large-scale power sector projects, off-grid solar products provide significant indoor air pollution reduction benefits and prevent a lock-in to fossil fuel-based electricity services.
The off-grid solar sector also builds the adaptive capacity and boosts resilience for climate-vulnerable people in a variety of ways, including:
diversifying jobs and livelihoods.
enhancing food and water security.
providing access to information and digital services.
boosting incomes, savings, and productivity for households and enterprises.
supporting improved health for households and communities.
However, the sector still needs to further demonstrate these benefits, with specific actions including the development of a framework to define and measure these impacts and capturing the data and evidence that will unlock further climate finance. This is not easy; adaptation and resilience are notoriously hard to measure given their multi-faceted and highly localised nature, even though the ever-increasing qualitative evidence provides high confidence of these positive impacts.
The virtual boardroom panelists concurred that the sector needs to better communicate these benefits to climate-aligned investors - public and private - to ensure the off-grid solar sector is front of mind in their investment strategies and decisions. This complements the development impact narrative that the sector is well known for, contributing as it does to SDG goals 2, 3, 4, 5, 6, 7 8, and 13.
The need for speed
We need to act fast; low-income countries are exposed to more climate change hazards and are less able to respond and recover. Climate change will exacerbate poverty and inequality leading to increased loss and damage if investments are not made in resilience .
Access to off-grid solar products can help some of the most climate-vulnerable people in the world adapt and become more resilient to the inevitable challenges ahead.
Energy access has received an unprecedented level of attention and commitments at COP26, the UN High-Level Dialogue, and is on the agenda for governments and public and private investors.
Climate finance is here, and the potential is huge
Mitigation finance reached $571 billion and adaptation finance $46 billion in 2019/2020, with the vast majority going to developed economies and middle-income countries . COP26 heard the climate and investment community promise greater equity for developing countries and parity for adaptation funding. Some key climate investors have recognised the opportunity of the off-grid solar sector and finance is starting to flow.
Another landmark facility from Standard Bank Group, Citi, CDC Group, and Norfund provides a $75 million equivalent Kenya shillings denominated loan for Greenlight Planet Kenya, that tracks the cumulative avoidance of CO2 emissions. It is one of the first sustainability-linked deals in Kenya, and one of the largest syndicated sustainable finance deals in the region to be provided in local currency .
Blended finance instruments led by specialist fund managers offer great potential for volume, as experienced industry players can aggregate demand and raise larger funds, as compared to the small ticket sizes that characterise the needs of most companies in this sector. Development finance institutions and donor support to the concessional parts of these instruments is key to mobilizing the private capital.
Most large commercial investors view the electricity access space in its entirety and are looking for opportunities across Solar Home Systems, productive use, mini-grids, and Commercial & Industrial (C&I) solar equipment. Greater collaboration across these segments is needed to help unlock the scale needed for these investors.
The same old challenges also apply to climate finance
There is optimism that climate finance can drive a step-change in sector growth. However, many barriers to investment in the industry exist regardless of the finance-lens, including a limited pipeline, lack of local currency financing, small ticket size of investments, a lender and borrower mismatch, and country risk. The sector is not well known by mainstream private institutional investors that are typically dominating the climate finance space. Oftentimes, they are looking for investment opportunities that offer higher liquidity and return than what the sector can offer at the moment whilst maintaining a consistent level of climate impact and risk.
To reach larger tickets and investors, the sector needs to focus both on scaling existing companies and vehicles, as well as continuous innovation and enhanced performance. Market leaders have proven that there are several viable business models and that the technology and tools exist to manage risk and deliver impact; the sector needs to replicate and scale this good practice in many more countries and companies.
Off-grid solar: the climate, development, and investment opportunity
An investment in the off-grid solar sector provides rapid and direct impact at a local level and achieves both climate change mitigation and adaptation goals. As such, achieving universal access to electricity represents a rare and special opportunity for climate-aligned investors.
We call on off-grid solar companies and fund managers to communicate louder about the climate impacts and benefits of the sector, and for investors and donors to support this pioneering sector and prioritise off-grid solar in climate-aligned strategy and targets.
The event was organised by GOGLA, and supported by GET.invest, a European programme supported by the European Union, Germany, Sweden, the Netherlands, and Austria.
The authors Sebastien Duquet of SunFunder, Laura Sundblad of Power Africa Off-Grid Project, Roan Borst of GOGLA, and Christine Eibs Singer, a renowned energy access advocate were coordinating the Virtual Boardroom C: Scaling the sector through climate finance