The Case for Financing Distributed Renewable Energy in Emerging Markets
The Case for Financing Distributed Renewable Energy in Emerging Markets
by Emily McAteer, Co-founder/CEO of Odyssey Energy Solutions
Trillions of dollars of investment will go into energy infrastructure in the coming decades. A significant share of this money will be targeted at closing energy deficits in emerging markets, where 600 million people still live without any access to electricity and millions more businesses and households have unreliable grid power. In Nigeria, for example, there were 4,600 hours of grid outages in 2018 – more than half of the entire year. Nigerians are spending $22 billion annually on diesel to supplement unreliable grid power.
When I first started working in distributed solar in emerging markets over a decade ago, I spent a lot of my time arguing for the merits of developing decentralized, small-scale power over grid extension. Now, distributed renewable energy (DRE) is leapfrogging centralized electricity systems. DRE is, unequivocally, a critical path for low-carbon development in emerging markets.
But not nearly enough investment is going into DRE projects to realize the sector’s potential. For example, as our partners at Crossboundary Energy Access note in their report on mini-grid financing, less than 0.1% of the public and private capital needed for solar mini-grids by 2030 has been deployed. And of the little money going into DRE projects, most of it is coming from project developers’ balance sheets. In order to scale DRE deployment in emerging markets, it is critical to unlock project finance. Distributed energy projects are essential infrastructure and must be financed with the type of capital that is designed for high-capex, long-term assets.
So what will it take to get project finance flowing into these markets? At Odyssey, we’ve been relentlessly tackling this challenge. Our investment and asset management platform targets three key barriers to unlocking project financing for DRE: access, aggregation, and data.
Access: The DRE sector in emerging markets is fragmented, with just a few large project developers and a long tail of small- or medium-sized businesses developing a variety of commercial, industrial, and community distributed solar systems. The majority of these project developers lack the network and tools to connect with international private capital markets. Infrastructure funds moving into this market also face challenges in navigating them efficiently to develop robust project pipelines from credible developers.
Aggregation: Project finance requires making investments at scale to overcome the significant fixed costs of complex asset-based transactions (e.g. setting up SPVs, long-term contracts, etc). Putting $50M to work on a large portfolio of small DRE assets, however, is a very different paradigm than deploying that capital into a single large utility-scale project. For project finance to move efficiently into the sector, DRE assets must be standardized and aggregated. Furthermore, there must be transparency in the aggregation process to ensure lenders have full visibility into the underlying assets across a large portfolio.
Data: Finally, continuing to build strong data sets on the DRE market is essential to unlocking capital for this nascent sector. The lack of long-term operating data hinders investors’ ability to assess and price risk when underwriting projects, and enforce contracts or assess portfolio performance post-investment. Continuing to collect, standardize, and make sector data accessible is critical to unlocking project finance for the DRE market.
At Odyssey we’ve been working with leading financiers to develop the technology, frameworks, and approaches that will drive private capital in the DRE sector. I asked our partners at Société Générale to share thoughts on what it will take to achieve this goal at scale. Marie-Aimée Boury, Head of Impact Based Finance at Société Générale, shared her thoughts on their approach:
Decentralized renewable energy systems are undoubtedly part of the solution to electrify the over 600 million people that currently don’t have access to power in Africa. As this new asset class is rather small scale, dispersed and perceived riskier, banks need to adapt and develop new and innovative financing solutions to support the accessibility to energy. Societe General is leveraging its strong presence in Africa and expertise in project and asset finance to structure tailor-made portfolio transactions that are attractive to private investors and commercial banks.
The potential for distributed renewables to close energy deficits in emerging markets cannot be understated. Let’s move faster to bring the trillions of infrastructure investment required for the sector to meet its potential.
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Whilst this is a priority for energy access, it isn't a strong financial 'pull' for climate capital and I don't think it'll get the traction that it deserves. What limited climate capital we do have will remain in established markets and be focused on the transition process. Micro-grids retain the inherent difficult of 'who pays ?', which has plagued roll-out as well as long-term maintenance in places like India.