• SunFunder

Catalyzing capital for energy access and climate change

In partnership with Shell New Energies, SunFunder convened a roundtable on 8 May in London on the financing needs for scaling up the solar energy access sector and achieving lasting impact. The event included participants from a range of companies, funds, foundations, development finance institutions (DFIs) and international banks.

The discussion determined that the long-term future of the sector relies on its ability to attract commercial investment. However, to reach that point, foundations, DFIs and financial intermediaries all have distinct roles to play, and must collaborate coherently. Meanwhile, investors must support solar companies to achieve profitability, for instance by promoting more sustainable growth.

While total investment in the industry may have reached over $1.7bn, more capital is needed to reach over 1 billion people who lack access to clean energy and mitigate the effects of climate change.

We are sharing some key points from the roundtable to prompt further discussion and encourage informed investment into the sector.

Early-stage equity and catalytic capital is urgently needed.

While more of all forms of capital are required for the energy access sector to reach its full potential, the industry is still nascent and urgently needs more risk-tolerant equity and catalytic capital to progress. Private capital will be critical for solar energy access to scale, but attracting it will require more companies building more track record.

Financial intermediaries are best placed to use catalytic capital in structures that provide downstream financing to solar companies. The immediate need of intermediary funds is risk capital for blended finance structures that can offer commercially-oriented investors an entry point into the market.

Increasing the availability of these two types of financing through intermediaries will seed and grow solar companies in emerging markets while they prove their viability.

It is necessary for foundations to increase their participation.

Foundations can play a key role in providing catalytic capital. However, the community of philanthropic organizations involved in the energy access sector needs to be broadened, and encouraged to deploy their funds more creatively.

Many foundations are still unaware of the needs and opportunities in the energy access sector. They can also be hindered by inappropriate requirements, such as restrictions carried over from other fields or high demands on program-related investments. Participants agreed that education initiatives, including on the role of financial intermediaries, can help broaden the pool of foundation capital.

The threat of market distortion.

There is now significantly more concessional debt available, especially to a core of more established off-grid solar companies. In 2018, nearly half the $225m of debt invested in the sector came from DFI and other government sources.

Market distortion poses major challenges for the sector, with some DFIs and impact investors offering concessional terms that undercut more commercially-oriented lenders. This risks delaying companies’ financial sustainability and crowding out private capital.

DFIs have a unique toolkit to support the industry and there are alternative roles where they could add more value, for instance by helping to mitigate currency risk or providing early-stage equity. They can also offer capacity building and technical assistance to improve the sector’s long-term bankability.

Solar companies need to focus on profitability.

The key driver for attracting commercial investors is profitability – which off-grid solar companies have sometimes been slow to deliver. In some cases they have faced investor pressure to grow without enough attention on managing that growth, for instance by having robust systems in place. Investors must align increased amounts of capital with expectations that balance growth and sustainability to successfully expand operations.

We are actively engaging with stakeholders across the sector to help deliver these solutions and we welcome your participation in this conversation.