Access to Clean Energy: An Innovative Financing Modality

Energy poverty is one of the most important but least discussed issues. It is condemning billions of people to darkness and to missed opportunities for education and prosperity. One in five people lacks access to electricity and 3 billion rely on wood^[1], coal or charcoal for cooking. Energy poverty is not just about the lack of energy, it cuts across – and undermines – all aspects of development. 

To turn on the lights in households around the world, successful examples of clean energy and energy efficient technology must be scaled up. This will require innovation that can spread through the developing world, where energy demand is burgeoning. With innovation come opportunities for development – and for business.

Energy poverty is a problem of technology, of infrastructure, of economics, of culture, and of politics – and it impacts over a billion people in the Asia-Pacific region alone.

Solving this problem requires solutions from the top-down and the bottom-up – everything from global finance to village-level technologies.

In the last few years, technological innovation has significantly reduced the cost of renewable energy technologies like solar panels, cooking energy solutions and other technologies, but renewable energy still needs serious financial supports to compete with conventional energy.

As of now, there are only limited options of financial mechanisms, which have been practicing widely by different actors. These mechanisms are primarily focused on grant, ODA funding, micro-credits, loans, which are merely considered as conventional funding windows. Indeed, based on the contemporary situation of providing access to energy at the bottom of the pyramid, it is realized that the conventional financial mechanisms alone may not be sufficient to fulfill the demands of energy. Perhaps, we need to think ‘out of the box’ and explore innovative financing streams or mechanism which could add impetus to the cause of providing access to energy for ALL.

An innovation on this front could be the carbon bundling mechanism. The key concept of the Carbon Bundling is that revenues from renewable energy carbon offsets can serve a risk-mitigating function for new renewable energy (RE) lending by microfinance institutions (MFIs). In this scheme, a financial institution would provide capital for a revolving fund set-up with a commercial bank or wholesale lending institution. This funding would be used to stimulate MFI lending for renewable energy technologies that are eligible for carbon trading.

Income from these carbon trades triggers three things: (1) provides much needed upfront capital (2) motivates MFIs to provide loans for RE by covering their default risk and (3) brings revolving liquidity into the system. Furthermore, income from carbon trades can support extended after-sales service and funding of more RE projects.

The value to MFIs and the attraction of their participation is available capital and increased client volume from low-risk loans. The benefit to participating financial institutions would be a share of carbon income plus the added client base of participating MFIs. Finally, the possibility for carbon trading firms to access the renewable energy market would bring additional private sector weight to the initiative.

Since this is a revolving fund, once the loan is paid back to the financial institution, its initial investment can go directly to start-up the same type of carbon bundling programme in other countries.

How It Works [Figure/1].

The carbon bundling business model can work on a system of lending spreads that are backstopped by carbon revenue.

1. The financial institution provides a soft loan of €1.5 million a year for a period of 3 years (total €4.5 million) —through a commercial bank — which funds MFIs to finance 5,000 RETs a year (each entity’s lending rate is shown below). The loans are paid back over a 3-year period. This means that €300 is available as loan per RET which in most case would require government subsidy as well (also refer to footnote 2).  
2. Carbon revenue would begin to be available at end of Year 2, through a carbon project developer which makes their money in the trade. It is assumed that the market price of carbon is 10 Euro per ton of which 5 Euro goes back in the project and 5 Euro is for the carbon project developer (to be negotiated).
3. Conservatively assuming every RET generates 1 tonnes carbon credits per year, this would generate €25,000 at the end of Year 2, increasing to €75,000 (post-project at end of Year 4) when all the units are operational
4. With MFIs facing a potential default rate among RET purchasers (borrowers) of 2%, a portion of carbon revenue is set aside as MFI insurance = €30,000 per year or, potentially, as incentive
5. A portion of the carbon revenue will go to RET purchasers as an incentive to participate or be developed as after-sales servicing (e.g.,  €3 per purchaser per year)
6. Any remaining carbon revenue will be channelled back into the programme
7. Regulation is provided by the Government of Nepal’s Alternative Energy Promotion Centre (which maintains a renewable energy credit facility)
8. Rural Microfinance Development Centre, a wholesale lending institution in microfinance, or a commercial bank, which focuses on energy financing, could be responsible for fund channeling.

Role of SNV

SNV would identify and align commercial partners (MFIs, commercial bank, carbon trading firm), develop and run trainings and workshops for MFIs and directly manage activities related to Microfinance, Renewable Energy and Carbon—especially with respect to valuations, assets and technical trends.

Note: Grateful to my esteemed colleague Tom Krader, who supported to give shape to this concept.