Lack of small-scale 'bankability' harming clean energy progress, finds IIED white paper


Traditional forms of climate financing are unsuitable for the transition required to ensure clean, low-cost and low-carbon energy access for all, argues a new white paper published by the International Institute for Environment and Development (IIED).

The report’s chief argument is that, while investing in projects such as large-scale wind farms offers an undeniably more attractive guarantee of profits, a lack of similar funds for more decentralized, small-scale projects undermines clean energy progress globally.

The co-author of the report and senior IIED researcher Neha Rai says that multilateral lenders and UN agencies currently in control of climate finance purse-strings recognize that decentralized energy projects such as solar home systems, mini-grids and clean-power cooking facilities are "just not as bankable" as more typical investment opportunities.

However, the report adds, this idea that funding small-scale projects does not deliver viable returns is misplaced. Funding a small domestic solar system, for example, ensures access to energy that in turn gives consumers the opportunity to become more self-reliant, which invariably makes people better off and more able to purchase other low-carbon consumer goods.

Edward Hanrahan, CEO of climate development finance company ClimateCare argues that very poor people become more viable as consumers when provided with off-grid solar lighting, for example – a simple solution that plants the seed for further consumption and awareness of low-carbon goods.

"We need to think about climate finance as being not just about climate," Hanrahan said."Some projects deliver improved development and health impacts too." This ‘multiple impact’ approach can convince investors to look at the wider picture when analyzing small-scale, off-grid projects.

For example, Hanrahan explained, a government agency might be interested in funding a household solar initiative in a poor part of Africa to study the impact of emissions reduction – looking at how that improves health, education, and personal wealth. "As a result you’ve got a couple of uncorrelated revenue streams, which improves the resilience of the project and makes it less risky for commercial investors," he said.

The report also looks at different methods of funding that are more workable when applied to smaller-scale projects. These includes opting for grants rather than concessional loans as a way to kick-start decentralization with a view to the wider economic benefits this brings, and further exploration of crowdfunding campaigns, which have already proven their efficacy in this space.

According to the IIED, as much as $50 billion a year will be required to deliver universal access to electricity by 2030. Current international public climate funds steer around $14 billion into climate finance annually, the report said, of which just 3%, or $475 million, is allocated specifically for decentralized energy. Averaged out between 2006 and 2015, this figure amounts to just $51 million annually.

The report says: "Climate funders are looking for viable projects that will assure returns from credit-based investments – yet as an emergent sector where business models are still being proven, decentralized energy projects are less bankable."

Decentralized energy startups require more flexible financing tools, the report adds, such as working capital, grants, subsidies and consumer finance to build business model and make services affordable.

The three recommendations laid out by the IIED report are improved targeting of international climate finance for decentralized energy access in low income countries; strengthening the national enabling environment to incentivize decentralized energy access, and filling knowledge gaps and sharing lessons among low income countries.