Subaskar Sitsabeshan: We must mobilize private finance into the off-grid energy sector

Reading time: 5 minutes
11 August 2015

With just over one week to go until The Climate Group hosts the first-ever India Off-Grid Energy Summit in New Delhi, Subaskar Sitsabeshan, Project Manager, The Climate Group, writes about how we must shore critical private finance and investment into the off-grid renewable energy sector in India and beyond.

Last week UN members underlined their support for universal access to affordable, sustainable and modern energy, with the adoption of a stand-alone ‘energy-for-all’ goal as part of their post-2015 Sustainable Development agenda.

This was a crucial moment. Sustainable and affordable energy is a unique factor that connects poverty alleviation, equitable economic development and a prosperous low carbon environment.

However, there are continuing challenges in providing this universal energy access – particularly with regards to financing.

Challenge and opportunity

Why is this issue so important? Well globally, 1.4 billion people lack access to grid electricity. This is approximately 18% of the world’s population, of which 360 million are based in India.

At present, these people – effectively the world’s poorest – spend an estimated US$30 billion per year buying kerosene for lighting purposes.

A report estimates that equivalent lighting for this population could be provided using solar energy for just US$2.7 billion per annum, freeing up US$27 billion for other purposes.

The scale of market opportunity in the off-grid sector is therefore enormous and well-documented. According to The Climate Group’s Business Case for Off-Grid Energy in India report, the market for solar home energy systems alone is likely to be worth US$215 million by 2018.

Because of this, increasing capital is being channelled toward the energy access sector by development banks and various governments around the world. Spurred by the clear market opportunity, private sector investors have also increased their investments in the off-grid space.

This has led to a perception that there is abundant capital for financing the off-grid energy sector and corresponding investment opportunities. But in reality, while many financiers and investors in The Climate Group’s network say the finance is there, they are often unable to find credible and viable projects to invest in.

Finance barriers

Discussions with key stakeholders at the receiving end highlight the particular finance access challenges that are currently being faced.

In India, partners of the Bijli – Clean Energy for All project have repeatedly expressed the ongoing challenge of securing capital, in particular debt financing, for scaling up.

While lack of collateral prevents these small and medium enterprises (SMEs) from securing debt from the mainstream banks, high interest rates also deters them from other local financing institutions.

And then there is the huge mismatch between the scale of investment on offer and the financing needs of these stakeholders.

Typically, SMEs in India require around US$500,000 to US$1 million in patient debt capital, to move from the seed stage to growth and scale up. However, the large scale finance – typically US$5-50 million – offered by multilateral banks and investors does not fit the business models or debt servicing capacity of these companies.

On the other hand, small scale capital (US$50-$200,000 often given as prizes or grants) can divert an enterprise’s attention, as management time is spent completing multiple applications and corresponding grant reports.

Many enterprises in the growth or scale up stages are caught in this cycle, unable to move on to other sources of finance. A negative consequence is that new, innovative seed stage enterprises are unable to compete and attract small scale capital and recognition.

Growth stage enterprises therefore, should ‘graduate’ from seeking small scale capital through prizes and grants, and focus on attracting capital for scaling up rapidly.

While prizes, donations and grants certainly help drive cash flow and capacity building – grants in particular have a huge de-risking role to play in mobilizing private investment – without an aim to address a particular challenge, this small scale capital has the potential to skew the market and do more harm than good.

Addressing challenges

The mismatch between lenders and borrowers’ requirements underlines the need to focus on the channels, instruments and mechanisms that are being used to mobilize private investment for off-grid renewable energy enterprises.

The Climate Group, through our Bijli – Clean Energy for All project, with the support of Dutch Postcode Lottery and Goldman Sachs Environmental Market Group, has identified this particular financing barrier and is working to address the challenges to shore private capital toward the sector in India.

In addition, the lenders and financiers’ concerns raised above (i.e. the discrepancy between the investment ticket size requested and offered), points to the need to bundle and aggregate projects and enterprises. Investors prefer to invest in large scale projects as funding large numbers of small projects means bigger costs and resources for due diligence and other relevant stages. This is an attractive option for private investors looking to spread their risks by consolidating, coordinating and aggregating off-grid projects and enterprises.

This would mean a portfolio of projects and enterprises is presented to the private investor (lender) who is able to invest at the scale they prefer, while the borrowers’ needs are also met as they receive financing catered to their specific needs and size of investment.

Unfortunately the length of time it takes for an enterprise to seek an investment – and the investor to transfer the funding – is another challenge.

Poorly designed regulatory environments, for example, can delay necessary due diligence processes meaning that enterprises do not get finances when they need them. But a standardized credit scoring mechanism or similar type of arrangement that saves time in conducting individual due diligence exercises would be one way to help both investors and companies.

Solutions are here

Despite the renewed focus and attention on ensuring universal energy access, there are plenty of barriers (and opportunities) for reaching that goal.

Extending large number of private finance and investment into the off-grid sector is an essential component.

But this a global problem that requires global solutions, and by collaborating with various stakeholders, we will find solutions to this problem that will lead us toward a prosperous, low carbon future. For everyone. 

You can follow the conversation online in the lead up to and during the summit on hashtag #OffGridSummit.


What is Bijli? See some of our project's big achievements here



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