Leveraging renewable energy sources like solar and wind power for income-generating agricultural, commercial, and industrial activities – known as productive use of renewable energy (PUE) – holds immense potential for driving economic development and job creation in the developing world. However, insufficient access to financing constrains the scale-up of PUE companies and technologies across sub-Saharan Africa, Asia, and other emerging markets.
Despite strong alignment with sustainable development goals, tailored financing solutions have been slow to reach PUE ventures. A recent report by GET.invest titled Financing and Scaling Productive Use of Energy – Challenges and opportunities for catalytic growth looks at the key challenges PUE faces in securing investment and explores pathways to channel capital into the sector at scale. Unlocking financing innovations will be critical to unleash the vast potential of PUE to improve incomes and livelihoods.
The Mismatch in Financing
While grants and concessional loans have supported pilot PUE projects, available financing falls far short of the capital flows required to support meaningful growth of PUE companies and deployment of productive use technologies.
Several interlinked factors contribute to this mismatch:
- PUE ventures often seek smaller transaction sizes – for both debt and equity investments – than the typical minimums required by impact investors and lenders.
- With a focus on base-of-pyramid customers in rural areas, profit margins tend to be thin. This heightens perceived risk and deters PUEly commercial capital.
- Local debt options are limited. Local banks shy away from PUE lending given narrow margins, lack of expertise, and high-risk profiles of agricultural activities.
- As a nexus spanning energy, agriculture, and industrial development, PUE falls outside the strict mandates of most development finance institutions.
- Insufficient risk mitigation instruments fail to draw local lenders. Credit guarantees, FX hedging, and other tools are lacking.
- Distributors require working capital financing to maintain appliance inventory and extend credit to consumers – but face constraints in securing such facilities.
Innovative Structures to Unlock Capital
Tailored financing structures that blend public and private capital can help mobilize investment to the PUE sector at scale. Some promising approaches include:
- Concessional lending from development partners compensates for the high cost of commercial capital. Extended tenors and below-market rates make room for risk.
- Payment deferrals and credit guarantees share risks of working capital financing tied to unpredictable agricultural cash flows. This builds lender confidence.
- Local currency credit lines and hedging instruments help PUE ventures manage foreign exchange risk. Imports are in dollars while revenues are local.
- Receivable’s financing supports distributors to scale up through access to working capital collateralized by future earnings.
- Leasing models lower upfront costs for end-users by enabling pay-as-you-go structures. This requires financing leasing firms.
- Investment grants support product innovation, pilots of nascent business models, and capacity building where commercial viability remains unproven.
- Enterprise challenge funds offer results-based grants for companies that extend PUE solutions to underserved communities in target regions.
Partnerships to Unlock Finance at Scale
Coordination between stakeholders across the investment value chain will be key to unlocking capital flows to PUE at scale:
- Development partners can blend concessional tools with commercial capital to de-risk deals.
- Local financial institutions need support to build internal PUE lending capabilities.
- Manufacturers and distributors must structure bankable projects that meet investor requirements.
- Government can enact policies to stimulate investment, such as tax breaks and credit enhancements.
- Industry associations can promote PUE solutions to raise investor awareness and interest.
With persistent effort and creative partnerships, tailored financing can unleash the vast potential of PUE to drive equitable economic empowerment and clean growth across the developing world.