Blended Capital to Fund African Solar

Stockholm (NordSIP) – On Thursday, February 7, Antoine Prédour, Head of Energy Debt at responsAbility Investments AG, discussed the innovative impact investment opportunities available to public and private investors in providing access to clean energy in developing countries at the Aktuell Hallbarhet Finans conference.

One of the hurdles faced by emerging markets on their developmental path is the ability to access reliable and well-distributed electricity throughout the country. For example, “Nigeria, which is the most populated country in Sub-Saharan Africa, 120 million people, which has a huge power outage. They have on average two to four power outage per day and can last for 10 to 12 hours per day,” says Prédour.

Antoine Prédour

Even today, in 2019, this is still a considerable problem, affecting more than 10% of the population of the world. “One billion people have no access to electricity throughout the world, meaning no access to any kind of electrical appliances. And from this one billion, there’s six hundred million in Sub-Saharan Africa”, adds Prédour.

The costs of this inadequate energy infrastructure are felt in a wide range of ways. Using kerosene lamps in the absence of electricity can cause respiratory issues from inhalation of the smoke and increases fire hazards. The darkness of night exposes remote communities to potential attacks, and it limits the ability of children to study after sunset. The alternative fossil fuel technology, diesel generators, are polluting and expensive.

“In 2018, 500 to 600 thousand of diesel generators have been sold worldwide, for an amount of circa US$ 20 billion. The sales of diesel generators in 2018 has been still increasing, believe it or not. Why? Mainly because there are not enough investments in these markets,” says Prédour.

To tackle this problem, responsAbility is deploying new financing strategies to fund companies that provide “decentralised energy” solutions, i.e. electricity is used where it is produced. SolarNow in Uganda is one of the companies that was featured during the discussion.

“Since the solar home systems companies have started to operate, the solar type of company that we just showed, US$4.9 billion have been saved by all those households worldwide, which is roughly speaking a US$200 per household that they have saved only by using those systems compared to the technologies, the kerosene lamps that they have,” according to Prédour who cited a recent report from GOGLA, the Global Association for the Off-Grid solar energy industry.

According to Prédour, the main concern for investors is the perceived high level of risk and how it can be mitigated. To respond to this issue, responsAbility has put in place a three-tiered structure for its new fund, with a junior, a mezzanine and a senior tranche, similar to what was recently proposed by Amundi in partnership with the IFC.

The junior tranche would absorb any losses incurred by the fund. It is aimed at governments and foundations, “who are okay to lose money because they want the capital to be catalytic.” The mezzanine tranche provides a much better risk/return and is mainly targeted at family offices, foundations and impact funds, who “are willing to take some risk because they believe in impact, but they get the nice return.” Finally, senior tranche holders are protected by the junior tranche and the mezzanine tranche. According to Prédour, “they would consist mainly of commercial investors, such as pension funds, insurance companies, foundations or individuals and Development Finance Institutions”, who would “get most of the time a fixed coupon, so it’s mostly fixed income”.

Video from responsAbility, Picture © NordSIP

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Filipe is an economist with 8 years of experience in macroeconomic and financial analysis for the Economist Intelligence Unit, the UN World Institute for Development Economic Research, the Stockholm School of Economics and the School of Oriental and African Studies. Filipe holds a MSc in European Political Economy from the LSE and a MSc in Economics from the University of London, where he currently is a PhD candidate.