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Green Climate Fund to become anchor investor in $3.5 billion debt fund backing solar home systems and micro-grids
An industry knows it has gone mainstream when the most risk-averse money - institutional investors such as pension funds, insurance companies, banks, hedge funds and endowments - starts to move in. That happened on Friday for decentralised renewable energy, including home and business rooftop solar and mini-grids, in emerging and energy-poor economies in Africa.
At a board meeting in South Korea, the Green Climate Fund (GCF) agreed to become the anchor investor in a $3.5 billion debt fund for decentralised renewables proposed by Deutsche Bank AG.
The $10 billion GCF is set to channel billions of dollars in climate change funding to developing countries in the coming years. Deutsche Bank AG is an accredited entity under the GCF.
The GCF approved $80 million for the bank's Universal Green Energy Access Program (UGEAP), which will initially focus on Nigeria, Benin, Namibia, Tanzania and Kenya, according to Michael Hoelter, a director of sustainable investment at Deutsche Bank Asset Management.
Envisioned to last 15 years, UGEAP intends to mobilise $300 million in its first two years, including a first close of $100 million (a first $40 million from the GCF, $10 million guaranteed by Swedish development agency SIDA, and $50 million in private-sector money), and a second close of $200 million (a second $40 million from the GCF, another $10 million from SIDA and $150 million from the private sector).
"When we hit $300 million, this will be when institutional investors really start to come in. We will have a proven history and they will be ready to write larger tickets," said Hoelter.
"Pension funds can't afford the luxury of losing money like impact investors. They need to secure a payout to pensioners in 20 years.... UGEAP provides meaningful and sensible investments for them," he added.
UGEAP will fill a huge gap in debt finance in the decentralised renewable energy sector. Many leading start-ups have raised equity, but the next phase of development requires debt and local currency finance.
But local banks are hesitant to serve a new industry with unbanked consumers and heavy up-front capital project costs, among other reasons. UGEAP will essentially "help local banks overcome the hurdles they face" by providing "risk off-take", said Hoelter.
JOBS FOR WOMEN
The Deutsche Bank fund will focus on three categories of investment: solar home systems; mini- and micro-grids for communities and remote villages; and clean energy supply to businesses and selected on-grid projects.
Hoelter estimates that allocations to each category will, over the life of the fund, be 20 percent, 20 percent and 60 percent respectively, but during the first two years solar home systems will dominate.
Companies selling those systems in Africa - including M-KOPA, Mobisol, BBOXX and Off Grid Electric - need to scale up, and debt financing is the major remaining bottleneck, while mini-grids still need some work to get to bankability.
UGEAP is expected to create 1,500 MW of renewable electricity via 450,000 new solar home systems, 10,500 solar mini-grid systems and 900 solar systems for small and medium enterprises. Deutsche Bank expects the initiative to create up to 15,600 permanent jobs and 7,900 temporary jobs, with a goal of about half of those jobs going to women.
Deutsche Bank started its sustainable investment activities in 1997, when it launched a micro-finance fund, and has since expanded into other areas including agriculture, financial inclusion and, most recently, climate.
Aside from UGEAP, earlier this year the GCF also approved $25 million to anchor the $100-million KawaSafi Ventures, a new equity fund managed by leading social impact investor Acumen Fund. KawaSafi made its first investment in BBOXX in August as part of a consortium that also including major energy company ENGIE.