Clean energy SMEs connecting off-grid communites are starved of funding

There's a growing buzz about the potential for business to fill the huge energy gap across the developing world, where 1.3 billion people live without grid electricity and a staggering 3 billion people cook on open fires or dirty cookstoves.

Pioneering small and medium-sized energy enterprises, that sell simple products like solar lanterns and cleaner cookstoves to low-income communities, are offering new hope that this huge global problem could one day be solved.

But research published by sustainable energy charity Ashden and Christian Aid shows that many of these clean energy enterprises are starved of funding to help them get their innovative businesses off the ground, and to enable them to grow fast enough to reach the scale that's needed.

Cash constraints

Lack of access to short-term working capital to help these enterprises manage day-to-day operations, from manufacturing to shipping to distribution, is particularly keenly felt. While equity and donor or governmental financing or guarantee windows are all valuable, accessing ongoing working capital is critical to achieving sustainable growth.

As Bob Annibale of Citi Microfinance says: "Many start-up enterprises need access to capital to tide them over for the time it takes between placing an order and distributing a product to under-served communities. But most of these companies don't yet have the track record and economies of scale to qualify for credit from commercial banks. That's why innovative funding models and partnerships are required."

Risks of investing – real and perceived

International commercial investors are also often reluctant to enter the market. Says Annibale: "The concept of selling energy products to low-income people is very new – and it's always hard to get investment in new business models, whatever the sector."

Another challenge in attracting investment is that energy enterprises selling clean energy products and services in low-income communities often have innovative business models that mainstream investors may not be used to.

As Willem Nolens of SolarNow, a company in Uganda selling solar home systems with an 18-months credit facility, says: "Investors find it hard to put us in the right box – we're a renewable energy company but also a microfinance provider in disguise. This means the due diligence process can sometimes take forever."

The consequences of scarce finance

That finance is so scarce brings with it a range of negative knock-on effects. For example, some of the enterprises the research team spoke to said that they have sometimes had to accept unworkable terms, or overly ambitious repayment schedules.

One solar enterprise expanded into multiple countries before it was ready in order to meet its repayment schedule. The effect, it says, was "crippling" – the company ultimately went into liquidation. Another company said that the finance terms were so exacting that they became a drain on the company, ending up eating into operational budgets.

Long delays in receiving finance are also common. One company told of waiting two and a half years for a loan to be agreed, by which time it was in considerable difficulty. There are strong arguments in favour of rigorous due diligence processes – but delays can impose new costs, like not having enough cash to be able to take advantage of bulk discounts, or missed opportunities to access other funding.

New opportunities

But the landscape is changing for the better. The perception of risk is diminishing, as enterprises start to look more bankable. The clean energy sector is increasingly being compared to the microfinance sector – which, as a briefing by the IIED notes – took two decades to break even and attract commercial investment.

Says Annibale: "A growing number of energy enterprises are doing well and growing rapidly, particularly those that are innovating with distribution and pay-as-you-go models, which makes products more affordable in under-served communities."

Nolens adds: "Commercially-oriented impact investors are definitely getting more interested. Instead of being worried about social impact and risks, they see a huge market and scalable business models. As these investors are faster and typically offer higher valuations, they're likely to overtake some of the socially oriented impact investors, and open much bigger pools of capital on the debt and equity side."

Creative collaboration

Donors and social investors are also starting to collaborate more with commercial investors and banks, incentivising them to provide capital by acting as guarantors. For example, our research found that in 2012, a state aid agency provided a loan guarantee of over $1m to a solar business in East Africa. This enabled the business to receive a loan from a national bank in local currency, which also meant they were protected from exchange rate fluctuations.

Citi and the US government's development finance institution, the Overseas Private Investment Corporation, have also recently agreed on an inclusive finance risk-sharing partnership that will provide finance for maturing companies that are trying to address the global energy challenge as well as meeting other needs of under-served communities.

Energy enterprises need an enabling environment

So what more needs to happen for energy enterprises to realise their potential? Clearly, there's a role for governments to create a more conducive operating environment for energy companies. Our report also calls for more agile investors, appropriate levels of due diligence and a closer relationship between investors and energy companies.

There's much scope for more collaboration between donors, governments and the private sector too.

The right support can play a pivotal role in helping clean energy companies achieve rapid, sustained growth. We need to see many more examples of it if we're to have hope of bringing modern energy to the billions of people that badly need it.

Ashden and Christian Aid's report Lessons on supporting energy enterprises provides recommendations for donors, investors, technical assistance providers and policymakers to improve the support they give to energy access enterprises.

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