You are currently viewing Building resilience through energy access

Building resilience through energy access

Financing the last-mile green transition

The energy sector

Global energy today is predominantly derived from coal, oil, and natural gas, which together make up about 80% of the supply. The rest of the energy supply comes from nuclear, hydropower, solar, wind and other renewables, along with biofuels and waste. The energy sector is responsible for most of the global GHG emissions, emitting 34,691.687 Mt CO2 through fuel combustion in 2023 alone. Emissions from the sector have showcased a massive 49% increase from 2000.

However, while energy consumption is a major contributor to climate change today, it is also vital for development. Sustainable Development Goal (SDG), specifically target 7.1, aims to ascertain universal access to affordable, reliable, and modern energy services by 2030. Although there has been considerable progress, approximately 666 million people globally still lack access to electricity. Furthermore, 85% of the global population lacking electricity access reside in sub-Saharan Africa – one of the least developed regions of the world. 

In this context, the energy sector is faced with a dual challenge today. On one hand, there is the urgent need to decarbonise a high-emission global energy system. On another, is the socio-developmental imperative to provide power to the millions still lacking access to electricity around the world.​

The resilience gap and financing barriers

In remote and rural areas, reliable energy is the bedrock of community survival against climate change. It powers irrigation systems that protect farmers from dry spells, cold storage to ensure food security during climate events, and clean cooking solutions that have positive environmental and health impact. Energy also keeps health centres operational, supporting lighting, medical machinery, and cooling systems. Without access to reliable energy sources, these communities remain trapped in a cycle of vulnerability.​

However, delivering this last mile access is fraught with financial complexity. Traditional grid extension is often too costly for low density remote locations. The initial costs for grid extension ranges from US $2,000-5,000 per kW with high maintenance needs. For decentralised solar, microgrid and standalone solar have initial costs of US $500-2,000 per kW with low maintenance needs and US $300-1,500 per kW with very low maintenance needs, respectively. While these numbers are positive, off-grid deployment faces shortages of trained technicians, spare parts, and digital tools like remote monitoring. Technical constraints, such as battery reliability in extreme weather and policy silos favouring centralised grids also add to the constraints. These challenges require policy alignment favouring innovation, supporting research and development and incentivising private sector participation.

However, despite the barriers, according to the World Bank, the development of a sustainable and adequately funded off-grid sector is essential for ensuring universal energy access. It will require an estimated US $3.6 billion in investments, of which, about 60% can be sourced from private sector equity, debt, and grants, however, 40% subsidies would be required to overcome the affordability gap.

While increase in public sector funding, policy development and private sector participation are all crucial aspects to enable scale, this article focuses on innovative financing solutions to enable private sector participation and maximise utility of public funds. Towards this, it is key to identify the barriers to scale from a financing lens; these include:

  • High upfront costs: Low-income households cannot afford the initial capital for solar kits. It is important to note that even with consumer centric PAYG models, discussed later in this article, 22% of the households lacking electricity can only afford 3 to 12 watts of power for about four hours daily. Moreover, the percentage drops further for remote areas with high operating costs making the previously mentioned public finance and subsidies critical
  • Currency risk: International investors provide capital in USD/EUR, but revenues are collected in local currency exposing the projects to currency volatility due to devaluation, with limited local-currency debt or securitisation available
  • Perceived risk: Investors often view rural markets as “high risk” driven by concerns over consumer affordability and payment reliability and demand returns that make projects financially unviable

Innovative financing models

In this context, several unique financing mechanisms have emerged to de-risk investment and unlock capital to enable a last mile green energy access in recent years. Following are some of the models that have proven successful:

  1. Pay-As-You-Go (PAYG)

PAYG is a pricing mechanism that enables customers to pay depending on their actual usage of a product or service rather than a pre-decided flat-fee or subscription model. The mechanism has proven useful to enhance access to distributed energy by removing the barrier of high upfront costs, allowing customers to pay for solar systems through smaller micropayments. 

A powerful example is presented by Fenix International, a Uganda-based PAYG solar system provider that has enabled access to clean and affordable energy for over 500,000 households. Over two third of their customers work in the informal or agriculture sectors, dependent on seasonal incomes and excluded from the formal financial systems. The model had a larger impact by allowing customers to build credit and repayment history and tap into financial services like school fee, agriculture and home loans, and medical insurance. 

  1. Blended finance and currency hedging

Blended finance mechanisms utilise public or philanthropic catalytic capital to attract private investments for development goals. However, development funds are often USD- or EUR- denominated, because of which, local currency risk hedging solutions have emerged to make projects viable.

Yellow Malawi, a Malawian off-grid solar distribution company that also uses a PAYG model, received a US $2 million investment from Acumen’s Hardest-to-Reach (“H2R”) initiative that was structured as a blended-currency two-tranche loan to manage foreign exchange risk. The first tranche of US $1 million was structured to be disbursed in US dollars with repayments to occur in Malawian Kwacha. This was made possible due to The Currency Exchange Fund (TCX), EU Market Creation Facility, subsidising hedging costs by 5%. The second tranche of US $1 million was structured to be disbursed and repaid in US dollars. This structure leveraged an innovative blended finance solution to hedge currency risk and enable energy access for 182,000 people, about 80% of whom will likely access energy for the first time. 

  1. Results-based financing (RBF)

RBF mechanisms provide rewards to investees after pre-agreed results are achieved and verified. While traditional grants often pay for project inputs, such as equipment procurement and installation costs, RBF pays for outcomes, for example, number of energy connections provided. This ensures that funds are only spent on systems that have actual impact. 

An impactful example in the renewable energy sector is the Universal Energy Facility (UEF), a multi-donor RBF facility providing incentives to clean energy companies for projects in Africa. Established in 2020 and managed by Sustainable Energy for All (SEforALL), the UEF is backed by a coalition of donors including the Rockefeller Foundation, IKEA Foundation, Shell Foundation, Bezos Earth Fund, among others. The facility currently operates across five countries, including Benin, the Democratic Republic of Congo, Madagascar, Sierra Leone, and Nigeria. UEF has leveraged US $19 million in funding, brought new or improved electricity access to over 31,000 households, and powered more than 3,000 businesses and institutions.

From access to resilience

The transition to green energy is not just about reducing emissions but is also about building a safety net for the world’s most vulnerable. Achieving last-mile energy access should not be viewed as the endpoint but should serve as the foundation for resilience-building investments in livelihoods, local economies, and climate adaptation. There is a need to mainstream performance-linked and climate-resilience metrics into energy finance so that capital systematically rewards projects that both decarbonise and demonstrably enhance community resilience.

Bibliography 

https://www.universalenergyfacility.org/about-us