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Wolfgang Gregor

Let's go to the black numbers: an innovative decentralised energy supply requires innovative financing instruments

Anyone who has observed the off-grid industry in recent years has noticed that there has been a virtual standstill in innovation and creativity in the financial sector. While the industry is developing technologically, with a few exceptions the instruments of the financial industry have remained at the level of their founding fathers.

To date, it has not been possible to integrate local commercial banks into the off-grid business and financing on the basis of grants or institutional subsidies is often the norm. This leads to considerable distortions on the market, as only a few off-grid players manage to raise sufficient capital. In particular the actors of the first hour are in the advantage since they have direct access to the large foundations, institutions or private philanthropists, which provide the necessary capital and have deep pockets to shoot up.

The smaller and local enterprises and start-ups that fall through the cracks here have the disadvantage. The fight for limited resources is merciless and many of the young local companies are jealous of the "Donor Darlings", who have a clear competitive advantage. Although the latter cannot be blamed for this, they can offer their customers long-term financing models, while the majority of local entrepreneurs live from hand to mouth. And it is precisely on this local basis that the financial industry and international development cooperation needs to act.

The fact is, even after more than five years, the off-grid industry is still largely unprofitable. There are few exceptions and unfortunately this industry has failed to convince international institutions, regulators, financiers and commercial banks how important decentralised energy supply is. They prefer to invest in outdated and often environmentally harmful industries. The off-grid industry thus ranks far behind fossil power generation and grid expansion, and its entrepreneurs still have to wait for recognition and their fair share of global energy investments.

A decentralised energy supply would create disproportionately large numbers of local jobs. Preventing migration by creating local jobs in Africa is the number one political issue in Europe today, yet politicians and their institutions are missing this first-class opportunity.

And where are the new financial products that are absolutely necessary for an industry that is still not profitable? There is hardly any sign of innovation and this accusation is particularly directed at the usual suspects, who today consider themselves the financial elite of the off-grid industry and often deal irresponsibly with the term impact investment and mean venture capital. Many of these investors do not think they are driven by greed - they are wrong.  There are exceptions, but they are in the minority and do not have the necessary means to develop the market in its full size.

At a time when Europe has a zero-interest rate policy, countless impact investors are waiting for investment opportunities that are in line with their values. Decentralised energy supply can play a key role here.  In Europe in particular, many foundations are looking for investment opportunities and would be more than satisfied with a dividend of 3 percent. However, there is one catch and that is the risk protection of their capital. Default guarantees are needed to provide impact investors with the necessary security. A global product default guarantee of only €100 million would have unimagined leverage and could reduce interest rates for debt financing to well below 10% and provide almost an entire industry with the necessary debt financing capital. Politics, but also international institutions are now required to step in – driven by a powerful industry and its associations.

However, this topic is unpopular with many financial investors as it undermines their established business models. It is not always a fair play, and sometimes flimsy or discriminatory arguments are used. It is said that local entrepreneurs no longer meet their obligations if these are covered by default guarantees. Pure paternalism and what is business routine in all established industries must also apply to the off-grid industry. Ultimately, this also includes simple factoring models for smaller market participants and consumer loans for their customers.

It goes without saying that any serious investment must always include an exit scenario. However, when off-grid investors are already talking publicly about exit strategies for their investments, as happened recently at the GOGLA Conference, this sends the wrong signal. This discussion may only take place if the off-grid industry is on an equal footing with other established industries and works profitably.

Time is pressing and the industrialized nations' focus on Africa should now be capitalized. New products for decentralised energy supply, such as mini grids or battery storage systems, combined with low-cost solar technology are now entering the market. Attractive payment systems such as PayGo or Mpesa were widely introduced and form an ideal basis for profitable business.  Everyone involved has the unique opportunity to make this industry sustainable.  This requires innovative financial products and the end of subsidies for the "old energies". Most important, the commitment to decentralised energy supply is an unquestionable prerequisite.

 

Wolfgang Gregor is CEO of Solar-Connect eG and former Executive Director of GOGLA.

 

 

 

 

 

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