Why DFIs and foundations linked up for energy access rescue effort

Sixteen organisations have committed $68 million to a relief fund that will “protect energy access for at least 20 million people in sub-Saharan Africa and Asia”, according to a joint statement released on Wednesday.

The Energy Access Relief Fund has a target of $80 million and will provide emergency finance to companies supplying energy to off-grid users. Those companies have been endangered by the global pandemic.

Geoffrey Manley, head of the energy access and efficiency team at CDC Group, told New Private Markets that the fund was unique in terms of the breadth of type of institution involved, as it includes philanthropic organisations, governments, non-profits, multilateral finance institutions and DFIs.

All the organisations shared a common objective of “supporting the energy access sector through a difficult period”, said Manley, but each have different institutional mandates and constraints. “One of the primary challenges was finding compromises to allow these various forms of capital to come together in a way that worked for all parties.”

The fund is structured to resemble a debt instrument, with senior investors purchasing notes that are protected by a significant portion of first-loss capital, in the form of grants, and guarantees, to minimise capital losses. “There is precedent for this type of structure, but it’s still a unique way to set up a fund,” said Manley.

The fund is managed by Social Investment Managers and Advisors, a manager with experience investing in energy access, as well as financial inclusion, affordable housing and education. “SIMA was ultimately selected because of its unique focus on the EA sector – specifically the types of smaller and medium-sized companies along multiple parts of the value chain that are the primary target for EARF,” said Manley.

Energy access companies provide power to those living off the grid. The primary example would be solar-home energy systems operating a pay-as-you-go model, but others would include things like providers of solar lanterns or operators of mini-grids. Such companies have been hit hard by the global coronavirus pandemic, noted the press release: “Broken supply chains, increased costs of solar components and continued covid lockdowns have crippled the energy access industry.”

Investors in the $68 million first close
Acumen, CDC Group, FMO, Green Climate Fund , IKEA Foundation, International Finance Corporation, Power Africa, Shell Foundation, Swedish International Development Cooperation Agency, Social Investment Managers and Advisors, Swiss Agency for Development and Cooperation, The Rockefeller Foundation, USAID, US Development Finance Corporation, UK Aid, and World Bank Group.

SIMA’s analysis of energy access companies eligible for relief funding across 50 countries shows that 77 percent of potential borrowers require emergency financial assistance to stay afloat. “Without it, many companies may be forced to take drastic measures such as pausing operations, laying off staff, or permanently closing their doors, which would disrupt energy access for customers at a particularly difficult time,” the statement said.

The universal nature of the global pandemic means that other sectors beyond energy access would benefit from a similar relief effort, Manley told NPM. For example, CDC has committed to another covid relief fund targeting microfinance institutions that provide credit to vulnerable lower-income populations.

However, energy access represents is a special case. “These companies are providing essential power to households without it – and those customers are struggling,” said Manley. “Therefore, the support of the EA sector benefits not only the companies themselves but also their employees and also allows them to keep the lights on for homes and small businesses.”

SIMA, the manager of the fund, said it had “innovated to create a robust underwriting approach” to allow it to provide rapid relief loans, said Asad Mahmood, CEO and managing partner of the firm.

The fund will provide “flexible and innovative financial structure blends different types of capital to offer low-interest loans and liquidity”.

On the subject of returns, CDC’s Manley told NPM: “All of the capital invested in EARF is on a concessional basis in order to offer low-cost loans to distressed companies.”