An industry knows it has gone mainstream when the most risk-averse money—institutional investors such as pension funds, insurance companies, banks, hedge funds, endowments—starts to move in. It looks like that's about to happen for decentralized renewable energy—home and business rooftop solar, mini-grids—in emerging economies like Africa.
Deutsche Bank AG is expected to learn this week at a Green Climate Fund (GCF) board meeting in China whether its proposed $3.5 billion debt fund for decentralized renewables is approved. GCF is the vehicle for a commitment by advanced economies to mobilize $100 billion a year by 2020. Deutsche Bank AG is an accredited entity under GCF.
Michael Hoelter, a director of Sustainable Investment at Deutsche Bank Asset Management, told Power for All that its Universal Green Energy Access Program (UGEAP) proposal in the first two years will be focused on Nigeria, Benin, Namibia, Tanzania and Kenya.
Envisioned to last 15 years, UGEAP intends to mobilize $300 million in its first two years, including a first close of $100 million ($40 million from GCF, $10 million guaranteed by SIDA and $50 million in private sector money), and a second close of $200 million ($40 million from GCF, $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 pay-out to pensioners in 20 years.... UGEAP provides meaningful and sensible investments for them."
If approved, UGEAP will fill a huge gap in debt finance that currently exists. Many companies in the decentralized renewable energy sector have raised equity, but the next phase of development requires debt and local currency finance. But local banks are hesitant to serve the sector—a new industry, unbanked consumers, heavy up-front capital project costs and other reasons. UGEAP will essentially "help local banks overcome the hurdles that they face" by providing "risk off-take", said Hoelter.
The Deutsche Bank fund will focus on three categories of investment: 1. solar home systems, 2. mini- and micro-grids for communities and remote villages and 3. clean energy supply to businesses in the industry and service sectors and selected on-grid projects.
Hoelter estimated that allocations to each category would over the life of the fund be 20%, 20% and 60% respectively, but during the first two years solar home systems would dominate. Companies selling solar home systems need the money badly and funding is the only 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 all 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.