Lagos — Despite encouraging prospects and robust records, energy efficiency technologies and renewable energy projects and businesses face significant difficulties in raising sufficient finance for investment. Indeed the problems are complex: mainly concerning lack of risk capital, which provides important collateral for lenders.
In emergent economies the need for risk capital is estimated at over -9 billion, far above existing levels. This shortfall largely accounts for why lenders are averse to financing even potentially viable commercial ventures.
Fortunately, aimed at the expansion of renewable energy, energy efficiency and other clean energy technologies, markets and services, the Global Energy Efficiency and Renewable Energy Fund (GEEREF) will enhance private sector access to risk capital through the patient capital mechanism because it offers various ways of risk sharing and co-funding in investment funds.
The GEEREF is a public-private investment fund focusing on developing countries and economies in transition. Set on making initial investments before the end of 2007, it will provide risk capital to investment funds specialised in advancing small and medium sized projects and companies in the renewable energy and energy efficiency sector.
GEEREF is expected to reach a first closing of around -140 million including -80 million of the European Commission (the Fund's promoting investor) and -24 million of the German Government. Italian (-8 million) and Norwegian Governments (-10 million) have shown strong interest and are expected to be among the group of initial investors.
Incidentally, fund management companies, financial institutions, project developers and individuals in the energy sector are invited to present their business plans.
The GEEREF can provide equity, or other applicable financing instruments with a typical investment horizon of between 10-15 years. Moreover, investments can be subordinated to other investors in the investment fund, as well as financially support the creation, operations and pipeline development of investment funds.
In as much as GEEREF will be active in Sub-Saharan Africa, East Asia and the Pacific, Non-EU Eastern Europe, Russia and Central Asia, Latin America and the Caribbean, the Middle East and North Africa, investments will be demand-driven with priority given to countries or regions with supportive energy efficiency and renewable energy policies that are conducive to private sector engagement.
Emphasis needs to be placed on deploying technologies with a proven technical record of accomplishment; such as small hydro projects, on-shore wind, geothermal, solar, biomass, biogas, modern cooking fuels and bio-fuels.
Energy efficiency projects will qualify in particular where similar financing barriers need to be resolved. Co-firing solutions, energy service companies and other small and medium scale energy efficient solutions will qualify.
Risk capital will be provided at affordable 'patient' terms whereby the degree of patience will reflect local and global benefits offered by the investment funds and their underlying projects. GEEREF's participation in an investment fund can range from between 25% to just below 50% for small and medium investment funds in underdeveloped markets with first-time management teams.
Participations in investment funds in more developed markets are more likely in a 5% - 15% range. In addition to investment capital, the fund can offer grants and seed capital to potential clients to support the creation, the operations and pipeline development in concert with improving or increasing the value of underlying assets of the investment funds.
This support is crucial to realise the full development potential of the GEEREF's investment objectives and for mitigating risks associated with investing in less advanced regions. Additional capital could be mobilised through the fund-in-fund structure including the project and SME level.
The fund also intends to recycle and reinvest the participations from public sector investors. The leverage of public funds could
be up to a factor of 10: considerably higher than for conventional grant-based schemes, which ask for 50-70% co-funding.
This innovative instrument could serve as a positive example to be replicated by other public and private investors. Once fully invested and leveraged, GEEREF could bring almost 1 Gigawatt of environmentally sound energy capacity to developing country markets. Annually, this could serve 1.25-1.75 million people with sustainable energy services, substituting 1-2 million tonnes of CO2 equivalents per annum.
The GEEREF will also broaden the range of instruments to effectively support the development and transfer of environmentally sound technologies between developed and emergent countries.
The benefits of an innovative investment tool such as the GEEREF exceeds the mere availability of risk capital at appropriate terms. Therefore, cooperation is sought amongst local fund managers and project developers, to create optimal conditions for each investment fund to serve the development of a vibrant and market-based local market for renewable energy and energy efficiency.
Development efforts (e.g. search for markets for their perishable goods) by indigenes could be aided by mobile phones, which need electricity to charge up.
Issues like this (including many others) limit the people's ability to achieve self-determination. Moreover, from March through December 2005, MTN Nigeria's subscriber base increased significantly from 5.6 to 8.4 million.
In the first quarter of 2006, Glo Mobile announced its subscription base had reached 5 million, two years after it began operations. Celtel (formerly Econet, and Vmobile) said at the end of 2005 it had approximately three million subscribers; current figures estimated at over four million.
Figures above are from 2005 and 2006. Presently, the assessment is that between MTN, Glo Mobile and Celtel, alone, GSM subscribers in Nigeria exceed 25 million and is growing.
Solar technology is tested and proven. Still, it is sad to note that though the African continent receives significant radiant energy, solar is not commanding enough support through research, development and implementation.
In Europe, solar electricity is nearly five times as expensive as conventional electricity but grid-connected PV is gaining cost/benefit advantages through integration into buildings and other designs.
If solar is to make significant contributions towards socio-economic and environmental sustainability in Nigeria, green tariffs and green electricity accessible to everyone including a fair price to groups generating solar electricity should be explored.
Adopting a centrally funded energy-efficiency programme with subsidies for renewable energy sources can encourage the citizenry to do more with less. The time to act is now.
- Additional vital information provided by Mr. Melford Ita, a Lagos based energy consultan.