Handout – Module 3 / Session: Project development and the Green Climate Fund (GCF)

GCF Proposal Fact Sheets

Note: The information contained in this fact sheet is taken from the GCF project landing page.

PROJECT FP027: Universal Green Energy Access Programme / Benin, Kenya, Namibia, Nigeria, United Republic of Tanzania

SUMMARY

Approved: October 2016 Duration: 15 years Project/programme lifespan:

15 years

Contributing to universal access to electricity in Sub-Saharan Africa by scaling up investments in renewable energy from local financial markets and the international private sector.

This programme is an investment fund that will reduce GHG emissions by increasing access to clean electrical energy for mainly rural populations in Sub-Saharan Africa. It aims to provide financing for decentralized energy service companies for off-grid and mini-grid systems for rural households and communities and renewable energy for industrial players.

Fossil fuel based energy production will be replaced with renewable, clean energy solutions that can meet increasing energy demand. Investments will target three types of projects. Off-grid renewable electricity energy in the form of solar home systems will be provided via an affordable payment plan. Green mini-grid projects will also be supported via companies that install, operate and maintain photovoltaic based mini-grids to sell energy services in rural communities. Finally, industrial renewable electrical energy and selected on-grid installations will be targeted, by investing in companies that provide modular, transportable, and often rented photovoltaic farms, offering SMEs and communities competitively-priced solar power. Around 50 investments will be made, totalling a volume of USD 500M over the course of five years, and via two phases.

At a later stage, the programme will work with local financial institutions to enable banks to provide long-term loans to businesses that provide clean electricity solutions. A public-private partnership instrument will leverage at least two-fold the impact of public capital through private investment.

USD 78.4M GCF financing in the form of equity will be provided for phase I of the programme. The grant element of USD 1.6M indicated above is subject to GCF Board approval at B.15.

PROJECT OWNERS

Accredited Entity Executing Entity Access Modality

Deutsche Bank Aktien Gesellschaft (Deutsche Bank AG)

The Universal Green Energy Access Program S.A.SIC-SICAV

International

This Training Material was developed by adelphi with financial support from GIZ as part of the CF Ready Program on behalf of the German Federal Ministry for Economic Cooperation and Development.

IMPACT

Financing window Mitigation

GCF results areas Energy generation and access

Gender benefits -

UN Sustainable Development Goal #7 Affordable and clean energy

Beneficiaries (anticipated number of people with increased resilience)

-

INVESTMENT DATA

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This Training Material was developed by adelphi with financial support from GIZ as part of the CF Ready Program on behalf of the German Federal Ministry for Economic Cooperation and Development.

GCF Proposal Fact Sheets – Additional project information

Note: The information contained in this fact sheet is taken from the funding proposal.

VALUE ADDED FOR GCF INVOLVEMENT

The following is an excerpt of section D.1 of the GCF Funding Proposal Template.

The GCF involvement in UGEAP is critical for the following reasons:

Facilitating the transition of the private sector into a new asset class Overcoming structural limitations of local financial markets and international investors Triggering private investment at scale through the appropriate risk-return profile No alternative source of public sector funding at scale is available Local banks require training and capability building measures to deal with renewable energy

related businesses

Facilitating the transition of the private sector into a new asset class:

Financing access to electricity in Africa has traditionally been a public sector mandate.In remote areas, the approach to electricity access was typically grid-based and thus not economic, requiring investment grants from the public sector to enable private management and additional private investment in operations and maintenance. Technological progress and associated cost reduction in off-grid renewable energy solutions have now created the opportunity for Africa to leapfrog to 100% private sector based off-grid access solutions. Nevertheless, these technology solutions are new, with a short operational track record, currently limited in scale and operating in an untested regulatory environment. The private sector, i.e. local financial institutions and international institutional investors, therefore will not provide 100% of the required debt financing from the beginning, especially not for category 1 and 2 projects, while technology risks also remain for category 3 projects. A public-private partnership with the support from the GCF is therefore required to provide private sector debt providers with support and comfort to enter into financing this new asset class.

Overcoming structural limitations of local financial markets and international investors: UGEAP will provide local currency debt finance to (D)ESCOS through local financial institutions (FIs) with a 5-10 year maturity, depending on project requirements. The majority of local financial markets are not yet developed enough to provide a similar offer to local businesses. Further, the capacity of local markets to offer the: maturity, pricing and volumes are well below the needs to bring clean energy access projects to fruition at the scale intended.

In terms of maturity, the loan maturities provided by local banks average around 5 years and therefore typically cannot meet the loan maturity requirements of 7-10 years of the proposed investments. This is largely due to the fact that the largest funding source for local banks are short-term liabilities, the majority of which are demand deposits, while even term deposits typically do not exceed maturities of 1-2 years. GCF through UGEAP will therefore provide much-needed long-term funding for local banks, allowing them to extend loans to energy supply companies with the required 7-10 year maturity. Consistent data on the asset-liability mismatch of local banks is not available as banks differ in their positions. However, two examples represent the situation well: In both countries, the weighted average life of liabilities fluctuate between 2-3 years – which is in significant contrast to the required terms of 5-10 years for the businesses UGEAP anticipates to invest into. x In terms of pricing, even in case loans are available with the required maturities, local currency loans provided by local financial institutions typically carry interest rates which jeopardize the financial viability of the projects in question. GCF’s involvement in UGEAP will allow local banks to extend loans with interest rates of 8-10% (USD equivalent) which are affordable vis-à-vis the expected return of the proposed investments.

In terms of volume, lending by local banks to infrastructure sectors in general and electricity projects in particular to date is limited as a result of the limited size of local banks’ balance sheet as well their lack of capacity in analyzing, structuring and assessing the credit risk of these projects. GCF as anchor investor in UGEAP will trigger access to additional financing volumes for clean energy projects, while tailoring the slice local banks are able to take on their balance sheet through the risk sharing and syndication mechanism.

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This Training Material was developed by adelphi with financial support from GIZ as part of the CF Ready Program on behalf of the German Federal Ministry for Economic Cooperation and Development.

EXPECTED PERFORMANCE AGAINST INVESTMENT CRITERIA – PARADIGM SHIFT POTENTIAL

The following is an excerpt of section E.2 of the GCF Funding Proposal Template.

Scaling Up / Replication

Program Level UGEAP will leverage GCF resources by a factor of 1:3.3 as part of the proposed program, creating the first program for public-private climate finance in Africa at scale, with a target volume of USD 500 million. In addition, successful investments by UGEAP will further multiply its impact inside and outside of the program as new markets have been created which will move towards sustainability and continue beyond UGEAP.

UGEAP contributes to the paradigm shift towards low-emission and climate-resilient development pathways through the following paradigm shift:

Mobilizing private climate finance in partnership and at scale for climate-smart electricity access investments: Private sector capital can be invested alongside existing local capacity from project developers as well as local banks to the benefit of climate-smart electricity access projects. Private sector investors at this stage have currently no opportunity to invest into climate-relevant mitigation projects (like those UGEAP targets) on the African continent and therefore do not cover the region with the necessary attention and capital. On the other hand the current demand for debt of businesses in the targeted categories is not met by local financial institutions.

Paradigm shift: UGEAP provides the first integrated platform to link private sector investors, local financial institutions and local and international project developers/climate businesses for the benefit of scaling up universal electricity access in Africa. UGEAP - on the active side - will indirectly add profitable assets to the balance sheets of local banks and enable them to serve larger transactions that are not reachable with their own capital sources and – on the passive side – shall provide institutional and other private sector investors with the opportunity to tap the climate mitigation market in Africa with higher certainty. Successful investments through UGEAP will allow for further transactions to follow from 3 sources: first, from local financial institutions who will allocate further (own) capital once they built up a successful track-record in lending to these projects; from international investors who will feel more comfortable to invest at scale after early successes and from equity/project sponsors who will invest more in projects with a proven market and technology.

Innovation through local and international financial market development: At the local level, UGEAP will provide local banks with long-term funding for cash-flow based lending. At the international level, UGEAP provides the first structure to allow international investors to finance green electricity access in Africa. Both are new markets.

Local banks in Africa face an asset-liability mismatch: in many African economies, financial markets are still predominantly short-term, in some cases even without a long-term financing benchmark (such as long-term government bonds) and in most cases lacking long-term deposits which banks could intermediate into long-term lending to projects which require a longer time horizon.

Contribution to the creation of an enabling environment

Technological sustainability: UGEAP offers long term capital only to businesses that mitigate greenhouse gas emissions. Promoting the respective technologies and scaling them up as the basis for economic development supports the end-beneficiaries in building a low-carbon environment as part of sustainable development. . In addition, after amortization of initial investments, renewable energy is almost free for the end-user and endlessly available during the

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This Training Material was developed by adelphi with financial support from GIZ as part of the CF Ready Program on behalf of the German Federal Ministry for Economic Cooperation and Development.

lifetime of the equipment. This creates a competitive advantages for its users and empowerment at the local level due to self-sustainability.

Accelerated local development path: Investments in all Categories deliver climate-smart infrastructure assets to end-beneficiaries without grid extensions to satisfy energy demand using fossil based energy carriers. Current projections suggest that local electrical energy grids are too far away to supply electricity within the same time frame, even if renewable sources would have a majority share in the energy generation mix. The UGEAP therefore accelerates the expected development path for local economies and will allow policy makers to include renewable off- and mini-grid solutions in national electrification strategies.

Environmental and social sustainability: All investments of UGEAP have to be in line with strict social, environmental and governance standards. Hence climate-smart businesses can be showcases for local regulators which activities are worth receiving supportive regulation. Successful precedents can therefore facilitate supportive local regulation for clean energy infrastructure solutions.

Building local capacity: UGEAP supports local solutions to local needs. All businesses to be invested into have local maintenance and operations (with global sourcing of technology and components) thereby mainstreaming and disseminating knowledge and capacity on photovoltaic technology into African energy supply.

Building local financial markets for climate finance: By partnering with local banks, UGEAP builds the capacity of local banks to assess and lend to climate-smart projects. Once local banks understand this business model, they are expected to continue providing finance to these businesses even without UGEAP participation.

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This Training Material was developed by adelphi with financial support from GIZ as part of the CF Ready Program on behalf of the German Federal Ministry for Economic Cooperation and Development.