Solar power for Africa? Donor nations can't just toss money at the challenge.

Alongside a heightened global focus on reducing carbon emissions is this challenging reality of human well-being: An estimated 1.2 billion people worldwide lack access to electricity.

So it’s not surprising that, from Washington to Beijing, experts and policy makers are brainstorming ways to provide developing countries with access to clean energy. And they’re finding that the hurdles go well beyond developing the right energy technologies or gathering initial seed money to start deploying them.

What’s especially needed, some development experts say, is to nurture the market conditions that, country by country, can allow clean energy from wind farms to off-grid solar systems to grow and thrive.

In some places, moreover, the current energy marketplace includes subsidized fossil fuels. So those providing international assistance need to take that into account with tailored strategies and longer-term project time frames.

“The basic message is: it isn’t just that governments have to change their ways, the whole international community that is supposed to be supporting government needs to do something slightly different going forward than it did in the past,” says Rachel Kyte, chief executive officer of Sustainable Energy for All, an initiative launched by the United Nations, during a recent meeting with reporters in Washington.

“If money gets spent in a very haphazard way, or without some kind of coordination and some kind of discipline, then we can spend an awful lot of money, or we could commit it and not disburse it, and we may not have a lot of effect.”

New markets for clean power

In the lead-up to the Paris climate treaty last year, developed countries such as the United States and Great Britain pledged hundreds of millions of dollars for clean energy initiatives like Power Africa and the Africa Renewable Energy Initiative. Additional funding went to both Asia and Latin America. Meanwhile, in 2015, developing and emerging economies committed $156 billion to renewable energy, a 14 percent jump from the year before, according to a 2016 report by the United Nations Energy Program.

But in many cases it takes more than just money to get the lights turned on – or kept on in places where electric utilities are strained by demand growth. That’s why a number of programs are starting to shift their attention to the partnerships between lenders and borrowers that can help clean energy projects get off the ground.

Most recently, in late June 2016, the US Agency for International Development (USAID) announced a new $36 million “Grand Challenge for Development” that focuses on expanding the off-grid energy market in sub-Saharan Africa. The funds go towards assisting entrepreneurs and investors to develop the region’s off-grid energy sector and connect around 20 million households to renewable power.

“Market conditions are primed, particularly household solar that’s ready to take off,” says Chris Jurgens, director of the US Global Development Lab, part of USAID.

In many regions disconnected from the electrical grid, the cost of solar panels is going down at the same time the price of kerosene is going up. Meanwhile, digital financial services are enabling pay-as-you-go business models to reach markets in places like East Africa where they were previously unavailable. But the ability of local companies to attract private investment is one of the most important components of spurring market growth, Mr. Jurgens says.

“The fact that you have a leading cohort of enterprises that have demonstrated viable business models and are starting to attract private financing, means the market is kind of at an inflection point,” he says. “So if household solar systems are at less than a million today, the growth rates are already projected to be pretty quick.”

Still, the market for technologies like household solar is still very young in many parts of the developing world. Countries like Bangladesh, Kenya, and Tanzania are succeeding at developing markets for renewable power. But now the challenge is to replicate these scenarios in neighboring countries.

Many local banks and equity investors view renewable electricity as a promising market, but they haven’t yet seen the 3 or 4 years of customer repayment to assure them it’s an investible sector. That’s where the USAID funding can come in, to give the market a boost over the next few years until the renewable market has proven itself as a trustworthy investment.

Some of the USAID funding helps early-stage firms attract the first round equity investment or debt. Other funding streams, meanwhile, act as a layer of risk capital, helping companies to raise money by borrowing. In some cases, the awards are structured so that grant funding is provided when companies also succeed in attracting private capital. This added layer of finance helps renewable energy firms attract private investment.  

But the number of renewable energy firms that are investment-ready still needs to grow.

“This is an attractive segment for [social] impact investors that are looking at earlier stage,” Jurgens says. “But there is a tier of about five firms that have taken off and are investment ready, and all of the investors are looking at those 5 firms.”

“We think it’s going to take a much larger number of firms with a variety of business models working in a variety of countries in order for the market to take off,” Jurgens explains. “So part of this Grand Challenge is how to build that next cadre of firms to the point where equity investors have more choices.”

Misplaced criticism?

As experts say this injection of investment is vital to rev up the renewable energy sector, many also say donors have an additional responsibility to help identify and address barriers to growth. Environmentally conscious observers occasionally rail against the leadership of developing countries for opting to burn fossil fuels instead of spearheading the transition to clean energy. But their criticism may be misplaced.

“We [the international community] should be able to put alternatives [to fossil fuels] on the table,” says Ms. Kyte at Sustainable Energy for All. “Alternatives do exist. They may be more cumbersome in terms of time, it might take more effort to stitch together the financing, but we have a responsibility to make that as easy as what’s being offered, which is the subsidized alternative of fossil fuels.”

Currently, members of the G7 and the G20 are subsidizing technology for coal-powered power plants. What’s more, coal-run power plants can often be up and running in under two years. Launching a large-scale renewable energy project, however, is often more complicated, requiring funding from a variety of sources and an unknown period of time to implement, Kyte points out.

“So attacking an Asian government for thinking that it could meet its people’s needs by embracing coal-fired power plant, we’ve got the wrong enemy in the sights,” she says.

“It’s time to get down regionally and nationally and say how do we build the kind of coalition that will offer a reasonable price and a reasonable time scale with the kind of certainties that countries want.”