How can we ensure energy access markets emerge from 2020 more resilient?

It has been reassuring to see continued investment activity from DFIs, governments, foundations, and investors in 2020. Yet the sector can and must work harder and faster still, writes Sam Parker, CEO, Shell Foundation.

The need for SDG-focussed investment has never been higher. Organisations including the World Bank and the UN estimate the pandemic could ultimately plunge a further 100-500million people into extreme poverty between 2020-21, potentially negating a decade of progress and development.

Along with the wider development sector, Shell Foundation (SF) has wrestled with how to continue the momentum of its investments into the energy access sector during the Covid-19 pandemic, to protect the gains made by the sector, build resilience in its companies and help maintain momentum towards the SDGs. We have had to adapt our ways of working in order to provide effective support under current market conditions, and believe some of the lessons are worth sharing.

During 2020, Shell Foundation, in partnership with the FCDO, USAID and Power Africa, will have deployed over $40m of funding into distributed renewable energy companies in Africa and South Asia, in addition to helping to mobilise $55m local debt into agri-related SMEs in India. Our support has leveraged more than $440m of additional investment.

This funding includes grant, repayable grant, debt and equity. We have seen how catalytic grant can be when deployed quickly and in partnership with other capital classes. We believe it is essential to keep up the pace of investment into the off-grid energy sector. The sector needs risk tolerant capital if it is to survive this crisis well enough to truly fulfil its potential towards SDG7. While still young, the sector is making tremendous strides towards more widespread profitability, and there are many attractive opportunities for both finance-first and impact-first investors.

Grant funding has financed pivots and increased resilience …

When the pandemic struck, we reworked our business plan to make additional funding available to our portfolio, specifically for business resilience support. Delivered alongside non-financial technical assistance on topics that are of high concern for the entrepreneurs, the aim was to help those in our portfolio of 65 social enterprises and institutions most affected by the pandemic to maintain impact, pivot if needed and retain viability following the expected period of lower revenues and investment.

This revised plan has allowed us to deploy $17m in grant funding in 2020, with an additional $5.4m committed to go out before year end. The grants have come from SF’s own funds and our co-funding energy partnerships with the FCDO — as part of their Transforming Energy Access programme — USAID and Power Africa. Our support has helped the portfolio leverage $440 of additional investment.

From using customer service platforms to identify need and provide key health products, to adjusting payment plans or delivery models, the entrepreneurs in our portfolio have adapted to the ever-changing circumstances with ingenuity and invention, pivoting their models and leveraging additional investment in order to retain viability through the pandemic and continue serving low-income consumers.

 

Find out more about portfolio responses

In order to ensure grants were deployed appropriately and didn’t distort markets, we put in place stringent pre-requisites to unlock funding, including significant cost-cutting measures and business pivots, management skin-in-the game, co-funding from existing investors and robust worst-case resilience financial plans.

This grant funding has allowed several partners to close investment rounds to ensure viability and, in some cases, continued growth.

S4S Technologies, for example, which installs solar food dehydration technology supporting female farmers in India and connects them to the entire value chain, last month raised a $1.75m series A round from a mix of new and existing investors, including Acumen and CSAW.

Funding from SF played a vital role in helping to conclude the investment round. It reiterated the strength of the relationship between our organisations and provided an important ‘vote of confidence’ during these most difficult times. We leveraged the funds to bring in new investment to support our mission and expansion plans."

Nigel Saunders, CEO, SureChill

… and unlocked additional capital classes

Working with portfolio companies as well as public and private sector actors, SF’s grant funding has unlocked early stage equity and debt, growth debt and local currency guarantees, whilst also supporting increased sharing of technical assistance to enterprises.

Factor[e], a venture development firm, has continued to invest in early-stage entrepreneurs with innovative technology solutions, deploying more than $2.65m in 2020 whilst also increasing business support to its portfolio though CEO community sessions, sessions on grant, debt and equity raising strategies, and virtual pitch days with brokered 1:1 conversations between investors and CEOs.

Persistent, which provides equity and specialised support to early stage Pay-As-You-Go solar ventures operating in under-served markets in Africa and Asia, has supported its portfolio companies to think through scenarios and strategic decisions to face pandemic challenges, as well as investing more than $1.5m in bridge capital during the period to unlock additional funding from co-investors.

“With the bridge capital deployed to our companies we were able to leverage 2-4x in additional financing with the trust signal that we sent when we invested,” said Tobias Ruckstuhl, Partner, CFO & Venture Building, Persistent.

“As for new investments, we have done one new one so far and planning to do another one, specifically as we think and see that both from an opportunity and impact perspective, making new investments is even more relevant in these times.”

responsAbility’s Energy Access Fund, which provides working capital finance to off-grid solar enterprises, adapted its strategy early in the crisis to work primarily with existing counterparties or with companies with which they had existing relationships. This strategy has allowed the fund to deploy more than $5m to several clients and been able to finalise due diligence process for a new client (already known to the fund) and expect to get IC approval in Q4 2020.

“Other investment scenarios were considered – such as a general investment halt – but we believe this would not be beneficial to any involved party. The fund would miss out on opportunities, and companies’ liquidity will worsen with no access to capital,” said Simon Gupta, Head Business Development, responsAbility.

“We believe the sensible way forward is to continue with the fund’s mandate, acting as a facilitator and mobiliser of capital that helps stabilise the sector. This is ultimately to the benefit of all stakeholders.”

DIFFERENT CAPITAL TYPES CAN WORK TOGETHER IN NEW WAYS TO ACCELERATE SECTOR GROWTH

The market needs all types of capital. Businesses rarely scale without access to the spectrum. Grant funding is often the principal source of capital at the incubation stage and helps companies get off the ground, become investible and move onto early stage debt and equity. We often see a period where companies use all three alongside very successfully, before moving off grant altogether. Critical to effective use of grant for building businesses is deploying it with a commercial lens and making sure that the transition to other types of capital is efficient and effective.

We’ve worked in recent years with multiple partners to establish development funds that help energy access companies transition to later stage capital. These funds have been able to continue sourcing and making investments through 2020, addressing specific barriers to scale.

The Energy Entrepreneur Growth Fund (EEGF)

An investment fund that provides financing and technical assistance to entrepreneurs operating in the energy access sector in sub-Saharan Africa. Managed by Triple Jump as portfolio manager and Persistent Energy Capital as advisor, EEGF was launched at end of 2019 with a $30m first loss equity from SF and $15m in junior notes from FMO and target fund size of $120m.

EEGF has approved its first round of investments into two off-grid solar companies, and is on track to commit between $7.5m and $8m of investments by year end through its mezzanine debt strategy.

EEGF is bridging a funding gap where others are hesitant to invest using equity or equity-like instruments. This funding gap was present before the Covid-19 pandemic, and has now deepened as a result of the crisis. Focusing on mezzanine structures, EEGF has identified a promising pipeline of companies that need this type of tailored, risk-taking capital that will enable them to pursue feasible paths to scale their products and profitability in a sustainable manner.

The Distributor Finance Fund

A partnership between SIMA Funds, an experienced off-grid solar lender with over $100m in assets under management, and Angaza, a leading technology provider for last-mile distribution. We supported the fund’s 2019 establishment in partnership with Ceniarth LLC, UK Aid, USAID, Power Africa, and the Skoll Foundation.

The fund serves last-mile distributors that specialise in reaching hard-to-serve customers. Its debt facilities cover inventory expenses and include partial financial guarantees from product manufacturers.

Last month the fund announced its first loans to three off-grid solar distributors: Altech Group of the Democratic Republic of Congo; Deevabits Green Energy of Kenya; and Easy Solar of Sierra Leone and Liberia. Read the full story on SunConnect.

India SME loan guarantee

In India, where Covid-19 has exacerbated the challenge of raising debt finance for small, early-stage enterprises working in often fragmented sectors, we have been working with Rabo Foundation, IKEA Foundation and the US DFC to create a create a guarantee vehicle that will mobilise $55m local debt  to support agri-related entrepreneurs. SF’s grant capital will act as first loss of the guaranteed amount, which enables the pre-identified impact focused lenders to lend to these enterprises at a time when capital is hard to raise.

Having had initial conversations in February 2020, all players recognised the need to accelerate the process in April in response to the pandemic. The guarantee is expected to be live before the end of the year.

Energy Access Relief Fund

SF is working with a consortium of donors and investors towards establishing the Energy Access Relief Fund, which is being designed to provide up to four-year tenure, subordinated, unsecured, low-cost, subsidised loans to viable companies that are facing liquidity challenges due to Covid-19. The fund intends to focus on the smaller to mid- sized energy access companies that are addressing the needs of the bottom of the pyramid consumers and expects to make 90–100 loans. While the fund will seek to be as inclusive as possible, its primary focus is expected to be on loans of less than $1M.

Visit SIMA's website to find out more about the EARF

Much more can be done

Blended finance in funds is not a new concept. However, we believe the potential to use different types of capital alongside each other in new ways to achieve faster market growth is largely untapped. We see huge potential in:

Shell Foundation is building evidence that these approaches work and we invite others to innovate with or alongside us. Uncertainty caused by Covid-19 has delayed funding decisions from major donors and investors, and as a result development finance is scarcer and harder to secure than ever before. There must be greater efforts made by all sector actors to quickly develop new approaches to finance which are capable of impacting millions of lives.