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April 03, 2013

Off-Grid Clean Energy Demands Social Bankability

Off grid solar
A while back I wrote about the need for social bankability based on the casual observation that our financial and energy systems are broken. Social bankability, simply put, is the decision, by fiat, to use public funds to fill in gaps where private banking has failed, but where the evidence shows the investments are entirely credit-worthy and socially desirable.

This is what Franklin Roosevelt did in 1933 when he decided that American farmers setting up electricity co-ops were credit worthy, even though banks didn't trust them. Muhammad Yunus did the same thing for enterprise loans to the poor with micro-credit. Now a new class of entrepreneurs are demanding the World Bank step up and do the same for off-grid clean energy access.

While innovations like crowd-funding are needed to disrupt the system, we can't let the system off the hook when it's our money being used. That's why it's exciting to see 22 of the world's leading off-grid clean energy entrepreneurs, as well as the Global Off Grid Lighting Association (GOGLA), demanding social bankability from the World Bank Group in the form of $500 million in risk adjusted investment. Because as countries around the world struggle with the ever increasing burden of austerity, the idea that scarce taxpayer money from donor countries would be used to make risky investments to subsidize a broken system is, simply put, infuriating.

Let's start with the why. In order to make good on the pledge to deliver universal energy access, the International Energy Agency (IEA) has found that half of all energy services flowing to the unelectrified must be provided by off-grid clean energy. The IEA has also shown that an overreliance on the opposite (large scale centralized power -- often dirty coal plants) will still leave 1 billion of the world's poor without energy access by 2030. That means regardless of climate concerns the right tool for the energy access job is decentralized off-grid clean energy.

The problem is that today's investments in energy access are heavily skewed toward the problem, not the solution. That happens because the financial system is not designed to finance small nimble decentralized investments (the kind that serve the poor). Worse, the system views all things new (including clean energy) with skepticism. That means in practice large-scale investments for centralized generation receive the lion's share of finance despite the fact that they do little to solve the problem (but a lot to cause climate change). And this practice continues even when, as with the proposed Kosovo coal project, the underlying economics are wildly unfavorable to the investment. This is just bad banking.

In the absence of dedicated credit mechanisms, the poor themselves have had to finance off-grid clean energy often through cash purchases (You and I don't do that with our share of the grid -- the middle class gets to pay as they go). The poor are able to do that thanks to a combination of highly innovative business and financial models, and the plummeting cost of renewable energy, which has made it affordable to early adopters. Adopters who know that it is energy's presence, not price, that changes lives.

This has laid the foundation for a revolution that demonstrates that small can be big in places like Bangladesh, where 1 million solar home systems have been installed (including 30,000 to 40,000 solar home systems every month. Now "pay-as-you go" systems, mobile banking payments, and community power that extends clean energy from off-grid cell phone towers to surrounding communities promises to build an entirely new bottom-up decentralized clean energy powered "grid." It's not leap-frogging; it's catapulting past the heavily polluting centralized grid that dominates the western world.

But to go from here to there means crossing the vaunted "valley of death,"' which requires dedicated credit sources. Given the maturity and returns of the sector today, that means deeming such investments, by fiat, socially bankable, even if commercial banks say, in a Catch 22, "We can't make these loans because these are not the kind of loans we make."

Which is exactly why the off-grid sector has made clear it wants the World Bank to step in. The problem is the Bank, even under Dr. Kim’s leadership, continues to do the opposite. Instead of funding the off-grid sector, it continues to support new coal plants like the one in Kosovo. In fact, nearly 60 NGOs from around the world sent a letter the same day demanding the institution stop funding fossil fuels or not receive future funding from donor governments.

Which takes us back to where we began. Public money is increasingly hard to come by, and the World Bank keeps using it to follow the lending practices of the past, rather than fulfilling its mission, which is to forge a credit pathway to the systems of the future. There are literally 1 billion reasons to change course. So Dr. Kim, what will it be?

-- Justin Guay, Sierra Club International

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