20 Sep 2017 Story Climate change

Sowing the seeds for change

Seeds Capital Assistance Facility (SCAF II) Mobilizing early stage investment in low carbon project development

“SCAF has empowered us to grow our business by providing access to scarce early stage financing and ensuring that meaningful skills transfer takes place within the country, a critical ingredient for the long term growth and sustainability of our business” , RedCap wind farm developer Mark Tanton.

Between now and 2050, developing countries need an estimated $531 billion per year of additional investment in energy supply and demand technologies in order to limit global temperature rise to 2° C above pre-industrial levels. To achieve this scale of investment, developing country governments and custodians of international public finance will need to deploy limited public finance in ways that leverage an unprecedented volume of private sector investment. Despite growing global investment in low-carbon energy and falling costs, it will be difficult to achieve the scale and urgency of investments needed without the appropriate policy, institutional, industry, and financial conditions.

In many developing countries entrepreneurs can transform markets, but they often face a number of challenges in doing so in the sustainable energy sector. A lack of development support services and early stage financing, high transaction costs and insufficient risk- adjusted returns are just some of them.

The Seed Capital Assistance Facility (SCAF) is designed to help overcome these barriers by offering clean energy focused investment fund managers two types of cost-sharing support for those willing to include a seed investment window within their overall investment strategy.

The Facility is operating in most developing countries of Asia and Africa and is implemented through the United Nations Environment Programme in partnership with the Asian Development Bank, the African Development Bank and other International Financial Institutions. Funding was initially provided by the Global Environment Facility and the UN Foundation and more recently by the UK and German Governments.

The facility is aimed at helping energy investment funds provide seed financing to early stage clean energy enterprises and projects.

Entrepreneurs can transform markets, but the environment for entrepreneurship is poor in many developing countries, particularly in the energy sector. For new business ventures there is a lack of available enterprise development support services and seed financing is hard to secure, with most investors reluctant to engage too early. This means that even high potential renewable sectors like solar, wind, small hydro and geothermal develop quite slowly.

The two largest challenges that investors have in providing seed capital financing to early stage projects and companies are the higher transaction costs and insufficient returns offered by these small, less mature and more risky ventures. The SCAF facility is designed to address these two hurdles, offering investment fund managers two types of cost-sharing support for those willing to include a seed investment window within their overall investment strategy.

To date cooperating agreements are on-going with seven renewable energy investment funds and their management companies:

  • four in Africa: Inspired Evolution Investment Management (Evolution One Fund), Frontier Investment Management (Frontier Market Energy and Carbon Fund), Lereko Metier Sustainable Capital Managers (Lekero Metier Sustainable Capital Fund), Berkeley Energy (Africa Renewable Energy Fund)
  • three in Asia : Berkeley Energy (Renewable Energy Asia Fund), Aloe Private Equity (Aloe Environment Funds, Green Investment Asia Sustainability Fund) and Armstrong Asset Management (Armstrong South East Asian Clean Energy Fund).

In total 79 projects are being supported through these seven cooperating funds, 22 of which have received seed financing commitments totaling USD 18 million. Three supported projects are now fully financed and in construction, with USD 329 million of financing secured. An example project under construction is the Red Cap Kouga Wind Farm.

Through a Cooperating Fund Agreement signed in 2010, SCAF and Inspired Evolution Investment Management (IEIM) have supported the South African development company Red Cap in preparing one of Africa's largest wind farms. Through its Evolution One Fund, IEIM has partnered with SCAF to provide early stage financing to Red Cap to cover the costs of grid connection and engineering studies, environmental assessment, financial modelling and other preparatory activities. By cost-sharing preparatory activities, all of which have elevated costs due to their first of a kind nature, SCAF has contributed to enhance the project's prospects for success. Kouga Wind Farm construction process is now on track with 27 of 32 turbine foundations now completed.

Based on the positive progress of the initial seven cooperating fund agreements, new donor support was secured in late 2013 for a follow-on SCAF II facility. The UK Department for International Development (DFID) has contributed £9 million to this new effort and other contributions are expected and the Government of Germany is negotiating a contribution as well.  This scaled up programme will make UNEP a key partner with the commercial investment community in seeding new sustainable energy markets across the developing world.

SCAF I programme has to date provided $5.5 million of GEF/UNF funds to mobilize $18 million of seed investment from commercial private equity funds for 22 projects and helped leverage $329 million for the first three fully developed and financed projects.  SCAF II is in the process of initiation but based on the results with SCAF I it is expected to help leverage several billion dollars of investment for low carbon projects in least developed and lower middle income countries.