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07 Jul 22

Pacific Island Countries must urgently transition to renewable energy

Pacific Island Countries must urgently transition to renewable energy

Millions of people in Pacific Island Countries lack access to electricity. Outdated power infrastructure, wide geographic dispersion impeding economies of scale, and limited generation capacity are some of the factors that explain low electrification rates and why they pay tariffs that are among the highest in the world. However, one of the biggest challenges is that imported diesel and liquid fuels accounts for more than 40% of their power generation. This heavy dependence exposes them to fluctuating energy prices and contributes to high energy costs. The current increase in fuel prices due to the war in Ukraine, makes the situation even more dire.

Pacific Islands Countries are among the most exposed to the effects of climate change. Such dependence on diesel heightens this exposure as their reliance on sea freight for diesel imports increases their vulnerability to supply chain disruptions caused by natural calamities. The greenhouse gas emissions from unsustainable diesel power generation, in turn, further contributes to climate change, which increases the likelihood of rising sea levels and tropical storms.

Hence, there is an urgent need for these countries to accelerate their transition to cleaner, cheaper, and more efficient renewable energy and substantially reduce their reliance on imported fuel. In fact, Pacific Island Countries boast a strong natural supply of solar, wind, and hydropower resources, offering sustainable and more resilient power alternatives.

Renewable energy projects beset by financing challenges

Most of these countries have already set ambitious renewable energy targets (six countries have set 100% renewable energy generation targets by 2030); however, implementation has been below expectations, and more than $5 billion of renewable energy investment is needed by 2030 to meet these targets. Development finance institutions (DFIs) and multilateral investment banks (MDBs) have already committed to invest over $1 billion in renewable energy projects in the Pacific.

It's no easy task. Given the unique geography of the Pacific, the countries would need to bolster investment across different types of renewable energy solutions, including utility-scale projects, commercial & industrial (C&I) projects, mini-grids, and solar home systems, with each solution facing its own set of financing challenges.

Large utility-scale projects have been able to attract grants and project financing from donors as well as DFIs and MDBs. For example, Asian Development Bank and the Government of Nauru signed a $22 million grant agreement to fund a 6-megawatt (MW) grid-connected solar power plant and battery storage system in Nauru. However, the requirements to access funding can be very stringent, and the approval timelines are typically long. C&I users (e.g. factories and resorts) can account for up to 50% of the energy provided by utilities in some countries. This puts a strain on utilities and often it makes sense for C&I customers to install their own renewable energy systems. However, they often come up against a high cost of capital if financing off their own balance sheets. Finally, mini-grid and solar home system solutions lack access to economical financing options needed to provide affordable energy to the most remote villages where population density is lower, and other grid-based solutions are unviable.

In all cases, access to more patient and flexible, low-cost financing solutions is required to implement these solutions at scale and provide affordable energy access to the local communities.

Drawing in the private sector to address financing challenges

Blended finance, the use of catalytic capital from public or philanthropic sources to increase private sector investment in sustainable development, could be instrumental in addressing these financing challenges and mobilizing private sector participation and capital at scale.

We can draw on some examples from Convergence’s Indo-Pacific Design Funding Window, which has awarded grants to support the design of several blended finance solutions that target expanding renewable energy in the Pacific. One example is Camco Clean Energy, which is working on designing TIDES, a $50 million structured debt and equity fund with a technical assistance facility. TIDES is partnering with local developers in the Pacific to finance a portfolio of renewable energy solutions across utility-scale, C&I, and mini- and micro-grid projects in the Pacific. Another example is the Private Financing Advisory Network (PFAN), which is designing the Fiji Outer Island Off-grid Fund to address energy access in the remote islands of Fiji by designing a results-based financing vehicle for developing off-grid solar mini- and micro-grids as well as solar home system solutions. Finally, Village Infrastructure Angels is working on developing the Micro Infrastructure Investment Fund for Asia-Pacific (MIIFAP), a blended fund that will provide micro-infrastructure products, primarily solar home systems, through a lease-purchase model to rural off-grid communities in the Pacific who otherwise have limited access to finance and technological know-how for investing in such products.

These solutions are only a start, and we’ll need many more of these scalable and replicable blended finance solutions for the Pacific Island Countries to meet their renewable energy targets and build resiliency. The need for renewable energy in the Pacific Islands is urgent. On top of the strong correlation between economic growth and access to stable electricity, it’s a question of survival as these countries are left with few options but to consume fossil fuels that increasingly make their homes uninhabitable in the future.

About the Author
Krishna Malhotra

Krishna Malhotra is a Manager on the Market Acceleration & Design Funding team at Convergence. Krishna has experience in impact investment in emerging markets and has previously worked in the Corporate Development team of Sterlite Technologies, a publicly listed technology company in India. Prior to Convergence, Krishna was a part of TD Securities, where he worked closely with the New York and Toronto fixed income trading desks. He has also worked with Barclays in their Global Capital Markets division. Additionally, Krishna volunteers as a Mentor at the Toronto Business Development Center, advising start-ups participating in their incubation program. Krishna has completed all three levels of the Chartered Financial Analyst program and has a master’s degree in Accounting and Finance from the University of Mumbai.