Many Pacific Island Nations have set ambitious renewable energy targets but are still heavily reliant on imported diesel for energy production and have among the highest costs of electricity in the world. New financing solutions that attract private capital for renewable energy projects and complement grant funding in the region are needed.
Convergence is currently supporting Camco, a grantee from our Indo-Pacific Design Funding Window, funded by the Australian Government, to design Transforming Island Development through Electrification and Sustainability (TIDES). This $100 million finance platform uses a blended finance structure comprised of three tranches:
- 20% concessional first loss
- 65% senior debt
- 15% equity, targeting private impact investors
TIDES uses an aggregation approach to fund renewable energy projects ranging from rural electrification to commercial and industrial (C&I) and utility-scale projects with local developers across the Pacific. TIDES also requires investees to target gender-focused metrics, such as the number of jobs created for women, the percentage of women in senior positions, and the percentage of female-owned businesses supported. The platform is based on a developer-centric funding model to strengthen local companies and accelerate due diligence. It consists of three market capacity building facilities managed by Camco:
- Results-based finance (RBF): A $18 million facility to mitigate key risks and support rural electrification through mini-grids with affordable tariffs
- Technical assistance (TA): A $5 million TA facility to support local developers and governments
- Development loan facility: A $7 million facility to support early-stage project development
TIDES is designed to catalyze private investment in renewables in the Pacific and thereby supports the efforts of donor funding in assisting the region’s clean energy transition.
Challenges to financing renewable energy projects in the Pacific
One of the biggest challenges facing not just TIDES but the sector as a whole is the level of developer capability. Because few developers in the Pacific can bring projects to financial close without either TA or development capital assistance or both, TIDES has deliberately been designed with market capacity building in mind.
Engaging with impact investors unfamiliar with the Pacific context is another challenge. As the platform is the first investment vehicle of its type aimed at renewables in the region, the team has prioritized educating potential investors about renewables investment and the market in the Pacific. Specifically, TIDES seeks to address the perception that the Pacific region has limited deal size and deployment potential and allay the perceived political risk often associated with the region.
Finally, as Pacific Island Nations are still working to develop clear and concise regulatory environments, they must overcome the challenge of still uncertain investment conditions. As the countries are formulating and adopting regulations at pace, there is a risk that some of the regulations under which investments are made may later be reversed or changed, which may impact expected returns for investors. TIDES’ TA program aims to assist local regulators in ensuring a stable and transparent regulatory environment is developed and maintained.
How Design Funding has helped to advance the solution
Convergence's Design Funding to TIDES has enabled the team to engage with all market stakeholders to ensure they have a platform design that reflects the need of the market. Overall, the funding will support Camco to launch TIDES and establish an on-the-ground presence in the Pacific, enabling them to work closely with local developers and provide the necessary flexible financing to build the region's clean energy sector and unlock its economic potential. In addition to the funding, the milestone reporting structure offered by Convergence also enabled Camco to receive critical analysis and insight regularly from the Convergence team. Finally, the Convergence resources that are made available to grantees, such as the fundraising deal platform, knowledge products (e.g., data briefs and case studies), and regular blended finance trainings, provided the team with a useful source of additional information as well as valuable lessons learned.
Camco has a twin-track gender strategy. Firstly, it mainstreams gender equality in its management and operations. Secondly, it works with donors and investors to ensure that gender equality is mainstreamed into the design,implementation, monitoring, and assessment of all renewable energy initiatives managed by Camco. TIDES will help drive growth in the number of female-owned and led businesses supported, and in employment opportunities for women in the Pacific. Investments will be consistent with the 2X Challenge for Gender Lens Investing to support women entrepreneurs, leaders, employees, and consumers to increase gender equity, reduce poverty and promote more inclusive and robust economic growth. TIDES aims to create 1,680 jobs, with a minimum of 30% going to female employees. Finally, the platform has a set target to channel 30% of funds to 2X-aligned businesses in the Pacific.
The way forward
TIDES is currently in due diligence with a number of potential first loss providers and are reaching out to Impact Investors in the region.
Convergence’s Design Funding Program operates as a market acceleration tool providing early-stage capital to support blended finance solutions in frontier markets and nascent sectors to accelerate the number of investible transactions in market targeting SDGs. Our Gender-Responsive Climate Finance Window, which focuses on the intersection of climate change and gender equality in emerging markets globally is currently accepting applications. Go to our Design Funding page to apply and explore our other open Windows.