U.S. Secretary of State John Kerry and USAID Administrator Rajiv Shah announced earlier this week a major and groundbreaking type of renewable energy deal with India.
For the first time ever, the Development Credit Authority — facilitated by a private investment fund, Northern Lights Capital Group — will partner up with a local clean energy financing firm, Nereus Capital Management, to provide $100 million for investment in energy-deprived markets in rural India.
Traditional investors tend to neglect these markets and clients because of perceived high risks and steep transaction costs relative to the potential for profit.
Despite its booming economy and becoming an emerging donor, inclusive growth has so far been elusive for India, especially in the energy sector. The country’s rural energy deficit is such that an estimated 400 million people do not currently have access to electricity.
On the heels of this major announcement, Devex spoke with DCA chief Ben Hubbard to learn more about what this investment means for India and USAID’s prospects for making a significant impact on this massive challenge.
Here are a few excerpts of our conversation with Hubbard:
What does this announcement mean for India, and for USAID’s role in easing India’s energy challenges?
The energy needs of India are well-known. They have massive and rising energy demand, which is set to double over the next ten years. They need another 600 terawatts of energy over the next 10 years.
They’re the third biggest consumer of coal in the world. They’re a major importer of fossil fuels. So we want to change the trajectory of their energy future. The good news is they’re targeting 30 gigawatts of clean energy over the next five years. We want to help facilitate investment into that direction as much as possible, and renewable energy has been a cornerstone of the U.S.-India relationship.
It’s a priority of our USAID mission, and it has the added benefit of being a technology that can be deployed in rural communities. What we’ve tried to do with this investment is what we do with any DCA, which is to bring in investors and reduce some of the risk.
It’s a great value-for-money story, in that this is actually costing the taxpayer nothing to set up. The risk to the U.S. government is extremely little, but the value to the investor is significant and will help facilitate this $100 million for the sector.
India’s energy market doesn’t seem like a market that’s lacking in investors now. Even renewable energy seems to be attracting huge amounts of foreign investment. Why is this credit guarantee so important, and why is it USAID’s place to insert itself into a market that seems to be moving in its own direction fairly rapidly?
I think it’s easy to overgeneralize the market. Certainly, renewable energy is attracting investment in India as it is in other emerging markets. What’s unique about this and is important to understand is these are smaller deals, between $15 million and $25 million, which in the energy sector is relatively small, and they are non-utility, non-grid-connected power sources. So these are going to be used to power rural communities.
When you fund power projects, it’s structured as traditional project finance. That means the revenues come from the buyer of the power. You put up your power plant and someone’s got to buy the power. Usually the buyer of that power is a utility. But the grid doesn’t go everywhere, and you want to be able to construct power plants in rural areas where there are industrial companies, manufacturers and other commercial consumers of power so investors have confidence that if they build a solar farm someone’s going to actually buy the power it generates.
What’s great is that any excess generation capacity can then be sold into the surrounding communities. So it’s a really interesting commercial way to get energy to distributed locations, and that’s what these investors are doing.
The big investors of the world are going to want to invest in $100, $200, $300 million-large projects, because the size of the prize relative to the transaction cost is great. Now, when you’re looking at smaller sizes, your transaction costs are bigger, so it can be less commercially attractive. This particular company has extensive experience investing in India and the energy sector, and they figured out a creative way to deploy capital to these types of projects.
It’s really important that we show these asset types can be profitable, because these are the types of deals that will help boost growth in rural, non-urban areas. If we can make investing in these types of projects in India as easy as it is to invest in a wind farm in Maryland, then we’ve done a very good thing in terms of helping India shape their renewable energy future.
This fund is just a really efficient, cost-effective way to do this, because we were able to add $100 million of headroom for their investment. These are projects they can develop in 6-12 months, and we can get another 200-300 megawatts of energy into India. So, again I think it’s a great way to use our resources, in just a totally new way.
With close to 1 billion people living in poverty in India, and the enormous energy deficit that you mentioned, can the limited resources that your office has available to promote this kind of investment actually position DCA as a viable mechanism to make a noticeable impact, or are these projects and investments more about demonstrating to others what they might be able to do?
Any deal the development banks do is going to be a drop in the ocean relative to the problem. What we seek to do for all of these is to demonstrate an investment model that can work, that can attract other investors for similarly structured investment models. The other thing we’re doing is, through this guarantee we’re able to up-size this fund significantly from where it would have been. By adding $100 million to this investment vehicle we’re getting an extra 200 megawatts of power online and increasing energy access through it. So considering that this actually costs the taxpayer no money, we think that’s a great value for our investment.
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