Exploring the Finance Gap in Energy SMEs
MicroEnergy International (MEI) partnered with Sustainable Business Institute (SBI), and the Research Group Microenergy Systems of the Technical University of Berlin to conduct a one month research study from August to September 2012, investigating the financing gap experienced by small and medium enterprises (SMEs) specializing in delivering sustainable energy products and services to bottom-of-the pyramid (BoP) customers in developing countries. The financial gap is crucial due to the high possibility of it resulting in an overall absence of resources or structural problems in distributing available resources. Previous research indicates the presence of the financing gap in which SMEs find themselves in a void where desired loan amounts are too small for traditional commercial financiers such as banks, equity investors, and too small for microfinance institutions. This research indicates that, on a global level, there are not enough international funds available to develop access to clean energy. MEI’s approach to understanding the financial gap was to directly target the players that confront it every day: energy SMEs and their funders.
MEI conducted a series of case studies and interviews with energy SMEs and funders whose projects target BoP populations in Afghanistan, Bangladesh, El Salvador, Ethiopia, India, Kenya, Panama, Philippines, Nicaragua, Tanzania, and Uganda to find out specifically why there is a financial gap in energy SMEs in developing countries.
The results based on the interviews reveal that the financing gap is mainly caused by:
- Information asymmetries between energy SMEs and financial institutions
- High working capital costs due to international sourcing of product parts
- High upfront costs in establishing service infrastructure
- Reduced liquidity for energy SMEs offering end-user financing options.
The results are presented as a series of case studies and recommendations targeted for renewable energy practitioners, energy SMEs, financiers and policy-makers.
MicroEnergy International identifies the issue of information asymmetries and recommends the following 4 solutions to bridge the gap:
- Development organizations should build sector knowledge in financial institutions in order to increase their capacity to assess technical and supply chain risks of energy SMEs.
- Specialized funders for energy SMEs that operate on multinational and global scales with specific sector knowledge should target investments in seed financing, growth financing and working capital financing using debt and equity.
- Energy SMEs should incorporate end-user financing in their business models to become more attractive. By offering financial options to their customers, market demand increases, which in turn pushes the attractiveness of the investment case for potential financiers.
- Policy-makers and official development assistance programs should create market interventions through subsidies, quality assurance mechanisms and transparency schemes. Such measure can attract financiers by increasing returns, decreasing quality risks and supporting market transparency.
MicroEnergy International finally identifies further research needs on energy SMEs, i.e. on the effects of transparency on national financial markets and on the impact of policy reform (subsidy measures, public quality control mechanisms,…) on bridging the financing gap.
The full report can be accessed here.