Renewable energy project developers in many emerging markets do not have the capital needed to develop projects at the earliest stages. Early-stage financing is critical to project preparation activities, and to ultimately attracting additional investment, achieving financial close, and getting projects built. However, attracting early-stage investments can be difficult due to both their relatively high risks, and a lack of investment vehicles that can meet private investors’ needs and help to manage these risks effectively. Thus, not nearly enough financing flows to the earliest stages of projects, and many projects are not built in developing countries which would be both technically and financially viable.
The Renewable Energy Scale-Up Facility (RESF), proposed by Baker and McKenzie and Get2C, is a fund that employs an innovative options mechanism to drive private institutional equity into earlier stages of renewable energy projects in emerging markets. RESF allows investors to gain exposure to equity opportunities across multiple technologies, geographies, project sizes, and developers while dramatically reducing risk by not taking an equity stake in projects until they pass key development milestones and achieve financial close. RESF is also a fully privately financed approach to early stage development, after an initial pilot implementation phase that would involve catalytic capital from donors and philanthropic investors.
The Renewable Energy Scale-Up Facility is an options platform that will drive private institutional equity into earlier stages of renewable energy projects in emerging markets.
RESF will establish a fund with two types of assets:
1.Option agreements giving the fund an option over shares in renewables projects at the early to mid- stage of development that have been selected through the Equity Option Platform; and
2. Shares in successful projects at financial close and operation (upon exercise of options).
Projects will bid in regular increments for RESF support, in return for preferential IRRs for RESF (relative to prevailing market conditions). Premium payments (being during the period where costs are only 1%-4% of total project costs, thus comparatively low) will be paid out against development milestones achieved.
In an initial Pilot phase, catalytic capital will support both options premiums and direct equity investment in the fund. Options premiums will be used to finance early-stage project preparation activities. These premiums will be lent on a concessional basis from donors and used to de-risk projects for institutional investors – as only successful projects that have passed through all requisite milestones will ultimately be considered for equity investment by RESF and drawdown institutional investors’ committed capital. Successful projects that achieve financial close will repay these premiums to donors who will then recycle this de-risking capital for subsequent projects.
The impact of this is that RESF investors will have access to the best-performing projects within a broad and diverse portfolio, while taking on relatively low risks. And simultaneously, capable developers will have access to the early-stage financing needed to develop viable projects through to financial close. In addition, catalytic equity investment from donors and philanthropic investors may be used to help crowd-in private investment in the fund. Ultimately, the Pilot can help to demonstrate that RESF’s options mechanism can work across a variety of technologies, countries, developers, and project sizes, to reduce overall portfolio risk for investors and give developers the financing and stability they need to scale up activities in emerging economies.