ACCELERATING ACCESS TO CARBON FINANCE

For clean cooking companies to grow and reach more customers, they need innovative finance.

_{^{© Mauro Vombe / Clean Cooking Alliance}}

Clean cooking is one of the most underfunded development challenges.

While investment in clean cooking companies has grown to more than $200 million a year, it remains far short of the $10 billion needed every year to achieve universal access.

This significant investment gap, combined with a host of other hurdles — such as technological affordability, a largely low-income customer base, unfavorable regulatory environments, and limited access to credit — has held back sector growth and its ability to attract financing.

CARBON FINANCE IS FILLING THE INVESTMENT GAP

With its large funding flows and rapid growth, carbon finance could provide some of the financial resources necessary to rapidly expand clean cooking access. Carbon markets, which allow companies to sell the carbon emissions that have been avoided thanks to clean cooking solutions, have been an important source of sector financing. Over the past decade, clean cooking has generated $225–530 million in carbon finance. According to the latest CCA Industry Snapshot, carbon finance flowing to clean cooking companies increased by a factor of 45 between 2017 and 2022.

Carbon finance has also helped the clean cooking sector attract traditional finance. Even if companies don’t receive carbon revenue until sometime in the future, the promise of that revenue allows companies to lower the cost of clean cooking solutions today, making them more affordable for customers, reaching more people, and generating more sales. This, in turn, helps companies expand their operations and creates a pathway for investors to earn returns.

However, challenges remain. It typically takes 18 to 36 months for a clean cooking carbon project to move from initiation to generating its first carbon credit sales. Companies must go through a cycle of project development and implementation, validation and certification, monitoring and data collection, verification, and carbon credit sales and marketing before finally getting to revenue distribution. Costs and risks are present at different stages of this process. If a wide array of financial institutions and investors is going to tap into carbon markets for clean cooking, these hurdles need to be addressed.

_{^{© Bhumesh Bharti / Clean Cooking Alliance}}

SPEEDING UP CARBON PROJECTS IN CLEAN COOKING

The lengthy cycle of project development and implementation can severely dampen the pace and scale of carbon projects. To solve this challenge, CCA established the Financing Partnership Platform (FPP) for Clean Cooking, in partnership with the African Guarantee Fund (AGF) and United Nations Capital Development Fund (UNCDF).

“The Financing Partnership Platform brings together the capacity building of banks and clean cooking companies, resulting in the expansion of markets for lending to clean cooking companies that help financial institutions meet their environmental, sustainability, and governance priorities and investments towards climate action.”
_{^{–Franck Adjagba, Group Director of Business Development, African Guarantee Fund}}

The FPP aims to accelerate carbon project development efforts by freeing up investor funds for reinvestment and mobilizing domestic banks in African countries looking to meet their climate commitments. Investors, banks, specialized financial institutions, and carbon project developers have joined the FPP to offer companies financing options such as loans backed by carbon finance revenue. The FPP is also finding ways to protect investors and companies from unpredictable changes in the market price of carbon, such as by providing a minimum guaranteed price for a carbon credit. Lastly, the FPP is helping to build banks’ abilities to evaluate carbon projects, working with government agencies to build supportive laws and policies, and testing its first structured deal with a biodigester company in Kenya (see next page).

THE FPP’S FIRST CLEAN COOKING DEAL:
BIOGAS IN KENYA

In a first test of its approach, the FPP is helping to structure a $1 million deal with a company in Kenya that has already installed more than 6,000 systems, known as biodigesters, that use animal waste to produce clean fuel for cooking.

The company’s major pain point is the time it takes — at least 12 months — to convert carbon credits to sales revenue, as credits have to be verified, buyers have to be found, sales terms negotiated, and payments made. This means the company needs to wait for these funds to accrue before reinvesting in selling more biodigesters and expanding in the Kenyan market.

The company has requested a $1 million line of credit to meet its annual working capital and capital expenditure needs, backed by future carbon revenue. This line of credit would allow the company to sell and install biodigesters for 2,000 households every year, thus avoiding around 18,000 tonnes of CO2 equivalent annually. These additional sales would also generate further opportunities for carbon finance.

To meet this request, the FPP is working with a regional bank that has a team dedicated to carbon and clean energy finance and would cover the largest share of the loan, partially secured against a 75% loan guarantee from one of the FPP partners, the AGF. An FPP investor has also expressed interest in holding a smaller stake in this deal. The FPP’s work to create a carbon price floor guarantee would provide added security for the bank and investor. The deal will likely close later this year.