7 predictions for distributed renewable energy in 2023
Odyssey has been working on scaling distributed renewable energy in emerging markets since 2017. Every year since, we’ve seen dramatic increases in interest, investment and growth across the industry. With the worst impacts of COVID in the rearview mirror, we know that 2023 will be a banner year; here are a few of our predictions for what’s to come.
Public and private finance see the opportunity for high returns
In 2017, interest in financing for the DRE sector in emerging markets was almost exclusively from development banks, governments and impact funds. That has been changing. In 2022, a number of institutional investors who we work with were actively seeking investments in DRE given the high returns potential. As we head into 2023, we expect many global institutional investors and also local commercial banks to expand their investments in DRE.
Concessionary capital fully embraces results-based financing
The verdict is in: for development banks, governments and impact funds looking to finance electrification projects, the most effective types of programs are results-based. This reflects a significant change from the traditional tender approach, whereby pre-selected sites are tendered out to the lowest bidder. Results-based schemes allow organizations to select their own customers or sites, and receive funding based on demonstrated outcomes (such as power delivered or GHG emissions reduced). A good example is the World Bank’s SCALE program, a ‘one-stop-shop” for all World Bank-administered results-based climate finance programs, with a funding target of $1B by the end of 2023. We predict continued momentum for results-based financing.
Industry-specific initiatives for maximum impact
With COVID we saw an increase in health electrification initiatives, including Powering Health, a USAID initiative that electrified over 200 health facilities, impacting over 2 million people. The success of this program, among others focused on education, has carved paths for scale. We witnessed more cooperation across stakeholders and a willingness to experiment with new financing models to build financial sustainability into the model. These programs are focused on the long-term reliability of installed solar, showing that monitoring solutions have an important role to play in measuring reliability and other performance metrics over the lifetime of the system. Based on the learnings, momentum and success of these initiatives, we expect to see more industry-specific financing in 2023.
New revenue streams for project developers: renewable energy credits
There is a growing interest from financiers and renewable energy companies to participate in renewable energy certificates (RECs). Our partnership with Powertrust and their 2022 Purchase Program and Energy Peace Partners are great early examples of this. For instance, through Powertrust, developers of impactful, distributed and utility scale projects in Asia, Africa and Latin America are using monitoring technology to measure kWhs generated and then selling them to corporate buyers who are looking to match their own energy use. As corporate buyers continue working toward their climate pledges we expect to see more creative ways for renewable energy companies to monetize the renewable energy and co-benefits produced.
The race for solar equipment
As the world recovers from the supply chain disruptions of the past few years, renewable energy companies in emerging markets will continue to face challenges in procuring equipment in the timeframes that make sense for their projects. In 2023, we see companies and services that offer in-stock or short-lead time equipment availability emerging as an important part of scaling DRE in those markets.
OEMs pedal to the metal
Meanwhile, as OEMs recover from the supply chain disruptions of the past few years, we expect OEMs who are ramping up their manufacturing to sell more aggressively with friendlier terms for customers. In 2023, we are likely to see greater investment in inventory in expectation of a ‘normal’ year notwithstanding the looming clouds of recession in certain parts of the world.
Data-led investment diligence
We are seeing increased interest from project investors to access operational data directly from projects to help them proactively monitor their investments, and also make better investment decisions with the benefit of hindsight. This is a new paradigm for most investors but both investors and renewable energy companies are loving using consistent, reliable information about their operations to ease the path to financing. We predict that in 2023 we’ll see an increased focus on digital technologies that provide insights on portfolios to all stakeholders – from investors to operators.
While diesel generators will continue to be an important part of the DRE puzzle for some time to come, the operational, financial and emissions challenges that they present will lead to continued innovation in green hydrogen technologies and solutions that can be deployed in the field to replace (or at least reduce) diesel.