Tackling poverty and climate change: IKEA and Acumen’s $25m energy investment initative

 

Biswarup Banerjee and Sarah Bieber

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Today, two out of three people living in extreme poverty live in rural areas, often without access to electricity.

The combined impact of the Covid-19 pandemic, climate change and volatile energy prices caused by the Russia-Ukraine war is making life even more difficult for rural communities. Add inflation and the spike in food prices and you have a potent mix of factors that could leave 50 million people facing acute food shortages in East Africa by the end of 2022.

A lack of access to electricity leaves people even more vulnerable to economic and climate shocks.

Renewables build resilience

Affordable renewable energy can build resilience in rural communities by powering people’s homes and businesses. Through renewable energy, impoverished areas can be well prepared to withstand shocks in the future and break out of poverty cycles.

Social businesses are working to equip rural communities with renewable-energy-powered appliances and solutions. Their products and services – such as solar-powered water pumps, dehydrators, and refrigerators – can replace fossil fuels and avoid greenhouse gas emissions (GHG). Simultaneously, they can increase the incomes and climate resilience of smallholder farmers and microentrepreneurs.

These enterprises now need access to capital and climate finance to refine their consumer credit and distribution models to scale their impact in underserved communities.

To this end, Acumen and the IKEA Foundation are launching a $25 million energy investment initiative with a dedicated group of partners. This will demonstrate the commercial viability as well as outsized impact of these innovative businesses, and crowd more capital into this market.

Displacing diesel generators

An issue that the solar market is addressing is the use of fossil-fuel generators. Noisy, polluting, and expensive, Fossil- fuel generators are used to power businesses and public services in communities without a reliable electricity supply. Across sub-Saharan Africa annual generator fuel costs account for 20 per cent of government spending on education and 15 per cent on healthcare. These statistics are expected to grow while fuel prices remain volatile.

However, renewable energy solutions are proving that solar is a viable alternative to provide much-needed electricity for micro-businesses. Koolboks is an Acumen portfolio company that provides solar-powered refrigerators to small businesses in Nigeria. They have shown that their 280-litre solar-powered refrigerator can save customers 40 per cent over two years compared to diesel and petrol-powered products.

Similarly, Winock Solar is replacing diesel generators with solar power systems, solar water pumps and other appliances for small businesses through a rent-to-own approach. These save business owners a substantial 68 per cent in energy costs.

Pathways out of poverty

For these microentrepreneurs, fuel cost savings combined with increased sales translate into higher incomes, while avoiding food loss and GHG emissions. Solutions like these create pathways out of poverty while also mitigating the impact of climate change.

Solar-powered technologies can meet the energy demands of small rural businesses if the pricing of these appliances comes down. Investing in these technologies can refine business models, create competition in the marketplace, drive consumer demand, and reduce prices.

Winock Solar and Koolboks are among the few early-stage businesses that have been able to make the leap from grants to investment capital designed to scale their operations. However, the total available market of the productive use of renewable energy (PURE) subsector is estimated to be more than US$11 billion.

Unique investment opportunity

During COP27 in Egypt, there is an increased focus on how under-electrified regions such as sub-Saharan Africa should power their economic growth. For a continent that has only contributed to three per cent of global GHG emissions and holds 568 million people without electricity access, climate injustice is an understatement.

As African governments continue to define the energy mix that meets their needs, climate investors have a unique opportunity to support this growing PURE market serving rural communities.

After all, solar-powered products that allow people in poverty to generate income are one of the few solutions that do not force leaders to choose between developing their economies or mitigating climate change.

Biswarup Banerjee is the Programme Manager for Renewable Energy at IKEA Foundation, and Sarah Bieber is Head of Energy Partnerships at Acumen.


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