P-REC Aggregation Fund

About

OVERVIEW

The Peace Renewable Energy Credit (P-REC) is a new financing mechanism that is unlocking new renewable energy investment in fragile, energy-poor countries, where renewable energy investment is severely limited. In 2020, Microsoft’s purchase of the first-ever P-RECs – from Congolese solar developer Nuru’s off-grid solar mini-grid project in the Democratic Republic of the Congo (DRC) – funded a transformative project that has increased access to energy. The P-REC Aggregation Fund will aggregate P-RECs and sell them to investors in order to provide up-front equity capital for project developers for a portfolio of renewable energy projects in the region.

THE PROBLEM

Climate finance is currently focused on the largest emitters of pollutants, with little investment flowing to the most climate-impacted. Africa and the Middle East combined receive roughly 6% of global climate finance, with a small fraction of that going to fragile states. Renewable energy projects in these regions face several barriers to finance, including political uncertainty, conflict risk, and lack of credit for energy off-takers and project developers. When developers can secure financing, it is prohibitively expensive or the due diligence process is exceptionally cumbersome. Traditional RECs are most commonly purchased on an annual basis on the spot market, and long-term contracts are rarely used. However, long-term contracts are most beneficial to make an impactful contribution to P-REC-eligible projects as they can provide upfront capital or commitments for new projects.

THE SOLUTION

The fund will aggregate P-REC projects and execute long-term contracts (up to 10 years) to purchase P-RECs. Investors would contribute to a fund that finances these contracts upfront, providing developers with catalytic capital (approximately 10% of project costs) necessary to start projects and reduce barriers to financing the remainder of the capital necessary to finish projects. In-depth, on-the-ground due diligence is an important part of the P-REC qualification process that further helps mitigate risk. Once projects are approved, P-RECs are issued to the fund entity, which in turn sells the P-RECs to corporate buyers. The fund earns revenue through interest payments and arbitrage opportunities.

 “As we build our pipeline of P-REC projects in DRC and other fragile, energy-poor countries, we see many viable renewable energy projects that struggle to raise capital. The P-REC Aggregation Fund can close this gap. The Lab will provide crucial modeling, structuring, and other advisory support that will help us scale the P-REC Aggregation Fund,” – Katie Retz, Energy Peace Partners

TARGET IMPACT

The Fund is estimated to support a portfolio of projects similar to the pilot P-REC project, generating 56,000 MWh of reliable, renewable power per year in DRC and providing energy access to thousands of households and small businesses, often for the first time.

Photo credit: Nuru