This section is essentially about all the various "flavors" of money -- where it comes from, what form it takes, how it is expected to be used, when and in what fashion it is returned, how much it costs, etc. Most enterprises, during their lifetimes, will access multiple flavors of money and part of their success will depend on how well they are able to navigate these transactions and acquire and blend resources. From the perspective of the enablers, it is important to know what combination of money types are needed for each project and to be able to accurately model the internal rate of return in order to determine whether the project falls within the operating guidelines of the enabling institution. When entrepreneurs (or champions) and investors/lenders (or, more broadly, enablers) understand these concepts and calculations from the beginning, it speeds up the decision process and saves both sides form wasting valuable time and resources.

  1. Review of funding types
  2. Review of funding sources
  3. Important lessons learned
  4. Enabler funding types and expectations summary table
  5. Case study: E+Co's self-described "Box"
  6. Tools

Review of funding types

The following is reproduced from the UNFCCC Guidebook, pg 155

Types of funding - Summary Table
Type of funding
Other funding models that fall under this type
Grants do not need to be repaid
Capital and operating grants
Revenue for products and services, including operating subsidies
Sale of carbon credits or pollution benefits
Loans are made base on the ability of the proposal to repay what is borrowed under clearly defined terms
Leasing, build, operate and transfer (BOT) contracts, installment sales or purchases (hire purchase), financing or credit terms from a supplier
Equity investments are made in return for a share of the profits upon the success of what is proposed.
Mezzanine debt, preferred shares, quasi-debt and quasi-equity

Review of the major funding sources

The following is reproduced from the UNFCCC Guidebook, pg 83 - 84

Loans -- are made on the basis of the ability of the proposal to repay amounts, generally under fixed terms and conditions. It must be demonstrated that a very conservative output of the proposal can more than repay the loan. This requires matching the schedule of revenue generation with the scheduled loan repayment and exceeding that schedule by a factor of say 50 per cent (which is called a 1.5 times debt service coverage, meaning that for every dollar, euro, rupee, peso or CFA of loan to be repaid, 1.5 units are expected to be available at the time the payment is due). A lender wants to know that all the other funding needed to build and operate the facility is in place, that there are guarantees that costs will be managed and that if there are additional costs others are prepared to pay them and capable of doing so.

Grants and donors -- If the request is for grant funding to provide important goods or services, because revenues cannot cover costs and the proposal has a negative rate of financial return, the donor will need to understand why the plan is an efficient use of scarce resources, where the plan its in with other programmes and priorities, how the proposal meets the donor’s stated core objectives and, very importantly, what will happen when the donor funding is used up. Key words to understand and deal with include efficiency, effectiveness, sustainability and context. A customized “logical framework” may help to communicate the Champion’s mastery of the needs and responses proposed.

Development, specialized and “triple-bottom-line” investor-lenders -- are lending- and investment-oriented to development, environmental and financial objectives. Usually involves the creation of human and physical infrastructure with modest financial return expectations and higher risk, but the payoff is a sustainable operation and good developmental and environmental impacts. Funding to create such infrastructure and begin such an operation may or may not be recovered over a commercially reasonable period of time. If start-up capital is being sought, then the ability to repay it over time and upon success needs to be demonstrated. Whether or not the capital will actually be repaid is a separate issue. Initially it needs to be shown that the revenues from repayments, after allowing for defaults and allowing for administrative costs, are sufficient to cover the cost of capital to achieve operational self-sufficiency, meaning that the proposal is on a path towards institutional self-sufficiency, which implies the ability to borrow capital regularly through a variety of commercially available sources, manage operations and repay those borrowings while increasing equity (the original start-up capital plus profits).

Venture capitalists and specialized investors -- If the request is to obtain risk capital for something new, it needs to be shown that there is either a very handsome return to be made on the initiative or a larger market with high returns to tap once the proposal has proved its case. Venture capitalists understand the assumption of risk, so after the return and market potential are demonstrated it needs to be shown that the assembled team can manage the expected bumps in the road. If the technology is new or new to the setting, how will breakdowns and setbacks be managed? If the profitability of the initiative is ultimately determined by the monetization of carbon benefits, how will this occur and why is this place the best place and why is this the best team to make it happen, especially if it has not happened before? If the market is going to grow, how will the venture grow and handle competition? Is there a first-mover advantage? How will these investors convert success into cash (exit strategy).

For a more detailed look at different types of loans, equity deals and guarantees, see the E+Co Investment Menu.

Important lessons learned:

The following is reproduced from the UNFCCC Guidebook, pg 83

  • One of the most important and patient things an Enabler can do is look at a Champion’s proposal from a flexible perspective: what can be done to match, for example, the early-stage cash-low problems of a proposal with later-stage stable periods? (For some ideas about how this is done, see the example of three different payment plans with the same NPV).

  • As much as possible, avoid delays in delivering promised or implied assistance or answers. Wasting time puts the Champion under unnecessary stress bordering on torture. Enabling organizations need to be prepared to take calculated risks and move on with the investment, or say an early “no”.

  • Champion and Enabler need to agree to a regular and reliable reporting schedule on progress. This evolves into actual implementation, when it is crucial for the Champion not to deviate from the implementation plan without prior discussion and agreement on what needs to be done. Anticipate this possibility when drawing up the investment or service contract.

Enabler funding types and expectations summary table

The following is reproduced from the UNFCCC Guidebook, pg 154 - 155

Types of donors (D), lenders (L) and investors (I)

Type of Enabler
Type of Money
Donors and specialized programmes
The donor will expect that the grant will be
used either as an addition to revenue to run the
business (operating grant) or to reduce the cost
of the proposal so that loans and equity will
cover the balance (capital grant). Donors need
to understand why the plan is an efficient use of
scarce resources, where the plan its in with other
programmes and priorities, how the proposal
meets the donor’s stated core objectives and,
very importantly, what will happen when the
donor funding is used up.
Same as above.
Charitable organizations
Same as above.
Multilateral development
Same as above.

subsidy programme
The providers expect that revenues will cover the
cost of the product or services and contribute to
the operation of the business (including repay-
ment of loans). The expectation is that left-over
revenues are first applied to the providers of
equity; then to other operating expenses (these
would include taxes, for example, and any inter-
est on loans); and, finally, to loan payments (such
payments are called principal or amortization,
while the combination of principal and interest on
loans is called debt service).
development institution
Lenders expect a very specific set of pay-
ments over time. Requirements are usually well
defined in terms of conditions that must be met
in advance and over the course of the loan.
Lenders do not want to take risks. Lenders want
to be repaid and, if the business cannot make
that repayment, they want to know that others
will make the payment or that assets of equivalent
value are available to reimburse them. Loans are
made to fund the construction of a project or the
purchase of goods or the provision of services
where the revenues from the goods or services
are expected to be more than sufficient to repay
the loans as and when promised. Some lenders
are flexible in their loans for a variety of reasons.
Others are absolutely not. The project needs to
demonstrate that a very conservative estimate of
revenue can more than repay the loan. Lenders
need clear procedures in place in case of loan
default, termination or repossession.
Commercial banks
Same as above.
Socially responsible and specialized investment funds
Loans, equity
Same as above

Development investors
Investors expect a higher return than lenders
and are willing to take more risk, but this should
not be confused with being risk-takers. They are
equally clear about what they are willing to do
or not do. Their interests are in seeing a business
succeed and in earning a return on their invest-
ment. If they become significant participants in
a business, they tend to establish very specific
(and stringent) targets to make sure that things
are going well. When things are not going well,
investors often have the ability to make significant
changes in a business, including replacement of
the management team. Investors get repaid only
if a proposal is successful and profitable. Positive
rates of return, market potential and a competent
management team must be shown. They are also
interested in market size, the reasonableness of
the base case, potential upsides and downsides
and exit strategies.
Strategic investors
Same as above.
Triple-bottom-line investors
Same as above.
Venture capitalists
Same as above.
Owners of businesses
Same as above.
Sponsors of social pro-
Same as above.
Financial investors
Same as above.

Case study: E+Co's self-described "Box"

E+Co, as a provider of finance to small and growing energy enterprises, has designated for itself a space where it believes most of its activities lie. The following is a step-by-step rationale regarding why the space is defined as it is, though other lenders and investors in this space may well disagree.

"North of microfinance" -- The amount of funding that clean energy enterprises need is usually greater than what microfinance institutions traditionally offer (more than $10,000). These enterprises may also need different types of funding or more flexibility in the structuring of that funding.
  • What's the same? However, E+Co has learned from microfinance not to let the absence of sufficient collateral prevent it from engaging in otherwise attractive deals. E+Co still requires registered collateral in order to disburse loans, but the actual properties involved would rarely if ever meet the traditional, more stringent requirements of what, say commercial banks would be willing to accept. Instead, much time and energy is invested in getting to know the entrepreneur personally, his or her family and community, and calling to mind Mohamad Yunus's famous dictum, "The poor always repay."
  • The microfinance connection: Energy access can be more effectively promoted if all aspects of the value chain are taken into consideration. Not only do enterprises need financing, but oftentimes, so do their clients. More can be found on this topic here. Another interesting point to add is that, in some cases, E+Co has provided what essentially amounts to end-user finance, though still working with amounts much larger than microfinance institutions would usually handle. An example of this can be found in the Red Ceramics case study.

"South of project or corporate finance" -- Small and growing clean energy enterprises, as a rule, need (and in fact, can only absorb) smaller amounts of capital than would be of interest to project and corporate financiers. An exception to this might include several cases of small hydropower developments.
  • What's the same? E+Co uses many of the tools traditionally employed in the "more sophisticated" financial realms and insists on accurate and rigorous business modeling for the purposes of matching projected cash flow with repayment terms.
  • The project and corporate finance connection: One of E+Co's goals is to make intial investments that can prove the viability of business and open the doors to growth and follow-on investments, paving the way towards more project and corporate finance opportunities for its investees. The case of La Esperanza (hydro) is illustrative in this regard; E+Co's initial investment was able to leverage much larger amounts of capital several years down the road, capital that can appropriately be described as "project finance."

"To the right of charity" -- Never has a development success story been built entirely off of charity. Something about "pure give-aways" tends to lead to a lack of ownership and weakening of ambition. Then, there is always the question of what whill happen post-give-away; will someone have the tools, resources, knowledge and incentives to build upon what was given? More often than not, this has not materialized and purely charitible interventions have a reputation of falling into disarray once direct support is removed. In addition, "pure give-aways" represent a less-than optimal use of finite resources which could otherwise be re-used or recycled for other purposes.
  • What's the same? Charity can however have a positive catalytic effect and some activities must simply be "subsidized," in whole or in part, temporarily or permanently. In some cases, E+Co's willingness to invest in projects and prove the viability of the sector has opened the doors for other to get involved. In other cases, E+Co remains a sole financier of projects that may never attract commercial funding sources. Today (2008) E+Co uses approximately $.30 for every initial dollar invested in a new enterprise to pay for overhead and services and this is not completely recovered (only about $.07 is recovered on a portfolio basis). The remain $.23 is made up of grant-based funding. Without that $.23 of soft funding (which is mostly used to provide capacity-building services to the entrepreneurs), however, E+Co would not be able to invest each dollar as successfully and attract the amount of quasi-commercial capital which permits a greater scope of operations. Here the $.23 is playing a catalytic role.

"To the left of venture capital" -- All of the actual numbers from E+Co's experience fall a little short of where they might on a "pure" market basis; entrepreneurs receive slightly concessionary interest rates because often they cannot afford the rates that local markets would offer (but in return, they put up with a lot more hassle), lenders to E+Co also lend on a slightly concessionary basis and social investors accept below-market returns in exchange for environmental and social returns. E+Co staff could probably make more money working elsewhere, but choose to stay on because they support the overall objectives of the company. Ideologically, this is in recognition of the fact that money is not the only measure of value. Practically, there is no way that donors would contintue to provide soft funding if they thought that those resources were only being used in order to provide near-market returns for E+Co's investors (although, one could argue that even this could constitute a wise use of funding if it really bumped up the level of market activity).
  • What's the same? However, similarly to commerical markets, E+Co espouses the ideas that "people respond to incentives." This is as true of the investees as it is of E+Co staff as it is of E+Co investors. Everyone wants something in return for what they've done, and everyone must do something in return for receiving something. Enterprise finance at E+Co is similar to venure capital in that E+Co essentially takes risks and expects rewards, even if the level of risk (or rather, the perceived level of risk) and the actual rewards (social and environmental in addition to financial) are slightly different from traditional venture capitalists.


Review of financial return
Project stakeholders' hurdle rate matrix
Using portfolio approaches

Review of financial return

The following is reproduced from the UNFCCC Guidebook, pg 85 - 86

Project or proposal rate of return is derived by posting the capital costs and the operating revenues and costs in their appropriate years. Net
present value and internal rate of return techniques give a time value to money. Anything beyond 15 years tends to have very little impact on these two results. (Year 1 is the first year of operations, all other prior years being zero, minus one, minus two, etc).
  • For each year, total the amounts outgoing and incoming. Total capital costs are a minus because these are outflows; grants are a plus because they are inflows; operating cash low is a combination of ins and outs.
  • For each year, total the cash low (out equals minus; in equals positive).
  • Calculate the internal rate of return.
  • If negative, revenues and grants cannot cover the capital and operating costs of the proposal. Without additional grants or subsidy, the proposal is probably not financially viable.
  • If positive, but below 5–7 per cent, the proposal is financially self-sustaining but may be of limited interest to the private sector. Specialized lenders-investors-donors who value development, environmental and market transformation impacts may consider such a proposal.
  • If positive and over 5–7 per cent, the proposal’s financial details (especially tax implications, debt structure and any additional revenues) need to be developed further and different financing schemes considered; the result may or may not be of interest to the private sector. Specialized lender-investor-donors who see the blended value potential of investments are likely targets.
  • If over 10 per cent, the financial details need to be developed with a strong bias towards engaging private-sector investors and lenders.

Estimated rate of return
Type of funding
Negative or zero
Grants and subsidies
Zero to between 5 and 7 per cent
Donors and investors who consider social and environmental
returns as well as financial ones
Over 5–7 per cent
Specialized lender-investor-donors who see the blended value
potential of investments are likely targets
Above 10 per cent
Private-sector investors and lenders

The following section attempt to summarize how a Champion must link what is needed with whom to ask.

Project stakeholders' hurdle rate matrix

The following is reproduced from the UNFCCC Guidebook, pg 85 - 86

Depending on the return potential, a sample of funders' interests is represented by the following three charts.


Using portfolio approaches

Lending, investing or even allocating grants is an inherently risky business; there is no guarantee that the project will succeed. In fact, it precisely because of this perceived risk that many institutions have been hesitant to enter the clean energy SGB space. However, after more than a decade of experimentation, it has been demonstrated that on an aggregate, or portfolio basis, clean energy enterprises in the developing world actually represent a relatively low risk class of investment opportunities.

  1. Complete assignments 1-4 of this worksheet example to become familiar with the modeling exercise.
  2. Then, play around with the various assumptions that have been made regarding your portfolio performance. What happens when one enterprise stops performing half way through its loan agreement?
  3. Does this need to be compensated for?
  4. What are some other variables that might be adjusted? Give an example of an adjustment that bring the rate of return back to its original value. Is this reasonable?
  5. (Optional) Now, complete assignments 5-9. What do you think?

This exercise can also be used to show how portfolio approaches work to smooth out differences amongst individual enterprises and the financial agreements made with them.

  1. What are some of these differences?
  2. Which differences are most important? To whom?
  3. How can allocating resources across many different types of deals help improve performance from the perspective of the enabler?