This guest post is by Dr Emma Wilson, senior researcher and energy team leader at the International Institute for Environment and Development.

How do you raise $1 trillion dollars of investment in 17 years? That’s what the International Energy Agency says is needed to achieve the UN’s goal of universal energy access by 2030.

Much of this investment is needed for decentralised energy access in communities in developing countries who may not be able to pay standard tariffs regularly, or who can’t afford capital investment in new equipment. Local initiatives often need very small-scale investment, typically a few thousand dollars. These are the markets that mainstream investors tend to avoid, and the levels of investment that they think are not worth the transaction costs.

Yet there’s increasing interest in emerging energy markets from impact investors: socially responsible investors who actively seek to place capital in businesses that harness the power of enterprise to do good. A survey by JP Morgan found that impact investors committed $8 billion to impact investments in 2012, and plan to commit $9 billion this year. Developing country energy markets are still seen as higher risk than some other investments, but there are indications that interest in this area is growing.

Flexibility to invest in innovation

An exciting new innovation for these circumstances is crowdfunding, which involves selling small amounts of debt or equity to large numbers of investors (the crowd). It is working for emerging energy markets using online platforms such as Kiva, Microplace and SunFunder. Crowdfunders have the flexibility to offer smaller deals and phased investment, and they can invest in early stage enterprises and innovative business models.

The critical element is a good business model. As Ryan Levinson, the founder of SunFunder puts it: “The key for us is sourcing a scalable pipeline of high impact, low risk projects.”

A key SunFunder partner is SunnyMoney a solar enterprise set up by SolarAid. SunFunder is seeking $25,000(£16,600) for SunnyMoney’s programme to provide 4,500 solar lights to benefit 22,500 people without electricity in Tanzania. So far 117 people have invested a total of $15,790. This will be used to purchase and sell solar lights with mobile phone chargers, as part of SunnyMoney’s ‘solar schools’ programme . As trusted community representatives, headteachers are trained to sell the products and provide after sales maintenance and advice. SunFunder is also seeking support for ReadySet, Charge!. Eighty-four people to date have funded $11,578 of a target of $15,000 to equip micro-entrepreneurs with ReadySet solar chargers with built-in LED lights. The manufacturer, Fenix International, is working with the Kinyara Sugar Savings and Credit Cooperative (SACCO) to make the chargers available to workers on credit. The workers can earn up to $40 a month from mobile phone charging services. Benefits of mobile phones to farming communities include access to information on crop prices, weather updates, health advice and mobile banking.

How crowdfunding works

So how does crowdfunding work in practice? The basic model is that individual investors make payments to local partners via the crowdfunding platform; the partner makes repayments to this crowdfunder which, in turn, repays the investors.

A key element of SunFunder’s success is its close relationship with local partners, who might be enterprises or community organisations, like savings groups. SunFunder focuses on partners who can demonstrate that their model works, but who have found it difficult to access sufficient funding to scale up their activities. A robust due diligence process is also essential. and it is not just a financial assessment, the personal relationship with the local partner is critical and trust is built through regular calls and direct engagement.

Initially SunFunder offers a one year financing term, which allows it to assess the risk of repayment from end users. It looks at the technology and talks to people in the market about what is working and what isn’t. Investors are interested in the development impact, so partners track how many people are empowered; how much money they are saving and so on.

Crowdfunding the growth of decentralised energy in the UK

Crowdfunding is just one option along a spectrum of finance options for decentralised energy access. SunFunder views itself as a solar finance company for the off-grid sector. It seeks to partner with other impact investors and eventually to attract mainstream investment.

Crowdfunding can have a positive social impact in emerging and developed economies alike. Here in the UK, it is increasingly being used by startups to kick start innovative business ideas. It is a very fast route to raise cash and creates a strong support network, enabling investors to monitor progress continually. Many crowdfunders even offer professional help such as legal or accountancy services for free. Most importantly, crowdfunding works best for companies with a passionate vision or a social mission that will excite investors. And decentralised energy projects fit that bill.

Correction made to text in paragraph six, 29 July 2013:

Original text: ‘SunFunder is seeking $25,000 (£16,600) for SunnyMoney’s programme to provide solar lights to 200,000 people without electricity in Tanzania.’

Amendment: ‘SunFunder is seeking $25,000 (£16,600) for SunnyMoney’s programme to provide 4,500 solar lights to benefit 22,500 people without electricity in Tanzania’