In South Africa’s rainy season, starting a traditional three-stone fire to boil water can take an hour and a half. For one ten-year-old, in a village where carbon developer TASC has distributed cookstoves, that was a chore before school. “Now, she told me, it takes 13 minutes to boil five litres of water,” says Shelley Estcourt, CEO of TASC, The African Stove Company.
TASC generates carbon credits from the emissions savings achieved when households switch to more efficient cookstoves, using credit sales to fund its work. But manufacturing, distribution, monitoring and verification require investment before credits generate cash. Early funding came from private investors willing to bear those risks.
Standard Bank subsequently financed anticipated carbon credit receipts, but only once cookstoves had reached households. “They don’t take distribution risk … they couldn’t step in for any funding mechanism until distribution had happened,” Estcourt says.
As Lawrence Cole-Morgan, who leads carbon-credit trading at Standard Bank South Africa, observes: “It’s still a nascent market.” Reforms aimed at restoring confidence are strengthening standards, but uncertainty remains.
The bank shares borrowers’ downside without participating in their upside and therefore takes a cautious approach. Its requirements include an experienced developer with a proven delivery record, a dependable regulatory environment and a creditworthy buyer under a contractual offtake agreement.
According to Standard Bank, its financing has helped TASC increase distribution from 400,000 to 950,000 stoves. For developers’ finance teams, the question is how much they can borrow against future carbon income, and how to fund costs debt will not cover.
Closing the funding gap
The bank assesses delivery risk (whether projects can generate sufficient credits), and price risk. Carbon market volatility means Standard Bank needs a fixed-price contract or minimum price floor against which to model future cash flows. Pricing linked solely to a market index would expose it to price risk it cannot accept. TASC has a fixed-price offtake contract.
Lending also depends on realistic delivery forecasts and contracted purchases. For example, a project capable of generating one million credits annually cannot borrow against all of them if purchase agreements cover only 500,000.
Developers must substantiate their credits through reliable records and monitoring. As Estcourt puts it: “Our data is our inventory.”
Cole-Morgan describes the approach as “kind of like a hybrid between project financing and invoice discounting”. In other words, the bank may lend only a proportion of expected revenue, even where sales are contracted.
A proven delivery record can give developers more funding choices. Cole-Morgan says some seek bank debt as an alternative to early financing arrangements that require them to surrender a substantial share of future carbon revenue. “Bringing cash forward helps bridge the funding gap and repay upfront capital and financing costs,” Estcourt says.
Uganda’s Mandulis Energy illustrates the earlier-stage challenge. Its proposed northern Uganda project combines solar, batteries, anaerobic digestion and biomass gasification, producing electricity and biochar that stores carbon. Co-founder Peter Ben Hur Nyeko says electricity and biochar fertiliser revenues alone would not provide sufficient returns to finance the plant. Forward carbon sales are therefore necessary to its proposed financing structure. Mandulis is offering future carbon removals for sale but has not yet issued credits, finalised purchase agreements or received advances.
Nyeko acknowledges that “a tonne of carbon locked in biochar is not yet a tonne on a registry, and a tonne on a registry is not yet money in the bank.” He is, however, encouraged by “the market around us growing up”. Microsoft’s agreement, through Rubicon Carbon, to buy two million tonnes of removal credits over nine years from Uganda’s Kijani Forestry is one example of buyers’ willingness to commit before delivery.
Protecting repayment capacity
A fixed sale price does not guarantee the volume of credits available to sell. Government policy, eligibility requirements and crediting methodologies can change, affecting saleable volumes and demand.
Estcourt says a methodology change during a crediting period overturned assumptions underpinning TASC’s modelling and financing. Such changes can affect repayment capacity even while projects continue operating. TASC, therefore, builds buffers into its cash flows and implementation schedules.
“Our ethos is to model conservatively. If our project and financing doesn’t work on a worst case scenario, we won’t do it,” Estcourt says. “We will never boost potential issuances or revenues or overcommit to how quickly we can distribute stoves.”
Insurance can offer protection. “There are delivery risk products that will pay out if the project doesn’t deliver the volume of credits that it says it will,” Cole-Morgan notes. For TASC, however, underperformance cover has proved too expensive for its South African operations.
Nyeko urges treasurers to distinguish between expected income and credits already issued, delivered or paid for, and examine who bears any delivery shortfall. “If the developer must make good any shortfall, that is a liability on one side as surely as it is revenue on the other,” he says.
In short, treasury must connect operational evidence with realistic volumes, payment dates and debt commitments to ensure that sufficient funding is available both before carbon receipts arrive and if they disappoint.
