Energy Access – Why the current financing model will fail


January 22nd, 2015

This is my second post from Abu Dhabi, where I have been attending the World Future Energy Summit as a guest of the Zayed Future Energy Prize. For the second year running Practical Action was shortlisted for this prestigious $1m prize in recognition of our work on helping poor people in the developing work access clean energy (we finished runners up again in case you didn’t see my last blog!).

DSC00206 (1)One of the recurrent themes of the conference sessions I have attended over the past week on energy access has been finance. I have written in this blog before about the general lack of funding for energy access, particularly off grid technology. The International Energy Agency (IEA)[i] has estimated that, if we are to achieve universal access to energy services by 2030, around 64% of the additional finance required will have to be invested in off grid systems, for example solar home systems or local mini grids powered by generators or renewables such as solar, wind or micro hydro. But there’s little evidence that much investment is going anywhere except into the traditional areas of big power stations and extensions to the grid, neither of which is expected to provide much benefit to those in remote rural areas who lack electricity at the moment. The Sierra Club, a US based environmental NGO, carried out an analysis of the major development banks energy lending portfolios for example[ii], which showed that the World Bank and the Inter-American Development Bank did best, with 25% of their lending on off-grid infrastructure (but still way off the 64% figure needed according to the IEA). At the other end of the scale, the Asian Development Bank had only 7% of its portfolio invested in off grid and the African Development Bank 0%!

But there is another type of finance gap now appearing. In addition to the general lack of availability of funding it’s also becoming apparent that there is a real affordability gap in the model currently being promoted by the development banks, donor agencies and sector specialists.

What this year’s Zayed Future Energy Prize winners MKOPA and runners up SELCO have been doing brilliantly in Kenya and India has been developing viable businesses to make solar lighting available at a cost which is increasingly affordable to those on low income – solar lanterns for households on US$ 1 -3 per day income and small solar home systems that can run 3 or 4 lights, charge a phone and maybe even run a small TV or radio for those with an income of as little as US $3 -5 a day.

But this is not yet energy access in the real sense. If we start layering in the energy services people really need to make a difference to their livelihoods – maybe refrigeration to preserve food or mechanical power for productive use (grinding, milling, pressing, drying or storing crops, pumping water etc), the power requirements go up dramatically, way beyond the capacity of current affordable solar home systems to supply.

This is where larger capacity communal mini grids come in, and there was much talk about these at the World Future Energy Summit. But the recurring motif in those discussions was the need for a business model that would bring in private investment to finance mini grids because “public subsidy was never going to be sufficient”. The problem is there are two enormous holes in that argument:

Hole 1: The idea that mini grids are financially attractive investments in their own right. The reality is that there is a massive gap between what would need to be charged as a tariff to recover costs and what poor people have at their disposal to spend on energy services. A recent report from the Lawrence Berkeley National Lab, University of California[iii] covers this ground nicely. It estimates the basic electricity needs of rural household for full energy access at around 80 kilowatt hours per month (based on using a fan, 4 LED lights, a small TV, a small refrigerator and the equivalent of 4 hours a day of power for a mechanic device such as a small irrigation pump or equivalent). Using an assumed cost of around $0.24/kwh (which is quite optimistic for small mini grid type supplies) that comes to a monthly cost of at least $20 per household if full cost recovery is required. Typically low income households spend around 10% of their income on energy (50% of which is on cooking fuel). This translates to budgets available for electricity of around $7.50 per month for households on $3 – 5 per day and less than $1.5 per month for the extreme poor on $1 a day or less. These figures from the University of California are very rough, but they serve to make an important point. The costs of mini grids would have to reduce by at least 60 to 90% to make the tariffs affordable for the poor but still keep the systems as viable investments for private capital.

Is it any wonder the banks can’t find investors to take out loans for mini grids?

Hole 2: The idea that there simply isn’t enough money in the world to make public subsidy viable. We are told that there is no possibility that public finance could be used to close the gap because there simply isn’t enough to go around. But at the same time, the IEA tells us that currently more than $500 billion[iv] is being put into public subsidies for fossil fuels every year (with others such as IRENA putting the figure much higher at as much as $1900 billion in 2011[v]). So the fossil fuel industry is being kept on a massive publicly funded life support system while the poor are told that the off grid systems they need to access a basic level of energy services can only ever be provided through private investment.

Conventional wisdom abhors subsidy, but in Bangladesh, where the most successful solar home system programme to date exists with around 4 million households supplied, provides a great example of how subsidy can work, making technology affordable and getting markets moving and costs down. According to a World Bank study[vi], the Bangladesh programme started off with an average subsidy of around 25% per unit in 2004, reducing to less than 10% by 2013. The interesting thing there was that the cost to the consumer for a system was less in 2013 than it was in 2004, despite the reduction in subsidy. Why? Because technology got cheaper and the scale of the programme drove innovation and cost reductions that, together, exceeded the reduction in subsidy over the same period.

It seems time for the development banks, donors and the energy sector as a whole to take a long and really honest look at the financial models being proposed to ensure universal access to energy. Its time to face up to the reality. Private capital and good business models are definitely needed. But universal access to energy (not just for light but energy for the productive uses that will help people work themselves out of poverty) will not be achieved without public finance playing a very significant role to close the affordability gap as well.

 

[i] IEA 2011, Energy For All, Financing access for the poor, page 25

[ii] Sierra Club / Oil Change International 2014, Failing to Solve Energy Poverty: How Much International Public Investment is Going to Distributed Clean Energy Access?

[iii] LIGTT, Institute for Globally Transformative Technologies at the Lawrence Berkeley National Lab, University of California, 2015, 50 Critical scientific and technical breakthroughs required for sustainable development – Energy Access pp 26 – 29.

[iv] Bloomberg, Nov 112, 2014 Fossil Fuels With $550 Billion Subsidies Hurt Renewables

[v] IRENA sourced from: LEVELLING THE PLAYING FIELD AND SAVING MONEY WITH

RENEWABLE ENERGY

[vi] World Bank (2013)  The Benefits of Solar Home Systems – An Analysis from Bangladesh Policy Research Working Paper 6724, page 10

3 responses to “Energy Access – Why the current financing model will fail”

  1. David Kempton Says:

    A very insightful article. Thank you.

  2. Natasha Jolob Says:

    Really good to hear Simon Trace, CEO of Practical Action give his insight into the problem of financing off grid energy, in response to discussions at the World Future Energy Summit, highlighting the barriers to financing communal mini grids as affordability by local people, and lack of government subsidy.

    Could social investment help? Social investment, where capital is used for finance and social returns is an emerging market in the UK . It supports the growth of the social enterprise sector and attracts more mainstream capital. It could be part of a solution.

    However here in the UK the barriers of attracting finance for investment into good deals are similar to those experienced in emerging economies.

    On the demand side, loan finance is not very well understood, many local social enterprises don’t know how to access finance and the ‘small and beautiful’ need support to get investment ready. Social enterprises find it hard to be strategic as they chase an ever more competitive pot of grant funding that is not viable for growing business, and they face increased demand for services but lack of suitable forms of capital.

    Supply side challenges are that currently social investment it is not suited to the demands of social enterprises, the distribution of capital is fragmented, it is hard for investors to find good investable deals, and developing agreed metrics to measure social outcomes is resource intensive.

    But there are ways through:

    In the UK providers of finance and investment are now working together on joint funding initiatives as philanthropy and commercial capital are mutually reinforcing. In this way, philanthropic capital takes the first loss position & opens the door to other investment capital. New funding and delivery models that co-ordinate philanthropic, public sector and social investment finance are also gaining ground e.g. Social Impact Bonds and outcomes based contracts. These are a form of borrowing that enable the public sector to make cuts whilst funders and investors invest in the delivery costs of preventative services. The public sector pays the investors back if the interventions deliver outcomes and save money. In this way the public sector leverages the deal flow needed to finance social care.

    Could these kind of models work for communal mini grids in a developing country context? A kind of funding and delivery model that brokers philanthropic and social investment funding and supports local social enterprise delivery?

  3. Martyn Cowsill Says:

    Good Evening All
    Access to clean energy in remote communities. I’m part of a team that has been working with University of Leicester to develop satellite-based earth observation technology that can identify, then further qualify as more-or-less viable, sites on rivers where micro hydro could be installed. You may be aware of some software products already available that will analyse the potential for a given site, but the product we are working on is different in one key way: it starts with the manufacturer inputting the operating parameters of his preferred turbine (the ones he wants to sell). The satellite then surveys whole river valleys, across the globe, to find places where that model of turbine would fit. What’s the big deal about that? Well, for the first time, there is a tool which will pro-actively provide the manufacturer with enough possible installation sites for him to start thinking about mass production. Mass production of a single standard type of hydro kit means lower product prices. Suddenly sites which previously were not cost-effective, are now cost-effective. The cost of surveying a remote rural river near a community in rural Uganda, using traditional methods, is close to prohibitive. This satellite kit costs next to nothing, or at least it will do once it’s fully developed. And that’s why I’m writing this comment. We need partners in the developing world to use a working prototype of the software to show that it works. We have had funding from Innovate UK (it was Technology Strategy Board when the project started three years ago) for the development so far and we’re about to apply for more funding, possibly from their “Newton Fund” to complete the product development. We’re also working on the prototype of a standard, fish-friendly hydro kit which combines the turbine with the generator, thus simplifying the kit in both its components, and, more importantly, in its installation. Yes, this does have a market in the EU, but the real benefits come in remote rural areas of the developing world where the cost of access to electricity (clean or dirty) is higher than in the EU.
    I’m hoping this note reaches Simon before I phone the office in Rugby tomorrow.
    best wishes
    Martyn Cowsill
    07827 017796

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