What do we observe?

1. access for all in Africacapitalisation studyIED-Axenne-Novalis7th annual meeting club-ER, Mombasa, 23-26 march 2010

2. What do we observe? • Important amounts of money • But not that much important regarding the needs • And the challenges (even if the impact of RE is difficult to assess precisely) • These amounts have not been equally disbursed between countries (Ghana, Marocco) and areas of a same country • Some « success story » (Maroc) exist but are not necessary so easy to reproduce elsewhere

3. A need to capitalize on these different experiences especially on the issues of institutional and financial designs in order to reorient the AFD strategy study realised by the consortium IED-Axenne-Novalis

4. Outline of the presentation • Some key issues of the study 1.1. Access, as part of a global political vision 1.2. The lessons from institutional reforms 1.3. Which cost/tariff/commercial management? 1.4. A continuum of technical solutions 2. Lessons for the AFD strategy 2.1. the AFD strategy 2.2. the « good ideas » for bankable projects

5. 1.1. Access as part of a global political visionNeed for upstream capacity and political will to formulate a vision and operational planning, with concrete definition of financial and organisational requirements The different situations of the same question of the access : • Grid extension within the national concession of the Power Company – national or privatised;  ; • Electrification of medium size towns or growth centres outside the national concession of the Power Company national grid or local generation systems with a distribution network MT and LT  ; • Electrification of very isolated and small localities individual systems or limited to collective services– especially the PV solar, or village grids (generally diesel) ; • Peri-urban electrification  question of densification of the connections different objectives : geographic repartition of the population/equity

6. Consequence : Organisational responsibilities are now dispersed utility, private operators, RE Fund / Agency, … Eonomically viable Not profitable, needs public support Shaded: can be covered by the operator (not always) 6

7. 1.2. what have we learnt from the institutional reforms? • 15 years ago, sector reforms : Power companies (public or privatised) and a Fund/agency of RE : one model • Consequence: often the RE Agencies are only juxtaposed to the urban electric system planning is difficult, few synergies • Key role of the public « champion » : Ivory Coast, Ghana, South Africa, Marocco, Tunisia • Too many institutional actors : lack of simplification after the sector reform (Mauritania water/RE) .

8. Are the Functions needed to implement a successful Access programme fulfilled?

9. 1.3. capacity of payment/tariffs/ commercial management • Capacity of payment of the electricity facture every month • Energy expenses are higher in rural areas (3-10$/month) quick saturation of the connection rate • Problem of the cost of connections :100-300€/annual expenses <50€pbes ad hoc financings of the connections : grant from the REF, cost sharing, loans, revolving fund mechanisms (Kenya) • Challenges of the commercial management/distribution (prepaid meters) to lower costs

10. 1.4 - Technical supply options have to be adapted to the contrasted geoeconomic situations A continuum of non exclusive supply options: • supply through grid extension, • central priority, • requires cheap generation; • decentralised production, • local distribution grid, • with variable local costs; • low levels of rural demand means that a large off taker is needed to make the option viable • off grid, • difficult to access and • costly to manage

11. A competitive cost of the Renewable energiesunder certain conditions: Energies Reneouvelables - Formation AFD, janvier 2009

12. 2. The lessons for the AFD strategy • Lesson 1 : support all stakeholders • Large sponsors : agro industries; investors; risk / returns sharing • Utilities – in particular to integrate renewables • End users for facilitating connection and reducing distribution management costs • Small scale operators (technical, managerial, financial support) • RE Funds / Agencies and financial intermediaries for fostering a sustaiable financing mechanism • National institutions for strategic technical and financial planning

13. Lesson 2 : Need for (“true”) innovation • from political to operational priority : mobilization of dedicate means (financial / human) • Consolidate list of projects /approaches to develop and test “best solutions for tomorrow“ • Identify African partners to implement these ideas • Identify donor’s partner to develop comprehensive approach and support • Lesson 3 : Focus on large scale diffusion • limit “pilot project” which use a lot of grant and have no demonstrative effect on financial scheme on the long run)

14. Lesson 4 : Leverage loans and grants Given the economics of access projects, concessional financing is a necessity, more particularly targeting the subsidy element on: Capacity building and upstream studies: Insitutional and regulatory frameworks; strategic planning; resource assessments and feasibility studies; technical and managerial training Project Implementation support Financial engineering, technical engineering, supervision of works, on the job capacity strengthening Investment support: risk sharing, softening terms, upfront grants

15. No profitability  investment grant Agro industry Project 1A Economically viable  Credit line, concessional Biomass waste Rural electrification 5% 50% 50% 30% Electricity production (500kW 10MW) 40% 20% Utility

16. Project 1A: Large sponsors (agro industries)Direct lending for large operations or credit lines through national commercial banks Sponsor(s) : agro industries Line of credit through national banks which then on lend. Countries: Kenya, Cameroon, Uganda, Tanzania, … • An agro industry invests in co-generation to reduce its energy bill • Has enough agro waste (rice husk, palm oil, wood waste, …) to produce excess power • A development bank provides a loan to an intermediary bank which onlends to the agro-industry • Profitability of additional investment depends on sales conditions of excess power: • Proximity of the grid and PPA • Location of unelectrified villages and level of demand; off take conditions • Percieved risk by the developer regarding the reliability of the off-taker over the long term. • Issue: will the local banks lend to agro industry? (commercial and project risk)

17. Economically viable  Credit line, concessional to match the profile of hydro investments Project 1B No profitability  investment grant Major off-takers 35% IPP @ 13 cts 25% Electricity poduction 100kW 15MW 40% Hydro site @ 5 cts Rural electrification @ 10 cts Risk due to hydrology Utility

18. Project 1B: Large sponsors – Independant Power Producers (IPP)Direct lending for large operations or credit lines through commercial banks Sponsor(s) : IPPs International concessional Line of credit through national banks which then on lend. Countries: Kenya, Cameroon, Uganda, Tanzania, Guinée, … • A private developer investor invests in a hydro unit as a business proposal • Assesses the quality of the site and physical risk • Looks for credit worthy off takers : • Large, base load, credit worthy industrial clients • The utility : distance to the grid? Purchase Price? • Villagers are last on the list: the IPP is not a distribution company and would want to see a reliable distributor • Issue: will the IPP be able to mobilise long term finance (15 years) needed to achieve attractive kWh costs (~5 cents / kWh)? • National banks generally have no appetite for these new and long term projects

19. investment : 700€/kW • kWh cost : 80% fioul • diesel @ 90cts/L : Cost > 30cts/kWh National electricitycompany Borrows and maximises n° connections in the short term, … but bears high operating costs over time Genset National electricitycompany Solar injection • investment : 8000€/kW • Cost : 20-25 cts/kWh • with long-term financing, • without battery storage Unwilling to use borrowing capacity for low number of connections per $ Despite LT sustainability ensured Project 2

20. Project 2 : UtilitiesTo ensure LT sustainable production costs – with renewablesLT soft financing is needed Borrower – technical and financial operator: Utility Countries: Sahelian region: Burkina Faso, Mauritania, Mali, Northern Cameroon, … • For villages located a distance from the interconnected grid, the standard remains electrification through diesel gensets • Utilities focus on large towns, often adminstrative capitals and on the most profitable clients within the settlement (large consumers, clustered) • Aim to connect maximum settlements with the scarce resources availble • Negative Long term consequences, with ever rising operating costs (cost of fuel and aging of the generators leading to inefficiencies) • Grid connected Solar PV is a viable alternative today – but utilities do not want to mobilise their rare financial resources for a small number of connections

21. Project 4A Local operators, Mali : PCASER PCASER unable to cover operating costs Rural electrification agency /fund(AMADER) Investmentgrant… ~80% competence pole biomassgasifiers (3 to 500 kW) Technical , Financial support

22. Project 4A: Private Small Scale OperatersTechnical and financial support for integrating biomass gasification and reducing fossil fuel dependancy Borrower: National Government, passing on to the Rural Electrification Fund (REF) Counterpart: RE Agency or Fund, then small scale local operators Possible countries: Mali, Guinée, Cameroon • Local operatorsgenerallyundertake diesel basedelectrification (understanding of the technology, lowinvestmentcosts) • Require 80 to 90% as an investmentgrantupfront and provide the balance as equity; • The REF provides a straight grant and isgenerally an account and not a financialintermediary; hardlyany local bank to loan in reality • After a few months / years, local operators are strandedbetweebrisingcost of diesel and lowcapacity to pay of customers: impertativeneed to bring down operating costs • Wherebiomassisavailableat the village level, gasificationwith straight mixing of the gas (up to 90%) is an option but requires: • information • technical know-how at the local level • availability of the gasifier or capacity to manufacture it

23. Local operators, Mali : PCASER PCASER unable to cover operating costs Rural electrification agency /fund(AMADER) Investmentgrant… ~80% competence pole biodiesel Technical , Financial support

24. Project 4.B: Private Small Scale OperatersLocal bio-diesel unit to substitute fuel in a cluster of gensets Borrower: National Government, passing on to the Rural Electrification Fund (REF) Counterpart: RE Agency or Fund, then an industrial SME Possible countries: Mali, Guinée, Cameroon, … most African countries • … same as 4A….. • Wherebiomassislocallyavailable, set up a smallscale biodiesel unit but requires: • information • Assessment of the biomassresource • technical know-how • contractualframeworkwith local operators to guarantee off take of the biofuelat a set price • investmentfinancing

25. Small operators Fund transfers manufactures utility Soft loans … Rural electrification agency/fund National governement grant National banks Soft loans Concessionnal financing Soft loans grant Cooperation banks and agencies Risk mitigation Financing autonomy, through long term bond issues, … Project 5

26. Project 5: Structuring a Rural Electrification Fund (REF)as a financial operator capable of leveraging funds REF / Rural Electrification Agency Madagascar, Congo- Brazzaville, Mali, Guinée – all countries politically committed to engage • As of today, REFs are not structured as financial intermediaries ie: • with the legal capacity to borrow from international agencies • To refinance themselves through issuing of bonds (as the Rural Electrification Corporation in India does) • Authorised to lend to local operators • In reality, face problems in leveraging funds from local banks. • The REF is an account to pass-on grants • International agencies provide sector loans to the Government who then passes on a small portion of the loan as a grant to the REF • There is no leveraging of funds in the Rural Electrification and Periurban subsector • Crucial to structure the REF to leverage grants

27. Indicative pipe of activities