The role of private sector and financial institutions in energy access – An emergent model

1. The role of private sector and financial institutions in energy access – An emergent model Enhancing Energy Access in Rural and Peri-urban Settlements: Knowledge-Based Policy Engagement 25 – 27 May, 2009 Cape Town, South Africa

2. outline review of: current situation regarding energy access; ‘fundamental behaviors/motivations’ of the private sector; and investment trends defining roles of private sector: SMEs under focus. barriers to private SME investment in clean energy products and services in developing countries/regions from theory to action: enabling and incentivizing SMEs and financial institutions to function the context of the REED programme Lessons and conclusions

3. Population living below national poverty line, 2008

4. energy access expansion: basic rationale… eliminating energy poverty: RISKS/ RETURNS US AGAINST THEM revalorizing agriculture-- improved productivity and incomes PROFIT / LOSS powering secondary industries, businesses, infrastructure:--economic diversification, growth and sustainability

5. nevertheless, the private sector (warts and all)… generates 86% of global investments – therefore can play a critical role in shaping the evolution of the energy sector in a climate constrained world. is projected to provide at least 80% of mitigation finance and a substantial share of adaptation monies. in developing countries, has already provided about 80% and 75% respectively of total investments respectively in renewable energy and energy efficiency.

6. a role for private SMEs… SME can lead the expansion of energy access (to modern equipment and services) ‘beyond the grid’ because they… …provide efficiently packaged services for a variety of energy users …provide low cost alternatives to grid extension – services ‘beyond the grid’ …can be configured in a wide range of possible business models …often provide significant net social and environmental returns Energy Branch, UNEP

7. role of SMEs vis-à-vis utilities and CBOs in energy access expansion population Rural Areas Urban Areas CBOs SMEs Utilities Poor $1/day Wealthy income levels Adapted from: Brew-Hammond, 2005

8. unleashing the genie – barriers to private SME sector investment: developing countries/EITs general barriers riskier business environment smaller transaction sizes  higher financing costs insufficient credit worthiness of project sponsors barriers specific to climate investments higher financial costs + overwhelming uncertainties of investing in unfamiliar technologies absence of a clear, durable, consistent, and sufficient price of carbon uncertainty regarding eligibility and definition of credits from carbon avoidance projects

9. Innovation capital Operating capital Transaction finance Entrepreneur’s equity Supplier credit Often secured Grants Working capital loans Consumer credit Occasionally secured Weak business planning skills Insufficient risk capital (growth and start-up) Non-existent end-user finance options Finance + capacity gaps Inadequate experience of Banks Enterprise development services User finance, micro-credit, lease/rentals, third party financing: Target group = Productive users of RE Capacity-building and risk sharing with local banks Seed and Patient capital funds Interventions egs. AREED, MEDREP, ISF Policy support for SMEs SME finance + capacity gaps Energy Branch, UNEP

10. Walking the talk: REED Energy Branch, UNEP

11. initial REED model – services and capital intermediaries: national/international NGOs enterprise development services Clients: Rural and/or peri-urban Energy Services private SMEs start-up + 2nd stage financing short-term: in-house Investment Facility long-term: financial institutions

12. key facts about AREED • current geographic coverage: Mali, Senegal, Ghana, Tanzania, Zambia. • donors: UN Foundation ($6.3m), Sida ($2.3m), BMZ ($0.4m), Dutch Government ($0.2m), other: DBSA, Bodyshop, Domini Investments. • seed fund size: $1.4 m (2000) to $1.8m (today). • enterprise development costs: $0.20 - $0.50 per $1 invested. • impacts: slow to produce direct impacts (job creation, GDP effects, GHG mitigation, etc) but can be significant over time. Energy Branch, UNEP

13. low willingness to pay for improved energy services African rural households “spend only a third as much on energy as their urban counterparts on average, the largest such discrepancy among regions.” WRI ICT Transportation Health Other Water Energy Food Housing Adapted from: World Resources Institute Energy Branch, UNEP

14. towards a solution low-wtp problem in AREED II Thesis: Combine ‘traditional’ AREED Support + End User Finance enterprise development services Clients: Primarily rural commercial customers of energy enterprises Energy Services private SMEs start-up financing Key Players:MFIs and regular FIs

15. AREED II end-user financing: roles of FIs end-users/borrowers equipment and services small loans & repayments private SMEs: clean energy equipment/ services micro-finance institutions: Nyetaa Finance… vendor finance agreement wholesale loans & repayments TA TA Mali Folkecenter wholesale lender: EcoBank recourse loans international development wholesale lender LRF escrow agreement escrow function Program implementation agreement and funding UNEP

16. lessons/conclusions • financing for clean energy access is not a prob …. [wait! reconsider this conclusion in light of global financial crisis!]. • private energy SME support and end-user financing must always go hand-in-hand as part of any energy market transformation strategy. • governments must create supportive investment climate, undergirded by good governance and mainstreaming of integrated resource planning approaches. small and medium-sized private enterprises can play a vital role in expanding energy access in developing countries (proof of concept).

17. Thank you! Lawrence Agbemabiese Energy Branch, UNEP DTIE, Paris Telephone: +33 (01) 44 37 30 03 Email: lagbemabiese@unep.fr