Finance for off-grid energy is increasing – the big challenge is working out how best to blend public and private investment to deliver energy services for poor communities.
Policy makers are increasingly recognising that off-grid solutions offer the potential to rapidly increase access to energy in poor communities. But what is less clear is how to make the finance work. The question was raised at last week’s United Nations Sustainable Energy For All Forum – and will be the focus of a session organised by CAFOD, CIDSE and IIED at the EU Development Days (EDD) in Brussels next week. What are the different roles for public and private investment in financing energy access, particularly for the poorest people?
The EDD is the EU’s annual development forum and Sustainable Energy for Growth is a key theme this year. The EU has recently boosted its energy spending through Electrifi, a 75 million euro facility, using aid budgets to provide early stage risk capital for off-grid electrification. So finance will be a hot topic.
Our panel debate (4 June) will root these discussions in real-world experience. Our panellists – working in Kenya, India, Indonesia and globally – will share insights from private-sector investors, donors, service providers and project developers, and civil society. We’ll be asking: how do we scale up investment in decentralized energy systems? Where is public money needed? Where is private money needed? What else needs to change to make finance flow?
Scaling up investment in off-grid energy
Development experts tend to agree that off-grid energy, such as mini-grids or solar home systems, are often cheaper and more sustainable than extending the grid to reach poor or remote communities. Typically it is smaller players – small and medium-sized enterprises or social enterprises with strong links to local communities – who are delivering these services. Large power utilities may be too inflexible, debt-ridden or politicised to invest.
But getting money to small-scale energy schemes face many barriers, from the high transaction costs of many small projects to rigid energy policies that still favour large-scale generation.
Clarifying public and private finance roles
A dilemma for policy-makers is working out how scarce public funds should be best targeted to attract investment in off-grid markets and to fill the gaps where the private sector cannot make a return.
- Recognise the variety of energy markets. People living in poverty do not form a homogenous group. A commercial or semi-commercial approach might work for energy providers serving people living on $US3-5/day, but a cost-recovery or non-profit solution is needed for people living on subsistence or extreme poverty. Governments, investors, business and NGOs need to know who they aim to reach.
- Fund local preparatory work. Successful projects require intensive local-level design and engagement work to tailor services to diverse energy needs, build demand and people’s capacity to use, maintain and benefit from new energy supplies. Collaborating with local NGOs and service providers can strengthen services and impacts. This is why CAFOD and IIED are piloting approaches to design energy services from the ‘bottom-up’. More public money is needed for the start-up stages, which private investors are unlikely to fund.
- Energy for income-generation. Energy can be expensive for poor people, so unless it is linked to income earning opportunities, it may not be financially sustainable. Public funding can be used to support this – funding agricultural advice, market analysis or business management advice, for example.
- Build markets not winners. Governments and donors need to shift from ‘picking winners’ and take a more comprehensive approach to building energy markets in low income communities. This may mean reforming policies, building institutional capacity, trying different delivery models, or expanding access to capital. There is no one size fits all – it needs to work for different local realities.
From New York to Brussels
The Brussels debate will be an opportunity to test these ideas – and draw in lessons from New York, where we held a similar session with CAFOD and the World Resources Institute (WRI).
With speakers from the SELCO Foundation, the Clean Energy Access Network and DIFFER, there seemed to be a consensus that financing has to be better tailored to suit different energy needs across different ‘market segments’, from people living in abject poverty to those with a slightly higher income (e.g. $3-5/day), and that investing in productive uses of energy was a priority.
Where the fault lines opened up was over whether private finance ‘should’ accept higher risks and lower returns to get energy services to poorer customers.
People had different views on whether more public finance was needed to subsidise energy for the poorest – or if it was a question of redirecting existing public subsidies. The question of how to measure and prioritise donor spending also came up. Most people agreed that supply-based measurements, such as the number of kilowatt hours generated, do not make sense for poor communities (who do not consume much).
This also links to wider calls for “access” to energy to be measured differently in the proposed Energy Sustainable Development Goal to lift people out of poverty – tracking access to different levels or “tiers” of services and evaluation whether they are good enough quality, reliable, affordable and safe enough be usable on the ground. For more on this, see my previous post.
One suggestion was that development agencies should adopt a ‘value based’ rather than ‘cost-based’ approach – linking the public financing to the level of development impact that different levels of energy service would bring. This would mean weighing up the pros and cons of delivering a low level of service to many people (e.g. lighting, mobile charging, TV and fan) over a higher level service to fewer people (eg power for an air conditioner, microwave and washing machine, or productive uses).
We hope that our discussions in New York and Brussels will help create a better understanding of how the public and private sectors can better work together.
You can join the debate by voting in our EDD survey on financing energy access for the event: download the app here.
This blog was written by Sarah Wykes with Sarah Best with Ben Garside. Sarah Best (email@example.com) and Ben Garside (firstname.lastname@example.org) are Senior Researchers working on energy in IIED’s Sustainable Markets Team.