Universal energy access: combining public and private sector efforts
Donors, governments and businesses need to collaborate more strategically to finance pro-poor energy access. This is a key message from a new IIED discussion paper Sharing the Load.
The world expects the private sector to help deliver universal energy access — not necessarily because it's best placed to do the job, but because public finance alone can't. But the task is not simple, as we explore in Sharing the Load.
The idea behind Sharing the Load is to trigger discussion and sharing of ideas, and we look forward to hearing from you in the comments section below this blog.
What is the problem?
Public and private finance for energy access is often directed towards large-scale infrastructure and on-grid distribution, where commercial viability and returns are assured.
Decentralised and low-income markets tend to be neglected because investments here are long term, low return and high risk. Yet there are innovative energy enterprises in developing countries, including those supported by the Ashden Awards. Such markets need time to mature, but there is increasing interest from impact investors (PDF).
Businesses need paying customers to cover their costs and risks. By engaging closely with those customers, businesses can design goods and services to be affordable and desirable, to stimulate 'willingness to pay'. Yet businesses that try to serve poor customers at the 'base of the (economic) pyramid', often end up serving less poor customers (those who can pay enough to ensure the business succeeds).
This is not necessarily a bad thing – private businesses drive development by serving populations that, while not living in acute poverty, still lack access to modern energy services.
Innovations, such as crowdfunding, pay-as-you-go payment schemes, and real-time monitoring technologies are helping private sector initiatives to build low-income markets. Social entrepreneurs and public-private partnerships (PPPs) are more likely to reach the poorer populations as they are driven by social as well as business objectives. But eventually even these models need to be financially self-sustaining, especially if they seek loans to scale up their activities.
Sharing the Load highlights opportunities and challenges encountered in the low-income and subsistence-level energy markets. For example, angel investors are providing loans to Village Infrastructure to finance solar lamp enterprises in poor communities; crowdfunding platforms like Sunfunder are raising investment for social enterprise organisations such as SolarAid's SunnyMoney to promote the sale of solar lamps; support hubs such as S3IDF are helping small enterprises; and organisations such as Impact Carbon are exploring voluntary carbon markets to support efficient stove businesses.
But these initiatives frequently rely on government and donor funds for start-up and scale-up activities, research and development, and monitoring and evaluation.
More public funds are becoming available to support energy projects in developing countries, from the Climate Investment Funds (CIFs) (PDF) and the Green Climate Fund to public pension funds and sovereign wealth funds.
A key challenge is in-country distribution – how will these instruments channel funds to serve the poor, and to support small-scale enterprise? Our report explores some established and emerging donor-led programmes supporting private enterprise, including Infrastructure Development Company Limited (IDCOL) in Bangladesh; the Central Renewable Energy Fund of Nepal (CREF); and the Scaling up Renewable Energy Programme in Low-Income Countries (SREP) in Ethiopia, Honduras, Kenya, the Maldives, Mali and Nepal.
Action and improvement
We concluded that governments and donors need to understand more about how to stimulate large- and small-scale private investment to deliver development goals – and when to target public funds to meet the needs of the most vulnerable.
To work out who is more effective in what circumstances, governments, donors and business could take a 'market segmentation' approach (PDF). A framework for targeting efforts at the 'base of the pyramid' might look like this:
- Low-income market segment (US$3-5/day): A commercial or cost-recovery approach can work, with subsidies, grants and capacity building for energy enterprises, shifting to low-interest capital and risk guarantees as they mature. Customers may be able to use community savings schemes, or credit-based schemes, possibly with government subsidy, and may also benefit from employment in energy enterprises
- Subsistence market segment (US$1-3/day): A cost-recovery approach is appropriate, with support for social enterprises in the form of subsidies, grants, soft loans and capacity building. People may be able to use government soft-credit programmes to buy stoves or solar lanterns. Community-level services may require government-subsidised payment schemes, and
- Extreme poverty segment (less than US$1/day): A non-profit approach is needed. People's precarious daily existence makes it impossible to participate in markets as consumers, producers or entrepreneurs. They need government social protection programmes or aid programmes including support for community funds or disaster relief.
So to be most effective, what do donors, governments and businesses still need to know? Our study identified several knowledge gaps:
- Market analysis and segmentation: We need to better understand where public, private or combined interventions are most effective in delivering modern energy services to different population segments
- Delivery model analysis: Donors and investors need clarity on the effectiveness and risks of different delivery models, including what makes an 'enabling environment' and how socio-cultural context might affect initiatives
- Developing and testing indicators of impact: We need to measure what works, in terms of both investment risks and ensuring energy access interventions are 'pro-poor'
- Productive uses: We need to understand whether and how a focus on energy for productive uses (for example for agricultural production or processing) might reduce poverty and increase investment potential
- Identifying and overcoming regulatory barriers to new finance innovations: What holds back initiatives such as crowdfunding and pay-as-you-go schemes in developing countries?
- Harnessing the diaspora and local populations: Can local people, or those who have left but still have links, finance energy access? For example, can remittances become investment capital?
- Alternative public sector options for reaching the poorest: We need to better understand options including social protection, emergency relief and support for community savings funds.
Join the discussion
Read the full report Sharing the Load: public and private sector roles in financing pro-poor energy access, and share your thoughts and ideas in the comments section below.
Also, as part of our efforts to build understanding and dialogue, IIED is joining the Overseas Development Institute and the Institute of Development Studies to hold a seminar on financing universal energy access on 17 November 2014. If you are interested in joining the debate, email firstname.lastname@example.org.
Read the full report: Sharing the Load: public and private sector roles in financing pro-poor energy access