Regional Workshop on Access to Modern Energy in Urban and Peri Urban Areas: Policies and Knowledge Sharing 3-5 November, Senegal, Dakar

Financing Mechanism for Clean Energy Access: The AREED Programme

Lawrence Agbemabiese United Nations Environment Programme, Energy Branch, Division of Technology, Industry and Economics

disconnection of modern energy regimes from the situation and needs of majority

Inspiration: D. Adams

small-scale energy SMEs can close the gap

“Empowering local entrepreneurs and enterprises is key to developing the Tier 4 markets” (the 4 billion people at the Bottom of the Pyramid)

C.K. Prahalad & Stuart L. Hart The Fortune at the Bottom of the Pyramid

the case for energy SMEs beyond the grid 1

SME can be key players in the delivery of modern energy services -- including bioenergy -- beyond they grid because they…

…provide efficiently packaged small scale energy services for a variety of energy users 2 3 …provide low cost alternatives to grid extension …exist in a wide range of possible business models 4 …often provide significant social and environmental returns

To successfully deliver energy services, what do SMEs need?… 1 …yes, “Financing.”

But that alone is insufficient!

2 Information 3 Seed and “second-stage” finance 4 Business systems and tools 5 Customer credit through 3 rd Party institutions 6 Enterprise development assistance

What sources of funding currently exist to support SMEs?… • • • • • • • Gifts and Grants Government Subsidies Development Assistance Guarantees Insurance Concessionary Loans Commercial Loans • • • • • Concessionary Investment Commercial Investment Supplier Credit Customer Up-front Payments Entrepreneur’s capital

Finance Spectrum I

Development/ Public Sector



Gifts and Grants Commercial/ Private Sector



Subsidies



Development Assistance & Specialized Programs



Concessionary Loans & Investments, Micro-credit



Entrepreneur’s Equity



Customer Down Payments & Supplier Credit



Commercial Loans, Investment, Insurance etc

Finance Spectrum I

Development/ Public Sector



Gifts and Grants Commercial/ Private Sector



Subsidies Gaps: 1. Too few intermediaries.

2. Too little seed capital.

3. Too little reasonably priced growth capital.

4. Insufficient consumer & micro-enterprise finance.



Customer Down Payments & Supplier Credit



Commercial Loans, Investment, Insurance etc

Upstream Concept Business Planning

Seed Capital Equity

Pilot

the finance gap in energy SME development terms

Downstream Expansion Operations/ Growth Roll Out Aggregate Investment

Asset-based financing

Investment Timeline

GAP Debt

how can these gaps be closed?

• • • • • Expand the number of intermediaries providing services and financing to SMEs.

Increase the available seed capital.

Increase the available pools of next stage capital.

Provide capital at realistic return expectations = 6% to 10% ROI on an IRR basis.

Expand access to innovative consumer finance.

UNEP response/translation: Rural Energy Enterprise Development (REED) • • • African REED (AREED I and AREED II): – 2000  Present in Tanzania, Zambia, Senegal, Ghana, Mali Brazil REED (BREED): – 2002  2005 China REED (CREED): – 2004  present (Yunan Province)

Walking the talk in Africa: AREED Energy Branch, UNEP

initial REED model – services and capital enterprise development services intermediaries: national/international NGOs

private SMEs

Energy Services Clients: Rural and/or peri urban start-up + 2 nd financing stage short-term: in-house Investment Facility long-term:

financial institutions

a problem: low willingness to pay for improved energy services

Health ICT Transportation Other Water

African rural households “spend only a third as much on energy as their urban counterparts on average, the largest such discrepancy among regions.” WRI

Energy Food Housing

Adapted from: World Resources Institute Energy Branch, UNEP

towards a solution in AREED II

Thesis : Combine ‘traditional’ AREED Support +

End User Finance enterprise development services

private SMEs Energy Services Clients: Primarily rural commercial customers of energy enterprises

start-up financing Key Players: MFIs

and regular

FIs

Exactly who are these “end-users”?

“The vast majority of Africa’s 600 million + people who lack modern energy and the opportunities these represent”

Often stereotyped as being: -Too poor to be taken seriously - Reluctant to adopt innovations - Unwilling to pay for modern amenities

The BOP = “those with annual incomes up to and including $3,000 per capita per year (2002 PPP).”

World Resources Institute

Too poor to be taken seriously?

Energy Branch, UNEP Source: World Resources Institute

BOP spending on energy: US$433.4 billion

Source: World Resources Institute

So, are clean energy end-users...

-Too poor to be taken seriously?

- Reluctant to adopt innovations?

- Unwilling to pay for modern energy?

NO

Energy Branch, UNEP

Are they reluctant to adopt innovations?

Consider:

• The phenomenal rise in the adoption of cell-phones by people at the BOP • The rapid proliferation of innovative applications, often discovered and popularized at the BOP • In Africa today, BOP spending on ICT-related services, mainly mobile phone use exceeds US$ 5 billion

So, are clean energy end-users...

-Too poor to be taken seriously?

- Reluctant to adopt innovations?

- Unwilling to pay for modern energy?

NO NO NO

Energy Branch, UNEP

Low ability to pay for improved energy services?

In Africa, yes:

Health ICT Transportation Water Energy Other

African rural households “spend only a third as much on energy as their urban counterparts on average, the largest such discrepancy among regions.” WRI

Food Housing

Adapted from: World Resources Institute Energy Branch, UNEP

AREED II end-user financing: roles of FIs

end-users/borrowers

equipment and services private SMEs: clean energy equipment/ services vendor finance agreement TA TA Mali Folkecenter LRF escrow agreement Program implementation agreement and funding small loans & repayments micro-finance institutions:

Nyetaa Finance…

wholesale loans & repayments wholesale lender:

EcoBank

escrow function recourse loans UNEP international development wholesale lender

lessons/conclusions • small and medium-sized private enterprises can play a vital role in expanding energy access in developing countries (

proof of concept

).

• 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.

Thank you!

Lawrence Agbemabiese Energy Branch, UNEP DTIE, Paris Telephone: +33 (01) 44 37 30 03 Email: [email protected]