Financing Renewable Energy for Rural Poor1

Hongpeng Liu2 Environment and Development Division United Nations Economic and Social Commission for Asia and the Pacific (ESCAP) liu4@un.org

ENERGY SUPPORTS DEVELOPMENT GOALS Energy is essential for production, income and employment generation in agriculture, manufacturing, commerce, mining, and service industries. It also has a significant role in promoting sustainable development with respect to poverty reduction and environmental sustainability offering opportunities for improved lives. The provision of energy products and services impacts every aspect of the society and as such, the lack of accessible, affordable and efficient energy presents a barrier to inclusive and sustainable development. Disruptions to either its availability or price can have serious socio-economic consequences on the development of the society. Energy price increases also impact the price of food. Studies show that a 10 per cent increase in crude oil prices is associated with a 2.7 per cent increase in the World Bank Food Price Index (World Bank 2011). ESCAP estimates that oil price increases will reduce growth by up to one per cent point in some developing Asia-Pacific economies as well as put pressure on inflation. Developing countries are particularly vulnerable to price increases. As such, market fluctuations in fossil fuel prices pose a major threat to meeting the development goals and, improving access to energy is widely considered to be the missing Millennium Development Goal (MDG). Rural areas bear the brunt of this infrastructure-deficit, the most. In the absence of energy services, both social and economic options remain hindered. For instance, income generating activities of agriculture and food processing are limited. Education remains constrained by daylight patterns. Cooking on traditional biomass with inadequate ventilation, women and children bear the brunt of indoor air pollution that is increasingly recognized as a key threat to human lives. However, given the relatively smaller population groups and relatively smaller incomes, it is difficult to promote market-based investments in electricity and other forms of modern energy services. As a result, a vicious cycle is set in.

Chief,EnergySecurityandWaterResourcesSection,EnvironmentandDevelopmentDivision,UNESCAP,United NationsBuilding,RajadamnoenNokAvenue,Bangkok,Thailand

PaperpresentedduringtheIFADsupportedAPRACAProject(GrantNo.11403APRACAEnhancingtheAccessofPoorRural PeopletoSustainableFinancialServicesthroughPolicyDialogue,CapacityBuildingandKnowledgeSharinginRural Finance)InceptionWorkshopheldon2829March2013heldatAmariWatergateHotel,Bangkok,Thailand.

Governments in the region are making efforts to address this situation through various programs. However, while the efforts for extension of national grids should continue, there is also potential to explore mini-grid and isolated off-grid connectivity and using locally available renewable energy resources. This is especially so as some terrains and population densities are economically better suited for smaller decentralized systems. On one hand, this should contribute positively towards improving access to energy services in rural areas and on the other, help to reduce dependence on fossil fuels. UNIVERSAL ACCESS TO MODERN ENERGY SERVICES Globally, it is estimated that to ensure universal electricity access by 2030, out of a total generation requirement of 952 TWh, a staggering 60% (or 572 TWh) will be provisioned via mini-grid and isolated off-grid technology. Table: Generation requirements for universal electricity access, 2030 (TWh)3 On-Grid Africa Sub-Saharan Africa Developing Asia China India Other Asia Latin America Developing Countries* World** 196 195 173 1 85 87 6 379 380 Mini-Grid 187 187 206 1 112 94 3 3,993 400 Isolated Off-Grid 80 80 88 0 48 40 1 171 172 Total 463 462 468 2 245 221 10 949 952

* Includes Middle East Countries; ** Includes OECD and transition economies In 2012, the United Nations General Assembly unanimously declared the decade 20142024 as the Decade of Sustainable Energy for All, underscoring the importance of energy issues for sustainable development and for the elaboration of the post-2015 development agenda. In adopting the resolution, the General Assembly reaffirmed its determination to make sustainable energy for all a reality. The resolution calls upon Member States to galvanize efforts to make

GET FiT Plus, De-Risking Clean Energy Business Models in a Developing Country Context, April 2011: DB Climate Change Advisors, Deutsche Bank Group

universal access to sustainable modern energy services a priority, noting that 1.3 billion people are without electricity and 2.6 billion people in developing countries rely on traditional biomass for cooking and heating. It expressed concern that even when energy services are available, millions of poor people are unable to pay for them. In addition, the UN Secretary-General launched a global initiative on Sustainable Energy for All to mobilize action from all sectors of society in support of three interlinked objectives to be achieved by 2030: providing universal access to modern energy services; doubling the global rate of improvement in energy efficiency; and doubling the share of renewable energy in the global energy mix. It is estimated that a total investment of nearly $1 trillion ($979 billion) would be required to achieve universal energy access by 2030, an average of $49 billion per year (from 2011 to 2030). This requirement is small when compared to global energy-related infrastructure investment, equivalent to around 3 per cent of the total (World Energy Outlook 2012, IEA). FINANCING: A KEY CHALLENGE TO RURAL RENEWABLE ENERGY SYSTEMS A crucial aspect that has been neglected in traditional rural energy policies is the use of energy not only to meet basic needs (such as lighting and cooking) but also to power income generating activities such as food processing, irrigation and manufacturing. Other problems are typically a lack of financial resources and technical expertise. These concerns rather than energy resources are usually the root of the energy access concern. At the same time, the potential of the renewable energy sector itself to create jobs is increasingly realized. Recent estimates indicate that about 5 million people worldwide work either directly or indirectly in the renewable energy industries. Many significant examples of job creation exist in the developing countries of the Asia-Pacific region. For instance, India estimated 350,000 renewable energy jobs created in 2009. Although there is no distinction between urban and rural jobs, technologies such as off-grid solar, biogas, and small-scale hydro, principally relevant in a rural context, account for more than 190,000 of Indias renewables jobs. As of December 2011, Bangladesh had installed 1.2 million solar home systems in rural areas, creating an estimated 60,000 jobs in the solar sector. Since 1998 a United Nations Development Programme (UNDP) initiative in Nepal has supported the construction of 323 micro-hydro plants, leading to the equivalent of 3,850 full-time jobs (REN21. 2012. Renewables 2012 Global Status Report). And while renewable energy remainsa promising option for rural areas, the seemingly high upfront cost is perceived as a formidable barrier. Given the scale of the effort towards universal access to modern energy services, access to various sources of financing is critical. Traditionally these are known to come from fiscal measures, such as government subsidies, cross-subsidization, end-use tariffs and concessional loans, apart from various international grants and development assistance programs by international financial institutions. However, governments have to deal with competing priorities and at the same time, its budgets are constrained. On the other hand, international sources of

funding such as grants and development assistance are subject to global economic and financial crises and hence, unreliable. And so, while these sources of funding continue to be applied in an optimal manner, there are opportunities to engage the private sector in multiple ways (for example, voluntary services, corporate social responsibility, project finance and public-private partnerships) and at multiple levels (national, sub regional and regional).Public-Private Partnerships (PPPs) have been employed as an innovative way to meet the challenges of widening access to energy services in rural areas. These are designed to combine the strengths of governments, which have the responsibility to ensure the provision of public goods, with the technical and financial strengths of the private sector. The governmental side of the partnership is critical, because it typically provides the overall framework for establishing the energy access programme. It does so in a variety of ways, such as licensing the private sector entities which actually deliver the services; providing the physical infrastructure necessary to deliver such services (e.g., roads to provide site access; electric grid infrastructure and gas pipelines, where appropriate; etc.); overseeing (and regulating to the extent necessary) the quality of delivered services; regulating the financial institutions which can make private sector loans for such tasks; establishing the tenders for services to be provided; providing subsidies and financial support for such programmes; developing and implementing national policies supporting and enabling energy access; etc. The private sectors role in the partnership is crucial as well, since it will actually provide the energy services. It typically requires an entrepreneurial pool of small-scale vendors and microenterprises who can master the supply-chain and technical requirements to meet the energy needs of the rural poor. It will require equipment manufacturers who can provide low-cost and efficient technologies and devices; service firms who can install and maintain such technologies and devices; financial institutions who can provide support and financing mechanisms for both the energy supply providers and those benefiting from the access programs on the demand side; entities capable of accessing financial resources in the international carbon market; and other entities capable of translating the governmental energy access programmes into actionable tasks and activities at the household level amongst the rural poor. In the context of rural renewable energy sector, upfront investments, transaction costs and the perceived risks remain relatively higher. As such the private sector, despite having both the expertise and financial resources, is not usually motivated to take upon itself the responsibility of supplying basic energy services to the poor, as it does not make a good business sense. Out of many, a key challenge is to enhance private sectors access to cheaper financing options. And while financial institutions further the efforts in this direction, various stakeholders are making efforts to design innovative business models suited for rural areas.

ESCAPS ONGOING EFFORTS With IFADs funding support, ESCAP is currently executing projects designed to enhance access to energy services in rural areas using locally available renewable sources. To meet the goal, these ongoing efforts aim at promoting innovative business models and financing sources, such as the Pro-Poor-Public-Private-Partnership (5P) model and carbon financing, respectively. There are three factors, which are particularly important and need attention for the development of a 5P project: 1) how to attract private sector investment through appropriate policy and institutional frameworks; 2) how to make basic services (requiring energy) affordable for households and income generating activities; and 3) how to make project-operations more effective and sustainable. Towards this, the 5P model works on a market segmentation approach (figure below) and treats the beneficiary community not only as users of modern energy services, but also as partners to the project. The regional initiative explores the potential for strengthening the policy, legal and regulatory frameworks of member States with a view to encouraging private sector participation in the rural energy sector, using locally available renewable sources to ensure market development and business continuity. The project also focuses on gender mainstreaming so that policies and programs reflect womens needs and priorities in a better way and that these are supported by a more equitable distribution of resources.

5Ps - Rural Electrification Market Segmentation Approach

Model
Profit oriented Commercial

Method
Business as usual Strong power purchase Market driven tariffs

Rural Electrification with Local RE Resource

Hybrid 5Ps

Cost recovery Empowerment

Capacity & equity building Community participation Awareness and education Policy and institutional mechanism Power purchase reinforcement Social project driven Project oriented Neglecting tariff and power purchase

Non commercial

Grants -Charity

Experience has also shown that some national governments in the Asia-Pacific region have successfully devised policies to promote businesses and industries for the provision of renewable energy products and services at relatively lower costs. Such efforts have hinged on national market development driven by sound national commitments to promote the use of renewable energy. Additionally, sub-regions and countries have, over the years, demonstrated specialist skills and positioned themselves as niche providers of not only capital, material, low-cost labor, product design, and manufacturing capacity, but also low-cost expertise in making conducive policy, legal, regulatory and financial frameworks. Many of these nations are either economies in transition or developing countries themselves. This suggests for replicability of development experience. The region is uniquely placed to exploit South-South Cooperation to enhance affordability of renewable energy options. This forms the background to assist developing countries to become part of a regional renewable energy value chain through assistance in facilitating introduction of adaptable, suitable technologies and technical know-how on application of renewable energy resources in accordance with national conditions. Using South-South Cooperation, ESCAP is leading another regional effort that aims to strengthen governance capacities of policy makers in selected developing countries to assist key stakeholders (such as financiers, industrialists, project developers, social entrepreneurs etc.) in identifying economically viable local production, distribution and consumption options for affordable renewable energy products and services. While the project is expected to highlight direct economic benefits in promoting the competitiveness of the local industries on renewable energy, it also aims to highlight the in-direct social benefits of investing in such economically viable models. With regard to decentralized solutions (off-grid, mini-grid power projects), the financing trend during the past decade has been to provide large amounts of funding to local private or public financing institutions that are committed (or trained) to support rural and renewable energy projects. Typically, such banks or funds develop a portfolio of possible projects, although they can also react to requests for new lines of financing by reviewing project proposals. They do not provide financing to households directly; rather, it is up to private companies, concessionaires, non-governmental organizations and microfinance groups to organize the demand for the energy service and to apply for project funding after developing a sound business plan to serve rural consumers. This successful model has been implemented in many countries of the region, such as Bangladesh and Sri Lanka. As a result, renewable household systems, improved biomass stoves and village or community small-grid systems can all be serviced by the same financing agency. In practice, many of these funds specialize initially in a single technology, such as solar home systems, but they are expanding increasingly to other renewable energy systems as well as to non-renewable energy access. On the other hand, international carbon markets, though currently in transition;continue to be a growing source of project finance. One such project, initiated in China in late 2008, involves the promotion of biogas digesters to produce energy for domestic heating, lighting and

cooking using animal waste. More than 33,000 households in low-income rural communities (or approximately 165,000 people) are benefiting from the installation of domestic digesters, displacing carbon-intensive domestic fuels, such as coal and coke (REN21. 2011. Renewables 2011 Global Status Report). KEY MESSAGES AND CONCLUSION Energy is essential for income and employment generation in agriculture and food processing activities in rural areas.It has a significant role in promoting sustainable development with respect to not only poverty reduction but also environmental sustainability.As such, energy policies should consider these aspects of energy along with technical and financial barriers and seek an integrated rural development approach to improve energy security at the household level. More and more governments around the world acknowledge the benefits of renewable energy for providing access to energy, particularly in rural areas of the developing world. The welcome forecast is that during the period through 2035, renewable energy deployment is on the rise. It is driven by incentives, falling costs, rising fossil fuel prices and, in some cases, carbon pricing. A main driver propelling renewable energy policies is their potential to create jobs. And while renewable energy remains a promising option for rural areas, the seemingly high upfront cost is perceived as a formidable barrier. Public-private renewable energy partnerships continue to play an increasingly important role to overcome some of these investment and business barriers while distributing risks and returns appropriately. There is a need to enhance the awareness on and understanding of innovative models such as the pro-poor PPPs (5Ps) concepts, especially among policy/ decision-makers, local communities and private investors. There is also a need to develop the capacities of institutions to take action to improve access to financing for the private sector to invest in rural renewable energy area. There is also a need to generate political support, and to expand the financing opportunities for pro-poor PPPs. In this context, South-South Cooperation is a strategic resource for enhancing the affordability of renewable energy resources and as such,could be explored.