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

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

Population living below national poverty line, 2008

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

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.

Energy Branch, UNEP 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

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

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

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

Energy Branch, UNEP Walking the talk: REED

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

Energy Branch, UNEP 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: $ $0.50 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 low willingness to pay for improved energy services Energy Food Housing Transportation Water Other Health ICT African rural households “spend only a third as much on energy as their urban counterparts on average, the largest such discrepancy among regions.” WRI Adapted from: World Resources Institute

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

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

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

Thank you! Lawrence Agbemabiese Energy Branch, UNEP DTIE, Paris Telephone: +33 (01)