Lawrence Agbemabiese United Nations Environment Programme, Energy Branch, Division of Technology, Industry and Economics Regional Workshop on Access to.

Lawrence Agbemabiese

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

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

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

Inspiration: D. Adams

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

the Bottom of the Pyramid)

small-scale energy SMEs can close the gap

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

the case for energy SMEs beyond the grid

……provide efficiently packaged small scale energy services provide efficiently packaged small scale energy services for a variety of energy usersfor a variety of energy users11

……provide low cost alternatives to grid provide low cost alternatives to grid extensionextension22

……exist in a wide range of possible business modelsexist in a wide range of possible business models33

……often provide significant social and environmental returnsoften provide significant social and environmental returns44

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

they…

To successfully deliver energy services, what do SMEs need?…

……yes, “Financing.” yes, “Financing.” But that alone is insufficient!But that alone is insufficient!11

InformationInformation22

Seed and “second-stage” financeSeed and “second-stage” finance33

Business systems and toolsBusiness systems and tools44

Customer credit through 3Customer credit through 3rdrd Party institutions Party institutions55

Enterprise development assistanceEnterprise development assistance66

• 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

What sources of funding currently exist to support SMEs?…

Gifts and Grants

Subsidies

Development Assistance & Specialized Programs

Concessionary Loans & Investments, Micro-credit

Entrepreneur’s Equity

Customer Down Payments & Supplier Credit

Commercial Loans, Investment, Insurance etc

Public Sector Private SectorDevelopment/ Commercial/

Finance Spectrum I

Gifts and Grants

Subsidies

Customer Down Payments & Supplier Credit

Commercial Loans, Investment, Insurance etc

Public Sector Private SectorDevelopment/ Commercial/

Finance Spectrum I

Gaps:1. Too few intermediaries.2. Too little seed capital.3. Too little reasonably priced growth capital.4. Insufficient consumer & micro-enterprise finance.

Operations/Growth

BusinessPlanning

RollOut

Concept

AggregateInvestment

Investment Timeline

Expansion

Pilot

Asset-based financingSeed

Capital

EquityEquity DebtDebtGAPGAP

the finance gap in energy SME development terms

Upstream Downstream

• 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.

how can these gaps be closed?

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)

Energy Branch, UNEP

Walking the talk in Africa: AREED

start-up + 2nd stagefinancing

enterprisedevelopmentservices

private SMEsEnergy Services

Clients:Rural and/or peri-

urban

initial REED model – services and capital

intermediaries:national/internationalNGOs

short-term: in-house Investment Facilitylong-term: financial institutions

Energy Branch, UNEP

a problem: low willingness to pay for improved energy services

Energy

Food

Housing

Transportation

WaterOther

HealthICT 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-upstart-upfinancingfinancing

enterpriseenterprisedevelopmentdevelopmentservicesservices

towards a solution in AREED II

private SMEsEnergy Services

Clients:Primarily rural

commercial customers of

energy enterprises

ThesisThesis::Combine ‘traditional’ AREED SupportCombine ‘traditional’ AREED Support

+ + End User FinanceEnd User Finance

Key Players: MFIs and regular FIs

““The vast majority of The vast majority of Africa’s 600 million + Africa’s 600 million +

people who lack people who lack modern energy and modern energy and

the opportunities the opportunities these represent”these represent”

Exactly who are these “end-users”?

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

Energy Branch, UNEP

Too poor to be taken seriously?

Source: World Resources Institute

Energy Branch, UNEP

BOP spending on energy: US$433.4 billion

So, are clean energy end-users...-Too poor to be taken seriously?- Reluctant to adopt innovations?- Unwilling to pay for modern energy?

NO

Source: World Resources Institute

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?

NONONO

Energy Branch, UNEP

Low ability to pay for improved energy services?

Energy

Food

Housing

Transportation

WaterOther

HealthICT In Africa, yes:

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

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

TATA

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).

• 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 AgbemabieseEnergy Branch, UNEP DTIE, ParisTelephone: +33 (01) 44 37 30 03

Email: [email protected]