|
|
| Line 3: |
Line 3: |
| | | | |
| | {{NAE Finance Page Banner}} | | {{NAE Finance Page Banner}} |
| | + | |
| | + | <br/> |
| | | | |
| | ---- | | ---- |
| − | <p style="text-align: center;"><span style="color:#cb3300ff;">'''Price/Tariff Regulation: The basis on which the price of electricity (or of standalone systems) are regulated'''</span></p> | + | <p style="text-align: center;"><span style="color:#203865ff;">'''Finance: Forms of funding used to finance electricity access'''</span><span style="color:#203865ff;">'''<br/>'''</span></p><p style="text-align: center;"><span style="color:#203865ff;"</span></p> |
| | ---- | | ---- |
| | | | |
| Line 12: |
Line 14: |
| | <br/> | | <br/> |
| | | | |
| − | = Uniform Price/Tariff:<br/> = | + | = Private Finance<br/> = |
| | | | |
| | {| border="1" cellspacing="1" cellpadding="1" style="width:100%;" | | {| border="1" cellspacing="1" cellpadding="1" style="width:100%;" |
| Line 20: |
Line 22: |
| | | | |
| | | style="width: 618px;" | | | | style="width: 618px;" | |
| − | '''<span></span><span></span><span>A regime under which all providers within a given category are required to sell electricity (or standalone systems) at the same price or tariff (or set of prices/tariffs). </span><span></span><span></span>''' | + | '''<span></span><span></span><span></span><span>Finance provided by investors or lenders in the expectation of financial returns (profit). </span><span></span><span></span><span></span>''' |
| | | | |
| − | <span>A uniform price/tariff arrangement may:</span><br/> | + | <span>Private finance will be input on commercial terms, meaning that the investor or lender will expect to receive returns that exceed the original investment or loan and at a level that reflects the risks involved. Factors considered by financiers may include risks to implementation, delivery and technology performance, risks of cost escalation, market/demand and credit/payment risks, regulatory and macro-economic risks and external risks such as policy framework and weather. Any financier will require clear information on forecast revenues and potential risks before providing funding. It may be difficult for new electricity businesses working in new markets, and for users without a formal credit-record, to give commercial funders the confidence they require. Finance for electrification may come in the form of equity investment, or capital asset or working capital loans, and may be provided to a business as a whole, to a specific project or to end-users.<span><span><span></span><span></span></span></span></span> |
| | | | |
| − | *Address purchase costs for standalone systems or connection charges and charges for electricity used or flat monthly changes<br/>
| + | '''''Equity''''' - Any equity investment implies partial business ownership, with the investor taking the risk of losing their investment if the electricity venture fails, but also expecting to receive bonus returns if forecast targets are exceeded. Early stage investment in new businesses often relies on finance from entrepreneurial individuals, angel investors or venture capitalists who are willing to take large risks but expect to receive high returns on their investment if it’s successful.<br/><br/>'''''Loans''''' - capital asset loans are used, generally in later stages of business development and on specific projects, to leverage equity investment enabling businesses to scale up and expand their assets. Capital lenders expect repayment of loans over fixed periods and with pre-agreed (fixed or variable) interest rates, so that if profits fall short of forecasts payments are reduced only once equity capital has been exhausted, but if forecasts are exceeded lenders receive no additional benefit.<br/><br/>'''''Working capital'''''- alongside capital investment, most businesses require working capital to bridge the gap between expenditure and receipt of revenues. Working capital is particularly needed by, for instance, solar product businesses, where there may be three months or more between purchase/ import of the product by the business and sale to the end-user.<br/> |
| − | *<span>Encompass a set of prices/tariffs for different classes of user (eg household, commercial and industrial) or for different levels of provision (eg size of solar home system) </span><br/>
| + | |
| − | *<span><span>Relate to one, several, or all technologies. Thus it may cover just electricity from solar home systems, or just from wind-powered mini-grids, or require that isolated mini-grids supply electricity at the same prices as the grid (a grid-parity price/tariff)</span></span><br/>
| + | '''''Sources of finance''''' - Often both international and local finance is required to support electrification – particularly where capital equipment or products are imported. The scale of funding needed for electrification may require international finance, and international financiers may have greater familiarity with, and hence be more comfortable with, some of the issues associated with the energy sector, particularly if their funding is channelled through an international company. However, local private funders will be more familiar with the national context and be more confident in resolving, and hence charge less premium for, risks associated with it. Exchange rate, and hence macro-economic, risks will always be an issue for private financiers where any of the electrification costs are in foreign currency. This issue will be greater where international funding is used to cover more than just import costs, and international funders will be very reluctant to provide finance if repatriation of funds is constrained. <br/> |
| − | *<span><span><span>Be based on an assessment of the average cost of provision, on existing grid prices, or on estimates of the avoided cost of grid extension. </span><span></span></span></span>
| + | |
| | | | |
| | |} | | |} |
| Line 44: |
Line 45: |
| | | | |
| | | style="width: 616px;" | | | | style="width: 616px;" | |
| − | <span style="color:#FFFFFF;"></span>It is usual for grid systems to use a uniform price/tariff structure, relying on the cross-subsidies inherent in a single unitary system with a single owner to balance differences in cost of provision in different areas. However, even in a grid context a uniform price/tariff structure can dis-incentivize the electricity provider from extending access to more remote, low demand areas, where the cost of provision is higher and they may be unable to recover costs or will have to raise prices for all customers.<br/> | + | <span style="color:#FFFFFF;"></span>Most national grid systems are constructed using public funds, though private finance can be introduced through privatisation of existing assets, inviting private generators to feed into the national grid, or establishment of distribution/grid-connected mini-grid concessions. For instance, the introduction of feed-in tariffs (e.g. in Tanzania) has provided the basis for private investment in generation. Mini-grids are more frequently, though by no means always, financed by the private sector since the smaller investment and shorter payback period can reduce the risks and provides a more manageable business opportunity. Stand-alone systems offer even greater opportunities for market-based finance since the relatively short period between purchase and sale to the user means that that only business establishment and a small amount of equipment capital investment is at risk. |
| − | | + | |
| − | If a uniform tariff is imposed on grid-connected mini-grids, distribution systems or isolated mini-grids, which are separately owned, it will be necessary to establish a system of subsidies or cross-subsidies between providers. Without this, providers in areas where costs are lower may make excess profits while in areas where costs are higher providers become insolvent or users remain unserved. For this reason individual price/tariff regulation is often applied to larger mini-grids, though for small mini-grids the costs may out-balance the benefits of individual price/tariff regulation, and a uniform tariff may be applied.<br/>
| + | |
| − | | + | |
| − | For standalone systems, prices are frequently unregulated. If prices are regulated, it’s more likely to be on a uniform than an individual basis, since standalone system businesses are not usually tied to a location and so differences in costs are likely to be linked to their technology offer, efficiency of operation, or financing structure rather than any fundamental factors outside the businesses control. (Within any uniform price regulation of standalone systems it will be necessary to consider how to incentivize system providers to move into more remote areas where distribution costs are higher).
| + | |
| − | | + | |
| − | The issues inherent in a uniform price/tariff regulatory structure will be all the greater if it is extended across more than one technology, for instance if isolated mini-grids or standalone systems are expected to supply electricity at the same prices as the grid system.
| + | |
| | | | |
| | |- | | |- |
| Line 60: |
Line 55: |
| | | | |
| | | style="width: 616px;" | | | | style="width: 616px;" | |
| − | A uniform regulated price/tariff structure is consistent with a public delivery model, with cross-subsidy between publically-owned entities and subsidy from wider public resources being relatively straightforward. Combining uniform prices/tariffs with a private delivery model is problematic, since this model precludes public financial support, leaving cross-subsidies between providers as the only option for balancing differences in costs. The need for subsidy to support a uniform price/tariff structure is thus likely to result in a public-private partnership model rather than pure private sector delivery.
| + | Application of market-based finance, by definition, requires private sector ownership or a public-private partnership (PPP). PPPs are often an effective way to attract private finance since the public-sector element can offer funding and offset the risk associated with financing of electrification. Any private or PPP financing will require a business model with clear investment requirements and projections of income that provide expected return on investment over an acceptable timeframe, and with acceptable levels of risk and uncertainty. |
| | | | |
| | |- | | |- |
| Line 70: |
Line 65: |
| | | | |
| | | style="width: 616px;" | <span style="color:#FFFFFF;"></span> | | | style="width: 616px;" | <span style="color:#FFFFFF;"></span> |
| − | Uniform prices or tariffs may be established through either concessions or a licensing system. In principle uniform prices/tariffs may be set through general legislation without licensing electricity providers. Enforcement will then rely on prosecution of any providers who exceed set prices or tariffs.
| + | Any private finance provider will consider the legal basis of electrification in terms of the risk profile it presents to them. The lower the risk and the greater certainty, the more likelihood that private finance will be available and at a lower cost. The most fundamental requirement for any private investment in fixed assets is clarity around the legality of operating and selling electricity. This may be provided explicitly through a concession or license, or through a general exclusion of certain types of electricity provision (e.g. mini-grids below a certain size) from the need to be licensed. Without this basic regulatory clarity, and so with the risk that future introduction of regulation may undermine their business and restrict their levels of income, it will be extremely difficult to attract private finance for electrification. |
| | + | |
| | + | |- |
| | + | | style="width: 10px; background-color: rgb(248, 101, 0);" | <br/> |
| | + | | style="width: 117px; background-color: rgb(154, 103, 0);" | <br/> |
| | + | | style="width: 616px;" | |
| | + | Is a critical factor for private investment in electrification, with inadequate or inappropriate price/tariff regulation often cited as the key barrier to such finance. Whatever form of price/tariff regulation is used the critical requirement is that it is clear and transparent, as without this, private financiers will see a significant risk of political pressure reducing prices or tariffs to the point below which they fail to cover investment costs. |
| | | | |
| | |- | | |- |
| | | style="width: 10px; background-color: rgb(248, 101, 0);" | <span style="color:#FFFFFF;"></span><br/> | | | style="width: 10px; background-color: rgb(248, 101, 0);" | <span style="color:#FFFFFF;"></span><br/> |
| | | style="width: 117px; background-color: rgb(32, 56, 100);" | | | | style="width: 117px; background-color: rgb(32, 56, 100);" | |
| − | <span style="color:#FFFFFF;">Finance</span><span style="color:#FFFFFF;"></span><br/> | + | <span style="color:#FFFFFF;">Other forms of Finance</span><span style="color:#FFFFFF;"></span><br/> |
| | | | |
| | <br/> | | <br/> |
| | | | |
| | | style="width: 616px;" | <span style="color:#FFFFFF;"></span> | | | style="width: 616px;" | <span style="color:#FFFFFF;"></span> |
| − | <span>A uniform price/tariff regime will give private financiers clarity. Whether this attracts finance will depend critically on whether the prices or tariffs set enable them to make adequate return on investment. Given variations in costs of provision it is likely to attract investment into easier to access areas and lower cost electricity technologies, and potentially enable businesses providing these to make high profits, while excluding from electricity access those living in smaller communities in more remote areas. In addition private financiers may see uniform prices/tariffs as arbitrary, inflexible and non-cost reflective, thus presenting a risk to future revenues and so discourage investment. Grants and subsidies may, of course, be used to attract private finance in the context of a uniform price or tariff system, as may tax exemptions or guarantees. However if they, too, are set on a uniform basis, while they may extend the group of users to whom electricity can be economically provided, they are also likely to create additional excess profits for those elements of electricity provision which could anyway have been delivered economically, while leaving others outside this envelope. If grants or subsidies are structured to reflect costs of provision, they may counterbalance the rigidity of uniform prices/tariffs, by transferring cost –reflectivity from tariffs to grants/subsidies. Cross-subsidies are also used to transfer income from those providers who face lower delivery cost to those with higher costs. Establishment of uniform prices or tariffs will obviously directly affect finance derived from users through these charges and the need for users to be able to access finance, or pay-as-you-go arrangement to cover any up-front element of these costs.</span><span></span> | + | <span style="font-size: 13.6px;">In many cases some other form(s) of public finance such as grants, subsidies, concessionary loans, tax exemptions or guarantees (to reduce investment risks) will be needed alongside private finance to overcome the lack of user spending power and the high costs of early market development.</span><span></span> |
| | + | |
| | + | '''''User Finance''''' – Charges paid by users provide the means to repay electricity providers’ loans and equity investments and pay interest and return on capital. Where upfront charges are imposed on users, they may in turn seek to borrow to cover these charges and then repay the loan over time. Alternatively the electricity provider may seek additional finance in order to reduce up-front charges and so minimize barriers to users accessing their services. |
| | | | |
| | |- | | |- |
| Line 90: |
Line 93: |
| | | | |
| | | style="width: 616px;" | | | | style="width: 616px;" | |
| − | Establishing (or amending or removing) a uniform price/tariff regime will require regulatory reform and capacity building or technical assistance may be required if the key actors lack the capacity to undertake this reform. Direct provision by implementing authorities is an alternative route to achieving uniform prices/tariffs. Other non-financial interventions, such as policy and target setting, establishment of quality and technical standards, awareness raising and demand promotion amongst users <span style="font-size: 13.6px;">and service providers, provision of market information and training (capacity building) for businesses and workers, may be </span><span style="font-size: 13.6px;">beneficial but are not specifically related to a uniform price/tariff structure. National energy planning will be key to establishing </span><span style="font-size: 13.6px;">the optimum mix of technologies to meet electrification needs across the country, regardless of the form of price/tariff </span><span style="font-size: 13.6px;">regulation employed.</span>
| + | Most support activities to assist national electrification will reduce the perceived financial risk and so help to attract private sector investment and sustainable market development. Providing policies and targets, standards and technical assistance for new electrification initiatives will all increase the private financier’s certainty regarding the likely outcomes and so reduce the risk of investment. Market information, capacity building and customer engagement through promotional activity will all have a similar positive effect.<span style="font-size: 13.6px;"></span> |
| | | | |
| | |} | | |} |
| Line 102: |
Line 105: |
| | | style="width: 10px; background-color: rgb(248, 101, 0);" | <br/> | | | style="width: 10px; background-color: rgb(248, 101, 0);" | <br/> |
| | | | | | |
| − | The main advantage of a uniform price or tariff arrangement is that of equity – allowing all users to access electricity at the same cost, preventing those in remote, low demand areas from being penalised by having to pay more for electricity and so enabling them to use it to improve their livelihoods and compete on a more level playing field. It thereby avoids “tariff envy” and smooths the transition from one form of electricity access to another for the user. The comparative simplicity of uniform prices/tariffs may also seem attractive, avoiding the need for appropriate prices/tariffs to be calculated and agreed for each scheme or business. This is a particularly relevant consideration for small-scale technologies (standalone systems and very small mini-grids), where the burden and cost of setting individual prices/tariffs will be disproportionately high and the differentials between costs of provision relatively low. The main disadvantage is that, in the absence of cost-reflective subsidies, grants or cross-subsidies, they will inevitably benefit those providers operating in areas where costs of provision are lower, while effectively excluding provision to higher cost areas (or causing those operating in these areas to become insolvent). This issue is greatly exacerbated if uniform prices/tariffs are extended across multiple technologies, typically by requiring grid-parity tariffs from other forms of electricity provision (which are, almost axiomatically, used in areas where grid extension is uneconomic at these price levels). Subsidies, grants or cross-subsidies can be used to overcome this disadvantage while retaining equity for users, though these will inevitably either limit extension of provision to that which can be sustained from public funding or cause prices for other users (the customers of the providers from whom cross-subsidies are drawn) to rise. The sustainability of these arrangements must be seriously considered.
| + | If private finance is attracted, it can support rapid electrification at a large scale, and can free up public funding to be used for other things. If market conditions are such as to attract purely private finance, this indicates that the electrification process will be self-sustaining without dependence upon external grants or subsidies from the government or donor organisations. Where customers are able to pay for electricity at a level that allows the supply to be maintained under market conditions, there is no concern over the withdrawal of public funding that may then prevent continued access to electricity. Experience also indicates that involvement of private finance can drive innovation and efficiencies in electrification as in other sectors. |
| | + | |
| | + | Private finance, however, requires clear evidence that revenues will provide returns on investment, and this may be an insurmountable barrier, particularly for forms of electrification such as grid and mini-grid systems which have high upfront capital costs that will be recovered over long periods (perhaps 20 years). Even where macro-economic conditions are stable, regulatory frameworks and prices/tariffs transparent, and users able to afford electricity, financiers may be reluctant to provide support in the absence of established companies with a track record of performance. Much time and effort may be expended in the attempt to attract sufficient private finance without the required results. Furthermore, private finance is usually more expensive than general government borrowing and this will particularly be the case for programmes that are seen by the financiers as carrying significant levels of risk. |
| | | | |
| | |} | | |} |
The Review was prepared by Mary Willcox and Dean Cooper of Practical Action Consulting working with Hadley Taylor, Silvia Cabriolu-Poddu and Christina Stuart of the EU Energy Initiative Partnership Dialogue Facility (EUEIPDF) and Michael Koeberlein and Caspar Priesemann of the Energising Development Programme (EnDev). It is based on a literature review, stakeholder consultations. The categorization framework in the review tool is based on the EUEI/PDF / Practical Action publication "Building Energy Access Markets - A Value Chain Analysis of Key Energy Market Systems".
A wider range of stakeholders were consulted during its preparation and we would particularly like to thank the following for their valuable contributions and insights:
- Jeff Felten, AfDB - Marcus Wiemann and other members, ARE - Guilherme Collares Pereira, EdP - David Otieno Ochieng, EUEI-PDF - Silvia Luisa Escudero Santos Ascarza, EUEI-PDF - Nico Peterschmidt, Inensus - John Tkacik, REEEP - Khorommbi Bongwe, South Africa: Department of Energy - Rashid Ali Abdallah, African Union Commission - Nicola Bugatti, ECREEE - Getahun Moges Kifle, Ethiopian Energy Authority - Mario Merchan Andres, EUEI-PDF - Tatjana Walter-Breidenstein, EUEI-PDF - Rebecca Symington, Mlinda Foundation - Marcel Raats, RVO.NL - Nico Tyabji, Sunfunder -
