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| | *[[NAE Case Study: Brazil, Luz para Todos (Light for All)|Brazil, Luz para Todos (Light for All)]]<br/> | | *[[NAE Case Study: Brazil, Luz para Todos (Light for All)|Brazil, Luz para Todos (Light for All)]]<br/> |
| | *[[NAE Case Study: Cambodia “Light Touch” Regulation|Cambodia “Light Touch” Regulation]]<br/> | | *[[NAE Case Study: Cambodia “Light Touch” Regulation|Cambodia “Light Touch” Regulation]]<br/> |
| − | *[[NAE_Case_Study:_Costa_Rica,_Distribution_Cooperatives|Costa Rica, Distribution Cooperatives]]<br/> | + | *[[NAE Case Study: Costa Rica, Distribution Cooperatives|Costa Rica, Distribution Cooperatives]]<br/> |
| | *[[NAE Case Study: Ethiopia, Solar Market Development|Ethiopia, Solar Market Development]]<br/> | | *[[NAE Case Study: Ethiopia, Solar Market Development|Ethiopia, Solar Market Development]]<br/> |
| | *[[NAE Case Study: Kenya, Off-Grid for Vision 2030|Kenya, Off-Grid for Vision 2030]]<br/> | | *[[NAE Case Study: Kenya, Off-Grid for Vision 2030|Kenya, Off-Grid for Vision 2030]]<br/> |
| | *[[NAE Case Study: Mali, Rural Electrification Programme|Mali, Rural Electrification Programme]]<br/> | | *[[NAE Case Study: Mali, Rural Electrification Programme|Mali, Rural Electrification Programme]]<br/> |
| − | *[[NAE_Case_Study:_Nepal,_Rural_Energy_Development_Programme|Nepal, Rural Energy Development Programme]]<br/> | + | *[[NAE Case Study: Nepal, Rural Energy Development Programme|Nepal, Rural Energy Development Programme]]<br/> |
| − | *[[NAE_Case_Study:_Peru,_Concession_Model_for_Standalone_Systems|Peru, Concession Model for Standalone Systems]]<br/> | + | *[[NAE Case Study: Peru, Concession Model for Standalone Systems|Peru, Concession Model for Standalone Systems]]<br/> |
| | *[[NAE Case Study: Philippines, Islanded Distribution by Cooperatives|Philippines, Islanded Distribution by Cooperatives]]<br/> | | *[[NAE Case Study: Philippines, Islanded Distribution by Cooperatives|Philippines, Islanded Distribution by Cooperatives]]<br/> |
| | *[[NAE Case Study: Rwanda, Sector-Wide Approach to Planning|Rwanda, Sector-Wide Approach to Planning]]<br/> | | *[[NAE Case Study: Rwanda, Sector-Wide Approach to Planning|Rwanda, Sector-Wide Approach to Planning]]<br/> |
| − | *[[NAE_Case_Study:_South_Africa,_Integrated_National_Electrification|South Africa, Integrated National Electrification]]<br/> | + | *[[NAE Case Study: South Africa, Integrated National Electrification|South Africa, Integrated National Electrification]]<br/> |
| | *[[NAE Case Study: Tanzania, Mini-Grids Regulatory Framework|Tanzania, Mini-Grids Regulatory Framework]]<br/> | | *[[NAE Case Study: Tanzania, Mini-Grids Regulatory Framework|Tanzania, Mini-Grids Regulatory Framework]]<br/> |
| − | *[[NAE_Case_Study:_Tunisia,_Low_Cost_Distribution_Technology|Tunisia, Low Cost Distribution Technology]]<br/> | + | *[[NAE Case Study: Tunisia, Low Cost Distribution Technology|Tunisia, Low Cost Distribution Technology]]<br/> |
| | *[[NAE Case Study: Vietnam, Rapid Grid Expansion|Vietnam, Rapid Grid Expansion]]<br/> | | *[[NAE Case Study: Vietnam, Rapid Grid Expansion|Vietnam, Rapid Grid Expansion]]<br/> |
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| | + | *Davis, 1998. Cross subsidies and sensitivities: Further analyses of sustainable financing of electrification in South Africa <u>[https://open.uct.ac.za/handle/11427/23011 https://open.uct.ac.za/handle/11427/23011]</u> |
| | + | *World Bank. 2014. From the Bottom Up: How Small Power Producers and Mini-Grids Can Deliver Electrification and Renewable Energy in Africa. <u>[https://openknowledge.worldbank.org/handle/10986/16571 https://]</u><u>[https://openknowledge.worldbank.org/handle/10986/16571 openknowledge.worldbank.org/handle/10986/16571]</u> |
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| | |} | | |} |
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Technology
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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.
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Delivery Models
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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.
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Legual Basis
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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.
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Price/Tariff Regulation
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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.
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Other Forms of Finance
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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.
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.
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Non-Financial Interventions
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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.
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Technology
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Grid and mini-grid electricity access has generally been paid for by users through a combination of connection charges, monthly charges and electricity usage charges. Those providers who are able to remove up-front connection fees, recovering investment through ongoing energy charges, have generally seen substantially higher connection rates. Standalone systems have usually in
the past been purchased, with the user bearing the entire cost (other than fuel and maintenance costs) upfront. Increasingly standalone system providers are looking to pay-as-you-go and similar arrangements whereby the user pays for the system over time, or for electricity used, bringing standalone system access more in line with grid and mini-grid access.
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Delivery Model
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Any delivery model, whether public, private or a PPP partnership will ultimately rely on user payments to cover ongoing costs and fund expansion. Under a public model, part of the funding may come from central public funds, making access more affordable to users, and under a PPP model the same can be achieved through grants and subsidies. The issue of enabling users to finance any up-front costs will remain regardless of the delivery model.
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Legual Basis
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There is clearly a direct link between user finance and price/tariff regulation arrangements, with the charges to be paid by users being set through any regulatory framework.
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Price/Tariff Regulation
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Other Forms of Finance
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Private/Market Finance – sufficient user finance is a critical factor for any private sector investor to determine whether there is a sustainable market for electricity consumption. The affordability of up-front costs and/or monthly payments will determine whether the supply of electricity to any potential customer(s) is a viable business opportunity. For low-income communities, the supplier may rely upon public sector support to ensure that households can afford the necessary services. The private finance sector may also be a source of finance for users to cover upfront charges. However, it is in the longer-term interests of the supplier to introduce a level of electricity, together with an appropriate financing mechanism, that the consumer can pay for directly without dependence on external resources.
Grants/Subsidies – Supply of electricity to some groups of the population will require funding in addition to payments that can be made directly by individual users. Non-commercial funding that does not require any repayment (grants) can be made available from government, or international donors, either to electricity providers to reduce charges or directly to users, and so reduce upfront costs. In a similar way, public sector payments to offset some of the ongoing costs associated with electricity supply (subsidies) can be introduced to increase affordability for users and reduce prices/tariffs charged by providers.
Cross-subsidies – Another option is for electricity provision to some users to be subsidized from charges paid by other (higher income) users, rather than from general public funds. Cross-subsidization can occur within a single electricity provider’s business (with some degree of cross-subsidization being inherent in any multi-user system) or arrangements for cross-subsidy can be established between electricity businesses. This approach can be effective provided that the balance in numbers between the groups of users is such that electricity can be made affordable for the subsidized group while remaining acceptably priced for those providing the cross-subsidy.
Tax exemptions – Provide an indirect means of subsidizing electricity costs and so making charges more affordable for users and reducing their need to access finance.
Guarantees – One means of enabling users to access finance is for government or other donor, such as an international development bank, to provide guarantees to micro-finance providers and other potential lenders to encourage them to offer loans to those wishing to access electricity.
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Non-Financial Interventions
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Capacity building and technical assistance to electricity providers and regulators may be needed to support design of price/tariff structures and finance arrangements which will increase affordability of electricity access to users. Awareness raising and capacity building to finance providers may also assist them to enter this market and design financial products which lower the barrier of upfront costs to electricity access. Demand promotion is key in enabling users to increase productive use of electricity and allowing providers to reduce per kWh charges and thus making it more affordable to users. User finance may itself be an element in demand promotion programmes, enabling users to access the finance to buy equipment and develop businesses based on electricity use.
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Technology
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Grid system construction and extension is highly capital intensive and almost all national grids (including those in developed countries) are constructed using public funding from government, sometimes supplemented by concessionary loans and grants from international agencies. The bulk of ongoing grid funding generally comes from users charges, but the grid is often seen as a national asset and electricity from it as a public good supporting national economic development, and governments may therefore choose to provide continuing subsidies either on a general basis, to incentivize extension to new users, or fund provision to specific groups of users (eg through lifeline tariffs). The primary financing for mini-grids will generally align with the delivery model, with publically-owned mini-grids using public finance and privately owned mini-grids drawing on private finance. However, where incomes are lower or system costs higher, grants and /or subsidies are likely to be needed to make electricity from mini-grids affordable to users and the mini-grid businesses economically sustainable. Standalone systems are most frequently provided commercially and purchased directly by users. Grants may be used, as seen in the NAE Case Study of the IDCOL programme in Bangladesh, to make systems more affordable to users, to enable providers to establish their businesses and to fund support activities. Where standalone system providers are moving towards pay-as-you-go arrangements their need for capital will increase and it may be more appropriate to channel grants and subsidies to them, allowing them to reduce monthly charges and charges to users for electricity used. Standalone systems may also, as can be seein in the NAE Case Study South Africa, be provided through a public delivery model and subsidized through that model.
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Delivery Models
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By definition, any public delivery model will use public finance - effectively government (and international ) grants and subsidies – combined with finance from users, while a purely private delivery model must be purely privately financed (since inclusion of any grants or subsidies finance would cause the delivery model to be categorized as a public-private partnership). All public-private partnership models will involve a combination of private and public finance, frequently through explicit grants and subsidies (or tax exemptions or guarantees) or through partial public ownership acting as a form of grant /subsidy.
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Legual Basis
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A concession may be used as a means of channelling grants or subsidies into electricity provision through the terms of the concession agreement. A license would not generally be linked directly to a grant or subsidy, but may be one of the qualifying requirements for accessing them. Grants and subsidies will most often be linked to some form of regulation to ensure proper use of funds.
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Price/Tariff Regulation
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Any price/tariff regulation must factor in grants or subsidies received by the electricity business, so that their effect is to reduce prices or tariffs and make electricity more affordable to users. This also serves to ensure proper use of public funding and so where grants and subsidies are made available, prices or tariffs are more likely to be regulated. Where combined with a uniform price/tariff arrangement, grants and subsidies may make electricity access more affordable, but 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 have been delivered economically at a lower subsidy level. This implies that where uniform prices or tariffs are used, grants or subsidies should be structured to reflect costs of provision. Where prices or tariffs are set on an individual basis, the prices/tariffs themselves can be made cost-reflective. Where prices/tariffs are unregulated, it is left to market competition to ensure that grants and subsidies are passed to the users rather than unnecessarily retained by the business to boost profits to excessive levels.
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Other Forms of Finance
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Private Finance – private finance will depend upon the investor’s (or lender’s) assessment of the financial return and the level of risk involved. Grants and subsidies can directly increase probable return and reduce risk by off-setting costs and increasing demand by making electricity affordable for more users. Indirectly grant-funded technical assistance, local capacity-building, awareness-raising, and promotion of uses of electricity by potential customers can also make investment in electricity access more attractive to private financiers.
User finance – grants or subsidies paid to users provide one source of user finance, allowing users to off-set up-front and/or ongoing charges. Grants and subsidies paid to electricity businesses have the same effect indirectly. Because grants and subsidies do not require repayment they provide an absolute reduction in users’ need to secure other forms of finance, not just a timing shift.
Cross-subsidies – sit alongside grants and subsidies as finance which is not derived from commercial investment in the specific electricity provider or payments from the users being supplied. They may therefore be seen as an alternative to grants and subsidies, but it must be recalled that they are taken from other businesses and users and so, unlike grants and subsidies simply redistribute the costs of electricity rather than reducing them
Tax exemptions and Guarantees – Act as indirect forms of grant or subsidy by reducing costs and risks
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Non-Financial Interventions
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Direct provision of electricity can act as a vehicle for grants and subsidies if it is undertaken at below cost, or if it uses funding (eg from the public purse) which is not required to be repaid. Grants may be used to fund other non-financial interventions, such as technical assistance and awareness raising. (Non-financial interventions undertaken at no cost to the electricity provider could also be regarded as grants or subsidies, but are not treated as such in categorizing NEA).
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Technology
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Some degree of cross-subsidy exists within any grid system because it is impossible to determine costs of provision for individual users and prices or tariffs are therefore generally set uniformly across broad classes of user. This cross-subsidy effect can be increased and targeted by deliberately setting differential prices or tariffs. The same cross-subsidy effect exists, though on a lesser scale within individual mini-grids and again prices/tariffs can be shaped to benefit specific groups. For standalone systems costs of provision vary less (for a given type and size of system) and users are generally charged the specific system cost, or something close to it. Standalone system providers will be reluctant to provide cross-subsidies in the absence of a concession or pricing structure set by government or regulator, because they will fear competition from others. Cross-subsidies between different technologies delivered by a single provider (for instance
subsidy of standalone systems provided by the grid operator) or between technologies delivered by different providers (e.g. the grid system and separately owned mini-grids) may be established but are likely to be driven by government policy or regulation.
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Delivery Models
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Active cross-subsidies are more likely to be put in place within a public delivery model, where the delivery organisation has social as well as financial objectives. In a private or public-private model cross-subsidies may be established either for social reasons (provided this does not threaten investor returns) or for commercial reasons (eg where a mini-grid operator believes that commercial customers will be willing to pay for electricity at a higher price than the cost of supplying them, and this can be used to lower charges to and so increase demand from households, thus increasing overall revenues). Otherwise cross-subsidies are likely to be the result of regulatory action.
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Legual Basis
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Concessions can provide a vehicle for cross-subsidisation, with finds transferring between concessionaires under the terms of concession agreements. Under a licensing structure some form of levy and energy fund will probably be needed. Cross subsidies between providers are unlikely to be practicable in an unregulated environment.
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Price/Tariff Regulation
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Any cross-subsidies will be linked to price/tariff regulation. Where prices or tariffs are shaped to subsidize one group of users by increasing prices or tariffs for another group within a regulated electricity business, the price/tariff structure will require regulatory approval, and may be driven by regulatory requirements. Any cross-subsidies between providers will almost inevitably be driven by government or regulatory requirements. Either cross subsidies or grants or subsidies from outside the sector will be needed within any uniform price/tariff arrangement to prevent providers in higher cost areas or to higher cost groups becoming insolvent, while those with a lower cost base are enabled to make excess profits. Within an individual price/tariff regime, any cross-subsidies should be factored in to price/tariff calculations, and may be used to make electricity more affordable for those it is more costly to supply, and hence more equitable.
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Other Forms of Finance
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Cross-subsidies may be used to attract private finance – but may also discourage it to the extent that funds are extracted from some businesses and thereby reduce returns. If they are seen as arbitrary or politically driven this is particularly likely to drive away private investment. Cross-subsidies will also directly affect user finance, since it is effectively a means of reducing the level of finance required from one set of users and increasing that from another. Cross-subsidies may also be seen as an alternative to external grants and subsidies – but it must be recalled that they merely move funding within the electricity sector rather than bringing new funds into the sector as a whole.
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Non-Financial Interventions
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Regulatory reform will be required to define any cross-subsidy framework and agree the introduction of such a framework with all relevant parties before it can successfully be implemented. Any cross-subsidy arrangement between providers will also need backing from Government policy, and should align with and support electricity access targets. Cross-subsidies may also be an appropriate means to support introduction of new technologies. Capacity building and technical assistance may be needed to enable policymakers and regulators to establish cross-subsidy arrangements which are effective and will produce desired outcomes without adverse unintended consequences.
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|
Technology
|
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.
|
|
Delivery Models
|
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.
|
|
Legual Basis
|
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.
|
|
Price/Tariff Regulation
|
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.
|
|
Other Forms of Finance
|
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.
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.
|
|
Non-Financial Interventions
|
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.
|
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 -
