Revision as of 10:32, 26 June 2018

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Non-Financial Interventions: Actions taken to support or facilitate electricity access

Interventions should be regarded as part of a National Electrification Approache only if they are integral to governement electrification policy/strategy

1 Direct Energy Access Provision
2 Institutional Restructuring
3 Regulatory Reform
4 Policy & Target Setting
5 Quality/Technical Standards
6 Technical Assistance
7 Capacity Building/Awarness Raising
8 Market Information
9 Demand Promotion
10 Technology Development/Adoption
11 National Energy Planning
12 References
- 12.1 Authors
- 12.2 Acknowledgements

Direct Energy Access Provision

Definition:

Direct action by an implementing authority (such as a Rural Energy Agency or national utility) to provide or take part in the provision of electricity directly, rather than by funding, incentivizing or facilitating provision by others.

This may include providing:

all, or multiple, steps along the supply chain - for instance development, construction and operation of isolated mini-grids and sale of electricity to users;
one link along the supply chain, such as bulk purchase of solar home systems which are then purchased by retailers to be distributed and sold to users

Internactions wiht other NAE Categories:

	Technology	Grid extension is often directly provided, but direct provision may also be used for mini-grids and standalone systems.
	Delivery Models	Direct provision sits naturally with a public delivery model where all the elements along the supply chain are undertaken by public entities. Where the public sector wishes to take on only some roles along the chain, a public-private partnership may be more appropriate. Direct provision through a purely private model is difficult to envisage.
	Legual Basis	Direct provision may be on a national concession monopoly basis, with oversight and control being through the organisational hierarchy (though a transparent regulatory system would still be best practice). Where direct provision is applied to only one part of electricity access and or to only some elements of the supply chain, it is important that the regulatory basis is clear so that other market participants can understand it and so that any potential threat to them is reduced.
	Price/Tariff Regulation
	Finance	Private finance is unlikely to be used to fund direct provision, though it will probably be used in the private elements of a public-private partnership arrangement including direct provision (and could be leveraged by the direct provision elements). Some form of public funding is very likely to be involved in direct provision, though since this may be within the public sector it may be implicit rather than through explicit grants or subsidies. Direct provision may also draw on cross-subsidies and hence on charges on existing users to subsidise provision to new users.
	Other Forms of Non-Financial Interventions	National energy planning will establish the optimum mix of technologies to meet electrification needs across the country, but not how they are best provided. Direct provision will often take place within existing structures, however Institutional restructuring may be needed to provide a focus for provision – eg by a Rural Energy Agency – and capacity building or technical assistance for this new organisation may be merited. Direct provision may also be accompanied by measures such as demand promotion and technology adoption.

Advantages and Disadvantages

Direct provision will generally use existing institutions, capabilities and systems and where these are strong may bring advantages. By drawing on these strengths it can bring economies of scale (eg through bulk purchasing). However, this will often be accompanied by entrenched ways of working and be inflexible and slow moving. Direct provision also has the potential to bring in other participants (for instance by offering standalone system providers a simple way to distribute their products), but carries the risk of distorting and crowding others out of the energy access provision.

Further Information and Guidance

Barnes, D. (2007). The Challenge of Rural Electrification: Strategies for Developing Countries. Book Chapter. https://books.google.co.uk/books?id=iOBi17Pr3fIC&printsec=frontcover&source=gbs_ge_summary_r&cad=0#v=onepage&q&f=false
ESMAP (2005), Meeting the Challenge of Rural Electrification in Developing Nations: The Experience of Successful Programs https://static.globalinnovationexchange.org/s3fs-public/asset/document/Meeting0the0Ch10Discussion0Version0.pdf?q3Tol9Bdn4yH4J43t3P9t3hq5lh6ZipT
IEA, (2010), Comparative Study on Rural Electrification Policies in Emerging Economies https://www.iea.org/publications/freepublications/publication/rural_elect.pdf
The World Bank Group, (2012). Institutional Approaches to Electrification: The Experience of Rural Energy Agencies/ Rural Energy Funds in Sub-Saharan Africa. November 14–16, 2011 Dakar, Senegal https://openknowledge.worldbank.org/bitstream/handle/10986/26073/763820WP0P11090s0to0Electrification.pdf?sequence=1&isAllowed=y

Relevante Case Studies:

Institutional Restructuring

Definition:

Reorganising and reassigning responsibilities between government departments, agencies, utilities and other organisations charged with managing the sector and delivering electricity access.

In many countries, the national electricity utility has historically been the sole provider of electricity and responsible for all electrification efforts. The motivation for institutional reform is generally some combination of poor performance or inefficiency of existing institutions (often the national utility) and a wish to accelerate extension of electricity access, to introduce new forms of electricity provision, to bring in new (often private) funding and investment or to create greater transparency and accountability.

The experience of structural change to the electricity industry in many countries has highlighted some key lessons. Orthodox approaches to organisations are often unsuitable, and no one industry structure appears to be significantly better than others. A structure compatible with the objectives of electricity distribution in developing countries, and with the local context and planned approach to electrification is needed. Energy sector restructuring has a significant political dimension, but restructuring can still fail even if there is support from government at a high level. It has also been noted that indecision and uncertainty regarding the format of a restructured utility can have serious negative consequences.

The organisations most frequently involved in institutional restructuring include:

Renewable Energy Agency (REA) – a national REA is usually a semi-autonomous institution which is responsible for executing the Government’s Rural Electrification Plan or Programme. Its major responsibilities include: planning and packaging projects for public or private investment in rural electrification and renewable energy power generation; implementing priority rural electrification projects; administering capital subsidies for private investments; maintaining a national database for rural electrification;
advising the relevant Government department(s) on policy issues in rural electrification; and managing any rural electrification programmes implemented with Government support.

Regulator– electricity regulatory agencies display a range of effectiveness depending upon their structure and official remit, and particularly their degree of independence. The presence of an electricity (or energy) regulatory law is a key factor in determining the role of a regulatory agency; with such a law established, the agency can provide independent enforcement but otherwise will be seen as an arm of Government during the preparation of such regulation. Whether or not the regulator is an autonomous agency or the sector ministry will clearly have a direct bearing on its level of independence (practical and/or perceived) and hence its likely impact. The mode of financing the regulatory agency is also an important factor in determining its cost-effectiveness; a regulator that is funded by a licence fee obligation or a line item in customers’ electricity bills clearly has a different status to one that is supported with a budget allocated by Government. It is important however to accept that each institutional structure must take account of specific local conditions and must be viewed within this context.

National electricity utility – over recent years, there have been several examples of national utilities in developing countries adopting a new approach to their operations, mainly through division into different operational units, and/or through privatisation. These reforms have mainly involved the unbundling of vertically integrated government utilities into three separate segments for generation, transmission and distribution. The main drivers for such change have been to improve quality of service, improve connectivity, improve reliability, reduce losses, attract private capital investment into the sector, and so enhance overall sector efficiency. When considering the privatisation of one or more of the resulting units, it is important for the government to assess in advance the likely impact, and to determine the most relevant options for tariffs. Some of the key objectives for such reform will include making the sector financially viable and able to perform without subsidies; increasing efficiency; improving commercial performance; meeting the increasing demand for electricity and the broader area coverage; improving the reliability and quality of electricity supply; attracting private sector capital and entrepreneurs and taking advantage of export opportunities.

Internactions wiht other NAE Categories:

	Technology	Institutional reform will have an impact on all approaches to electrification and the associated technology categories. For grid extension, existing institutions have extensive experience of practices that may no longer be most appropriate for electrification in more areas. New practices may be required to increase levels of efficiency in order to make further grid extension a viable option, new expertise and knowledge may be needed to support adoption of new forms of electricity provision, and cultural change may be needed to achieve increased focus on supplying new users alongside serving existing customers. mini-grids, whether isolated or integrated with the grid, require different support structures to be effective, reliable and commercially viable. Stand-alone systems again offer a different approach to the aims of electrification, with the satisfaction of basic needs being the principle driver, rather than a full power service. This too requires a different institutional perspective, skills and understanding that can only be delivered through the reform of existing support structures.
	Delivery Models	The institutions originally established to deal with power generation and supply were almost exclusively public sector, centred upon the national electricity utility. With the increasing cost of reaching more remote areas, the need for upfront investment has become a serious constraint to network expansion. Rural electrification also raises new challenges regarding the need for more intensive community interaction and closer management of the local operations. Consequently, the resources that can more readily be offered by the private sector – including the scale of investment and commercial management in order to make sufficient returns – are increasingly required. There is a growing need for private models and public-private-partnerships, which face the barrier of public institutions that have experience of a single method of providing access to electricity. The reform of these institutions, taking account of private sector interests, can thereby create opportunities for partnerships that will bring mutual benefits to all involved.
	Legual Basis	Establishment of either or concessions or licenses for electricity provider implies a wish to bring in private or public-private electricity provision. Setting up these arrangements will require competent institutions with responsibility for managing them, and institutional restructuring is a likely response to this need and a first step in establishing new legal arrangements for electricity provision.
	Price/Tariff Regulation	Similarly any form of price/tariff regulation requires a regulator. A regulator independent from government and those with vested interests in the sector will carry greatest credibility with potential new electricity providers and investors. Subsequent changes and adjustments to regulatory frameworks will be the responsibility of the regulator.
	Finance	An institutional structure convincing to private sector businesses and investors is key to attracting private finance. It is also through this institutional structure that the interests of users are protected and the portion of funding provided by users set. The institutional structure also governs how any grant/subsidy, cross-subsidy, tax exemptions and guarantee arrangements are set up and implemented.
	Other Forms of Non-Financial Interventions	The institutions charged with managing the sector and delivering electricity access will also be responsible for designing and managing non-financial interventions. One key element of institutional change will be to match the capabilities of staff to new requirements. Training to familiarise staff with new approaches, and to transfer the new skills required to provide the associated support will be an important requirement for any lasting reform process (and, if fulfilled adequately, will also incur a significant cost due to the large size of the institutions involved and the broad range of their activities – this should be budgeted in advance to set clear expectations). A first step in this process will be to educate staff regarding the need for reform, to convince them of the benefits, and so secure ownership and commitment to the change process. In the case that existing staff are unable or unwilling to adapt their approach, or when new skills are required to support modern demands, then the recruitment of new staff should be considered to establish the target capacity). Having raised the awareness and understanding of staff, they will become more receptive to the transfer of skills, equipping the institution with sufficient capacity to move forward, with minimum disruption.

Advantages and Disadvantages

The main benefit from institutional reform is to improve the operation and therefore the efficiency of current organisations involved with the expansion of electrification and to align them with new models and approaches to electrification. The electricity industry has usually been centred upon a national power utility, whose focus has been exclusively on grid-extension. With the increasing cost of electrification to remote areas, alternatives to the central grid have become more relevant, but the utility is often not structured in a way that can consider and react to these alternatives. The reform of the utility, and related state structures, can increase the ability of the sector to consider and react more positively to new electrification approaches.

An immediate disadvantage from such reform is the impact of change. Such change is often disruptive and will initially require additional resources to introduce unfamiliar systems and there may be significant costs associated with new infrastructure and systems. There will also be the need to support capacity building for operators who have been involved with previous systems, and possibly the introduction of new staff to enable sustainable reform processes. Given these costs it is important to be sure that institutional restructuring is necessary and not just a distraction from the real challenges of extending electrification. However it is usually a one-off, upfront cost to put changes into effect; this can then be compensated over time from the improved efficiencies and more cost-effective output.

Further Information and Guidance

IADB (Balza, Jimenez, Mercado), Dec 2013, Privatization, Institutional Reform, and Performance in the Latin American Electricity Sector. https://publications.iadb.org/handle/11319/6016
The World Bank Group, (2012). Institutional Approaches to Electrification: The Experience of Rural Energy Agencies/ Rural Energy Funds in Sub-Saharan Africa. November 14–16, 2011 Dakar, Senegal https ://openknowledge.worldbank.org/bitstream/handle/10986/26073/763820WP0P11090s0to0Electrification.pdf?sequence =1&isAllowed=y

Relevante Case Studies:

Regulatory Reform

Definition:

Reform of laws and regulations governing the generation, distribution and sale of electricity, and of related processes and procedures.

Because electricity is such an essential service, most countries have some regulation of who may provide and sell electricity, and on what terms, to protect both providers and users. Often these have in the past been based on the assumption that electricity will be provided through a national grid system. As new options for electricity provision emerge, regulatory reform may be needed to enable their implementation, to create incentives for private and public sector power utilities to provide electricity, both through the extension of electricity networks and decentralized power provision, and to protect users.

Internactions wiht other NAE Categories:

	Technology	Regulation of the grid system is generally well established. Reform may be required in order to allow for privatisation and introduction of private finance, creation of grid connected distribution systems or introduction of grid connected mini-grids or Independent Power Plants. Regulatory reform may also be needed to allow and incentivize isolated mini-grids. Standalone systems have in the past generally been unregulated, but as these become a more significant element in electricity provision, reform may be undertaken to bring them under regulatory control and to create incentives for their supply. In particular it may be necessary in order to allow pay-as-you-go arrangements to be established.
	Delivery Model	Within a public delivery model, regulatory reform will generally be a matter of improving efficiency and transparency. Reform is likely, however, be fundamental to allowing private and public-private partnership models for electricity delivery. The regulatory structure which is the outcome of this reform will form the basis of the development of these models and how they deliver electricity access.
	Legual Basis	The current regulatory framework must be the stating point for any reform. In many cases this will be a monopoly (nation-wide concession) for the national utility. The fundamental requirement to allow private sector participation is to make it legal. This may achieved simply by change in the law allowing all to generate and sell electricity, but authorities generally wish to maintain some level of oversight, over larger mini-grids at least, and so require their operators to be licensed. Alternatively, concession areas may be established, creating local monopolies for which electricity businesses can compete, with the terms of the concession agreement setting out the concessionaires rights and obligations. Standalone system providers are not usually covered by any utility monopoly (since it is the means of accessing electricity rather than electricity itself which they are selling), but as they become a more significant element in electricity provision, and particularly to allow pay-as-you-go arrangements, their regulation may be appropriate. Regulatory reform will be required to introduce such regulatory approaches, or to transition between one approach and another according to experience under local conditions.
	Price/Tariff Regulation	Regulatory reform is also central to establishing regulation of prices and tariffs. Appropriate price/tariff regulation is important to to protect users and incentivize suppliers. To see further information on different forms of price/tariff regulation, please go to the Uniform Price/Tariff and Individual Price/Tariff category descriptions.
	Finance	The most usual motives for regulatory reform are to allow and encourage private, commercial, investment in electricity provision and to protect users and limit the requirement for user finance through price/tariff regulation. Reform to financial and tax regulation may also be needed to allow pay-as-you-go arrangements and to establish any tax exemptions. While grants, subsidies and guarantees are less directly linked to regulatory reform, it is important that they be aligned with the regulatory framework established.
	Other Forms of Non-Financial Interventions	Institutional Restructuring frequently accompanies Regulatory Reform, particularly where restructuring is needed to manage the regulatory framework being established. Both the regulatory framework and the institutional structure should be aligned with government policy and targets. Capacity building or technical assistance may be needed where the key actors involved do not have the expertise needed to design the regulatory framework.

Advantages and Disadvantages

Regulatory reform is an essential pre-requisite to many National Electrification Approaches. Its main disadvantages are the costs and resources used in reform, and the risk that the regulatory system designed may not, in practice, support the intended objectives and that over-regulation may hamper rather than assist improvements in electricity access.

Further Information and Guidance

De Montfort University (2013), Financing Energy Access and Off-grid Electrification: A Review of Status, Options and Challenges https://www.dmu.ac.uk/documents/technology-documents/research-faculties/oasys/project-outputs/peer-reviewed-journal-articles/pj7--financing-energy-access--rser-paper.pdf
UNEP-FI (2012), Financing renewable energy in developing countries http://www.unepfi.org/fileadmin/documents/Financing_Renewable_Energy_in_subSaharan_Africa.pdf

Relevante Case Studies:

Policy & Target Setting

Definition:

Finance provided by investors or lenders in the expectation of financial returns (profit).

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.

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.

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.

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.

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.

Internactions wiht other NAE Categories:

	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.

Advantages and Disadvantages

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.

Further Information and Guidance

De Montfort University (2013), Financing Energy Access and Off-grid Electrification: A Review of Status, Options and Challenges https://www.dmu.ac.uk/documents/technology-documents/research-faculties/oasys/project-outputs/peer-reviewed-journal-articles/pj7--financing-energy-access--rser-paper.pdf
UNEP-FI (2012), Financing renewable energy in developing countries http://www.unepfi.org/fileadmin/documents/Financing_Renewable_Energy_in_subSaharan_Africa.pdf

Relevante Case Studies:

Quality/Technical Standards

Definition:

Finance provided by investors or lenders in the expectation of financial returns (profit).

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.

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.

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.

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.

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.

Internactions wiht other NAE Categories:

	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.

Advantages and Disadvantages

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.

Further Information and Guidance

De Montfort University (2013), Financing Energy Access and Off-grid Electrification: A Review of Status, Options and Challenges https://www.dmu.ac.uk/documents/technology-documents/research-faculties/oasys/project-outputs/peer-reviewed-journal-articles/pj7--financing-energy-access--rser-paper.pdf
UNEP-FI (2012), Financing renewable energy in developing countries http://www.unepfi.org/fileadmin/documents/Financing_Renewable_Energy_in_subSaharan_Africa.pdf

Relevante Case Studies:

Technical Assistance

Definition:

Finance provided by investors or lenders in the expectation of financial returns (profit).

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.

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.

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.

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.

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.

Internactions wiht other NAE Categories:

	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.

Advantages and Disadvantages

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.

Further Information and Guidance

De Montfort University (2013), Financing Energy Access and Off-grid Electrification: A Review of Status, Options and Challenges https://www.dmu.ac.uk/documents/technology-documents/research-faculties/oasys/project-outputs/peer-reviewed-journal-articles/pj7--financing-energy-access--rser-paper.pdf
UNEP-FI (2012), Financing renewable energy in developing countries http://www.unepfi.org/fileadmin/documents/Financing_Renewable_Energy_in_subSaharan_Africa.pdf

Relevante Case Studies:

Capacity Building/Awarness Raising

Definition:

Finance provided by investors or lenders in the expectation of financial returns (profit).

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.

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.

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.

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.

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.

Internactions wiht other NAE Categories:

	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.

Advantages and Disadvantages

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.

Further Information and Guidance

De Montfort University (2013), Financing Energy Access and Off-grid Electrification: A Review of Status, Options and Challenges https://www.dmu.ac.uk/documents/technology-documents/research-faculties/oasys/project-outputs/peer-reviewed-journal-articles/pj7--financing-energy-access--rser-paper.pdf
UNEP-FI (2012), Financing renewable energy in developing countries http://www.unepfi.org/fileadmin/documents/Financing_Renewable_Energy_in_subSaharan_Africa.pdf

Relevante Case Studies:

Market Information

Definition:

Finance provided by investors or lenders in the expectation of financial returns (profit).

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.

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.

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.

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.

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.

Internactions wiht other NAE Categories:

	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.

Advantages and Disadvantages

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.

Further Information and Guidance

De Montfort University (2013), Financing Energy Access and Off-grid Electrification: A Review of Status, Options and Challenges https://www.dmu.ac.uk/documents/technology-documents/research-faculties/oasys/project-outputs/peer-reviewed-journal-articles/pj7--financing-energy-access--rser-paper.pdf
UNEP-FI (2012), Financing renewable energy in developing countries http://www.unepfi.org/fileadmin/documents/Financing_Renewable_Energy_in_subSaharan_Africa.pdf

Relevante Case Studies:

Demand Promotion

Definition:

Finance provided by investors or lenders in the expectation of financial returns (profit).

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.

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.

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.

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.

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.

Internactions wiht other NAE Categories:

	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.

Advantages and Disadvantages

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.

Further Information and Guidance

De Montfort University (2013), Financing Energy Access and Off-grid Electrification: A Review of Status, Options and Challenges https://www.dmu.ac.uk/documents/technology-documents/research-faculties/oasys/project-outputs/peer-reviewed-journal-articles/pj7--financing-energy-access--rser-paper.pdf
UNEP-FI (2012), Financing renewable energy in developing countries http://www.unepfi.org/fileadmin/documents/Financing_Renewable_Energy_in_subSaharan_Africa.pdf

Relevante Case Studies:

Technology Development/Adoption

Definition:

Finance provided by investors or lenders in the expectation of financial returns (profit).

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.

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.

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.

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.

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.

Internactions wiht other NAE Categories:

	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.

Advantages and Disadvantages

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.

Further Information and Guidance

De Montfort University (2013), Financing Energy Access and Off-grid Electrification: A Review of Status, Options and Challenges https://www.dmu.ac.uk/documents/technology-documents/research-faculties/oasys/project-outputs/peer-reviewed-journal-articles/pj7--financing-energy-access--rser-paper.pdf
UNEP-FI (2012), Financing renewable energy in developing countries http://www.unepfi.org/fileadmin/documents/Financing_Renewable_Energy_in_subSaharan_Africa.pdf

Relevante Case Studies:

National Energy Planning

Definition:

Finance provided by investors or lenders in the expectation of financial returns (profit).

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.

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.

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.

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.

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.

Internactions wiht other NAE Categories:

	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.

Advantages and Disadvantages

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.

Further Information and Guidance

De Montfort University (2013), Financing Energy Access and Off-grid Electrification: A Review of Status, Options and Challenges https://www.dmu.ac.uk/documents/technology-documents/research-faculties/oasys/project-outputs/peer-reviewed-journal-articles/pj7--financing-energy-access--rser-paper.pdf
UNEP-FI (2012), Financing renewable energy in developing countries http://www.unepfi.org/fileadmin/documents/Financing_Renewable_Energy_in_subSaharan_Africa.pdf

Relevante Case Studies:

References

Authors

Authors: Mary Willcox, Dean Cooper

Acknowledgements

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 -

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Any feedback would be very welcome. If you have any comments or enquires please contact: mary.willcox@practicalaction.org.uk, benjamin.attigah@euei-pdf.org, or caspar.priesemann@giz.de.

Download the Tool as a Power Point: https://energypedia.info/images/a/aa/National_Approaches_to_Electrification_-_Review_of_Options.pptx

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@@ Line 268: / Line 268: @@
 | style="width: 618px;" |
-'''<span></span><span></span><span></span><span>Finance provided by investors or lenders in the expectation of financial returns (profit).&nbsp;&nbsp;</span><span></span><span></span><span></span>'''
+'''<span></span><span></span><span></span><span></span><span>Reform of laws and regulations governing the generation, distribution and sale of electricity, and of related processes and procedures.</span><span></span><span></span><span></span><span></span>'''
-<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.&nbsp; 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>
+<span>Because electricity is such an essential service, most countries have some regulation of who may provide and sell electricity, and on what terms, to protect both providers and users.&nbsp; Often these have in the past been based on the assumption that electricity will be provided through a national grid system. As new options for electricity provision emerge, regulatory reform may be needed to enable their implementation, to create incentives for private and public sector power utilities to provide electricity, both through the extension of electricity networks and decentralized power provision, and to protect users.</span><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/>
-'''''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.&nbsp;<br/>
 |}
@@ Line 291: / Line 287: @@
 | style="width: 616px;" |
-<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.&nbsp; 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.
+<span style="color:#FFFFFF;"></span>Regulation of the grid system is generally well established. Reform may be required in order to allow for privatisation and introduction of private finance, creation of grid connected distribution systems or introduction of grid connected mini-grids or Independent Power Plants. Regulatory reform may also be needed to allow and incentivize isolated mini-grids. Standalone systems have in the past generally been unregulated, but as these become a more significant element in electricity provision, reform may be undertaken to bring them under regulatory control and to create incentives for their supply. In particular it may be necessary in order to allow pay-as-you-go&nbsp; arrangements to be established.
 |-
 | style="width: 10px; background-color: rgb(49, 49, 152);" | <br/>
 | style="width: 117px; background-color: rgb(50, 100, 154);" |
-<span style="color:#FFFFFF;">Delivery Models</span><br/>
+<span style="color:#FFFFFF;">Delivery Model</span><br/>
 <br/>
 | style="width: 616px;" |
-Application of market-based finance, by definition, requires private sector ownership or a public-private partnership (PPP).&nbsp; 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.&nbsp;
+Within a public delivery model, regulatory reform will generally be a matter of improving efficiency and transparency. Reform is likely, however, be fundamental to allowing private and public-private partnership models for electricity delivery. The regulatory structure which is the outcome of this reform will form the basis of the development of these models and how they deliver electricity access.&nbsp;&nbsp;
 |-
@@ Line 311: / Line 307: @@
 | style="width: 616px;" | <span style="color:#FFFFFF;"></span>
-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.
+The current regulatory framework must be the stating point for any reform. In many cases this will be a monopoly (nation-wide concession) for the national utility. The fundamental requirement to allow private sector participation is to make it legal. This may achieved simply by change in the law allowing all to generate and sell electricity, but authorities generally wish to maintain some level of oversight, over larger mini-grids at least, and so require their operators to be licensed. Alternatively, concession areas may be established, creating local monopolies for which electricity businesses can compete, with the terms of the concession agreement setting out the concessionaires rights and obligations. Standalone system providers are not usually covered by any utility monopoly (since it is the means of accessing electricity rather than electricity itself which they are selling), but as they become a more significant element in electricity provision, and particularly to allow pay-as-you-go arrangements, their regulation may be appropriate. Regulatory reform will be required to introduce such regulatory approaches, or to transition between one approach and another according to experience under local conditions.<br/>
 |-
@@ Line 321: / Line 317: @@
 | 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.
+Regulatory reform is also central to establishing regulation of prices and tariffs. Appropriate price/tariff regulation is important to&nbsp; to protect users and incentivize suppliers. To see further information on different forms of price/tariff regulation, please go to the Uniform Price/Tariff and Individual Price/Tariff category descriptions.<br/>
 |-
 | style="width: 10px; background-color: rgb(49, 49, 152);" | <span style="color:#FFFFFF;"></span><br/>
 | style="width: 117px; background-color: rgb(32, 56, 100);" |
-<span style="color:#FFFFFF;">Other Forms of Finance</span><span style="color:#FFFFFF;"></span><br/>
+<span style="color:#FFFFFF;">Finance</span><span style="color:#FFFFFF;"></span><br/>
 <br/>
 | style="width: 616px;" | <span style="color:#FFFFFF;"></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>
+<span style="font-size: 13.6px;">The most usual motives for regulatory reform are to allow and encourage private, commercial, investment in electricity provision and to protect users and limit the requirement for user finance through price/tariff regulation. Reform to financial and tax regulation may also be needed to allow pay-as-you-go arrangements and to establish any tax exemptions.&nbsp; While grants, subsidies and guarantees are less directly linked to regulatory reform, it is important that they be aligned with the regulatory framework established.</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.&nbsp; Alternatively the electricity provider may seek additional finance in order to reduce up-front charges and so minimize barriers to users accessing their services.
 |-
 | style="width: 10px; background-color: rgb(49, 49, 152);" | <span style="color:#FFFFFF;"></span><br/>
 | style="width: 117px; background-color: rgb(0, 100, 100);" |
-<span style="color:#FFFFFF;"></span><span style="color:#FFFFFF;">Non-Financial Interventions</span><span style="color:#FFFFFF;"></span><br/>
+<span style="color:#FFFFFF;"></span><span style="color:#FFFFFF;">Other Forms of Non-Financial Interventions</span><span style="color:#FFFFFF;"></span><br/>
 <br/>
 | style="width: 616px;" |
-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.&nbsp; 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.&nbsp; Market information, capacity building and customer engagement through promotional activity will all have a similar positive effect.<span style="font-size: 13.6px;"></span>
+Institutional Restructuring frequently accompanies Regulatory Reform, particularly where<br/>restructuring is needed to manage the regulatory framework being established. Both the regulatory framework and the institutional structure should be aligned with government policy and targets. Capacity building or technical assistance may be needed where the key actors involved do not have the expertise needed to design the regulatory framework.&nbsp;&nbsp;<span style="font-size: 13.6px;"></span>
 |}
@@ Line 355: / Line 349: @@
 | style="width: 10px; background-color: rgb(49, 49, 152);" | <br/>
 |
-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.&nbsp; 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.
+<span style="font-size: 13.6px;">Regulatory reform is an essential pre-requisite to many National Electrification Approaches. Its main disadvantages are the costs and resources used in reform, and the risk that the regulatory system designed may not, in practice, support the intended objectives and that over-regulation may hamper rather than assist improvements in electricity access.</span><br/>
-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.
 |}

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National Approaches to Electrification – Non-Financial Interventions

Revision as of 10:32, 26 June 2018

Contents

Direct Energy Access Provision

Internactions wiht other NAE Categories:

Advantages and Disadvantages

Further Information and Guidance

Relevante Case Studies:

Institutional Restructuring

Internactions wiht other NAE Categories:

Advantages and Disadvantages

Further Information and Guidance

Relevante Case Studies:

Regulatory Reform

Internactions wiht other NAE Categories:

Advantages and Disadvantages

Further Information and Guidance

Relevante Case Studies:

Policy & Target Setting

Internactions wiht other NAE Categories:

Advantages and Disadvantages

Further Information and Guidance

Relevante Case Studies:

Quality/Technical Standards

Internactions wiht other NAE Categories:

Advantages and Disadvantages

Further Information and Guidance

Relevante Case Studies:

Technical Assistance

Internactions wiht other NAE Categories:

Advantages and Disadvantages

Further Information and Guidance

Relevante Case Studies:

Capacity Building/Awarness Raising

Internactions wiht other NAE Categories:

Advantages and Disadvantages

Further Information and Guidance

Relevante Case Studies:

Market Information

Internactions wiht other NAE Categories:

Advantages and Disadvantages

Further Information and Guidance

Relevante Case Studies:

Demand Promotion

Internactions wiht other NAE Categories:

Advantages and Disadvantages

Further Information and Guidance

Relevante Case Studies:

Technology Development/Adoption

Internactions wiht other NAE Categories:

Advantages and Disadvantages

Further Information and Guidance

Relevante Case Studies:

National Energy Planning

Internactions wiht other NAE Categories:

Advantages and Disadvantages

Further Information and Guidance

Relevante Case Studies:

References

Authors

Acknowledgements