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| | | style="width: 117px; background-color: rgb(32, 56, 100);" | | | | 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;">Other Forms of Finance</span><span style="color:#FFFFFF;"></span><br/> |
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| − | '''<span><span></span></span><span><span></span></span><span><span>A regime under which the price or tariff at which each provider can sell electricity (or standalone systems) is separately agreed with the regulator.</span></span>''' | + | '''<span><span></span></span><span><span></span></span><span><span></span></span><span><span>Finance from charges paid by users for electricity or purchase of standalone systems, and finance made available to users to pay these charges</span></span><span><span></span></span>''' |
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| − | An individual price/tariff arrangement may:
| + | Users may pay a fee for connection to the main electricity grid or a mini-grid, for membership of the local customer group for a mini-grid, or purchase of a stand-alone system, flat monthly charges, and/or charges for electricity used. These charges serve to fund the costs of provision of electricity access, ongoing operational and maintenance costs, and costs of extending electricity access. Public subsidies and grants may be used to cover some of the cost and make electricity more affordable to users, but to the extent that private finance has been used to establish the means of energy access or the energy access business, payments from users will be needed to repay the private investment and pay any interest on loans or return on capital. Where users are required to pay charges up-front this can create a major barrier to access to electricity (even if the user could afford the cost if spread over time). If users would otherwise be unable to access bank loans or micro-finance to cover these upfront costs, loans may be provided as part of an intervention programme. Another solution is for the service provider (e.g. the national utility or mini-grid company) to source this funding, either by providing loans themselves, or by structuring their charges to reduce upfront payments. In the case of standalone system providers this may be achieved through pay-as-you-go arrangements where users pay for systems over months or years rather than up-front. For suppliers to reduce up-front charges it will usually be necessary for them to secure additional finance themselves, but this should have a lower cost than individual users borrowing. When planning to provide electricity to target customers, it is thus essential for the supplier to consider how the costs can be both afforded and financed by users. |
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| − | *Address purchase costs for standalone systems or connection charges and charges for electricity used or flat monthly changes<br/>
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| − | *Encompass a set of prices or tariffs for different classes of user (eg household, commercial and industrial) or for different levels of provision (eg size of solar home system) <br/>
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| − | *Relate to electricity from one or more technologies and/or standalone systems as long as these are all provided by a single entity<br/>
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| − | *Cover a single unit within the provider’s operation (eg a single mini-grid) or the entirety of the provider’s operation<br/>
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| − | *Be based (most usually) on the provider’s average or incremental costs, net of any grant or subsidy (cost-recovery tariffs) or on estimates of the avoided cost of grid extension to the area, or some other basis
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| | | style="width: 616px;" | <span style="color:#FFFFFF;"></span> | | | style="width: 616px;" | <span style="color:#FFFFFF;"></span> |
| − | It is in principle possible to set individual prices/tariffs for different areas within a grid system. This could have the advantage of incentivizing the grid company to extend into more remote areas where costs are higher, but is often politically unacceptable and a uniform price/tariff structure is therefore most often used. Grid connected mini-grids and distribution systems rely on the sale of electricity to the grid, and import of electricity from the grid and its sale to users, as well as sale of own-generated electricity to users. Clarity on how each of these tariffs is set and regulated is vital. Tariffs for import of electricity from and export to the grid will usually be on a uniform price/tariff basis. Tariffs for users of grid- connected mini-grids as well as isolated mini-grids are usually set individually for each mini-grid or distribution area (or mini-grid company) to reflect their specific costs and any subsidies or grants they may have received. For larger, particularly grid-connected, systems, these factors may be overcome by political considerations and attempts to achieve equal treatment of users considerations (but cost-reflective grants or subsidies, or cross-subsidies, will then be needed to maintain economic sustainability). At the other end of the scale it may be concluded that the costs and bureaucracy of agreeing individual tariff levels for single small mini-grids may be unjustified. It is most usual to leave tariffs for mini-grids below a certain size unregulated (on the basis that they do not create an effective monopoly and so purchase decisions can be left to users), though use of a<br/>uniform price/tariff is also an option.
| + | Grid and mini-grid electricity access has generally been paid for by users through a combination of connection charges, monthly charges and electricity usage charges. Those providers who are able to remove up-front connection fees, recovering investment through ongoing energy charges, have generally seen substantially higher connection rates. Standalone systems have usually in<br/>the past been purchased, with the user bearing the entire cost (other than fuel and maintenance costs) upfront. Increasingly standalone system providers are looking to pay-as-you-go and similar arrangements whereby the user pays for the system over time, or for electricity used, bringing standalone system access more in line with grid and mini-grid access. |
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| − | Prices for standalone systems are also generally unregulated, though where public funding is used to support provision of standalone systems, it may (as with the [[NAE Case Study: Bangladesh, IDCOL Solar Home Systems|NAE Case Study of the Bangladesh IDCOL programme]]) be regarded as appropriate to regulate prices. If the move towards pay-as-you-go, with users paying for electricity as they do from grid or mini-grids, while suppliers retain ownership of the capital equipment, continues or accelerates, regulation of electricity prices may become more relevant. If they are regulated it’s more likely to be on a uniform than an individual basis (since standalone system businesses are not usually tied to a location and so differences in costs are likely to be linked to their technology offer, efficiency of operation, or financing structure rather than any fundamental factors outside the businesses control).
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| − | An individual regulated price/tariff structure may be used with a public delivery model where multiple public entities are involved in electricity provision. It is in the context of a private or a public-private delivery model, particularly, that individual regulated prices or tariffs are most likely to be needed, since this offers the private sector element both clarity and the opportunity to recover costs.
| + | Any delivery model, whether public, private or a PPP partnership will ultimately rely on user payments to cover ongoing costs and fund expansion. Under a public model, part of the funding may come from central public funds, making access more affordable to users, and under a PPP model the same can be achieved through grants and subsidies. The issue of enabling users to finance any up-front costs will remain regardless of the delivery model. |
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| − | | style="width: 10px; background-color: rgb(243, 178, 131);" | <span style="color:#FFFFFF;"></span><br/> | + | | style="width: 10px; background-color: rgb(243, 178, 131);" rowspan="2" | <span style="color:#FFFFFF;"></span><br/> |
| | | style="width: 117px; background-color: rgb(154, 103, 0);" | | | | style="width: 117px; background-color: rgb(154, 103, 0);" | |
| − | <span style="color:#FFFFFF;">Legual Basis</span><br/> | + | <span style="color:#FFFFFF;">Legual Basis</span> |
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| − | <br/> | + | | style="width: 616px;" rowspan="2" | <span style="color:#FFFFFF;"></span> |
| | + | There is clearly a direct link between user finance and price/tariff regulation arrangements, with the charges to be paid by users being set through any regulatory framework. <br/> |
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| − | | style="width: 616px;" | <span style="color:#FFFFFF;"></span> | + | |- |
| − | <span style="font-size: 13.6px;">Individual prices or tariffs may be established through either concessions or a licensing system. Without some form of licensing it is impractical to regulate individual prices or tariffs.</span><br/>
| + | | style="width: 117px; background-color: rgb(205, 52, 0);" | |
| | + | <span style="color:#FFFFFF;">Price/Tariff Regulation</span> |
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| | | style="width: 10px; background-color: rgb(243, 178, 131);" | <span style="color:#FFFFFF;"></span><br/> | | | style="width: 10px; background-color: rgb(243, 178, 131);" | <span style="color:#FFFFFF;"></span><br/> |
| | | style="width: 117px; background-color: rgb(32, 56, 100);" | | | | style="width: 117px; background-color: rgb(32, 56, 100);" | |
| − | <span style="color:#FFFFFF;">Finance</span><br/> | + | <span style="color:#FFFFFF;"><span style="color: rgb(255, 255, 255); font-size: 13.6px; background-color: rgb(32, 56, 100);">Other Forms of Finance</span></span><br/> |
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| − | An individually regulated price/tariff regime will give those considering investing long term private capital confidence, reducing risk while protecting users. Whether this attracts finance will depend critically on whether the prices/tariffs set enable them to make adequate return on investment. A clear and transparent framework which allows potential investors to understand how prices/tariffs will be set and estimate levels likely to be acceptable to regulators will be key. (For smaller-scale, shorter-term investments, individual price/ tariff regulation may be regarded as a burden rather a protection). Any framework must factor in grants or subsidies received by the electricity business, so that their effect is to reduce prices/tariffs and make electricity more affordable to users. This also serves to ensure proper use of <span style="font-size: 13.6px;">public funding and so where grants and subsidies are made available, prices/tariffs are more likely to be regulated. (Any cross-</span><span style="font-size: 13.6px;">subsidies should also be incorporated into price/tariff calculations, but these are unlikely to be used alongside individually </span><span style="font-size: 13.6px;">regulated tariffs). Tax exemptions and guarantees, will be reflected through their impacts on equipment, finance and other </span><span style="font-size: 13.6px;">costs. The levels at which prices/tariffs are set will obviously directly affect finance derived from users through these charges </span><span style="font-size: 13.6px;">and the need for users to be able to access finance, or pay-as-you-go arrangement to cover any up-front element. </span>
| + | '''''Private/Market Finance''''' – sufficient user finance is a critical factor for any private sector investor to determine whether there is a sustainable market for electricity consumption. The affordability of up-front costs and/or monthly payments will determine whether the supply of electricity to any potential customer(s) is a viable business opportunity. For low-income communities, the supplier may rely upon public sector support to ensure that households can afford the necessary services. The private finance sector may also be a source of finance for users to cover upfront charges. However, it is in the longer-term interests of the supplier to introduce a level of electricity, together with an appropriate financing mechanism, that the consumer can pay for directly without dependence on external resources.<br/> |
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| | + | '''''Grants/Subsidies''''' – Supply of electricity to some groups of the population will require funding in addition to payments that can be made directly by individual users. Non-commercial funding that does not require any repayment (grants) can be made available from government, or international donors, either to electricity providers to reduce charges or directly to users, and so reduce upfront costs. In a similar way, public sector payments to offset some of the ongoing costs associated with electricity supply (subsidies) can be introduced to increase affordability for users and reduce prices/tariffs charged by providers.<span style="font-size: 13.6px;"></span> |
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| | + | '''''Cross-subsidies''''' – Another option is for electricity provision to some users to be subsidized from charges paid by other (higher income) users, rather than from general public funds. Cross-subsidization can occur within a single electricity provider’s business (with some degree of cross-subsidization being inherent in any multi-user system) or arrangements for cross-subsidy can be established between electricity businesses. This approach can be effective provided that the balance in numbers between the groups of users is such that electricity can be made affordable for the subsidized group while remaining acceptably priced for those providing the cross-subsidy. |
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| | + | '''''Tax exemptions''''' – Provide an indirect means of subsidizing electricity costs and so making charges more affordable for users and reducing their need to access finance. |
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| | + | '''''Guarantees''''' – One means of enabling users to access finance is for government or other donor, such as an international development bank, to provide guarantees to micro-finance providers and other potential lenders to encourage them to offer loans to those wishing to access electricity. |
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| − | Establishing individual price/tariff regulation will require regulatory reform and capacity building or technical assistance may be needed if the key actors lack the capacity to undertake this reform. Other non-financial interventions, such as policy and target setting, establishment of quality and technical standards, awareness raising and demand promotion amongst users and service providers, provision of market information and training (capacity building) for businesses and workers, may be beneficial but are not specifically related to a uniform price/tariff structure. National energy planning will be key to establishing the optimum mix of technologies to meet electrification needs across the country and should feed in to design of the price/tariff regulation system.
| + | Capacity building and technical assistance to electricity providers and regulators may be needed to support design of price/tariff structures and finance arrangements which will increase affordability of electricity access to users. Awareness raising and capacity <span style="font-size: 13.6px;">building to finance providers may also assist them to enter this market and design financial products which lower the </span><span style="font-size: 13.6px;">barrier of upfront costs to electricity access. Demand promotion is key in enabling users to increase productive use of </span><span style="font-size: 13.6px;">electricity and allowing providers to reduce per kWh charges and thus making it more affordable to users. User finance </span><span style="font-size: 13.6px;">may itself be an element in demand promotion programmes, enabling users to access the finance to buy equipment </span><span style="font-size: 13.6px;">and develop businesses based on electricity use. </span> |
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| − | The main advantage of an individual price/tariff regulation system is that it can reflect genuine underlying differences in the costs of provision under different circumstances and so enable economically sustainable electricity provision and attract private finance and businesses, while also protecting users from over-charging, particularly in a monopoly or quasi-monopoly situation, and ensuring that public financial support is properly used and benefits users by increasing affordability (rather than boosting private profits beyond those needed to attract capital).
| + | Charges paid by users provide the ultimate source of funding for electricity access. Only if users are able to pay for electricity access, at least in the medium to long-term will it be economically sustainable and cease to be a burden on public and donor funds. |
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| − | One disadvantage is that, if not well designed and rigorously applied by an expert and knowledgeable regulator, it may fail to incentivize energy businesses to work efficiently and control costs. Another is that, calculation and agreement of prices or tariffs for multiple providers on an individual basis is costly and resource intensive. This may be ameliorated by establishing a standard framework for price/tariff calculation, but some cost will remain. When deciding on an individual price/tariff calculation arrangement, consideration should therefore be given to materiality and the balance of costs and benefits.<br/>
| + | Providing finance to users has the great advantage of addressing affordability at its source –making additional resources available directly to people in remote areas without the risk of loss to intermediaries. User finance can often be the catalyst required to bring electricity supplies to low-income customers, thereby stimulating demand for increased supply and so helping to develop a sustainable market. |
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| − | A greater issue is that, relative to a uniform price/tariff system, it discriminates between users, allowing those who can be supplied with electricity at lower cost (particularly in urban areas and within reach of the grid system) to access electricity at a lower price and to benefit from the cross-subsidies inherent in a grid system, while requiring those in more remote areas to pay the full cost of their access. While grants and subsidies may partially off-set these differences they are unlikely to eliminate them entirely. Not only is this inequitable, but it constrains those receiving more expensive forms of electricity from using it economically, improving their livelihoods and increasing demand to levels at which electricity would become cheaper. It thus acts as a constraint on economic development in higher cost areas and holds people back from moving up the energy access ladder. As a result an individual price/tariff regulatory system may lead to “tariff envy”, as those who initially welcomed modern electricity as providing them with better energy at lower cost than traditional sources, see neighbouring communities receiving it at still lower cost – and hence to political pressures to move away from individual towards uniform prices/tariffs. Thought should therefore be given when setting up an individual price/tariff regulation system to the future, how the system may need to be amended as the national electricity access context changes, and how this can be achieved on a basis which maintains both users acceptability and investor confidence.<br/>
| + | However, electricity access provision is a long term enterprise and if user-finance is made available on conditions which do not meet user’s needs or for only a short period, then the impact may rather be to undermine any nascent local market that may have been developing. If user finance is provided without a clear exit strategy and then withdrawn, there is a danger of market disruption and potentially collapse, so long term planning of any user finance is required from the outset. Careful targeting of user finance is essential to ensure a positive impact. User finance is a critical element in electricity provision, both as a source of funding and an area of need, but one which is often disregarded. |
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| | |} | | |} |
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 -
