Development finance for the energy trilemma
How universal energy access is financed is crucial if targets are to be met by 2030
The most commonly accepted estimate of the financing needed to secure universal energy access by 2030 was made in the SE4ALL Global Tracking Report 2015. This forecasts an annual investment requirement of $50bn. However, based on commitments, the International Energy Agency foresees an average of only $19bn being invested in power plants and associated infrastructure yearly through 2030.
To bridge this gap, innovative approaches will be needed to tap resources. Other important factors to consider include the variety of technology solutions, the multitude of stakeholders and the diversity of regional and national circumstances.
With regard to attracting finance, one of the biggest obstacles is the perceived risk element, since energy access projects are predominantly small-scale and target poor communities. But options are available. Aggregation solutions are financial clustering mechanisms that convert a broad range of small projects into pools large enough to reduce transaction costs and meet investors' requirements.
In providing energy access, an important stakeholder group is SMEs. Due to their size, companies of this size have little access to traditional finance. Instead, multilateral development banks and DFIs often play a prominent role. OFID, for example, is an equity partner in The Energy Access Fund (EAF), an impact investment fund sponsored by Schneider Electric. The EAF supports energy-related SMEs through equity investments of €2.5m-€5m.
It is local banks, however, that are better equipped to offer loans to the local private sector. International aid agencies should also provide assistance to the local financial sector, including credit enhancement and risk mitigation, in addition to capacity building. For OFID, this worked successfully in the case of its $10m loan to Armenia's Ardshinbank, which is using the financing to fund local SMEs involved in small-scale hydropower plants (SHPPs).
The examples of innovative financing solutions are numerous, but what will underpin financing for universal access to modern services is the creation of an investment-enabling environment. This must be politically, institutionally and economically stable at the macro-level, and have a regulatory framework at the micro-level. For instance, a key factor in approving OFID's loan to Ardshinbank was the political commitment of the Armenian government to promoting SHPPs. Another key element in the successful financing of projects is the commitment to the power purchase agreement (PPA).
An illustration of the importance of policy clarity and stability is drawn from OFID's experience with a mini-grid-project in India. For mini-grids projects, given the long-term investment perspective needed to develop them, private investors' involvement may be deterred if they are not assured that schemes will not be superseded by connection to the national grid.
Finally, a key barrier limiting wider access to modern energy services by the poor is their lack of ability to pay for services. Pro-poor "smart" subsidies can extend energy access for rural and poor people. Such subsidies should be transparent, well oriented and should reach low-income households. Cross-sector taxes/subsidies can be a self-sustained financial approach to the benefit of small-scale energy access projects. For example, the tariff paid by grid-connected customers could be adjusted slightly upward in order to provide subsidies to mini-grid projects in remote areas.