Building a competitive Market for Micro-Scale Renewable Energy technologies

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Developing a competitive supply and distribution chain for deployment of off grid solutions such as solar Pico PV is always a challenge. This challenge is further aggravated with socio-economic, human induced problems as well as through market distortions, caused by sub-standard products. How can we overcome this challenge?

Indeed, several remedies can be applicable to these problems; however, a systemic cure can be achieved by creating a competitive business environment for deployment of micro-scale renewable energy solutions like solar lantern, which would be promoted by providing ex post financial incentive to manufacturing companies and entrepreneurs through result based finance fund (RBF).

It is expected that RBF can be linked to manufacturing companies and eventually to retailers and distributors. These retailers and distributors will have access to the financial incentive system of RBF fund, which could be received by them on completing pre-determined sales targets of stoves/solar lanterns. It is expected that these retailers and distributors will also facilitate post installation care and support the end-users (customers) for ensuring timely repair and maintenance of solar lanterns.

In this whole supply chain, one shall ensure a healthy competition amongst the companies, manufacturers, distributors and retailers which will eventually ensure long term sustainability of micro-scale renewable energy technologies such as lighting solutions.

There is an urgent need to breakdown the currently prevailing ‘subsidy driven, grant or aid linked inertia’ of project developers in the renewable energy sector and will eventually yield a truly commercial lighting sub-sector, which attracts private investment and debt or credit from financial institutions after the completion of this RBF funding.

For this blog posting, an indicative, generic design on RBF incentive and its effect on market is proposed. It is visualized that the RBF funds can be used to carry out key activities and to establish a business model that is: (a) profitable: at each level, the margins and incentives are clear and sufficient; (b) commercially viable: self-sustaining without requiring continuous external support or  subsidy; (c) environmentally sensitive: recycling of batteries will be developed and addressed in partnership with the solar PV central distributors, and; (d). scalable: the model can be expanded to new areas and the product range can grow as new products and product innovations and improvements become available.

The RBF design shall lead to the creation of commercial partnerships between manufacturers, local wholesalers, distributors, retailers and financial institutions. (a). private sector funding to manufacturers and central distributors is key, which can be disbursed as ex-post based on achieving pre-determined sales targets. Private sector actors invest their own funds upfront for manufacturing, market development and promotional activities; (b). an ex post premium to project promoters (e.g., PicoPV distributors and retailers) on completing pre-determined volume of sales of solar lanterns (maximum up to 20 % of the monetary value of the stoves and Solar Lanterns sold, which exceeds the pre-determined target. The sales target will be determined based on actual baseline and market study in the project areas.). This premium will be paid at two levels of the supply chain, viz., (i). at the central distributor level This fund will cover as ex-post payment to distributors, for establishing a working capital system for pre-financing the retailers with its own funds. and; (ii), at the last-mile entrepreneur retailers level ( which will enhance their demand and ability to buy higher volume of solar lanterns) upon meeting sales target and creating more demands. Most individual retailers cannot shoulder first move costs and risks associated with penetrating undeveloped lighting markets. The RBF progarmme will work to significantly reduce these risks and build industry confidence. , Lastly, (c). a ‘voucher’ finance mechanism, which will be provided to households upon fulfilling pre-agreed conditions like taking responsibility for maintenance of their solar lantern (battery recovery) as well as completing a successful operational lifetime of the appliance and to be used for either replacement of the existing lantern or for the purchase of an extra lantern. The monetary value of the redeemed vouchers would be transferred to the bank accounts of the retailers and distributors.

The theory of change of this proposed business model is built upon five key inputs: mobilize private sector funding with RBF as an incentive instrument; catalyze the RE sector and broker partnerships between private sector, development agencies, retailers, distributors and government; promote quality solar lanterns; develop an enabling business environment for private sector actors at national and sub-national level and create/share knowledge in the region and globally. By means of this approach, the RBF business model will promote market-based learning amongst micro-scale RETs manufactures, distributors, retailers and local NGOs in the supply chain as their participation in the program will require for (i) formalizing business to business relations amongst manufacturers, distributors and retailers (contracting, record based billing), (ii) initiating sales strategies based on higher turnover and attaining premium (iii), ensuring better use of solar and other micro-scale RETs at domestic level by users and redeeming the voucher, and (iv) profit management for investment amongst retailers and distributors. This way, RBF contributes to building up distribution lines for both products, reducing transaction costs and bringing structural change in the local market by paving the way for the private sector to further penetrate the household cooking and lighting market.

Keshav C Das

August 24, 2015

Transforming SDGs into realities

Blog.Feb
Development Landscape of Vietnam- Photo Credit:Anna-Selina Kager

Global leaders, think tanks and development practitioners are working tirelessly to agree “a truly transformative agenda” in a new set of development goals that will improve the lives of all people. These new global targets will replace the millennium development goals (MDGs), which reach their deadline at the end of this year. But, how are we moving in achieving a grossly agreed [consensus based] development agendas?  Will the new sustainable development goals [SDGs] have the strategic focus and necessary strengths, which could benefit almost 1 billion people, still living in abject poverty; would the hundreds of thousands of women, dying each year during pregnancy and childbirth be able to overcome this? Could it be able to provide clean cooking and lighting to 3 billion people, who have been still relying on traditional biomass for cooking and heating and 1.2 billion have no access to clean lighting? Similar questions also go for the global health, sanitation, education and human rights. Indeed, a draft set of 17 sustainable development goals (SDGs), with 169 targets have been developed. The proposed goals cover the broad themes of the MDGs – ending poverty and hunger, and improving health, education and gender equality – but also include specific goals to reduce inequality, make cities safe, address climate change and promote peaceful societies. It is hoped that the goals will encourage a more holistic approach to development at national and international level, and offer a chance for more partnerships and collaboration. However, unfortunately, we have not yet seen a universal buy-in of the SDGs by national governments as well as international donor’s communities. There is a general perception that the goals are too many and ‘having too many targets means no targets’. Hence, there is an urgent need to develop a consensus on the targets and goals. Crucially, the next set of goals should be universal, which means all countries would be required to consider them when crafting their national policies.  Indeed, this will be a major challenge. We will also need endorsement of bilateral donors, philanthropists and private sectors on the proposed SDGs and perhaps, private sectors will also be interested to see a focus on market externalities, resources and/or capital. We must not forget that the real test of UNs, global leaders, think tanks, donors and governments’ commitment isn’t the loftiness of the goals; but, it is what they are prepared to do to reach them!

Keshav C Das Senior Advisor SNV Netherlands Development Organisation Kathmandu, February 03, 2015

ENERGY SMART FOOD – LINKING FOOD AND CLEAN ENERGY

If energy prices continue to rise, the global food sector will face increased risks and lower profits. The efforts from low-GDP countries to emulate high-GDP countries in achieving increases in productivity and efficiencies in both small and large-scale food systems may be constrained by high energy costs. Lowering the energy inputs in essential areas, such as farm mechanization, transport, heat, electricity and fertilizer production, can help the food sector mitigate the risks from its reliance on fossil fuels. Hence, a major focus of food processing industries should be to reduce energy demand and/or promoting efficient energy management as well as introducing renewable energy technologies (RETs) to reduce the food sector’s dependence on fossil fuels. Indeed, introduction of RETs should happen from field to factory (processing) and up to the retail-outlet.  Energy.Smart

The encouraging development is that there is increasing consensus on the necessity on energy smart food and very recently in a study on energy-smart food, the Food and Agriculture Organization of the UN (FAO) stresses that agriculture’s dependence on fossil fuels is undermining efforts to build a more sustainable world economy. The paper, which is titled “Energy-Smart Food at FAO: An Overview[1],” notes that world food production consumes 30% of all available energy, most of which occurs after the food leaves the farm. The paper calls for: increasing the efficiency of direct and indirect energy use in agri-food systems; using more renewable energy as a substitute for fossil fuels; and improving access to energy services for poor households. It outlines numerous approaches to adapt practices to become less energy intensive.

However, to promote the campaign on energy smart food, we need affordable technologies at farm-level and food processing level. Unfortunately, most of the ‘energy efficient’ technologies in the agriculture sector of developing countries are expensive and not within the reach of poor farmers. Similarly, financing is also pivotal. Most farmers do not have upfront investment for introducing energy efficient devices in to their farm operations. Can we think of introducing a concessional loan systems into the farm system to meet this requirement as well as provide a really doable and practical contract farming model to the farmers, where, farmers will receive advance market commitments from global retailers and big MNCs in food market chain, and therefore, farmers will be in a comfortable situation to produce more and trade more? Indeed, agriculture insurance is also a key and obligatory intervention in the current context; particularly to reduce the risk of damage and loss due to climate change related adverse effects.

We also need enabling policies: strong and long-term supporting policies and innovative multi-stakeholder institutional arrangements are required if the food sector is to become energy-smart for both households and large corporations. Financial policies to support the deployment of energy efficiency and renewable energy will also be necessary to facilitate the development of energy-smart food systems. Examples exist of cost-effective policy instruments and inclusive business schemes that have successfully supported the development of the food sector. These exemplary policy instruments will need to be significantly scaled up if a cross-sectoral landscape approach is to be achieved at the international level.

Indeed, development organisations like SNV Netherlands Development Organisation has a major role to play in this domain so that the agriculture sector of developing countries are ready for the deployment of appropriate technologies; introduction, sharing and adaptation of energy-smart technologies; and carrying out capacity building, support services, and education and training on energy smart food production supply chain. Nevertheless, addressing the energy-water-food-climate nexus is a crucial and complex challenge. It demands significant and sustained efforts at all levels of governance: local, national and international.

 

Keshav C Das

Senior Advisor, Renewable Energy and Climate Finance

SNV Netherlands Development Organisation

 

[1] http://www.fao.org/docrep/014/i2454e/i2454e00.pdf

Access to Clean Energy: An Innovative Financing Modality

Energy poverty is one of the most important but least discussed issues. It is condemning billions of people to darkness and to missed opportunities for education and prosperity. One in five people lacks access to electricity and 3 billion rely on wood[1], coal or charcoal for cooking. Energy poverty is not just about the lack of energy, it cuts across – and undermines – all aspects of development. 

To turn on the lights in households around the world, successful examples of clean energy and energy efficient technology must be scaled up. This will require innovation that can spread through the developing world, where energy demand is burgeoning. With innovation come opportunities for development – and for business.

Energy poverty is a problem of technology, of infrastructure, of economics, of culture, and of politics – and it impacts over a billion people in the Asia-Pacific region alone.

Solving this problem requires solutions from the top-down and the bottom-up – everything from global finance to village-level technologies.

In the last few years, technological innovation has significantly reduced the cost of renewable energy technologies like solar panels, cooking energy solutions and other technologies, but renewable energy still needs serious financial supports to compete with conventional energy.

As of now, there are only limited options of financial mechanisms, which have been practicing widely by different actors. These mechanisms are primarily focused on grant, ODA funding, micro-credits, loans, which are merely considered as conventional funding windows. Indeed, based on the contemporary situation of providing access to energy at the bottom of the pyramid, it is realized that the conventional financial mechanisms alone may not be sufficient to fulfill the demands of energy. Perhaps, we need to think ‘out of the box’ and explore innovative financing streams or mechanism which could add impetus to the cause of providing access to energy for ALL.

An innovation on this front could be the carbon bundling mechanism. The key concept of the Carbon Bundling is that revenues from renewable energy carbon offsets can serve a risk-mitigating function for new renewable energy (RE) lending by microfinance institutions (MFIs). In this scheme, a financial institution would provide capital for a revolving fund set-up with a commercial bank or wholesale lending institution. This funding would be used to stimulate MFI lending for renewable energy technologies that are eligible for carbon trading.

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Income from these carbon trades triggers three things: (1) provides much needed upfront capital (2) motivates MFIs to provide loans for RE by covering their default risk and (3) brings revolving liquidity into the system. Furthermore, income from carbon trades can support extended after-sales service and funding of more RE projects.

The value to MFIs and the attraction of their participation is available capital and increased client volume from low-risk loans. The benefit to participating financial institutions would be a share of carbon income plus the added client base of participating MFIs. Finally, the possibility for carbon trading firms to access the renewable energy market would bring additional private sector weight to the initiative.

Since this is a revolving fund, once the loan is paid back to the financial institution, its initial investment can go directly to start-up the same type of carbon bundling programme in other countries.

How It Works [Figure/1].

The carbon bundling business model can work on a system of lending spreads that are backstopped by carbon revenue.

  1. The financial institution provides a soft loan of €1.5 million a year for a period of 3 years (total €4.5 million) —through a commercial bank — which funds MFIs to finance 5,000 RETs a year (each entity’s lending rate is shown below). The loans are paid back over a 3-year period. This means that €300 is available as loan per RET which in most case would require government subsidy as well (also refer to footnote 2).  
  2. Carbon revenue would begin to be available at end of Year 2, through a carbon project developer which makes their money in the trade. It is assumed that the market price of carbon is 10 Euro per ton of which 5 Euro goes back in the project and 5 Euro is for the carbon project developer (to be negotiated).
  3. Conservatively assuming every RET generates 1 tonnes carbon credits per year, this would generate €25,000 at the end of Year 2, increasing to €75,000 (post-project at end of Year 4) when all the units are operational
  4. With MFIs facing a potential default rate among RET purchasers (borrowers) of 2%, a portion of carbon revenue is set aside as MFI insurance = €30,000 per year or, potentially, as incentive
  5. A portion of the carbon revenue will go to RET purchasers as an incentive to participate or be developed as after-sales servicing (e.g.,  €3 per purchaser per year)
  6. Any remaining carbon revenue will be channelled back into the programme
  7. Regulation is provided by the Government of Nepal’s Alternative Energy Promotion Centre (which maintains a renewable energy credit facility)
  8. Rural Microfinance Development Centre, a wholesale lending institution in microfinance, or a commercial bank, which focuses on energy financing, could be responsible for fund channeling.

Role of SNV

SNV would identify and align commercial partners (MFIs, commercial bank, carbon trading firm), develop and run trainings and workshops for MFIs and directly manage activities related to Microfinance, Renewable Energy and Carbon—especially with respect to valuations, assets and technical trends.

Note: Grateful to my esteemed colleague Tom Krader, who supported to give shape to this concept.

Keshav C Das
Senior Advisor, Climate Finance, SNV Netherlands Development Organisation


[1] World Economy Forum 2011.