Results-Based Financing for Off-grid Solar Energy Access in Cambodia
Despite year-round high solar radiation, the deployment of solar off-grid solutions is well below potential in Cambodia. To the extent that only 16.4% of off-grid rural households use a solar solution (Solar Home System, Solar Lighting Points or Solar Lanterns) as their primary source of electricity, while 13.4% still use rechargeable batteries[1].
Even though the Cambodian Government’s Rural Electrification Fund (REF) provides a subsidy for acquiring Solar Home Systems (SHS), the uptake of solar solutions among rural households remains low. The objective at the heart of the Green Microfinance Programme started in 2015, is therefore to increase deployment of SHS in off-grid rural households.
RBF to support scaling-up activities
There are four key market barriers that hold back the deployment of off-grid solar solutions in rural Cambodia: (i) declining product quality due to cost pressures; (ii) high transaction costs for last-mile distribution and maintenance of the systems; (iii) and partly underpinning the second factor, limited working capital and management skills among solar distributors; and (iv) a lack of financing schemes and awareness among customers.
To tackle these challenges, the Programme has put in place in 2015 a Results-Based Financing (RBF) mechanism to incentivise partner solar distributors to reach a wider customer base in rural areas, while overcoming some of the challenges currently facing solar deployment.
This RBF targets SHS deployment in greater numbers and among low-income customers in off-grid rural areas. During the first two years of the Programme, this RBF has offered performance bonuses to partner solar distributors for reaching new low-income customers through microfinance loans. As of the end of October 2017, 2,580 households were reported to be equipped with quality-assured solar systems out of which 793 systems (31%) were financed through a loan form a partner Microfinance Institution (MFI).
Although this RBF mechanism has permitted establishing a favourable environment for SHS sales and microfinance loan disbursement to scale up, overall sales performance remained below expectation.
Therefore, a stakeholders’ consultation was conducted in 2017 and led to the revision of the RBF incentive scheme with four new incentives that solar companies can now earn:
For Sales of Good SolarTM certified-products: SHS, Solar Lighting Points as well as Solar Lanterns.
For Sales with a microfinance loan: this incentive is deposited in a dedicated ‘Guarantee Fund’ to be used for borrowers who default on their loan, in This mechanism reduces the risk on the solar loan portfolio for our partner MFIs.
For After-Sales Services: incentivises a coordinated approach to improve customer service management, corrective & preventive maintenance.
For the establishment of Local Sales Agents and Resellers in the targeted off-grid villages: to improve last-mile distribution.
Local reseller in Kampong Speu, Cambodia
RBF to support innovation
The revision of the RBF scheme also takes into account the extent to which RBF can support innovation across the energy access supply chain. On the one hand, research into new business models may offer the opportunity to roll-out existing solar energy technologies for uses beyond home lighting and into more productive uses; on the other hand, research and development into energy access technologies might yield new or more efficient energy access solar technologies. The objective of an additional new component of the RBF scheme is therefore to incentivise technological R&D and support business model innovation to increase energy access via off-grid solar energy.
There are three key problems holding back R&D and business model innovation: first, even though there are some opportunities for technological improvements in solar energy, there is little research and investment capacity among Cambodian solar distributors to capitalise on these opportunities. Second, customers often do not trust new technology; consequently few are willing to take the risk of taking a loan or spending their savings to cover the capital costs of solar home systems (SHS). Third, while business models based on variable usage payment schemes (e.g. Pay-as-you-go) are trying to overcome the twin challenges of last-mile servicing and maintenance and high upfront costs, they are facing limitations in how rapidly they can be scaled.
In response to these challenges, the Programme has launched in 2017, a Challenge Fund to offer to the partner solar distributors the opportunity to introduce new solar solutions to the market: adding new innovative solar product sub-categories under the Good Solar Initiative Quality Framework, to become eligible for solar loans from our partner MFIs and for the RBF incentives on Sales. This reduce the risk and financial constraints that the solar distributors face, allowing them to scale up volume and sales.
These new innovative solar solutions are currently being evaluated and will be launched in the Cambodia market in May 2018.
For more information please visit our website: http://www.goodsolarinitiative.org/
The Green Microfinance Programme is implemented by SNV Cambodia with support from the French Development Agency (AFD) and the European Union.