This article was first published in Connect Magazine 2017. The complete publication is available for download.
Low budget - big challenge
Over 1.1 billion people worldwide live without access to electricity and almost 3 billion people lack clean cooking facilities. Access to modern energy is crucial to human well-being as well as to countries’ economic development, but these services are still out of reach for the world’s poor and public budgets are insufficient to end this energy poverty.
Private sector involvement in the sector is essential if we are to reach the Sustainable Development Goal 7 target of affordable and clean energy for all. However, their market entry into developing countries is fraught with risk. So how can we reduce these risks and stimulate companies to reach the huge number of people still living without access to energy?
Igniting the market while minimising risk
One of the innovative financial tools SNV incorporates into a number of its projects is Results Based Financing (RBF). RBF uses incentive payments to stimulate local businesses to deliver clean energy products, services or systems to markets that serve the bottom of the pyramid, oftentimes in remote communities. RBF helps to grow these markets by overcoming the hurdles of these seemingly less attractive markets. The key feature of RBF is payment upon result, which the involved companies are expected to pre-finance.
By providing RBF, SNV covers part of their investment in hard to reach, markets. As these markets develop and economies of scale are achieved, incentives are gradually terminated. Therefore, RBF helps to create a sustainable market which lasts beyond our stay - one of SNV’s fundamental goals. In a panel discussion at the SE4All 2017 forum in New York, Ruben Walker, Commercial Director and Co-founder of African Clean Energy (ACE), one of the leading cookstoves producers globally said, “RBF really can create a paradigm shift in market development and stimulate innovation”. ACE is also one of the companies participating in the SNV-managed cookstove RBF project in Cambodia, Laos and Vietnam, which is part of the global EnDev programme.
SNV is accelerating market development of solar products in rural Tanzania
Driving scale – A challenging road
Even though Results Based Financing can limit risks for companies and help scale the market, it still isn’t always an easy road to take and organisations will encounter challenges on the way. Many of the markets where this tool is being applied aren’t stable, they can be impacted by factors such as a sudden tax regime change. The global Energising Development (EnDev) programme, in which SNV is one of the key implementing partners, recently issued a report entitled ‘Driving markets to scale’ which looks at the lessons learnt during the implementation of RBF projects in 14 countries. One of the main findings was that successful RBF facilities don’t work in isolation. RBF will only be effective in markets with supportive legislation and if complementary (project) support is given. It is advised to monitor the market before, during and after the introduction of RBF incentives so that companies can be as prepared as possible for any sudden market changes. Companies need to be clear about the risks and costs as well as the benefits of RBF. Many enterprises getting involved in this market are often still in their infancy and they need to assess what level of risk they are comfortable with when entering markets in developing countries. Although there can be a number of challenges to get RBF to work, it is evident that this tool is starting to reap enormous benefits in terms of scaling markets.
Case study – Vietnam Biogas Programme
In an effort to phase out biogas subsidies to end users and reduce dependency on Official Development Assistance (ODA), SNV applied an RBF approach. This RBF approach has indeed been successful in enforcing the latent power of many companies to look for their own customers, establish customer communications and deliver biogas. In addition, since November 2016, the Vietnam biogas RBF programme has used an online verification tool from the Akvo foundation. This tool provides an online dashboard with a map that shows the geography of dissemination and gives important visual updates on progress. During first half of 2017, almost 10.000 digesters were registered from 18 provinces, and for almost 6.000 digesters RBF incentives were claimed. The verification process was supported by the online tool, both for acceptance of digesters and the physical check of results. Direct uploading of information, using mobile phones, allowed for fast verification. So far, over 4.000 digesters qualified for payment. RBF in combination with online tooling has proven to be a successful approach. Therefore, the project will expand to 48 provinces in Vietnam.
Case study – Solar PV in Tanzania
With the vast majority of Tanzania expected to remain off grid for the foreseeable future, innovative financing mechanisms are needed to spur last-mile distribution of solar lighting and power solutions. In collaboration with EnDev and DFID, SNV is accelerating market development of solar lanterns, phone chargers and small solar home systems in rural areas of Tanzania. The objective is to facilitate access to energy for 360.000 rural Tanzanians by August 2018. To date, the project has shown very promising results; 297.000 people have directly benefitted from the project; over 1.100 new jobs have been created and 25 new solar products have been introduced into the market.
Tom Derksen, Managing Director for Energy, SNV concluded at the SE4All forum, New York – “although RBF is not the silver bullet, it is an important part of a broader toolkit to support market development for access to clean energy. However, it is imperative to get the incentives right and take into account local market conditions to ensure the mechanism helps overcome market barriers.” Finally, it is very clear to see from the examples that RBF is scalable, provided that the design allows for flexibility and fits the local context. It is definitely a tool that development partners can seriously consider when aiming to serve emerging markets.
Vietnam: 18 provinces registered almost 10.000 digesters in the 1st half of 2017