Emerging Experience and Guiding Principles for a PURE Approach
Lessons Learned from PURE Programmes1 The following sections outlines a review of renewable energy programmes supported by UNDP-GEF, UNDP, GEF and other donors, governments, and other organizations (as described in existing literature). It is not an exhaustive review of all projects with Productive Use of Renewable Energy (PURE) components that are currently implemented world-wide, but rather it provides selected examples of such projects and the lessons that are beginning to emerge from these projects. The criteria for selection has been the availability of accurate and evaluative information on the projects. As many of these projects are still under implementation, or have very recently been completed, it is still too early to assess their long-term impact. The review, therefore, focuses on their perceived contributions to market development of RETs via MSMEs (Micro-, Small-, and Medium sized Enterprises) and, by building financial capital, and institutions, by building social and human capital. Project directed at these two main users of RETs are analysed within various sectors (for example agriculture, health), including the financing models employed, in order to draw key guiding principles for pursuing the PURE approach in the future. Linkages to rural development strategies and gender aspects are also discussed in the context of the potential role of RETs in rural areas.
Project Bangladesh Sustainable Energy Management Programme (SEMP) in Bangladesh Biomass Energy for Rural India BERI Energy for Rural Transformation Uganda ENSIGN (Financing Energy Services and Income-Generating Opportunities for the Poor) FINESSE - Philippines IWM – Improved Water Mill Support Program in Nepal Mali Multifunctional Platform (MFP) Microhydro: Garung and Seloliman (East and West Java, Indonesia) National Sustainable and Renewable Energy Programme Malawi Optimizing Development of Small Hydel Resources in the Hilly Regions of India Renewable Energy Based Small Enterprise Development in the Quiche Region of Guatemala Renewable energy based village power system in Palawan, Philippines Renewable Energy for Agriculture, Mexico Renewable Energy-based Electricity for Rural, Social and Economic Development, Ghana Rural energy development programme in Nepal Uganda Photovoltaic Pilot Project for Rural Electrification
Reviewed PURE programmes (see Annex G for more details)
RETs Market Development via Rural Enterprises
In order to ensure increased use of renewable energy services among MSMEs for income generation, local entrepreneurs need help with identifying ways to absorb the energy service cost. Where the delivery of rural energy services relies on the private sector, specific supply and maintenance capacities need to be established to support to development of the business infrastructure. Business
Draft Report, November 2005. Lead Author: Sara Nordström, Vattenfall Power Consultant (formerly independent consultant to UNDPGEF). Input provided by: Annemarije Kooijman-van Dijk, Department of Technology and Sustainable Development, CSTM, University of Twente; K V Ramani, Independent Expert on Energy and Rural Development in Asia and the Pacific; Helianti Hilman, Executive Director YBUL; Joy Clancy, Department of Technology and Sustainable Development, CSTM, University of Twente; Soma Dutta, Asia Regional Network Coordinator, ENERGIA- International Network on Gender and Sustainable Energy; R. M. Shrestha, S. Kumar, S. Martin and T. Urmee, Asian Institute of Technology. The report does now express the view of UNDP or GEF.
models and skills will need to be enhanced throughout the energy supply chain to enable the market for the renewable technology to expand.
Use of energy in small rural enterprises
Technology-switch, introduction of RETs, or better fuel efficiency, can bring about important contributions to productivity in a small business. Some examples are illustrated below: i. Improving productivity The use of RETs in energy consuming MSMEs which produce their own energy can improve productivity regardless of energy intensiveness. This improved productivity, if it finds a market, can then generate additional income. Three examples can be quoted:
Biomass gasification in the silk industry in India: Silk reelers switching from traditional biomass2 ovens to specially design biomass gasifiers increased their silk yield by 3.7 per cent (UNDP, 2002a). Banana solar drying in Thailand: The use of solar dryers to dry bananas in Northern Thailand reduced the drying time from 7 to 5 days compared with conventional sun drying methods (Shrestha et al., 2005). PV lighting in workshops in Bangladesh: The use of PV powered fluorescent lamps allows for increased working hours of workshops and other businesses, which earlier needed to close at dusk. A sawmill owner in Bangladesh was able to operate his business for an additional four hours every day after installing a PV system to light the workshop (Allerdice and Rogers, 2000).
ii. Bringing additional value to the product Because of the technology switch goods manufactured with RETs can also be of better quality than the traditionally produced goods. This marginal effect are primarily applicable to energy consuming MSMEs that are producing their own energy. The following examples are noteworthy: • • • Silk industry in India: Silk produced with heat produced by biomass gasifiers is found to be of superior quality. This superior quality silk has as a higher market price and allows silk reelers to increase their income by Rupees 200 per day (UNDP, 2002a). Banana solar drying in Thailand: Bananas dried in a closed environment are protected from dust and insects. Their better quality increases their market price by 75 per cent (Shrestha et al., 2005). Milk refrigeration in Peru: The quality of the milk produced by farmer- members of “El Titnte” agricultural cooperative in Peru improved drastically once electricity from a micro hydro plant became available for cold storage. As a result, the market price almost doubled, from US$0.06 to US$0.11 per litre (Allerdice and Rogers, 2000).
Many energy consuming activities in energy-using MSMEs require heat and motive power (such as mills, juice extraction, village workshops), and not electricity. For example, in rural Thailand heat on average accounts for almost 60 per cent of the total energy consumption of enterprises (small businesses and industries combined) (DEDE, 2003). In Eritrea, the three most energy intensive MSMEs, namely, brick factories, bakeries and pastry makers require mainly heat (Habitetsion and Tsighe, 2002). In the tea sector, the ratio of thermal to electricity consumption is about 85:15 (RERIC, 2002b). Another example is from the desiccated coconut sector, which makes an important contribution to the economy of Philippines and Sri Lanka. The thermal energy constitutes between 65 and 95 per cent of the total energy consumption. Though electricity is essential for most industrial activities, it may not necessarily be the most important energy requirement in industries. Energy related expenditures can be as high as 70 per cent the total running costs of MSMEs in the most energy intensive cases. In Thailand, irrigation intensive agricultural MSMEs such as rose-apple or lemon plantations or foodstuff production units requiring large cold storage capacities are examples of MSMEs with high energy expenses (Shrestha et al., 2005). The irrigation MSME consumes large quantities of diesel for their pumps, whereas the foodstuff production MSME needs a high quantity of electricity. In Eritrea, energy related expenditures in grain mills represent about 65 per cent of the total production cost (Habitetsion and Tsighe, 2002). A general trend in for MSMEs is to move from traditional sources of energy to the use of convenient, modern sources (electricity and fossil fuels), when available. In Eritrea, MSMEs derived 76 per cent of their energy requirements from biomass sources in 1995; by 1998, this had fallen to 50 per cent, with commercial fuels (oil and electricity) accounting for the remaining 50 per cent (Habitetsion and Tsighe, 2002). This contributes to increased primary energy imports and dependence on fossil fuels producers.
Two different categories of rural enterprises have been identified from the analysis of UNDP-GEF more recent PURE-focused renewable energy projects: village energy interventions or cooperatives such as multifunction-platforms and smaller individual entrepreneurs (bottle bars, cottage industries, small goods stores). In the former group of projects enterprise development was specifically designed as a part of the project framework. The latter group has often benefited from “traditional” renewable energy projects “by chance”, even while the project did not specifically focus on these groups but rather on users at a household level. The Mali MFP demonstrates concrete linkages between modern energy services and a range of poverty and development outcomes. While the MFPs established in West Africa largely have been based on diesel platforms which - as a technology - is ineligible for GEF support, the project concept has shown impressive results and is extendable to RETS-based applications. The overall approach is increased energy access based on productive uses but with strong linkages to broader development goals (poverty reduction and MDGs). The project focuses on local community organization and empowerment of women (only women are running the MFPs). The core idea of the programme was to use a diesel engine to power different productive use tools, such as cereal mill, husker and battery charger, along with electricity for lighting and refrigeration. Recent impact studies of the Mali MFP have revealed that the project has had great success in stimulating MFP-based rural enterprises and had a major impact on lives of rural people. (UNDP, 2005a) Owned and operated by women in 450 villages in Mali, the programme raised the incomes of rural women, proved financially self-sustainable, saved women’s time, improved their health. The number of requests for MFPs is growing fast, and by the end of 2004 MFPs were estimated to cover 10 per cent of Mali’s rural population. The platforms have shown to be viable on a self-sustaining basis after installation. The annual income for women has increased when time is freed to use for income-generating activities as well as when the MFP itself is used for productive activities such as grinding. The MFP also provides employment opportunities for women operating the platform. The increased income and more efficient (less time consuming) food processing have also shown a measurable increase of girls’ attendance in primary school. An interesting feature with the MFPs in Mali is that projects are based on the existing local village economy, deriving from (as well as creating an increase in) agricultural markets. The MFPs are aiming to bring about a more efficient and profitable way of doing what villagers are already engaged in, but they are not aiming at new markets. A similar type of community platform is the Improved Water Mills (IWM) initiative in Nepal which has expanded the traditional end-use (grain grinding) to a more diversified applications such as oil expelling, sawing, and electricity generation. Many of the 1000 installed mills have also been used as 'Village Energy Service Centers' meeting rural energy needs for agricultural processing, and creating opportunities for blacksmiths and other village enterprises. The project is about to scale-up to 4000 IWM by 2007. (Shresta, 2003) A few completed UNDP-GEF projects (Guatemala, Ghana, India) with the objective of improved livelihoods from productive uses have had impact on income generating activities. However it seems as if they have not paired the appropriate technology with the intended end use: • The Guatemala Renewable Energy-based Small Enterprise project reported that it was unable to contribute to the development of small enterprises in the region. (UNDP, 2002) The reason for this was that the small hydro plant has yet to be completed and the solar PV systems only produce enough power for household lighting, 12V radios and TV sets. There is however a follow up project about to start implementation and this will increase the focus on small hydro which will have enough power for agricultural processing of coffee, grain and garlic. The project is now being scaled up with both off-grid micro hydro and ongrid small hydro, which are expected to provide more potential for productive activities. • In Ghana, the main economic activity is agriculture. A recent impact study has shown that an increase in productive use applications has not materialized because the energy demand needed for these activities could not be provided by PVs, which was the primary RET promoted. Even if it would be technically possible to design larger PV systems the cost would become too high. However, a number of people who acquired PVs were using it to enhance their commercial – non-farm – economic activities such as tailoring shops, goods store, beer bars, petrol station etc. The UNDP-GEF project has therefore not led to the creation of new enterprises but has improved the services from the existing ones, which is an important contribution to building RETs markets. (GEF, 2004d) • This is also the case for India, where the project had positive impacts on home based income generating activities like electricity operated wool spinning and milk-churning machines. These activities were already taking place before the small hydro plant (the village then had an unreliable electricity supply through the main grid) but new supply seems to have increased their use, particularly in areas where it indeed provided a more stable power supply. However, mainstream livelihood activities, such as agriculture and apple cultivation remained largely unaffected by the project interventions. (GEF, 2004a) The REDP project in Nepal is beginning to show results with hundreds of rural energy systems (micro-hydro, biogas, solar energy, improved cook stoves) installed. Results materialize in improved rural livelihoods, increased income from off-farm and non-farm activities, improved health from less smoke inhalation and improved sanitation, better education to children, increased capital base from credit operations etc. Impacts studies of the REDP show improvements in HDI in the target villages compared to average 3
district-level HDI (UNDP, 2004b ). This has stimulated government commitment to promote community-based rural energy systems and up-scaling through policy interventions. Maintenance and equipment certification Furthermore, it is crucial to develop a sustainable system (both financially and practically) for maintenance such as for example in the Nepal case, where local electromechanical workshops have been promoted as rural energy service centres for maintenance and technical support to RET installations. Even a short interruption in energy supply may create high costs and losses for MSMEs such as production downtime, material waste, lost retail sales. For MSMEs poor supply reliability results in increased production costs for goods and services which is a disincentive for further investment in the enterprise. Ensuring supply with a reliable maintenance system is therefore even more important than when the energy is primarily intended for household use. Related to the matter of maintenance is obviously ensuring proper equipment quality in the first place – before the equipment enters into the market – by applying certified standards to avoid unnecessary maintenance costs. Gender: The gender dimension of productive uses of energy is an important factor, as in most developing countries women play a major role as owners and operators of micro, and often also small enterprises, particularly in the informal sector. A study of Pakistan (Kelkar and Nathan, 2005) reported that approximately 100,000 women worked in brick kilns, but were not officially employed because, although the entire families worked, only the men were registered as the head of the households. Enterprises usually operated by women include food-processing industries, kiln-using manufacturing activities and service-sector activities which are often heatintensive, labor intensive, and/or light-intensive. As a result, lack of adequate energy supplies for these activities affects these micro enterprises profit. Despite the often low financial returns, women’s enterprises provide crucial sources of household income. Statistics show that the informal sector is a larger source of employment for women than for men and that the numbers of informal sector enterprises are on the increase. The limited data available point to the importance of women in home-based work and street vending in developing countries: 30-90 per cent of street vendors (except in societies that restrict women’s mobility); 35-80 per cent of all home-based workers including both self-employed and home workers); and 80 per cent or more of home workers (industrial outworkers who work at home) are women (ILO 2002). In Bangladesh between 1983-84 and 1995-1996, the number of women among the informal workers increased from 44 percent to 75 percent (Kelkar and Nathan 2005). The significant contribution of the informal sector to national economies is not explicit in national statistics. As a result, the majority of women entrepreneurs operate in a policy vacuum in relation to energy. The Mali MFP project has been extremely successful in bringing genders aspects into the project design and the project has shown significant impacts on women empowerment (training in business skills, increased income generation, freeing up time for other productive uses). (Brew-Hammond and Crole-Rees, 2004) The project has been able to quantify the average time savings from the MFP to 8 hours a week; increased income of 68 USD a year3; increased rice production and consumption with about two thirds. The girls’ school attendance has surpassed the national average of girl/boy ratio of 0.71/1. Where there was a communal water pump installed with the MFP the girl ratio was even higher. (UNDP, 2005a) Some key aspects in providing energy services for rural enterprises have been identified in the analysis. These aspects also have a close linkages with gender issues:
Informal and unorganized nature of enterprises: Many enterprises are located in the home, and these “cottage industries” tend to be overlooked because they are indistinguishable from other household activities. Heavy reliance on process heat: A significant share of enterprises use process heat, generated usually from purchased wood or charcoal. Given the focus on electricity supply within energy planning, it should not be forgotten that for many of these applications, electricity is not the most cost effective option. Some indication of the significant quantities consumed can be illustrated by an example from Nepal, where an estimated 816,865 metric tonnes of fuelwood is consumed annually by hotels, restaurants, guesthouses and teashops. These businesses form nearly half the total consumption of rural industries. Drawing on the end-user’s experiences, and working in partnership to develop tailored uses of RETs, will provide technologies that have a sustained use and create a viable market; they match the needs of users who are prepared to invest scarce cash resources to acquire them.
3 In rural Mali the average per capita income from agriculture is USD122. (2002)
Energy’s contribution to sustainability of rural enterprises: The role of energy in the sustainability of enterprises is not well understood, particularly not in the informal sector. In food processing enterprises it has been estimated that energy costs are 20 - 25 per cent of the total inputs. However, for most other industries, there is practically no data available on how much energy is being consumed and what its role is in their start-up/ shut down and sustainability. In general, energy is considered a significant cost factor and small industries generally buy their fuel, even in rural areas. Small enterprises can be severely affected by rising energy costs, fuel shortages and deforestation, which would suggest that technological interventions could increase the scale and profitability of these businesses. Since fuel is a significant cost factor, there is a commercial motivation to improve the energy efficiency of the production processes. Furthermore, deforestation and increasing fuel costs force them to resort to inferior fuels, leading to adverse health impacts. Importance of complementary inputs: Complementary inputs is much broader, encompassing non-energy inputs to rural infrastructure (roads, communication, water supply, market information and access, access to credit, etc.). Importance of organization and management: Energy is one of the many factors of input that influence the performance of small and medium enterprises. This problem is greater in the case of women’s enterprises because of social and practical constraints related to ownership and control over productive resources. Women (and poor people in general) are typically marginalized from decision making and suffer barriers related to illiteracy, lack of exposure to information and training. There is a need to promote new delivery models that provide opportunities to articulate real concerns and needs. One option is to form co-operatives. Co-operatives are particularly useful for marginalized and poorer members of the business community since they can increase the bargaining power of members and can force recognition of particular issues. The ability of the poor to generate livelihoods from micro enterprises is constrained by not only energy factors but also nonenergy related factors, such as high marketing costs – and even access to markets; and the informal nature of these industries which makes it difficult for them to access credit, equipment and other support services. The low rates of return prevent inward investment, hindering innovation and expansion, which are regarded as key factors in enterprise sustainability. There is little research to explain what forces drive these start-ups and shutdowns, and the role of energy in their sustainability.
1.1.1 Markets for goods PURE projects in general require a much better understanding of the local economy, micro enterprise and farm management, and business development opportunities, as opposed to “regular” renewable energy programmes. This is also evident from many rural energy projects in the past that have claimed to contribute to better livelihoods by productive uses but where this has not materialized. There has been a belief that productive uses spontaneously occur. Instead, projects aiming at productive uses activities need to take a much more proactive role. An important aspect of the Mexico Renewable Energy for Agriculture project (WB-GEF) is that the training and capacity building for the farmers is focused on production (farming) and not on technology or energy services. (Kapadia, 2004) The project is implemented on a national government level as a rural development initiative by the governmental agriculture development agency. The India Hilly Hydel project could have had “substantial impact on the beneficiaries in the targeted areas in terms of achieving employment, livelihood and regional development objectives on the ground”, if the activities had been integrated with other developmental work of related agencies and departments (GEF, 2004a). Increased productivity for MSMEs – derived from access to better energy services – implies the need for access to markets for the new or more refined products. Experiences from programmes that are focusing on MSMEs demonstrate that programme design flaws, such as insufficient feasibility studies of market potential for increased production, can have serious negative impacts on the sustainability of the efforts. Activities that per definition could lead to income generation may not be sufficient to stimulate or catalyse local communities to supplement their incomes if factors such as access to new markets and the quality of products are also not considered. (UNDP, 2004b) For example if there is no identified market for an increased product volume deriving from production powered by PV, the PV system is likely to become a power source for household appliances – and with that the direct effect on increasing productivity is gone. If the intended increased income was part of a repayment scheme for the energy services (which is often the case in PURE project design) then the project sustainability is greatly at risk. An analysis of enterprises in northern India and their energy choices points towards the fact that many strategies followed by the entrepreneurs are related to the market for their products and services. 4 There are distinctive differences in producing for a distant market as opposed to producing for a local market5:
4 See A Koijman, Keynote paper UNDP PURE Workshop, 2005. 5 Local markets can be within a rural settlement, but it can also include nearby towns to which road connection and public transport are available, and the product quantities marketed are not large so that people could carry them without incurring excessive transport charges. Distant markets could include such nearby towns but it could, more importantly, signify markets to which separate transportation of ‘bulk goods’ is necessary. The key distinction here is the need for transport, followed by communication and contacts. All these require infrastructure and organization of a certain scale not readily available to rural small and micro enterprises, though medium enterprises would normally be able to cope better. An important offshoot of the
1. Enterprises with local markets • The establishment of enterprises with local markets is the most common in enterprise development. The impact of modern energy services on the establishment or growth of small enterprises with products for local markets may be initially significant, but will decrease quickly due to market saturation if: o there is low expenditure on goods other than basic necessities, o local markets in these areas are small due to low population density and travel time. • In areas where customers’ ability or willingness to pay extra for improved product quality or improved services is very limited, the advantage of many electrical appliances is much reduced. The main advantage may then be improved comfort of the entrepreneur, and the priority given to this is related to the living standards of the entrepreneur. 2. Enterprises with distant markets • The impact of modern energy services on the establishment or growth of small enterprises with products for distant markets is low if networks with or assistance from organisations or persons with knowledge of these markets are lacking. • Modern energy services in production enterprises for distant markets create new income generation opportunities for remote areas. • In remote areas where the local markets are small due to poverty, the benefit of improved energy services will be mainly for enterprise that are able to access a distant market. For the establishment and growth of enterprises, markets and access to markets are the key issues. Without the establishment of access to distant markets, the benefits of productive uses of energy depend on the local market. Because the areas where renewable energy projects are typically being planned are remote areas where local markets are small, it seems likely that the impacts of renewable energy will be limited unless access is created to distant markets. These preliminary insights lead to a cautionary remark for renewable energy projects and programmes focusing on productive uses of energy. When discussing access to distant markets, it is also crucial to consider transportation. One could end up establishing a RETs-based enterprise turning out fine products and generating all sorts of product quality, emission reduction and other benefits. But, if transport fuel costs are high (and they are rising), it will add greatly to the end cost of the products at the point of sale. The point is that when one looks at such examples, one must take a holistic view that accounts for ‘all’ energy inputs and their cost implications along the product to market value chain.
Sales of RETs or Energy Services by small enterprises
Emerging evidence in developing countries suggests that energy can be used as an instrument for governments to meet particular social objectives and to boost rural development through economic development. Once energy is perceived as a prioritized tool to reach other goals, then the cost of energy delivery to off-grid areas6 often becomes a prohibitive factor. The most common tool to adjust costs is to apply well-designed subsidies, aiming at promoting supply to off-grid markets. In particular, subsidies should be designed in such a way as to reinforce cost-reduction and end-user focused services. This means extending subsidies to service providers according to results — actual operational parameters (connections, sales), diversification of actors (new suppliers), electrification mode (conventional, renewable), and so forth. However, by overlooking the recurring costs of maintenance in these subsidies, one not only passes the burden to end-users but also provides no motivation for equipment quality assurance. In order for smart subsidies to be truly effective, end-user financing, equipment quality assurance, and possibly equipment performance guarantees should be considered. If the objective is to attract private service providers to rural and poor areas there is need for additional financial incentives, anchored in an enabling legal and policy framework. For example rural cooperatives or smaller independent utilities, rather than the national utility have been significant drivers for rural electrification in China, Bangladesh and Philippines. (Lamech and O’Sullivan, 2002) Experiences from Ghana highlight that electricity from RETs is not competitive to grid electricity as long as the subsidy on electricity is only covering grid-electricity. Three suggestions are derived from the project’s implementation experiences: (1) encourage outright purchase by installment or through an established line of credit; (2) there is the need to provide subsidy to PV energy users the same way subsidies are provided in connection with grid tariffs. In addition the same kind of support often given to communities to undertake rural electrification should be given to communities to undertake RET projects; (3) establishment of a minimum base demand for communities as a criteria for either being linked to the national grid or RETs. (GEF, 2004d)
above is that, besides the availability of energy for the enterprises themselves, energy is also needed for transportation and communication.
6 Access to energy services being a function of availability and affordability.
Understanding the economic limitation of rural people, the development of rural energy services must take into account the following pre-requisite condition to ensure sustainability, namely: •must adopt field-proven and most cost-efficient technological option; •must involve commercial suppliers with reliable after-sales warranties and service; •must be accompanied by the development of electricity-intensive rural businesses that will contribute to significant and sustainable electricity consumption; •must be accompanied by the development of competitive market infrastructure by government or development agencies; and •financing facilities to be made available to all key actors (developers, suppliers, producers, intermediaries and end users). There are a number of requirements for sustainability of rural energy provision. Scaling of systems should be determined by the availability of demand (current and potential demand in the immediate future. If an electricity-intensive businesses is available – a so called “anchor-users” – it is more likely that the energy service business is also able to cover recurrent costs and recover investment. Sufficient revenue to cover costs and reinvestment needs, along with market infrastructure to ensure quality and continued service delivery is key for sustainable market-based rural energy provisions. The example from Guatemala points at a very important aspect – the eventual linkage between decentralized electricity-producing RETs and the centralized grid. This linkage has been poorly explored in RETs market development efforts. A part of the problem lies with RETs advocacy, which often views the grid as a threat to further RETs use. The reverse is also true among grid utilities. In a PURE approach, where emphasis is put on identifying a base-load, it would seem more realistic to eventually also link these systems to the grid or at least mini-grids (where feasible). As some RETs also only can offer a pre-set energy output, rising demands of rural communities must be met effectively.
RETs Market Development for Rural Community Services
Improved community services, such as water supply and better health care (vaccine refrigeration or lights), have the potential of benefiting all rural inhabitants – provided that the issue of access to these services for marginalized groups is carefully considered. (van Campe et al., 2000) Four UNDP-GEF projects reported provision of renewable energy electricity supply to health centers and hospitals. The Ghana project reported that five solar PV systems had been installed at health centers. Similarly, the Guatemala Renewable Energy for Small Enterprise Development reported that six solar PV vaccine refrigeration systems had been installed in health centers. The Uganda PV for Rural Electrification project also reported ‘unintended’ benefit, in that the solar PV was used to provide refrigeration of vaccines and lighting in maternity clinics. (Puri, 2003) However, no project has developed specific indicators for health related renewable energy use. Reporting is unsystematic, general, and not linked directly to project log frames. (GEF, 2003b) Among the four UNDP.GEF projects, the Malawi project, currently under implementation, has shown most success in providing energy services from PV to 50 health clinics (including 130 vaccine fridges), to 15 schools and for 50 water pumping systems. Recent attempts to include renewable energy options for energy services in public sector plans seems to have promising results (Uganda WB-GEF) and more efforts should be put into cross-sectoral tools. The key barriers for scaling up the Mali project for example have been identified as; poor policy coordination and little attention and knowledge of the potential of energy services can have in cross-sectoral policies (not addressed properly in PRS etc.); the opportunities for income generation needs to be diversified and markets developed; the energy source for the MFP needs to be diversified and based on locally available renewable energy sources (such as jatropha oil from biomass); and that capacity building and awareness is needed among finance institutions, NGOs and key government organizations. This review has found little evidence that integration of renewable energy technology options for institutions such as health clinics and schools is carried out in a systematic way. When the institutional sector is targeted for increased use of RETs this is often done alongside other target groups, such as households. To date, the large WB programmatic projects demonstrate the strongest multisectoral approach and components by involving non-energy sector agencies and organizations. The Uganda ERT aims to capture demand-supply synergies between energy and those sectors requiring energy services (Fishbein, 2003). In the case of Mexico, the governmental agricultural development agency is the implementing institution. This approach is particularly important in health and education applications. Experience has shown that a key component in promoting the use of energy for health and education purposes is creating awareness in health and education agencies and NGOs about the opportunities available from RETs in remote areas. Education and capacity building in non-energy sector agencies are therefore considered as a key component of these projects. The next step would be to develop tools to guide such a cross-sectoral approach; this is slowly beginning to emerge.7 Focusing more consistently on infrastructure for social services would have important impacts on the HDI, as it could contribute to attracting civil servants to stay in rural areas is there is basic access to electricity.
7 IT Power, GVEP
Local ownership of renewable energy systems and participatory processes have been identified as a key factor for success of rural renewable energy projects (Guatemala, Philippines, India). Capacity building in installing and operating RETs is the first step toward local ownership and must be based on a careful assessment of local needs and motivations. “Focus on people’s organization and democratic participatory methods and not on technology – hardware transference. The social, cultural, ethnic and gender aspects of rural energy services are central to overall project design and implementation. Technology innovation / introduction to isolated communities must follow a well-established social engineering map. The emphasis is thus on ‘know-why’, rather than ‘know-how’. Taking people’s considerations, needs and aspirations into account from the very beginning pays off in terms of technology transfer.” (UNDP, 2002) This process could also consider community aspects such as water and sanitation. Several projects (Nepal, Indonesia, Bangladesh) have shown that the renewable energy installations (such as community based biogas plants) do not only provide an alternative source of energy, but also improve their health and sanitation of the community, and thereby have provided indirect benefits for the villages. In Guatemala, telecommunications are developed as a new service to communities and as a direct consequence of the project.
Financing and Delivery for RET Market Development: private sector
Some examples in Indonesia demonstrate that market-based financing scheme for rural energy services is viable also for all incomelevel groups if it is directly integrated to income-generating activities. The use of energy has actually helped to increase the income compared to the baseline scenario. It is the incremental value generated by the energy-intensive income generating activities that is used to repay the investment on energy service provision. Despite different financing solutions applied to different stakeholders, as a rule of thumb, to increase financing feasibility of off-grid renewable energy implementation, these projects must adopt the following principles: a. Reduce the Cost. To be achieved through the adoption of least-cost options, efficiency as the result of economies of scale, and/or low cost of capital.
b. Increase profitability. To be achieved through increasing the profit margin as well as the sales volume. Having diversified
source of revenue also helps. In the case of community-based energy projects, this involves income-generating uses of the energy.
c. Mitigate the risks. To be achieved through various risk mitigation instruments.
Even where a full subsidy is available, the above principles still need to be followed to ensure the sustainability of the service to avoid subsidizing inefficient use. This review of financing experiences point towards the acknowledged fact that focusing on financing issues alone is not sufficient but efforts should be put into a wider focus in the political, institutional and legal frameworks: • The FINESSE project highlighted that without policy interventions it is unlikely that demand for financing will in effect increase. Capacity building is needed in all parts of the finance delivery chain. Financiers further need to be equipped with the means (regulatory mechanisms) to manage risks, both those that protect financiers from being exposed to political risks and those that actually allow the financiers to take calculated risks, i.e. reducing equity requirements. (UNDP, 2004b ) • Increased awareness among commercial banks can contribute to more flexible and diverse loan packages. In the case of Malawi, this could eliminate the need to establish credit guarantee fund to ensure access to credit by end-users. • The India HHP project had at project completion a low number of stand-alone small hydro schemes serving un-electrified villages. Too narrow focus on commercial developers is argued to be the reason for this effect. By definition commercial developers are interested in economically viable schemes, which tend to require larger schemes and a high plant load factor (or surplus supply to the main grid). The second reason why remote areas were avoided by the commercial developers is that the implementation and management of schemes in remote areas was perceived as very costly. • A finding from another project using cooperative banks to provide loans for the end-users is that without any specifically designed interventions (such as a risk guarantee etc), the cooperative banks preferred using a higher than average interest rate. The rationale behind this was that this would ensure that the customer is making efforts to pay off this loan; if the loan has a low interest rate compared to other loans by the same customer, the customer would prefer to pay off other loans first. This clearly indicates the need for developing mechanisms that provide incentives for finance institutions to offer more tailored solutions to customers for financing renewable energy systems. (GEF, 2004c) On the other hand, loans offered to rural areas will probably always be more expensive due to higher transaction costs. A more powerful incentive for borrowers to repay the loans is the scale of additional income generated; it is the proportion of the interest burden to the added income that really matters, often not the rates themselves.
Whether the energy service delivery should be managed by a private sector owned utility, be part of the state utilities, or run by NGO's or rural cooperatives, depends on local governance systems, level of remoteness etc. and without doubt varies from country to country. What seems evident from the review is however that it takes great skills to manage energy service utilities in rural areas. When the purpose is to encourage productive uses another layer of skills is needed within this utility to identify potential business opportunities and emerging markets. It is also important to have a strong local participation, no matter which delivery model is selected. Replication and suitability will only happen if the scheme ensures local people a stake in the activities and if there is an obvious positive local impact. (GEF, 2004a) There are also important gender considerations related to financing. Micro-financing is emerging as an important tool that allows women to access capital for acquiring appliances and access to RETs. However, there are often legal or collateral problems hindering women to benefit from these programs. The Grameen Bank in Bangladesh has been successful in linking groups of women and using savings-schemes as collateral. (UNDP, 2004c) There are several issues associated with expanding the role of micro-finance for increased energy access. GVEP has identified some key considerations when incorporating micro-finance in energy initiatives (GVEP, 2004): • Market research is a crucial first step in determining the profile of the potential clients and the types of technologies suitable for specific regions and applications. Micro Finance Institutions (MFIs) have to be able to identify viable market before they can be expected to expand into a particular sector. • Accordingly, it is crucial to train MFI staff on the basics of the technology and the end-use application to better understand the products. With better understanding of energy products and services, MFIs would be better equipped to develop new lending products for a range of equipment. Awareness is also needed for consumers. In many cases consumers are not aware of the technologies and lending options available to provide needed energy services. Capacity building is therefore is a major factor to be considered when designing loan portfolios. • The specific design of a loan product will always depend on the preferences of the customer and the local market characteristics. Micro-finance could also be linked to pertinent artisan or trade group. • Interest rates should to the extent possible be set at market rate and should include cost of capital and risk to assure financial sustainability. In many cases, collateral for the loan will be the (energy- or production) equipment itself. The loan maturity and repayment frequency will depend upon the preference of the consumer within the parameters offered by the MFI. • The use of subsidies must be considered on a case by case basis. Subsidies should preferably be time-bound and targeted. Access to energy services should be subsidized, not consumption of energy services. • MFIs need to guarantee the client for the energy service provider, and the energy service provider needs to guarantee the client for the MFI. In other words, the risk needs to be shared. If the client is enabled an income from better energy access then this fact could play a part in this risk-sharing. • There is a need to match loan amounts to funding sources. MFIs tend to limit the size of their loans, whereas traditional banks often have a floor for loan sizes below which they will not lend. Therefore, depending on the technology chosen, small enterprise loans can be too large for MFIs to fund, but too small to receive bank funding • Productive uses and income generation should be a priority. This increases the client’s ability to pay back loans and mitigates risk otherwise borne by MFIs. The ENSIGN project successfully developed energy-linked micro enterprise portfolios through micro credit banks and institutions. In both rural and urban contexts, process heat and motive power were found more crucial to income-generation than lighting of workshops.8 A revolving fund provided 36 per cent of total loan funds, national financing institutions provided 50 per cent, and borrowers’ equity provided 14 per cent. Interest rates were 15 to 20 per cent, which was below market rates, with repayment periods of two to six years. Both individuals and communities received financing, and the average increase in income was 124 per cent (higher for the community projects). Although not part of the project design, the vast majority of borrowers were women, who proved to be entrepreneurial, innovative and creditworthy. Significant benefits for women, in addition to increased income, were time savings and enhanced self-confidence. The project identified a need to account for the transaction costs of intermediaries, and for a “Business Facilitator,” possibly an NGO, in future replication efforts. (UNDP, 2004c) This financing model clearly demonstrates that schemes need to be linked with the productive use; this is essential to ensure sustainability and to leverage private sector financing.
8 A range of activities were financed, including garment making, felt and leather goods manufacturing, welding, utensil manufacturing, baking, cold storage, grain grinding, threshing, fish drying and powdering, soybean processing, and rice processing.
Financing and Delivery for RET Market Development: public sector
The options for financing RETs in off-grid areas in developing countries has been traditionally and until recently dominated by public sector and donor funding. One of the reasons is because both renewable energy as well as rural electrification is often seen as costs rather than as investment, thus no private sector has put much interest on RETs implementation to cater off-grid/rural areas. Another reason is the high perceived risks among domestic finances towards both renewable energy as well as rural electrification because RETs is considered to be new within the country, the market has not yet been established or the targeted market has insufficient capacity to pay. A financing option can be found either on a grant-basis, revolving-fund basis, or subsidized credit facility. The government/donor interventions can either subsidize the preliminary work (feasibility study, business plan, social preparation) or the investment (engineering, procurement, construction). The grant-based approach has the potential of providing direct and short-term impact towards the beneficiaries, yet most of these projects have not had good performance in terms of sustainability, long-term impact as well as the capacity to further leverage its impact. Also, grant-based projects have a tendency of creating dependency of the beneficiaries. A grant-based approach can provide optimum benefit and effectively reach the objective if it is used in combination with other financing to create synergism. This must comply with a market mechanism and promote the capacity of the beneficiaries to be selfsufficient. Although off-grid consumers are mostly associated with a lack of capacity to pay, one need also to consider the internal capacity of off-grid consumer in financing the implementation of RETs. For example, palm oil farmers in Indonesia earn 3 to 5 times higher than farmers on other agricultural commodity, and thus they constitute prospective consumers from PV SHS distributors; because with their revenue, they can deliver the purchasing price of a PV SHS within 12 months. For these kinds of consumers, their barrier to access electricity is not in their capacity to pay, but on the remoteness of their location to the grid. Although the government/donor funding is crucial during the engineering, procurement and construction (EPC) it is valuable to engage the community for in-kind contribution (labor, raw materials, land, etc.) as this builds an ownership while also reducing the costs. A community’s contribution for operation and maintenance is also a necessity to ensure sustainability of the communitybased rural electricity service. Clearly, even though there are policies in place supporting increased access to energy in rural areas, such as national Rural Electrification Agencies, the plans for implementing these policies are often falling behind due to lack of financial means. Efforts become scattered and depending on external donor funding. However, many projects have demonstrated that UNDP and GEF funds have served as a catalyst to mobilize resources from local communities, local government, government subsidies and other donors and programmes. As previously discussed many rural electrification programmes focused on “one light in every house” have often required disproportionately large subsidies from the government and have therefore not been sustainable. However, when focus is on either encouraging increased income generation in rural areas or providing social services, some form of public-private partnership could be the solution. The public sector would then identify the local needs through cross-sectoral methodologies and allocate resources to off-set start-up costs, with delivery of basic services justifying the investment. Community benefits such as lighting of communal health centres and schools, water purifications systems and telecommunication could justify a smaller collective community payment. Community involvement is also crucial for ensuring maintenance services.
Financing for PURE: Promoting a Market-Based Approach
Grant-based funding is very scarce and limited. Relying too heavily on this type of funding would delay or restricting rural community to meeting their energy need at the most cost efficient manner. Costly 'hit and run' projects carried out by donors, multinational hardware producers, and NGOs have been proven to have far less impact than the consumer markets developed from the bottom up. Such markets have come into being where rural people have taken their energy provision into their own hands, and more attention should be given to building and supporting these types of markets. This approach can be successful, if the starting point is a pragmatic focus on those local networks which will disseminate, install, service and support rural energy systems, in other words, a focus on building market infrastructure.9 Building a market-based rural energy service means to formulate the rural energy service as an investment opportunity that attract the interest of commercial financiers to invest. Success in developing a market-based rural energy services will provide the service provider with a greater access to financial resources. However, the challenge would be how to turn the rural energy services into an attractive investment package in terms of the profitability versus the risks associated (for example, sustainability of energy supply, reaching the target groups).
9 A.L Tobing . “Selling Rural Electrification as Practical Consideration”. 2004
Check-list: Turning RETs into market-based investment opportunities Feasibility of RETs investment: In assessing the investment feasibility of rural energy, commercial financiers shall look into: Technological options, as well as operational and maintenance (O/M) aspects, especially on the efficiency level of the adopted technology, manageability of operation and maintenance, manageability of the potential technical risks, and the life-cycle of the technology. Target market of the products/services generated through productive activities involving renewable energy Volume of product/services generated through productive use of renewable energy, whether it reaches the minimum economic of scale to justify the investment. What are the sources of revenue stream, how sufficient to commensurate the costs and investment, how reliable and sustainable are such revenue streams. Profitability: To attract investment, RETs for productive uses need to secure revenues to meet the risk that the investors are exposed to. Profitability is related with the potential revenue that MSMEs can obtain, and this are very much related to the volume of products versus the pricing of products/services. Risk Mitigation: The potential profits of financing PURE must correspond to the potential risks the financiers are exposed to. Identification and mitigation of the potential risks which includes technical, financial and business risks is crucial.
The introduction of commercial use of RETs (for income generating activities) in off-grid areas has potential to address the issues of investment feasibility, profitability, and risk mitigation - if it is mobilizing the collective role of community-based organizations. The preference for having a collective PURE implementation through organizations like a cooperative is based on the following assumptions: •Collective implementation for energy supply need to be institutionalized to develop a well-organized structure; •The cooperative has a captive market, for example its members, and therefore it is easier to achieve economy of scale and a sufficient market for both the production and the consumption of rural energy services; •The cooperative can be mobilized to create productive activities that generate incomes (depends on local conditions and the willingness and ability to take risks) which can contribute to revenues for recovering the rural energy investment; and •The cooperative can be mobilized to render micro-financing services that support slightly more energy-intensive small businesses by its member, thereby, promoting the growth of energy use through increase of local access to financing.
Integrating Market-Based Rural Energy Services with Donor Funding
Although market-based rural energy services is introduced to allow wide scale implementation of rural electrification (without being dependent on availability of donor’s fund), the donor intervention is often required to fill in the financing gap where the commercial financiers is not yet willing to participate due to perceived high risks, as well as to help create the market infrastructure that will support the growth of local entrepreneurs. One way of integrating donor funding into commercial funding, whereby the donor funds is utilized, has been explored in small hydro community schemes in Indonesia: •Equity financing: A corresponding fund towards the investors’ financing; the availability of this fund increases the trust of investors towards the project feasibility. •Loan guarantee facility: A guarantee for the project risks that the investors may be exposed to in financing the integrated rural energy services project. In such a business model local cooperatives (production cooperatives) are provided with capacity building covering technical, financial and managerial aspects. The local financing institution is provided with working capital for the credit line. The loan by the local financing institution is used for two main purposes: (1) financing of rural energy services and other income-generating related infrastructure, and (2) financing of energy-consuming processing businesses. Under this business model, the financial support is provided either as revolving fund or soft loan, which the beneficiary will have to repay.
Based on the lessons from small hydro schemes in Indonesia, there are some key issues that need to be taken into account for the purpose of integrating smart donor instrument to PURE investments:10
• • •
limiting the expectations of donor programmes' impact to a realistic level, to prevent market distortion as a result of donor presence (long-term stability and energy services versus short term (technology) supply); integrating business development services in the supply chain, where training could focus on several different capacities, with greater emphasis on sales skills rather than technical skills; markets need time to develop and can only successfully accept support that is in line with their state of development; when a basic delivery and technical infrastructure does not yet exist in a market it does not make sense to launch advanced concepts such as regional concessions for fee-for-service models; making choices more explicit, as many donor instruments are ambivalent as to which goal they aim to achieve; on the one hand market and business development deserve attention, but on the other, activities often have to take place within the framework of poverty reduction, so programmes would be much more effective if choices would be more explicit; and market studies are helpful to better understand the demand side and the supply side at project planning stage.
Project planning and design
When designing a PURE project it is crucial to ensure technology neutrality at the design stage. This means that the targeted sector must have been carefully analyzed through pre-feasibility studies to ensure that the right technology is identified and will fit the purpose of the specific end-use application. The Mali MFP case has clearly demonstrated the potential for motive power for agroprocessing in Africa (while this specific project was powered by diesel). The India Hilly Hydel project aimed at reducing firewood consumption in the Himalayan region as well as improving the production process in the teagardens factories. However, the major improvements both in terms of GHG reductions and the production process could be made by changes to a more efficient heating/drying process and not by surplus electricity from small hydro plants. There is now a new project under development specifically focusing on making the production process in these factories more productive and the heat process more energy efficient.11 Another problem with projects that are technology driven is that by selecting a specific technology the technology is locked in for the remainder of the programme, even if other technologies later on would prove to provide a better service. (GEF, 2004c) An important lesson from several projects (Philippines, Mexico) is the importance of using existing and locally established organizations, for example cooperatives, for implementation of a project. Such organization, on village or regional level, should also be involved in steering the PU component during project design through participatory processes. By using existing structures and focusing on capacity development based on local expertise, which has a long-term presence and is likely to stay in the project area, project results will inherently become more sustainable. Formation of local cooperatives can also lead to empowerment through capacity building of organizational, technical and business management. After project completion the knowledge can then easier be channeled for other initiatives though the local organization. One potential negative impact of productive use projects is related to water rights issues. For example, in India a new well for irrigation of dry land and increased biomass production initially constrained the already low ground water levels. The solution to the problem was a watershed approach and training on water harvesting structures (UNDP, 2004b). On the other hand, the project had positive impacts as the biomass crops reduced erosion and restored fertility when less agrochemicals were used. When degraded land and wasteland were restored this also had positive impacts on the water retention. In the India Hilly Hydel project access and control of water has shifted from local people to scheme developers, which are often private commercial entities. This increased the vulnerability of the local inhabitants (GEF, 2004a). Participatory processes to ensure that women’s needs are fully accounted for (as in the example of the Mali project) are crucial for project success; taking gender aspects into account forms a basis for sustainability of the initiative. In the India HHP project, the government and private sector actively participated, but the local population, particularly women, was hardly involved. As a result, “this non-involvement of the local population has been a major set back for the timely and effective implementation of the project and has diluted the actual and effective impact of the project.” (GEF, 2004a) This shows the importance of making proper needs assessment of women’s use of energy, which can be very different from that preferred by men. T There is also evidence that participatory processes indirectly help creating awareness about other environmental issues, such as indoor air pollution. (Puri,
11 Also, any change brought by the project in use of wood fuels for household purposes could not be identified. Furthermore, in the mid 1990s the Government of India concluded that LPG would be the best
option to solve this problem, and not electricity. (GEF, 2004a)
2003) A note-worthy observation from the Philippines project is that while there are significant potential benefits identified for women from using biogas tanks for pig waste (improving the quality of fertilizers, reducing the need for wood fuel for cooking and providing a smokeless cooking fuel), the technology was perceived as less attractive for external private sector actors as there was not much imported equipment involved. (GEF, 2004c) The discussion of participatory processes puts the focus on two major and interlinked uses of RETs-provided energy: (a) fuels to save women’s time and (b) fuels and electricity to make use of that saved time in women-operated micro enterprises or village cooperatives. This is not so much a matter of ensuring the ‘participation’ of women. In the rural context, many agencies go through the motions of involving women in discussions and so forth, but eventually women’s views are not a prime consideration in project selection; the whole issue of participation has then been reduced to politically correct tokenism without substance. What is nonetheless evident is that women are major consumers of energy, and on many occasions they are more capable than men in utilizing energy for productive purposes.
One of the most persistent claims for rural electrification is that it can induce industrial growth in otherwise lagging low-income rural economies. The evidence from developing countries does not support this claim; rural electrification has not, by itself, triggered industrial growth or regional development. (Lamech and O’Sullivan, 2002) In certain circumstances, it has supported growth led mainly by the agricultural sector or where targeted, long-term and consistent support has been provided such as in the Mali MFP case. However, where other prerequisites of development (access to health, water, education) were absent, demand for energy for productive uses did not grow.12 Without agricultural growth13 and without targeted government or donor funded support, the use of electricity in rural areas has remained low, replication of any successful efforts not consistent, and many of the expected economic benefits of electrification have not been realized. Investment (by private sector) in rural electrification is therefore perceived as economically justified only when the emerging uses of electricity are strong enough to ensure sufficient growth in demand to produce a reasonable economic rate of return on the investment. However, if productive uses of renewable energy aim at having an effect on the HDI as described above then other tools than regular financial feasibility calculations may need to be applied to value the true impacts of rural energy services. This would involve a multi-criteria analysis where both quantitative and qualitative benchmarks are used to define criteria for energy services in rural areas. These services could be targeted to increase the financial capital (through support to expanded use of RETs by MSMEs) or to increase the social or human capital (through infrastructure support such as education and health). This analysis therefore logically needs to be conducted through a cross-sectoral framework where actors from all concerned sectors interact. If other dimensions than pure cost per kWh is evaluated, and if on-going development plans in for example the health and water sector are taken into account and forms part of the planning for rural energy provision, then scarce resources can be better optimized. Such a framework would also allow for interaction with the PRSP and guide how resources could be steered for most impact. Further, this cross-sectoral analysis would require more transparent policies and rural energy planning, which is a first step for any private sector investment. Furthermore, if the eligibility of projects is determined by their potential impact on the HDI then baselines also need to include more explicit information on estimated local incomes, employment benefits or other ‘socio-economic’ benchmarks and pertinent indicators (which should be outcome and impact oriented). To date, very few projects have established more systematic socioeconomic baselines against which such improvements in incomes and employment – or even improved livelihoods in general – could be measured.
12 An exception is demand for electricity for water pumping to expand irrigated farming. 13 Low growth in the agricultural sector often derives from low access to markets, be it on local, national or international level.