National Approaches to Electrification – Non-Financial Interventions

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Technology: The physical means by which electricity is generated, transmitted and distributed

Grid-connected mini-grids and distribution systems  share characteristics with both Grid Extension and Isolated Mini-grids – They are linked to the grid system and are able to import electricity from and export electricity to it, so technically they have more in common with Grid Extension. However, in that they are owned and managed independently they are more similar to Isolated Mini-grids. These differences call for different policy and regulatory approaches, so a separate Technology category has been established.

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Direct Energy Access Provision

Definition:

Finance provided by investors or lenders in the expectation of financial returns (profit).   Private finance will be input on commercial terms, meaning that the investor or lender will expect to receive returns that exceed the original investment or loan and at a level that reflects the risks involved. Factors considered by financiers may include risks to implementation, delivery and technology performance, risks of cost escalation, market/demand and credit/payment risks, regulatory and macro-economic risks and external risks such as policy framework and weather. Any financier will require clear information on forecast revenues and potential risks before providing funding.  It may be difficult for new electricity businesses working in new markets, and for users without a formal credit-record, to give commercial funders the confidence they require. Finance for electrification may come in the form of equity investment, or capital asset or working capital loans, and may be provided to a business as a whole, to a specific project or to end-users. Equity - Any equity investment implies partial business ownership, with the investor taking the risk of losing their investment if the electricity venture fails, but also expecting to receive bonus returns if forecast targets are exceeded. Early stage investment in new businesses often relies on finance from entrepreneurial individuals, angel investors or venture capitalists who are willing to take large risks but expect to receive high returns on their investment if it’s successful. Loans - capital asset loans are used, generally in later stages of business development and on specific projects, to leverage equity investment enabling businesses to scale up and expand their assets. Capital lenders expect repayment of loans over fixed periods and with pre-agreed (fixed or variable) interest rates, so that if profits fall short of forecasts payments are reduced only once equity capital has been exhausted, but if forecasts are exceeded lenders receive no additional benefit. Working capital- alongside capital investment, most businesses require working capital to bridge the gap between expenditure and receipt of revenues. Working capital is particularly needed by, for instance, solar product businesses, where there may be three months or more between purchase/ import of the product by the business and sale to the end-user. Sources of finance - Often both international and local finance is required to support electrification – particularly where capital equipment or products are imported. The scale of funding needed for electrification may require international finance, and international financiers may have greater familiarity with, and hence be more comfortable with, some of the issues associated with the energy sector, particularly if their funding is channelled through an international company. However, local private funders will be more familiar with the national context and be more confident in resolving, and hence charge less premium for, risks associated with it. Exchange rate, and hence macro-economic, risks will always be an issue for private financiers where any of the electrification costs are in foreign currency. This issue will be greater where international funding is used to cover more than just import costs, and international funders will be very reluctant to provide finance if repatriation of funds is constrained.

Internactions wiht other NAE Categories:

	Technology	Most national grid systems are constructed using public funds, though private finance can be introduced through privatisation of existing assets, inviting private generators to feed into the national grid, or establishment of distribution/grid-connected mini-grid concessions.  For instance, the introduction of feed-in tariffs (e.g. in Tanzania) has provided the basis for private investment in generation. Mini-grids are more frequently, though by no means always, financed by the private sector since the smaller investment and shorter payback period can reduce the risks and provides a more manageable business opportunity. Stand-alone systems offer even greater opportunities for market-based finance since the relatively short period between purchase and sale to the user means that that only business establishment and a small amount of equipment capital investment is at risk.
	Delivery Models	Application of market-based finance, by definition, requires private sector ownership or a public-private partnership (PPP).  PPPs are often an effective way to attract private finance since the public-sector element can offer funding and offset the risk associated with financing of electrification. Any private or PPP financing will require a business model with clear investment requirements and projections of income that provide expected return on investment over an acceptable timeframe, and with acceptable levels of risk and uncertainty.
	Legual Basis	Any private finance provider will consider the legal basis of electrification in terms of the risk profile it presents to them. The lower the risk and the greater certainty, the more likelihood that private finance will be available and at a lower cost. The most fundamental requirement for any private investment in fixed assets is clarity around the legality of operating and selling electricity. This may be provided explicitly through a concession or license, or through a general exclusion of certain types of electricity provision (e.g. mini-grids below a certain size) from the need to be licensed. Without this basic regulatory clarity, and so with the risk that future introduction of regulation may undermine their business and restrict their levels of income, it will be extremely difficult to attract private finance for electrification.
	Price/Tariff Regulation	Is a critical factor for private investment in electrification, with inadequate or inappropriate price/tariff regulation often cited as the key barrier to such finance. Whatever form of price/tariff regulation is used the critical requirement is that it is clear and transparent, as without this, private financiers will see a significant risk of political pressure reducing prices or tariffs to the point below which they fail to cover investment costs.
	Other Forms of Finance	In many cases some other form(s) of public finance such as grants, subsidies, concessionary loans, tax exemptions or guarantees (to reduce investment risks) will be needed alongside private finance to overcome the lack of user spending power and the high costs of early market development. User Finance – Charges paid by users provide the means to repay electricity providers’ loans and equity investments and pay interest and return on capital. Where upfront charges are imposed on users, they may in turn seek to borrow to cover these charges and then repay the loan over time.  Alternatively the electricity provider may seek additional finance in order to reduce up-front charges and so minimize barriers to users accessing their services.
	Non-Financial Interventions	Most support activities to assist national electrification will reduce the perceived financial risk and so help to attract private sector investment and sustainable market development.  Providing policies and targets, standards and technical assistance for new electrification initiatives will all increase the private financier’s certainty regarding the likely outcomes and so reduce the risk of investment.  Market information, capacity building and customer engagement through promotional activity will all have a similar positive effect.

Advantages and Disadvantages

If private finance is attracted, it can support rapid electrification at a large scale, and can free up public funding to be used for other things. If market conditions are such as to attract purely private finance, this indicates that the electrification process will be self-sustaining without dependence upon external grants or subsidies from the government or donor organisations.  Where customers are able to pay for electricity at a level that allows the supply to be maintained under market conditions, there is no concern over the withdrawal of public funding that may then prevent continued access to electricity. Experience also indicates that involvement of private finance can drive innovation and efficiencies in electrification as in other sectors. Private finance, however, requires clear evidence that revenues will provide returns on investment, and this may be an insurmountable barrier, particularly for forms of electrification such as grid and mini-grid systems which have high upfront capital costs that will be recovered over long periods (perhaps 20 years). Even where macro-economic conditions are stable, regulatory frameworks and prices/tariffs transparent, and users able to afford electricity, financiers may be reluctant to provide support in the absence of established companies with a track record of performance. Much time and effort may be expended in the attempt to attract sufficient private finance without the required results. Furthermore, private finance is usually more expensive than general government borrowing and this will particularly be the case for programmes that are seen by the financiers as carrying significant levels of risk.

Further Information and Guidance

De Montfort University (2013), Financing Energy Access and Off-grid Electrification: A Review of Status, Options and Challenges https://www.dmu.ac.uk/documents/technology-documents/research-faculties/oasys/project-outputs/peer-reviewed-journal-articles/pj7--financing-energy-access--rser-paper.pdf UNEP-FI (2012), Financing renewable energy in developing countries http://www.unepfi.org/fileadmin/documents/Financing_Renewable_Energy_in_subSaharan_Africa.pdf

Relevante Case Studies:

Bangladesh, IDCOL Solar Home Systems Brazil, Luz para Todos (Light for All) Cambodia “Light Touch” Regulation Ethiopia, Solar Market Development Kenya, Off-Grid for Vision 2030 Mali, Rural Electrification Programme Philippines, Islanded Distribution by Cooperatives Rwanda, Sector-Wide Approach to Planning Tanzania, Mini-Grids Regulatory Framework Vietnam, Rapid Grid Expansion

Institutional Restructuring

Definition:

Finance provided by investors or lenders in the expectation of financial returns (profit).   Private finance will be input on commercial terms, meaning that the investor or lender will expect to receive returns that exceed the original investment or loan and at a level that reflects the risks involved. Factors considered by financiers may include risks to implementation, delivery and technology performance, risks of cost escalation, market/demand and credit/payment risks, regulatory and macro-economic risks and external risks such as policy framework and weather. Any financier will require clear information on forecast revenues and potential risks before providing funding.  It may be difficult for new electricity businesses working in new markets, and for users without a formal credit-record, to give commercial funders the confidence they require. Finance for electrification may come in the form of equity investment, or capital asset or working capital loans, and may be provided to a business as a whole, to a specific project or to end-users. Equity - Any equity investment implies partial business ownership, with the investor taking the risk of losing their investment if the electricity venture fails, but also expecting to receive bonus returns if forecast targets are exceeded. Early stage investment in new businesses often relies on finance from entrepreneurial individuals, angel investors or venture capitalists who are willing to take large risks but expect to receive high returns on their investment if it’s successful. Loans - capital asset loans are used, generally in later stages of business development and on specific projects, to leverage equity investment enabling businesses to scale up and expand their assets. Capital lenders expect repayment of loans over fixed periods and with pre-agreed (fixed or variable) interest rates, so that if profits fall short of forecasts payments are reduced only once equity capital has been exhausted, but if forecasts are exceeded lenders receive no additional benefit. Working capital- alongside capital investment, most businesses require working capital to bridge the gap between expenditure and receipt of revenues. Working capital is particularly needed by, for instance, solar product businesses, where there may be three months or more between purchase/ import of the product by the business and sale to the end-user. Sources of finance - Often both international and local finance is required to support electrification – particularly where capital equipment or products are imported. The scale of funding needed for electrification may require international finance, and international financiers may have greater familiarity with, and hence be more comfortable with, some of the issues associated with the energy sector, particularly if their funding is channelled through an international company. However, local private funders will be more familiar with the national context and be more confident in resolving, and hence charge less premium for, risks associated with it. Exchange rate, and hence macro-economic, risks will always be an issue for private financiers where any of the electrification costs are in foreign currency. This issue will be greater where international funding is used to cover more than just import costs, and international funders will be very reluctant to provide finance if repatriation of funds is constrained.

Internactions wiht other NAE Categories:

	Technology	Most national grid systems are constructed using public funds, though private finance can be introduced through privatisation of existing assets, inviting private generators to feed into the national grid, or establishment of distribution/grid-connected mini-grid concessions.  For instance, the introduction of feed-in tariffs (e.g. in Tanzania) has provided the basis for private investment in generation. Mini-grids are more frequently, though by no means always, financed by the private sector since the smaller investment and shorter payback period can reduce the risks and provides a more manageable business opportunity. Stand-alone systems offer even greater opportunities for market-based finance since the relatively short period between purchase and sale to the user means that that only business establishment and a small amount of equipment capital investment is at risk.
	Delivery Models	Application of market-based finance, by definition, requires private sector ownership or a public-private partnership (PPP).  PPPs are often an effective way to attract private finance since the public-sector element can offer funding and offset the risk associated with financing of electrification. Any private or PPP financing will require a business model with clear investment requirements and projections of income that provide expected return on investment over an acceptable timeframe, and with acceptable levels of risk and uncertainty.
	Legual Basis	Any private finance provider will consider the legal basis of electrification in terms of the risk profile it presents to them. The lower the risk and the greater certainty, the more likelihood that private finance will be available and at a lower cost. The most fundamental requirement for any private investment in fixed assets is clarity around the legality of operating and selling electricity. This may be provided explicitly through a concession or license, or through a general exclusion of certain types of electricity provision (e.g. mini-grids below a certain size) from the need to be licensed. Without this basic regulatory clarity, and so with the risk that future introduction of regulation may undermine their business and restrict their levels of income, it will be extremely difficult to attract private finance for electrification.
	Price/Tariff Regulation	Is a critical factor for private investment in electrification, with inadequate or inappropriate price/tariff regulation often cited as the key barrier to such finance. Whatever form of price/tariff regulation is used the critical requirement is that it is clear and transparent, as without this, private financiers will see a significant risk of political pressure reducing prices or tariffs to the point below which they fail to cover investment costs.
	Other Forms of Finance	In many cases some other form(s) of public finance such as grants, subsidies, concessionary loans, tax exemptions or guarantees (to reduce investment risks) will be needed alongside private finance to overcome the lack of user spending power and the high costs of early market development. User Finance – Charges paid by users provide the means to repay electricity providers’ loans and equity investments and pay interest and return on capital. Where upfront charges are imposed on users, they may in turn seek to borrow to cover these charges and then repay the loan over time.  Alternatively the electricity provider may seek additional finance in order to reduce up-front charges and so minimize barriers to users accessing their services.
	Non-Financial Interventions	Most support activities to assist national electrification will reduce the perceived financial risk and so help to attract private sector investment and sustainable market development.  Providing policies and targets, standards and technical assistance for new electrification initiatives will all increase the private financier’s certainty regarding the likely outcomes and so reduce the risk of investment.  Market information, capacity building and customer engagement through promotional activity will all have a similar positive effect.

Advantages and Disadvantages

If private finance is attracted, it can support rapid electrification at a large scale, and can free up public funding to be used for other things. If market conditions are such as to attract purely private finance, this indicates that the electrification process will be self-sustaining without dependence upon external grants or subsidies from the government or donor organisations.  Where customers are able to pay for electricity at a level that allows the supply to be maintained under market conditions, there is no concern over the withdrawal of public funding that may then prevent continued access to electricity. Experience also indicates that involvement of private finance can drive innovation and efficiencies in electrification as in other sectors. Private finance, however, requires clear evidence that revenues will provide returns on investment, and this may be an insurmountable barrier, particularly for forms of electrification such as grid and mini-grid systems which have high upfront capital costs that will be recovered over long periods (perhaps 20 years). Even where macro-economic conditions are stable, regulatory frameworks and prices/tariffs transparent, and users able to afford electricity, financiers may be reluctant to provide support in the absence of established companies with a track record of performance. Much time and effort may be expended in the attempt to attract sufficient private finance without the required results. Furthermore, private finance is usually more expensive than general government borrowing and this will particularly be the case for programmes that are seen by the financiers as carrying significant levels of risk.

Further Information and Guidance

De Montfort University (2013), Financing Energy Access and Off-grid Electrification: A Review of Status, Options and Challenges https://www.dmu.ac.uk/documents/technology-documents/research-faculties/oasys/project-outputs/peer-reviewed-journal-articles/pj7--financing-energy-access--rser-paper.pdf UNEP-FI (2012), Financing renewable energy in developing countries http://www.unepfi.org/fileadmin/documents/Financing_Renewable_Energy_in_subSaharan_Africa.pdf

Relevante Case Studies:

Bangladesh, IDCOL Solar Home Systems Brazil, Luz para Todos (Light for All) Cambodia “Light Touch” Regulation Ethiopia, Solar Market Development Kenya, Off-Grid for Vision 2030 Mali, Rural Electrification Programme Philippines, Islanded Distribution by Cooperatives Rwanda, Sector-Wide Approach to Planning Tanzania, Mini-Grids Regulatory Framework Vietnam, Rapid Grid Expansion

Regulatory Reform

Definition:

Finance provided by investors or lenders in the expectation of financial returns (profit).   Private finance will be input on commercial terms, meaning that the investor or lender will expect to receive returns that exceed the original investment or loan and at a level that reflects the risks involved. Factors considered by financiers may include risks to implementation, delivery and technology performance, risks of cost escalation, market/demand and credit/payment risks, regulatory and macro-economic risks and external risks such as policy framework and weather. Any financier will require clear information on forecast revenues and potential risks before providing funding.  It may be difficult for new electricity businesses working in new markets, and for users without a formal credit-record, to give commercial funders the confidence they require. Finance for electrification may come in the form of equity investment, or capital asset or working capital loans, and may be provided to a business as a whole, to a specific project or to end-users. Equity - Any equity investment implies partial business ownership, with the investor taking the risk of losing their investment if the electricity venture fails, but also expecting to receive bonus returns if forecast targets are exceeded. Early stage investment in new businesses often relies on finance from entrepreneurial individuals, angel investors or venture capitalists who are willing to take large risks but expect to receive high returns on their investment if it’s successful. Loans - capital asset loans are used, generally in later stages of business development and on specific projects, to leverage equity investment enabling businesses to scale up and expand their assets. Capital lenders expect repayment of loans over fixed periods and with pre-agreed (fixed or variable) interest rates, so that if profits fall short of forecasts payments are reduced only once equity capital has been exhausted, but if forecasts are exceeded lenders receive no additional benefit. Working capital- alongside capital investment, most businesses require working capital to bridge the gap between expenditure and receipt of revenues. Working capital is particularly needed by, for instance, solar product businesses, where there may be three months or more between purchase/ import of the product by the business and sale to the end-user. Sources of finance - Often both international and local finance is required to support electrification – particularly where capital equipment or products are imported. The scale of funding needed for electrification may require international finance, and international financiers may have greater familiarity with, and hence be more comfortable with, some of the issues associated with the energy sector, particularly if their funding is channelled through an international company. However, local private funders will be more familiar with the national context and be more confident in resolving, and hence charge less premium for, risks associated with it. Exchange rate, and hence macro-economic, risks will always be an issue for private financiers where any of the electrification costs are in foreign currency. This issue will be greater where international funding is used to cover more than just import costs, and international funders will be very reluctant to provide finance if repatriation of funds is constrained.

Internactions wiht other NAE Categories:

	Technology	Most national grid systems are constructed using public funds, though private finance can be introduced through privatisation of existing assets, inviting private generators to feed into the national grid, or establishment of distribution/grid-connected mini-grid concessions.  For instance, the introduction of feed-in tariffs (e.g. in Tanzania) has provided the basis for private investment in generation. Mini-grids are more frequently, though by no means always, financed by the private sector since the smaller investment and shorter payback period can reduce the risks and provides a more manageable business opportunity. Stand-alone systems offer even greater opportunities for market-based finance since the relatively short period between purchase and sale to the user means that that only business establishment and a small amount of equipment capital investment is at risk.
	Delivery Models	Application of market-based finance, by definition, requires private sector ownership or a public-private partnership (PPP).  PPPs are often an effective way to attract private finance since the public-sector element can offer funding and offset the risk associated with financing of electrification. Any private or PPP financing will require a business model with clear investment requirements and projections of income that provide expected return on investment over an acceptable timeframe, and with acceptable levels of risk and uncertainty.
	Legual Basis	Any private finance provider will consider the legal basis of electrification in terms of the risk profile it presents to them. The lower the risk and the greater certainty, the more likelihood that private finance will be available and at a lower cost. The most fundamental requirement for any private investment in fixed assets is clarity around the legality of operating and selling electricity. This may be provided explicitly through a concession or license, or through a general exclusion of certain types of electricity provision (e.g. mini-grids below a certain size) from the need to be licensed. Without this basic regulatory clarity, and so with the risk that future introduction of regulation may undermine their business and restrict their levels of income, it will be extremely difficult to attract private finance for electrification.
	Price/Tariff Regulation	Is a critical factor for private investment in electrification, with inadequate or inappropriate price/tariff regulation often cited as the key barrier to such finance. Whatever form of price/tariff regulation is used the critical requirement is that it is clear and transparent, as without this, private financiers will see a significant risk of political pressure reducing prices or tariffs to the point below which they fail to cover investment costs.
	Other Forms of Finance	In many cases some other form(s) of public finance such as grants, subsidies, concessionary loans, tax exemptions or guarantees (to reduce investment risks) will be needed alongside private finance to overcome the lack of user spending power and the high costs of early market development. User Finance – Charges paid by users provide the means to repay electricity providers’ loans and equity investments and pay interest and return on capital. Where upfront charges are imposed on users, they may in turn seek to borrow to cover these charges and then repay the loan over time.  Alternatively the electricity provider may seek additional finance in order to reduce up-front charges and so minimize barriers to users accessing their services.
	Non-Financial Interventions	Most support activities to assist national electrification will reduce the perceived financial risk and so help to attract private sector investment and sustainable market development.  Providing policies and targets, standards and technical assistance for new electrification initiatives will all increase the private financier’s certainty regarding the likely outcomes and so reduce the risk of investment.  Market information, capacity building and customer engagement through promotional activity will all have a similar positive effect.

Advantages and Disadvantages

If private finance is attracted, it can support rapid electrification at a large scale, and can free up public funding to be used for other things. If market conditions are such as to attract purely private finance, this indicates that the electrification process will be self-sustaining without dependence upon external grants or subsidies from the government or donor organisations.  Where customers are able to pay for electricity at a level that allows the supply to be maintained under market conditions, there is no concern over the withdrawal of public funding that may then prevent continued access to electricity. Experience also indicates that involvement of private finance can drive innovation and efficiencies in electrification as in other sectors. Private finance, however, requires clear evidence that revenues will provide returns on investment, and this may be an insurmountable barrier, particularly for forms of electrification such as grid and mini-grid systems which have high upfront capital costs that will be recovered over long periods (perhaps 20 years). Even where macro-economic conditions are stable, regulatory frameworks and prices/tariffs transparent, and users able to afford electricity, financiers may be reluctant to provide support in the absence of established companies with a track record of performance. Much time and effort may be expended in the attempt to attract sufficient private finance without the required results. Furthermore, private finance is usually more expensive than general government borrowing and this will particularly be the case for programmes that are seen by the financiers as carrying significant levels of risk.

Further Information and Guidance

De Montfort University (2013), Financing Energy Access and Off-grid Electrification: A Review of Status, Options and Challenges https://www.dmu.ac.uk/documents/technology-documents/research-faculties/oasys/project-outputs/peer-reviewed-journal-articles/pj7--financing-energy-access--rser-paper.pdf UNEP-FI (2012), Financing renewable energy in developing countries http://www.unepfi.org/fileadmin/documents/Financing_Renewable_Energy_in_subSaharan_Africa.pdf

Relevante Case Studies:

Bangladesh, IDCOL Solar Home Systems Brazil, Luz para Todos (Light for All) Cambodia “Light Touch” Regulation Ethiopia, Solar Market Development Kenya, Off-Grid for Vision 2030 Mali, Rural Electrification Programme Philippines, Islanded Distribution by Cooperatives Rwanda, Sector-Wide Approach to Planning Tanzania, Mini-Grids Regulatory Framework Vietnam, Rapid Grid Expansion

Policy & Target Setting

Definition:

Finance provided by investors or lenders in the expectation of financial returns (profit).   Private finance will be input on commercial terms, meaning that the investor or lender will expect to receive returns that exceed the original investment or loan and at a level that reflects the risks involved. Factors considered by financiers may include risks to implementation, delivery and technology performance, risks of cost escalation, market/demand and credit/payment risks, regulatory and macro-economic risks and external risks such as policy framework and weather. Any financier will require clear information on forecast revenues and potential risks before providing funding.  It may be difficult for new electricity businesses working in new markets, and for users without a formal credit-record, to give commercial funders the confidence they require. Finance for electrification may come in the form of equity investment, or capital asset or working capital loans, and may be provided to a business as a whole, to a specific project or to end-users. Equity - Any equity investment implies partial business ownership, with the investor taking the risk of losing their investment if the electricity venture fails, but also expecting to receive bonus returns if forecast targets are exceeded. Early stage investment in new businesses often relies on finance from entrepreneurial individuals, angel investors or venture capitalists who are willing to take large risks but expect to receive high returns on their investment if it’s successful. Loans - capital asset loans are used, generally in later stages of business development and on specific projects, to leverage equity investment enabling businesses to scale up and expand their assets. Capital lenders expect repayment of loans over fixed periods and with pre-agreed (fixed or variable) interest rates, so that if profits fall short of forecasts payments are reduced only once equity capital has been exhausted, but if forecasts are exceeded lenders receive no additional benefit. Working capital- alongside capital investment, most businesses require working capital to bridge the gap between expenditure and receipt of revenues. Working capital is particularly needed by, for instance, solar product businesses, where there may be three months or more between purchase/ import of the product by the business and sale to the end-user. Sources of finance - Often both international and local finance is required to support electrification – particularly where capital equipment or products are imported. The scale of funding needed for electrification may require international finance, and international financiers may have greater familiarity with, and hence be more comfortable with, some of the issues associated with the energy sector, particularly if their funding is channelled through an international company. However, local private funders will be more familiar with the national context and be more confident in resolving, and hence charge less premium for, risks associated with it. Exchange rate, and hence macro-economic, risks will always be an issue for private financiers where any of the electrification costs are in foreign currency. This issue will be greater where international funding is used to cover more than just import costs, and international funders will be very reluctant to provide finance if repatriation of funds is constrained.

Internactions wiht other NAE Categories:

	Technology	Most national grid systems are constructed using public funds, though private finance can be introduced through privatisation of existing assets, inviting private generators to feed into the national grid, or establishment of distribution/grid-connected mini-grid concessions.  For instance, the introduction of feed-in tariffs (e.g. in Tanzania) has provided the basis for private investment in generation. Mini-grids are more frequently, though by no means always, financed by the private sector since the smaller investment and shorter payback period can reduce the risks and provides a more manageable business opportunity. Stand-alone systems offer even greater opportunities for market-based finance since the relatively short period between purchase and sale to the user means that that only business establishment and a small amount of equipment capital investment is at risk.
	Delivery Models	Application of market-based finance, by definition, requires private sector ownership or a public-private partnership (PPP).  PPPs are often an effective way to attract private finance since the public-sector element can offer funding and offset the risk associated with financing of electrification. Any private or PPP financing will require a business model with clear investment requirements and projections of income that provide expected return on investment over an acceptable timeframe, and with acceptable levels of risk and uncertainty.
	Legual Basis	Any private finance provider will consider the legal basis of electrification in terms of the risk profile it presents to them. The lower the risk and the greater certainty, the more likelihood that private finance will be available and at a lower cost. The most fundamental requirement for any private investment in fixed assets is clarity around the legality of operating and selling electricity. This may be provided explicitly through a concession or license, or through a general exclusion of certain types of electricity provision (e.g. mini-grids below a certain size) from the need to be licensed. Without this basic regulatory clarity, and so with the risk that future introduction of regulation may undermine their business and restrict their levels of income, it will be extremely difficult to attract private finance for electrification.
	Price/Tariff Regulation	Is a critical factor for private investment in electrification, with inadequate or inappropriate price/tariff regulation often cited as the key barrier to such finance. Whatever form of price/tariff regulation is used the critical requirement is that it is clear and transparent, as without this, private financiers will see a significant risk of political pressure reducing prices or tariffs to the point below which they fail to cover investment costs.
	Other Forms of Finance	In many cases some other form(s) of public finance such as grants, subsidies, concessionary loans, tax exemptions or guarantees (to reduce investment risks) will be needed alongside private finance to overcome the lack of user spending power and the high costs of early market development. User Finance – Charges paid by users provide the means to repay electricity providers’ loans and equity investments and pay interest and return on capital. Where upfront charges are imposed on users, they may in turn seek to borrow to cover these charges and then repay the loan over time.  Alternatively the electricity provider may seek additional finance in order to reduce up-front charges and so minimize barriers to users accessing their services.
	Non-Financial Interventions	Most support activities to assist national electrification will reduce the perceived financial risk and so help to attract private sector investment and sustainable market development.  Providing policies and targets, standards and technical assistance for new electrification initiatives will all increase the private financier’s certainty regarding the likely outcomes and so reduce the risk of investment.  Market information, capacity building and customer engagement through promotional activity will all have a similar positive effect.

Advantages and Disadvantages

If private finance is attracted, it can support rapid electrification at a large scale, and can free up public funding to be used for other things. If market conditions are such as to attract purely private finance, this indicates that the electrification process will be self-sustaining without dependence upon external grants or subsidies from the government or donor organisations.  Where customers are able to pay for electricity at a level that allows the supply to be maintained under market conditions, there is no concern over the withdrawal of public funding that may then prevent continued access to electricity. Experience also indicates that involvement of private finance can drive innovation and efficiencies in electrification as in other sectors. Private finance, however, requires clear evidence that revenues will provide returns on investment, and this may be an insurmountable barrier, particularly for forms of electrification such as grid and mini-grid systems which have high upfront capital costs that will be recovered over long periods (perhaps 20 years). Even where macro-economic conditions are stable, regulatory frameworks and prices/tariffs transparent, and users able to afford electricity, financiers may be reluctant to provide support in the absence of established companies with a track record of performance. Much time and effort may be expended in the attempt to attract sufficient private finance without the required results. Furthermore, private finance is usually more expensive than general government borrowing and this will particularly be the case for programmes that are seen by the financiers as carrying significant levels of risk.

Further Information and Guidance

De Montfort University (2013), Financing Energy Access and Off-grid Electrification: A Review of Status, Options and Challenges https://www.dmu.ac.uk/documents/technology-documents/research-faculties/oasys/project-outputs/peer-reviewed-journal-articles/pj7--financing-energy-access--rser-paper.pdf UNEP-FI (2012), Financing renewable energy in developing countries http://www.unepfi.org/fileadmin/documents/Financing_Renewable_Energy_in_subSaharan_Africa.pdf

Relevante Case Studies:

Bangladesh, IDCOL Solar Home Systems Brazil, Luz para Todos (Light for All) Cambodia “Light Touch” Regulation Ethiopia, Solar Market Development Kenya, Off-Grid for Vision 2030 Mali, Rural Electrification Programme Philippines, Islanded Distribution by Cooperatives Rwanda, Sector-Wide Approach to Planning Tanzania, Mini-Grids Regulatory Framework Vietnam, Rapid Grid Expansion

Quality/Technical Standards

Definition:

Finance provided by investors or lenders in the expectation of financial returns (profit).   Private finance will be input on commercial terms, meaning that the investor or lender will expect to receive returns that exceed the original investment or loan and at a level that reflects the risks involved. Factors considered by financiers may include risks to implementation, delivery and technology performance, risks of cost escalation, market/demand and credit/payment risks, regulatory and macro-economic risks and external risks such as policy framework and weather. Any financier will require clear information on forecast revenues and potential risks before providing funding.  It may be difficult for new electricity businesses working in new markets, and for users without a formal credit-record, to give commercial funders the confidence they require. Finance for electrification may come in the form of equity investment, or capital asset or working capital loans, and may be provided to a business as a whole, to a specific project or to end-users. Equity - Any equity investment implies partial business ownership, with the investor taking the risk of losing their investment if the electricity venture fails, but also expecting to receive bonus returns if forecast targets are exceeded. Early stage investment in new businesses often relies on finance from entrepreneurial individuals, angel investors or venture capitalists who are willing to take large risks but expect to receive high returns on their investment if it’s successful. Loans - capital asset loans are used, generally in later stages of business development and on specific projects, to leverage equity investment enabling businesses to scale up and expand their assets. Capital lenders expect repayment of loans over fixed periods and with pre-agreed (fixed or variable) interest rates, so that if profits fall short of forecasts payments are reduced only once equity capital has been exhausted, but if forecasts are exceeded lenders receive no additional benefit. Working capital- alongside capital investment, most businesses require working capital to bridge the gap between expenditure and receipt of revenues. Working capital is particularly needed by, for instance, solar product businesses, where there may be three months or more between purchase/ import of the product by the business and sale to the end-user. Sources of finance - Often both international and local finance is required to support electrification – particularly where capital equipment or products are imported. The scale of funding needed for electrification may require international finance, and international financiers may have greater familiarity with, and hence be more comfortable with, some of the issues associated with the energy sector, particularly if their funding is channelled through an international company. However, local private funders will be more familiar with the national context and be more confident in resolving, and hence charge less premium for, risks associated with it. Exchange rate, and hence macro-economic, risks will always be an issue for private financiers where any of the electrification costs are in foreign currency. This issue will be greater where international funding is used to cover more than just import costs, and international funders will be very reluctant to provide finance if repatriation of funds is constrained.

Internactions wiht other NAE Categories:

	Technology	Most national grid systems are constructed using public funds, though private finance can be introduced through privatisation of existing assets, inviting private generators to feed into the national grid, or establishment of distribution/grid-connected mini-grid concessions.  For instance, the introduction of feed-in tariffs (e.g. in Tanzania) has provided the basis for private investment in generation. Mini-grids are more frequently, though by no means always, financed by the private sector since the smaller investment and shorter payback period can reduce the risks and provides a more manageable business opportunity. Stand-alone systems offer even greater opportunities for market-based finance since the relatively short period between purchase and sale to the user means that that only business establishment and a small amount of equipment capital investment is at risk.
	Delivery Models	Application of market-based finance, by definition, requires private sector ownership or a public-private partnership (PPP).  PPPs are often an effective way to attract private finance since the public-sector element can offer funding and offset the risk associated with financing of electrification. Any private or PPP financing will require a business model with clear investment requirements and projections of income that provide expected return on investment over an acceptable timeframe, and with acceptable levels of risk and uncertainty.
	Legual Basis	Any private finance provider will consider the legal basis of electrification in terms of the risk profile it presents to them. The lower the risk and the greater certainty, the more likelihood that private finance will be available and at a lower cost. The most fundamental requirement for any private investment in fixed assets is clarity around the legality of operating and selling electricity. This may be provided explicitly through a concession or license, or through a general exclusion of certain types of electricity provision (e.g. mini-grids below a certain size) from the need to be licensed. Without this basic regulatory clarity, and so with the risk that future introduction of regulation may undermine their business and restrict their levels of income, it will be extremely difficult to attract private finance for electrification.
	Price/Tariff Regulation	Is a critical factor for private investment in electrification, with inadequate or inappropriate price/tariff regulation often cited as the key barrier to such finance. Whatever form of price/tariff regulation is used the critical requirement is that it is clear and transparent, as without this, private financiers will see a significant risk of political pressure reducing prices or tariffs to the point below which they fail to cover investment costs.
	Other Forms of Finance	In many cases some other form(s) of public finance such as grants, subsidies, concessionary loans, tax exemptions or guarantees (to reduce investment risks) will be needed alongside private finance to overcome the lack of user spending power and the high costs of early market development. User Finance – Charges paid by users provide the means to repay electricity providers’ loans and equity investments and pay interest and return on capital. Where upfront charges are imposed on users, they may in turn seek to borrow to cover these charges and then repay the loan over time.  Alternatively the electricity provider may seek additional finance in order to reduce up-front charges and so minimize barriers to users accessing their services.
	Non-Financial Interventions	Most support activities to assist national electrification will reduce the perceived financial risk and so help to attract private sector investment and sustainable market development.  Providing policies and targets, standards and technical assistance for new electrification initiatives will all increase the private financier’s certainty regarding the likely outcomes and so reduce the risk of investment.  Market information, capacity building and customer engagement through promotional activity will all have a similar positive effect.

Advantages and Disadvantages

If private finance is attracted, it can support rapid electrification at a large scale, and can free up public funding to be used for other things. If market conditions are such as to attract purely private finance, this indicates that the electrification process will be self-sustaining without dependence upon external grants or subsidies from the government or donor organisations.  Where customers are able to pay for electricity at a level that allows the supply to be maintained under market conditions, there is no concern over the withdrawal of public funding that may then prevent continued access to electricity. Experience also indicates that involvement of private finance can drive innovation and efficiencies in electrification as in other sectors. Private finance, however, requires clear evidence that revenues will provide returns on investment, and this may be an insurmountable barrier, particularly for forms of electrification such as grid and mini-grid systems which have high upfront capital costs that will be recovered over long periods (perhaps 20 years). Even where macro-economic conditions are stable, regulatory frameworks and prices/tariffs transparent, and users able to afford electricity, financiers may be reluctant to provide support in the absence of established companies with a track record of performance. Much time and effort may be expended in the attempt to attract sufficient private finance without the required results. Furthermore, private finance is usually more expensive than general government borrowing and this will particularly be the case for programmes that are seen by the financiers as carrying significant levels of risk.

Further Information and Guidance

De Montfort University (2013), Financing Energy Access and Off-grid Electrification: A Review of Status, Options and Challenges https://www.dmu.ac.uk/documents/technology-documents/research-faculties/oasys/project-outputs/peer-reviewed-journal-articles/pj7--financing-energy-access--rser-paper.pdf UNEP-FI (2012), Financing renewable energy in developing countries http://www.unepfi.org/fileadmin/documents/Financing_Renewable_Energy_in_subSaharan_Africa.pdf

Relevante Case Studies:

Bangladesh, IDCOL Solar Home Systems Brazil, Luz para Todos (Light for All) Cambodia “Light Touch” Regulation Ethiopia, Solar Market Development Kenya, Off-Grid for Vision 2030 Mali, Rural Electrification Programme Philippines, Islanded Distribution by Cooperatives Rwanda, Sector-Wide Approach to Planning Tanzania, Mini-Grids Regulatory Framework Vietnam, Rapid Grid Expansion

Technical Assistance

Definition:

Finance provided by investors or lenders in the expectation of financial returns (profit).   Private finance will be input on commercial terms, meaning that the investor or lender will expect to receive returns that exceed the original investment or loan and at a level that reflects the risks involved. Factors considered by financiers may include risks to implementation, delivery and technology performance, risks of cost escalation, market/demand and credit/payment risks, regulatory and macro-economic risks and external risks such as policy framework and weather. Any financier will require clear information on forecast revenues and potential risks before providing funding.  It may be difficult for new electricity businesses working in new markets, and for users without a formal credit-record, to give commercial funders the confidence they require. Finance for electrification may come in the form of equity investment, or capital asset or working capital loans, and may be provided to a business as a whole, to a specific project or to end-users. Equity - Any equity investment implies partial business ownership, with the investor taking the risk of losing their investment if the electricity venture fails, but also expecting to receive bonus returns if forecast targets are exceeded. Early stage investment in new businesses often relies on finance from entrepreneurial individuals, angel investors or venture capitalists who are willing to take large risks but expect to receive high returns on their investment if it’s successful. Loans - capital asset loans are used, generally in later stages of business development and on specific projects, to leverage equity investment enabling businesses to scale up and expand their assets. Capital lenders expect repayment of loans over fixed periods and with pre-agreed (fixed or variable) interest rates, so that if profits fall short of forecasts payments are reduced only once equity capital has been exhausted, but if forecasts are exceeded lenders receive no additional benefit. Working capital- alongside capital investment, most businesses require working capital to bridge the gap between expenditure and receipt of revenues. Working capital is particularly needed by, for instance, solar product businesses, where there may be three months or more between purchase/ import of the product by the business and sale to the end-user. Sources of finance - Often both international and local finance is required to support electrification – particularly where capital equipment or products are imported. The scale of funding needed for electrification may require international finance, and international financiers may have greater familiarity with, and hence be more comfortable with, some of the issues associated with the energy sector, particularly if their funding is channelled through an international company. However, local private funders will be more familiar with the national context and be more confident in resolving, and hence charge less premium for, risks associated with it. Exchange rate, and hence macro-economic, risks will always be an issue for private financiers where any of the electrification costs are in foreign currency. This issue will be greater where international funding is used to cover more than just import costs, and international funders will be very reluctant to provide finance if repatriation of funds is constrained.

Internactions wiht other NAE Categories:

	Technology	Most national grid systems are constructed using public funds, though private finance can be introduced through privatisation of existing assets, inviting private generators to feed into the national grid, or establishment of distribution/grid-connected mini-grid concessions.  For instance, the introduction of feed-in tariffs (e.g. in Tanzania) has provided the basis for private investment in generation. Mini-grids are more frequently, though by no means always, financed by the private sector since the smaller investment and shorter payback period can reduce the risks and provides a more manageable business opportunity. Stand-alone systems offer even greater opportunities for market-based finance since the relatively short period between purchase and sale to the user means that that only business establishment and a small amount of equipment capital investment is at risk.
	Delivery Models	Application of market-based finance, by definition, requires private sector ownership or a public-private partnership (PPP).  PPPs are often an effective way to attract private finance since the public-sector element can offer funding and offset the risk associated with financing of electrification. Any private or PPP financing will require a business model with clear investment requirements and projections of income that provide expected return on investment over an acceptable timeframe, and with acceptable levels of risk and uncertainty.
	Legual Basis	Any private finance provider will consider the legal basis of electrification in terms of the risk profile it presents to them. The lower the risk and the greater certainty, the more likelihood that private finance will be available and at a lower cost. The most fundamental requirement for any private investment in fixed assets is clarity around the legality of operating and selling electricity. This may be provided explicitly through a concession or license, or through a general exclusion of certain types of electricity provision (e.g. mini-grids below a certain size) from the need to be licensed. Without this basic regulatory clarity, and so with the risk that future introduction of regulation may undermine their business and restrict their levels of income, it will be extremely difficult to attract private finance for electrification.
	Price/Tariff Regulation	Is a critical factor for private investment in electrification, with inadequate or inappropriate price/tariff regulation often cited as the key barrier to such finance. Whatever form of price/tariff regulation is used the critical requirement is that it is clear and transparent, as without this, private financiers will see a significant risk of political pressure reducing prices or tariffs to the point below which they fail to cover investment costs.
	Other Forms of Finance	In many cases some other form(s) of public finance such as grants, subsidies, concessionary loans, tax exemptions or guarantees (to reduce investment risks) will be needed alongside private finance to overcome the lack of user spending power and the high costs of early market development. User Finance – Charges paid by users provide the means to repay electricity providers’ loans and equity investments and pay interest and return on capital. Where upfront charges are imposed on users, they may in turn seek to borrow to cover these charges and then repay the loan over time.  Alternatively the electricity provider may seek additional finance in order to reduce up-front charges and so minimize barriers to users accessing their services.
	Non-Financial Interventions	Most support activities to assist national electrification will reduce the perceived financial risk and so help to attract private sector investment and sustainable market development.  Providing policies and targets, standards and technical assistance for new electrification initiatives will all increase the private financier’s certainty regarding the likely outcomes and so reduce the risk of investment.  Market information, capacity building and customer engagement through promotional activity will all have a similar positive effect.

Advantages and Disadvantages

If private finance is attracted, it can support rapid electrification at a large scale, and can free up public funding to be used for other things. If market conditions are such as to attract purely private finance, this indicates that the electrification process will be self-sustaining without dependence upon external grants or subsidies from the government or donor organisations.  Where customers are able to pay for electricity at a level that allows the supply to be maintained under market conditions, there is no concern over the withdrawal of public funding that may then prevent continued access to electricity. Experience also indicates that involvement of private finance can drive innovation and efficiencies in electrification as in other sectors. Private finance, however, requires clear evidence that revenues will provide returns on investment, and this may be an insurmountable barrier, particularly for forms of electrification such as grid and mini-grid systems which have high upfront capital costs that will be recovered over long periods (perhaps 20 years). Even where macro-economic conditions are stable, regulatory frameworks and prices/tariffs transparent, and users able to afford electricity, financiers may be reluctant to provide support in the absence of established companies with a track record of performance. Much time and effort may be expended in the attempt to attract sufficient private finance without the required results. Furthermore, private finance is usually more expensive than general government borrowing and this will particularly be the case for programmes that are seen by the financiers as carrying significant levels of risk.

Further Information and Guidance

De Montfort University (2013), Financing Energy Access and Off-grid Electrification: A Review of Status, Options and Challenges https://www.dmu.ac.uk/documents/technology-documents/research-faculties/oasys/project-outputs/peer-reviewed-journal-articles/pj7--financing-energy-access--rser-paper.pdf UNEP-FI (2012), Financing renewable energy in developing countries http://www.unepfi.org/fileadmin/documents/Financing_Renewable_Energy_in_subSaharan_Africa.pdf

Relevante Case Studies:

Bangladesh, IDCOL Solar Home Systems Brazil, Luz para Todos (Light for All) Cambodia “Light Touch” Regulation Ethiopia, Solar Market Development Kenya, Off-Grid for Vision 2030 Mali, Rural Electrification Programme Philippines, Islanded Distribution by Cooperatives Rwanda, Sector-Wide Approach to Planning Tanzania, Mini-Grids Regulatory Framework Vietnam, Rapid Grid Expansion

Capacity Building/Awarness Raising

Definition:

Finance provided by investors or lenders in the expectation of financial returns (profit).   Private finance will be input on commercial terms, meaning that the investor or lender will expect to receive returns that exceed the original investment or loan and at a level that reflects the risks involved. Factors considered by financiers may include risks to implementation, delivery and technology performance, risks of cost escalation, market/demand and credit/payment risks, regulatory and macro-economic risks and external risks such as policy framework and weather. Any financier will require clear information on forecast revenues and potential risks before providing funding.  It may be difficult for new electricity businesses working in new markets, and for users without a formal credit-record, to give commercial funders the confidence they require. Finance for electrification may come in the form of equity investment, or capital asset or working capital loans, and may be provided to a business as a whole, to a specific project or to end-users. Equity - Any equity investment implies partial business ownership, with the investor taking the risk of losing their investment if the electricity venture fails, but also expecting to receive bonus returns if forecast targets are exceeded. Early stage investment in new businesses often relies on finance from entrepreneurial individuals, angel investors or venture capitalists who are willing to take large risks but expect to receive high returns on their investment if it’s successful. Loans - capital asset loans are used, generally in later stages of business development and on specific projects, to leverage equity investment enabling businesses to scale up and expand their assets. Capital lenders expect repayment of loans over fixed periods and with pre-agreed (fixed or variable) interest rates, so that if profits fall short of forecasts payments are reduced only once equity capital has been exhausted, but if forecasts are exceeded lenders receive no additional benefit. Working capital- alongside capital investment, most businesses require working capital to bridge the gap between expenditure and receipt of revenues. Working capital is particularly needed by, for instance, solar product businesses, where there may be three months or more between purchase/ import of the product by the business and sale to the end-user. Sources of finance - Often both international and local finance is required to support electrification – particularly where capital equipment or products are imported. The scale of funding needed for electrification may require international finance, and international financiers may have greater familiarity with, and hence be more comfortable with, some of the issues associated with the energy sector, particularly if their funding is channelled through an international company. However, local private funders will be more familiar with the national context and be more confident in resolving, and hence charge less premium for, risks associated with it. Exchange rate, and hence macro-economic, risks will always be an issue for private financiers where any of the electrification costs are in foreign currency. This issue will be greater where international funding is used to cover more than just import costs, and international funders will be very reluctant to provide finance if repatriation of funds is constrained.

Internactions wiht other NAE Categories:

	Technology	Most national grid systems are constructed using public funds, though private finance can be introduced through privatisation of existing assets, inviting private generators to feed into the national grid, or establishment of distribution/grid-connected mini-grid concessions.  For instance, the introduction of feed-in tariffs (e.g. in Tanzania) has provided the basis for private investment in generation. Mini-grids are more frequently, though by no means always, financed by the private sector since the smaller investment and shorter payback period can reduce the risks and provides a more manageable business opportunity. Stand-alone systems offer even greater opportunities for market-based finance since the relatively short period between purchase and sale to the user means that that only business establishment and a small amount of equipment capital investment is at risk.
	Delivery Models	Application of market-based finance, by definition, requires private sector ownership or a public-private partnership (PPP).  PPPs are often an effective way to attract private finance since the public-sector element can offer funding and offset the risk associated with financing of electrification. Any private or PPP financing will require a business model with clear investment requirements and projections of income that provide expected return on investment over an acceptable timeframe, and with acceptable levels of risk and uncertainty.
	Legual Basis	Any private finance provider will consider the legal basis of electrification in terms of the risk profile it presents to them. The lower the risk and the greater certainty, the more likelihood that private finance will be available and at a lower cost. The most fundamental requirement for any private investment in fixed assets is clarity around the legality of operating and selling electricity. This may be provided explicitly through a concession or license, or through a general exclusion of certain types of electricity provision (e.g. mini-grids below a certain size) from the need to be licensed. Without this basic regulatory clarity, and so with the risk that future introduction of regulation may undermine their business and restrict their levels of income, it will be extremely difficult to attract private finance for electrification.
	Price/Tariff Regulation	Is a critical factor for private investment in electrification, with inadequate or inappropriate price/tariff regulation often cited as the key barrier to such finance. Whatever form of price/tariff regulation is used the critical requirement is that it is clear and transparent, as without this, private financiers will see a significant risk of political pressure reducing prices or tariffs to the point below which they fail to cover investment costs.
	Other Forms of Finance	In many cases some other form(s) of public finance such as grants, subsidies, concessionary loans, tax exemptions or guarantees (to reduce investment risks) will be needed alongside private finance to overcome the lack of user spending power and the high costs of early market development. User Finance – Charges paid by users provide the means to repay electricity providers’ loans and equity investments and pay interest and return on capital. Where upfront charges are imposed on users, they may in turn seek to borrow to cover these charges and then repay the loan over time.  Alternatively the electricity provider may seek additional finance in order to reduce up-front charges and so minimize barriers to users accessing their services.
	Non-Financial Interventions	Most support activities to assist national electrification will reduce the perceived financial risk and so help to attract private sector investment and sustainable market development.  Providing policies and targets, standards and technical assistance for new electrification initiatives will all increase the private financier’s certainty regarding the likely outcomes and so reduce the risk of investment.  Market information, capacity building and customer engagement through promotional activity will all have a similar positive effect.

Advantages and Disadvantages

If private finance is attracted, it can support rapid electrification at a large scale, and can free up public funding to be used for other things. If market conditions are such as to attract purely private finance, this indicates that the electrification process will be self-sustaining without dependence upon external grants or subsidies from the government or donor organisations.  Where customers are able to pay for electricity at a level that allows the supply to be maintained under market conditions, there is no concern over the withdrawal of public funding that may then prevent continued access to electricity. Experience also indicates that involvement of private finance can drive innovation and efficiencies in electrification as in other sectors. Private finance, however, requires clear evidence that revenues will provide returns on investment, and this may be an insurmountable barrier, particularly for forms of electrification such as grid and mini-grid systems which have high upfront capital costs that will be recovered over long periods (perhaps 20 years). Even where macro-economic conditions are stable, regulatory frameworks and prices/tariffs transparent, and users able to afford electricity, financiers may be reluctant to provide support in the absence of established companies with a track record of performance. Much time and effort may be expended in the attempt to attract sufficient private finance without the required results. Furthermore, private finance is usually more expensive than general government borrowing and this will particularly be the case for programmes that are seen by the financiers as carrying significant levels of risk.

Further Information and Guidance

De Montfort University (2013), Financing Energy Access and Off-grid Electrification: A Review of Status, Options and Challenges https://www.dmu.ac.uk/documents/technology-documents/research-faculties/oasys/project-outputs/peer-reviewed-journal-articles/pj7--financing-energy-access--rser-paper.pdf UNEP-FI (2012), Financing renewable energy in developing countries http://www.unepfi.org/fileadmin/documents/Financing_Renewable_Energy_in_subSaharan_Africa.pdf

Relevante Case Studies:

Bangladesh, IDCOL Solar Home Systems Brazil, Luz para Todos (Light for All) Cambodia “Light Touch” Regulation Ethiopia, Solar Market Development Kenya, Off-Grid for Vision 2030 Mali, Rural Electrification Programme Philippines, Islanded Distribution by Cooperatives Rwanda, Sector-Wide Approach to Planning Tanzania, Mini-Grids Regulatory Framework Vietnam, Rapid Grid Expansion

Market Information

Definition:

Finance provided by investors or lenders in the expectation of financial returns (profit).   Private finance will be input on commercial terms, meaning that the investor or lender will expect to receive returns that exceed the original investment or loan and at a level that reflects the risks involved. Factors considered by financiers may include risks to implementation, delivery and technology performance, risks of cost escalation, market/demand and credit/payment risks, regulatory and macro-economic risks and external risks such as policy framework and weather. Any financier will require clear information on forecast revenues and potential risks before providing funding.  It may be difficult for new electricity businesses working in new markets, and for users without a formal credit-record, to give commercial funders the confidence they require. Finance for electrification may come in the form of equity investment, or capital asset or working capital loans, and may be provided to a business as a whole, to a specific project or to end-users. Equity - Any equity investment implies partial business ownership, with the investor taking the risk of losing their investment if the electricity venture fails, but also expecting to receive bonus returns if forecast targets are exceeded. Early stage investment in new businesses often relies on finance from entrepreneurial individuals, angel investors or venture capitalists who are willing to take large risks but expect to receive high returns on their investment if it’s successful. Loans - capital asset loans are used, generally in later stages of business development and on specific projects, to leverage equity investment enabling businesses to scale up and expand their assets. Capital lenders expect repayment of loans over fixed periods and with pre-agreed (fixed or variable) interest rates, so that if profits fall short of forecasts payments are reduced only once equity capital has been exhausted, but if forecasts are exceeded lenders receive no additional benefit. Working capital- alongside capital investment, most businesses require working capital to bridge the gap between expenditure and receipt of revenues. Working capital is particularly needed by, for instance, solar product businesses, where there may be three months or more between purchase/ import of the product by the business and sale to the end-user. Sources of finance - Often both international and local finance is required to support electrification – particularly where capital equipment or products are imported. The scale of funding needed for electrification may require international finance, and international financiers may have greater familiarity with, and hence be more comfortable with, some of the issues associated with the energy sector, particularly if their funding is channelled through an international company. However, local private funders will be more familiar with the national context and be more confident in resolving, and hence charge less premium for, risks associated with it. Exchange rate, and hence macro-economic, risks will always be an issue for private financiers where any of the electrification costs are in foreign currency. This issue will be greater where international funding is used to cover more than just import costs, and international funders will be very reluctant to provide finance if repatriation of funds is constrained.

Internactions wiht other NAE Categories:

	Technology	Most national grid systems are constructed using public funds, though private finance can be introduced through privatisation of existing assets, inviting private generators to feed into the national grid, or establishment of distribution/grid-connected mini-grid concessions.  For instance, the introduction of feed-in tariffs (e.g. in Tanzania) has provided the basis for private investment in generation. Mini-grids are more frequently, though by no means always, financed by the private sector since the smaller investment and shorter payback period can reduce the risks and provides a more manageable business opportunity. Stand-alone systems offer even greater opportunities for market-based finance since the relatively short period between purchase and sale to the user means that that only business establishment and a small amount of equipment capital investment is at risk.
	Delivery Models	Application of market-based finance, by definition, requires private sector ownership or a public-private partnership (PPP).  PPPs are often an effective way to attract private finance since the public-sector element can offer funding and offset the risk associated with financing of electrification. Any private or PPP financing will require a business model with clear investment requirements and projections of income that provide expected return on investment over an acceptable timeframe, and with acceptable levels of risk and uncertainty.
	Legual Basis	Any private finance provider will consider the legal basis of electrification in terms of the risk profile it presents to them. The lower the risk and the greater certainty, the more likelihood that private finance will be available and at a lower cost. The most fundamental requirement for any private investment in fixed assets is clarity around the legality of operating and selling electricity. This may be provided explicitly through a concession or license, or through a general exclusion of certain types of electricity provision (e.g. mini-grids below a certain size) from the need to be licensed. Without this basic regulatory clarity, and so with the risk that future introduction of regulation may undermine their business and restrict their levels of income, it will be extremely difficult to attract private finance for electrification.
	Price/Tariff Regulation	Is a critical factor for private investment in electrification, with inadequate or inappropriate price/tariff regulation often cited as the key barrier to such finance. Whatever form of price/tariff regulation is used the critical requirement is that it is clear and transparent, as without this, private financiers will see a significant risk of political pressure reducing prices or tariffs to the point below which they fail to cover investment costs.
	Other Forms of Finance	In many cases some other form(s) of public finance such as grants, subsidies, concessionary loans, tax exemptions or guarantees (to reduce investment risks) will be needed alongside private finance to overcome the lack of user spending power and the high costs of early market development. User Finance – Charges paid by users provide the means to repay electricity providers’ loans and equity investments and pay interest and return on capital. Where upfront charges are imposed on users, they may in turn seek to borrow to cover these charges and then repay the loan over time.  Alternatively the electricity provider may seek additional finance in order to reduce up-front charges and so minimize barriers to users accessing their services.
	Non-Financial Interventions	Most support activities to assist national electrification will reduce the perceived financial risk and so help to attract private sector investment and sustainable market development.  Providing policies and targets, standards and technical assistance for new electrification initiatives will all increase the private financier’s certainty regarding the likely outcomes and so reduce the risk of investment.  Market information, capacity building and customer engagement through promotional activity will all have a similar positive effect.

Advantages and Disadvantages

If private finance is attracted, it can support rapid electrification at a large scale, and can free up public funding to be used for other things. If market conditions are such as to attract purely private finance, this indicates that the electrification process will be self-sustaining without dependence upon external grants or subsidies from the government or donor organisations.  Where customers are able to pay for electricity at a level that allows the supply to be maintained under market conditions, there is no concern over the withdrawal of public funding that may then prevent continued access to electricity. Experience also indicates that involvement of private finance can drive innovation and efficiencies in electrification as in other sectors. Private finance, however, requires clear evidence that revenues will provide returns on investment, and this may be an insurmountable barrier, particularly for forms of electrification such as grid and mini-grid systems which have high upfront capital costs that will be recovered over long periods (perhaps 20 years). Even where macro-economic conditions are stable, regulatory frameworks and prices/tariffs transparent, and users able to afford electricity, financiers may be reluctant to provide support in the absence of established companies with a track record of performance. Much time and effort may be expended in the attempt to attract sufficient private finance without the required results. Furthermore, private finance is usually more expensive than general government borrowing and this will particularly be the case for programmes that are seen by the financiers as carrying significant levels of risk.

Further Information and Guidance

De Montfort University (2013), Financing Energy Access and Off-grid Electrification: A Review of Status, Options and Challenges https://www.dmu.ac.uk/documents/technology-documents/research-faculties/oasys/project-outputs/peer-reviewed-journal-articles/pj7--financing-energy-access--rser-paper.pdf UNEP-FI (2012), Financing renewable energy in developing countries http://www.unepfi.org/fileadmin/documents/Financing_Renewable_Energy_in_subSaharan_Africa.pdf

Relevante Case Studies:

Bangladesh, IDCOL Solar Home Systems Brazil, Luz para Todos (Light for All) Cambodia “Light Touch” Regulation Ethiopia, Solar Market Development Kenya, Off-Grid for Vision 2030 Mali, Rural Electrification Programme Philippines, Islanded Distribution by Cooperatives Rwanda, Sector-Wide Approach to Planning Tanzania, Mini-Grids Regulatory Framework Vietnam, Rapid Grid Expansion

Demand Promotion

Definition:

Finance provided by investors or lenders in the expectation of financial returns (profit).   Private finance will be input on commercial terms, meaning that the investor or lender will expect to receive returns that exceed the original investment or loan and at a level that reflects the risks involved. Factors considered by financiers may include risks to implementation, delivery and technology performance, risks of cost escalation, market/demand and credit/payment risks, regulatory and macro-economic risks and external risks such as policy framework and weather. Any financier will require clear information on forecast revenues and potential risks before providing funding.  It may be difficult for new electricity businesses working in new markets, and for users without a formal credit-record, to give commercial funders the confidence they require. Finance for electrification may come in the form of equity investment, or capital asset or working capital loans, and may be provided to a business as a whole, to a specific project or to end-users. Equity - Any equity investment implies partial business ownership, with the investor taking the risk of losing their investment if the electricity venture fails, but also expecting to receive bonus returns if forecast targets are exceeded. Early stage investment in new businesses often relies on finance from entrepreneurial individuals, angel investors or venture capitalists who are willing to take large risks but expect to receive high returns on their investment if it’s successful. Loans - capital asset loans are used, generally in later stages of business development and on specific projects, to leverage equity investment enabling businesses to scale up and expand their assets. Capital lenders expect repayment of loans over fixed periods and with pre-agreed (fixed or variable) interest rates, so that if profits fall short of forecasts payments are reduced only once equity capital has been exhausted, but if forecasts are exceeded lenders receive no additional benefit. Working capital- alongside capital investment, most businesses require working capital to bridge the gap between expenditure and receipt of revenues. Working capital is particularly needed by, for instance, solar product businesses, where there may be three months or more between purchase/ import of the product by the business and sale to the end-user. Sources of finance - Often both international and local finance is required to support electrification – particularly where capital equipment or products are imported. The scale of funding needed for electrification may require international finance, and international financiers may have greater familiarity with, and hence be more comfortable with, some of the issues associated with the energy sector, particularly if their funding is channelled through an international company. However, local private funders will be more familiar with the national context and be more confident in resolving, and hence charge less premium for, risks associated with it. Exchange rate, and hence macro-economic, risks will always be an issue for private financiers where any of the electrification costs are in foreign currency. This issue will be greater where international funding is used to cover more than just import costs, and international funders will be very reluctant to provide finance if repatriation of funds is constrained.

Internactions wiht other NAE Categories:

	Technology	Most national grid systems are constructed using public funds, though private finance can be introduced through privatisation of existing assets, inviting private generators to feed into the national grid, or establishment of distribution/grid-connected mini-grid concessions.  For instance, the introduction of feed-in tariffs (e.g. in Tanzania) has provided the basis for private investment in generation. Mini-grids are more frequently, though by no means always, financed by the private sector since the smaller investment and shorter payback period can reduce the risks and provides a more manageable business opportunity. Stand-alone systems offer even greater opportunities for market-based finance since the relatively short period between purchase and sale to the user means that that only business establishment and a small amount of equipment capital investment is at risk.
	Delivery Models	Application of market-based finance, by definition, requires private sector ownership or a public-private partnership (PPP).  PPPs are often an effective way to attract private finance since the public-sector element can offer funding and offset the risk associated with financing of electrification. Any private or PPP financing will require a business model with clear investment requirements and projections of income that provide expected return on investment over an acceptable timeframe, and with acceptable levels of risk and uncertainty.
	Legual Basis	Any private finance provider will consider the legal basis of electrification in terms of the risk profile it presents to them. The lower the risk and the greater certainty, the more likelihood that private finance will be available and at a lower cost. The most fundamental requirement for any private investment in fixed assets is clarity around the legality of operating and selling electricity. This may be provided explicitly through a concession or license, or through a general exclusion of certain types of electricity provision (e.g. mini-grids below a certain size) from the need to be licensed. Without this basic regulatory clarity, and so with the risk that future introduction of regulation may undermine their business and restrict their levels of income, it will be extremely difficult to attract private finance for electrification.
	Price/Tariff Regulation	Is a critical factor for private investment in electrification, with inadequate or inappropriate price/tariff regulation often cited as the key barrier to such finance. Whatever form of price/tariff regulation is used the critical requirement is that it is clear and transparent, as without this, private financiers will see a significant risk of political pressure reducing prices or tariffs to the point below which they fail to cover investment costs.
	Other Forms of Finance	In many cases some other form(s) of public finance such as grants, subsidies, concessionary loans, tax exemptions or guarantees (to reduce investment risks) will be needed alongside private finance to overcome the lack of user spending power and the high costs of early market development. User Finance – Charges paid by users provide the means to repay electricity providers’ loans and equity investments and pay interest and return on capital. Where upfront charges are imposed on users, they may in turn seek to borrow to cover these charges and then repay the loan over time.  Alternatively the electricity provider may seek additional finance in order to reduce up-front charges and so minimize barriers to users accessing their services.
	Non-Financial Interventions	Most support activities to assist national electrification will reduce the perceived financial risk and so help to attract private sector investment and sustainable market development.  Providing policies and targets, standards and technical assistance for new electrification initiatives will all increase the private financier’s certainty regarding the likely outcomes and so reduce the risk of investment.  Market information, capacity building and customer engagement through promotional activity will all have a similar positive effect.

Advantages and Disadvantages

If private finance is attracted, it can support rapid electrification at a large scale, and can free up public funding to be used for other things. If market conditions are such as to attract purely private finance, this indicates that the electrification process will be self-sustaining without dependence upon external grants or subsidies from the government or donor organisations.  Where customers are able to pay for electricity at a level that allows the supply to be maintained under market conditions, there is no concern over the withdrawal of public funding that may then prevent continued access to electricity. Experience also indicates that involvement of private finance can drive innovation and efficiencies in electrification as in other sectors. Private finance, however, requires clear evidence that revenues will provide returns on investment, and this may be an insurmountable barrier, particularly for forms of electrification such as grid and mini-grid systems which have high upfront capital costs that will be recovered over long periods (perhaps 20 years). Even where macro-economic conditions are stable, regulatory frameworks and prices/tariffs transparent, and users able to afford electricity, financiers may be reluctant to provide support in the absence of established companies with a track record of performance. Much time and effort may be expended in the attempt to attract sufficient private finance without the required results. Furthermore, private finance is usually more expensive than general government borrowing and this will particularly be the case for programmes that are seen by the financiers as carrying significant levels of risk.

Further Information and Guidance

De Montfort University (2013), Financing Energy Access and Off-grid Electrification: A Review of Status, Options and Challenges https://www.dmu.ac.uk/documents/technology-documents/research-faculties/oasys/project-outputs/peer-reviewed-journal-articles/pj7--financing-energy-access--rser-paper.pdf UNEP-FI (2012), Financing renewable energy in developing countries http://www.unepfi.org/fileadmin/documents/Financing_Renewable_Energy_in_subSaharan_Africa.pdf

Relevante Case Studies:

Bangladesh, IDCOL Solar Home Systems Brazil, Luz para Todos (Light for All) Cambodia “Light Touch” Regulation Ethiopia, Solar Market Development Kenya, Off-Grid for Vision 2030 Mali, Rural Electrification Programme Philippines, Islanded Distribution by Cooperatives Rwanda, Sector-Wide Approach to Planning Tanzania, Mini-Grids Regulatory Framework Vietnam, Rapid Grid Expansion

Technology Development/Adoption

Definition:

Finance provided by investors or lenders in the expectation of financial returns (profit).   Private finance will be input on commercial terms, meaning that the investor or lender will expect to receive returns that exceed the original investment or loan and at a level that reflects the risks involved. Factors considered by financiers may include risks to implementation, delivery and technology performance, risks of cost escalation, market/demand and credit/payment risks, regulatory and macro-economic risks and external risks such as policy framework and weather. Any financier will require clear information on forecast revenues and potential risks before providing funding.  It may be difficult for new electricity businesses working in new markets, and for users without a formal credit-record, to give commercial funders the confidence they require. Finance for electrification may come in the form of equity investment, or capital asset or working capital loans, and may be provided to a business as a whole, to a specific project or to end-users. Equity - Any equity investment implies partial business ownership, with the investor taking the risk of losing their investment if the electricity venture fails, but also expecting to receive bonus returns if forecast targets are exceeded. Early stage investment in new businesses often relies on finance from entrepreneurial individuals, angel investors or venture capitalists who are willing to take large risks but expect to receive high returns on their investment if it’s successful. Loans - capital asset loans are used, generally in later stages of business development and on specific projects, to leverage equity investment enabling businesses to scale up and expand their assets. Capital lenders expect repayment of loans over fixed periods and with pre-agreed (fixed or variable) interest rates, so that if profits fall short of forecasts payments are reduced only once equity capital has been exhausted, but if forecasts are exceeded lenders receive no additional benefit. Working capital- alongside capital investment, most businesses require working capital to bridge the gap between expenditure and receipt of revenues. Working capital is particularly needed by, for instance, solar product businesses, where there may be three months or more between purchase/ import of the product by the business and sale to the end-user. Sources of finance - Often both international and local finance is required to support electrification – particularly where capital equipment or products are imported. The scale of funding needed for electrification may require international finance, and international financiers may have greater familiarity with, and hence be more comfortable with, some of the issues associated with the energy sector, particularly if their funding is channelled through an international company. However, local private funders will be more familiar with the national context and be more confident in resolving, and hence charge less premium for, risks associated with it. Exchange rate, and hence macro-economic, risks will always be an issue for private financiers where any of the electrification costs are in foreign currency. This issue will be greater where international funding is used to cover more than just import costs, and international funders will be very reluctant to provide finance if repatriation of funds is constrained.

Internactions wiht other NAE Categories:

	Technology	Most national grid systems are constructed using public funds, though private finance can be introduced through privatisation of existing assets, inviting private generators to feed into the national grid, or establishment of distribution/grid-connected mini-grid concessions.  For instance, the introduction of feed-in tariffs (e.g. in Tanzania) has provided the basis for private investment in generation. Mini-grids are more frequently, though by no means always, financed by the private sector since the smaller investment and shorter payback period can reduce the risks and provides a more manageable business opportunity. Stand-alone systems offer even greater opportunities for market-based finance since the relatively short period between purchase and sale to the user means that that only business establishment and a small amount of equipment capital investment is at risk.
	Delivery Models	Application of market-based finance, by definition, requires private sector ownership or a public-private partnership (PPP).  PPPs are often an effective way to attract private finance since the public-sector element can offer funding and offset the risk associated with financing of electrification. Any private or PPP financing will require a business model with clear investment requirements and projections of income that provide expected return on investment over an acceptable timeframe, and with acceptable levels of risk and uncertainty.
	Legual Basis	Any private finance provider will consider the legal basis of electrification in terms of the risk profile it presents to them. The lower the risk and the greater certainty, the more likelihood that private finance will be available and at a lower cost. The most fundamental requirement for any private investment in fixed assets is clarity around the legality of operating and selling electricity. This may be provided explicitly through a concession or license, or through a general exclusion of certain types of electricity provision (e.g. mini-grids below a certain size) from the need to be licensed. Without this basic regulatory clarity, and so with the risk that future introduction of regulation may undermine their business and restrict their levels of income, it will be extremely difficult to attract private finance for electrification.
	Price/Tariff Regulation	Is a critical factor for private investment in electrification, with inadequate or inappropriate price/tariff regulation often cited as the key barrier to such finance. Whatever form of price/tariff regulation is used the critical requirement is that it is clear and transparent, as without this, private financiers will see a significant risk of political pressure reducing prices or tariffs to the point below which they fail to cover investment costs.
	Other Forms of Finance	In many cases some other form(s) of public finance such as grants, subsidies, concessionary loans, tax exemptions or guarantees (to reduce investment risks) will be needed alongside private finance to overcome the lack of user spending power and the high costs of early market development. User Finance – Charges paid by users provide the means to repay electricity providers’ loans and equity investments and pay interest and return on capital. Where upfront charges are imposed on users, they may in turn seek to borrow to cover these charges and then repay the loan over time.  Alternatively the electricity provider may seek additional finance in order to reduce up-front charges and so minimize barriers to users accessing their services.
	Non-Financial Interventions	Most support activities to assist national electrification will reduce the perceived financial risk and so help to attract private sector investment and sustainable market development.  Providing policies and targets, standards and technical assistance for new electrification initiatives will all increase the private financier’s certainty regarding the likely outcomes and so reduce the risk of investment.  Market information, capacity building and customer engagement through promotional activity will all have a similar positive effect.

Advantages and Disadvantages

If private finance is attracted, it can support rapid electrification at a large scale, and can free up public funding to be used for other things. If market conditions are such as to attract purely private finance, this indicates that the electrification process will be self-sustaining without dependence upon external grants or subsidies from the government or donor organisations.  Where customers are able to pay for electricity at a level that allows the supply to be maintained under market conditions, there is no concern over the withdrawal of public funding that may then prevent continued access to electricity. Experience also indicates that involvement of private finance can drive innovation and efficiencies in electrification as in other sectors. Private finance, however, requires clear evidence that revenues will provide returns on investment, and this may be an insurmountable barrier, particularly for forms of electrification such as grid and mini-grid systems which have high upfront capital costs that will be recovered over long periods (perhaps 20 years). Even where macro-economic conditions are stable, regulatory frameworks and prices/tariffs transparent, and users able to afford electricity, financiers may be reluctant to provide support in the absence of established companies with a track record of performance. Much time and effort may be expended in the attempt to attract sufficient private finance without the required results. Furthermore, private finance is usually more expensive than general government borrowing and this will particularly be the case for programmes that are seen by the financiers as carrying significant levels of risk.

Further Information and Guidance

De Montfort University (2013), Financing Energy Access and Off-grid Electrification: A Review of Status, Options and Challenges https://www.dmu.ac.uk/documents/technology-documents/research-faculties/oasys/project-outputs/peer-reviewed-journal-articles/pj7--financing-energy-access--rser-paper.pdf UNEP-FI (2012), Financing renewable energy in developing countries http://www.unepfi.org/fileadmin/documents/Financing_Renewable_Energy_in_subSaharan_Africa.pdf

Relevante Case Studies:

Bangladesh, IDCOL Solar Home Systems Brazil, Luz para Todos (Light for All) Cambodia “Light Touch” Regulation Ethiopia, Solar Market Development Kenya, Off-Grid for Vision 2030 Mali, Rural Electrification Programme Philippines, Islanded Distribution by Cooperatives Rwanda, Sector-Wide Approach to Planning Tanzania, Mini-Grids Regulatory Framework Vietnam, Rapid Grid Expansion

National Energy Planning

Definition:

Finance provided by investors or lenders in the expectation of financial returns (profit).   Private finance will be input on commercial terms, meaning that the investor or lender will expect to receive returns that exceed the original investment or loan and at a level that reflects the risks involved. Factors considered by financiers may include risks to implementation, delivery and technology performance, risks of cost escalation, market/demand and credit/payment risks, regulatory and macro-economic risks and external risks such as policy framework and weather. Any financier will require clear information on forecast revenues and potential risks before providing funding.  It may be difficult for new electricity businesses working in new markets, and for users without a formal credit-record, to give commercial funders the confidence they require. Finance for electrification may come in the form of equity investment, or capital asset or working capital loans, and may be provided to a business as a whole, to a specific project or to end-users. Equity - Any equity investment implies partial business ownership, with the investor taking the risk of losing their investment if the electricity venture fails, but also expecting to receive bonus returns if forecast targets are exceeded. Early stage investment in new businesses often relies on finance from entrepreneurial individuals, angel investors or venture capitalists who are willing to take large risks but expect to receive high returns on their investment if it’s successful. Loans - capital asset loans are used, generally in later stages of business development and on specific projects, to leverage equity investment enabling businesses to scale up and expand their assets. Capital lenders expect repayment of loans over fixed periods and with pre-agreed (fixed or variable) interest rates, so that if profits fall short of forecasts payments are reduced only once equity capital has been exhausted, but if forecasts are exceeded lenders receive no additional benefit. Working capital- alongside capital investment, most businesses require working capital to bridge the gap between expenditure and receipt of revenues. Working capital is particularly needed by, for instance, solar product businesses, where there may be three months or more between purchase/ import of the product by the business and sale to the end-user. Sources of finance - Often both international and local finance is required to support electrification – particularly where capital equipment or products are imported. The scale of funding needed for electrification may require international finance, and international financiers may have greater familiarity with, and hence be more comfortable with, some of the issues associated with the energy sector, particularly if their funding is channelled through an international company. However, local private funders will be more familiar with the national context and be more confident in resolving, and hence charge less premium for, risks associated with it. Exchange rate, and hence macro-economic, risks will always be an issue for private financiers where any of the electrification costs are in foreign currency. This issue will be greater where international funding is used to cover more than just import costs, and international funders will be very reluctant to provide finance if repatriation of funds is constrained.

Internactions wiht other NAE Categories:

	Technology	Most national grid systems are constructed using public funds, though private finance can be introduced through privatisation of existing assets, inviting private generators to feed into the national grid, or establishment of distribution/grid-connected mini-grid concessions.  For instance, the introduction of feed-in tariffs (e.g. in Tanzania) has provided the basis for private investment in generation. Mini-grids are more frequently, though by no means always, financed by the private sector since the smaller investment and shorter payback period can reduce the risks and provides a more manageable business opportunity. Stand-alone systems offer even greater opportunities for market-based finance since the relatively short period between purchase and sale to the user means that that only business establishment and a small amount of equipment capital investment is at risk.
	Delivery Models	Application of market-based finance, by definition, requires private sector ownership or a public-private partnership (PPP).  PPPs are often an effective way to attract private finance since the public-sector element can offer funding and offset the risk associated with financing of electrification. Any private or PPP financing will require a business model with clear investment requirements and projections of income that provide expected return on investment over an acceptable timeframe, and with acceptable levels of risk and uncertainty.
	Legual Basis	Any private finance provider will consider the legal basis of electrification in terms of the risk profile it presents to them. The lower the risk and the greater certainty, the more likelihood that private finance will be available and at a lower cost. The most fundamental requirement for any private investment in fixed assets is clarity around the legality of operating and selling electricity. This may be provided explicitly through a concession or license, or through a general exclusion of certain types of electricity provision (e.g. mini-grids below a certain size) from the need to be licensed. Without this basic regulatory clarity, and so with the risk that future introduction of regulation may undermine their business and restrict their levels of income, it will be extremely difficult to attract private finance for electrification.
	Price/Tariff Regulation	Is a critical factor for private investment in electrification, with inadequate or inappropriate price/tariff regulation often cited as the key barrier to such finance. Whatever form of price/tariff regulation is used the critical requirement is that it is clear and transparent, as without this, private financiers will see a significant risk of political pressure reducing prices or tariffs to the point below which they fail to cover investment costs.
	Other Forms of Finance	In many cases some other form(s) of public finance such as grants, subsidies, concessionary loans, tax exemptions or guarantees (to reduce investment risks) will be needed alongside private finance to overcome the lack of user spending power and the high costs of early market development. User Finance – Charges paid by users provide the means to repay electricity providers’ loans and equity investments and pay interest and return on capital. Where upfront charges are imposed on users, they may in turn seek to borrow to cover these charges and then repay the loan over time.  Alternatively the electricity provider may seek additional finance in order to reduce up-front charges and so minimize barriers to users accessing their services.
	Non-Financial Interventions	Most support activities to assist national electrification will reduce the perceived financial risk and so help to attract private sector investment and sustainable market development.  Providing policies and targets, standards and technical assistance for new electrification initiatives will all increase the private financier’s certainty regarding the likely outcomes and so reduce the risk of investment.  Market information, capacity building and customer engagement through promotional activity will all have a similar positive effect.

Advantages and Disadvantages

If private finance is attracted, it can support rapid electrification at a large scale, and can free up public funding to be used for other things. If market conditions are such as to attract purely private finance, this indicates that the electrification process will be self-sustaining without dependence upon external grants or subsidies from the government or donor organisations.  Where customers are able to pay for electricity at a level that allows the supply to be maintained under market conditions, there is no concern over the withdrawal of public funding that may then prevent continued access to electricity. Experience also indicates that involvement of private finance can drive innovation and efficiencies in electrification as in other sectors. Private finance, however, requires clear evidence that revenues will provide returns on investment, and this may be an insurmountable barrier, particularly for forms of electrification such as grid and mini-grid systems which have high upfront capital costs that will be recovered over long periods (perhaps 20 years). Even where macro-economic conditions are stable, regulatory frameworks and prices/tariffs transparent, and users able to afford electricity, financiers may be reluctant to provide support in the absence of established companies with a track record of performance. Much time and effort may be expended in the attempt to attract sufficient private finance without the required results. Furthermore, private finance is usually more expensive than general government borrowing and this will particularly be the case for programmes that are seen by the financiers as carrying significant levels of risk.

Further Information and Guidance

De Montfort University (2013), Financing Energy Access and Off-grid Electrification: A Review of Status, Options and Challenges https://www.dmu.ac.uk/documents/technology-documents/research-faculties/oasys/project-outputs/peer-reviewed-journal-articles/pj7--financing-energy-access--rser-paper.pdf UNEP-FI (2012), Financing renewable energy in developing countries http://www.unepfi.org/fileadmin/documents/Financing_Renewable_Energy_in_subSaharan_Africa.pdf

Relevante Case Studies:

Bangladesh, IDCOL Solar Home Systems Brazil, Luz para Todos (Light for All) Cambodia “Light Touch” Regulation Ethiopia, Solar Market Development Kenya, Off-Grid for Vision 2030 Mali, Rural Electrification Programme Philippines, Islanded Distribution by Cooperatives Rwanda, Sector-Wide Approach to Planning Tanzania, Mini-Grids Regulatory Framework Vietnam, Rapid Grid Expansion

References

Authors

Authors: Mary Willcox, Dean Cooper

Acknowledgements

The Review was prepared by Mary Willcox and Dean Cooper of Practical Action Consulting working with Hadley Taylor, Silvia Cabriolu-Poddu and Christina Stuart of the EU Energy Initiative Partnership Dialogue Facility (EUEIPDF) and Michael Koeberlein and Caspar Priesemann of the Energising Development Programme (EnDev). It is based on a literature review, stakeholder consultations. The categorization framework in the review tool is based on the EUEI/PDF / Practical Action publication "Building Energy Access Markets - A Value Chain Analysis of Key Energy Market Systems".

A wider range of stakeholders were consulted during its preparation and we would particularly like to thank the following for their valuable contributions and insights: - Jeff Felten, AfDB - Marcus Wiemann and other members, ARE - Guilherme Collares Pereira, EdP - David Otieno Ochieng, EUEI-PDF - Silvia Luisa Escudero Santos Ascarza, EUEI-PDF - Nico Peterschmidt, Inensus - John Tkacik, REEEP - Khorommbi Bongwe, South Africa: Department of Energy - Rashid Ali Abdallah, African Union Commission - Nicola Bugatti, ECREEE - Getahun Moges Kifle, Ethiopian Energy Authority - Mario Merchan Andres, EUEI-PDF - Tatjana Walter-Breidenstein, EUEI-PDF - Rebecca Symington, Mlinda Foundation - Marcel Raats, RVO.NL - Nico Tyabji, Sunfunder -

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Any feedback would be very welcome. If you have any comments or enquires please contact: mary.willcox@practicalaction.org.uk, benjamin.attigah@euei-pdf.org, or caspar.priesemann@giz.de.

Download the Tool as a Power Point: https://energypedia.info/images/a/aa/National_Approaches_to_Electrification_-_Review_of_Options.pptx

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