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Financing energy access
Financing Energy Access
According to the IEA, providing electricity and clean cooking for all would
require $786 billion in cumulative investment in the period from 2017 to 2030, equal to 3.4% of total energy sector investment over the period, with sub-Saharan Africa accounting for the largest share of investment, followed by developing Asia[1].
In order to meet these investment requirements, increased financing from all possible sources will be needed. This includes governments, development banks, bilateral development assistance and the private sector.
Domestic resource mobilization has been recognized by the 2030 Agenda for Sustainable Development as being critical for developing countries. Since the Governments of most of these countries have limited resources to meet such steep financing needs, additional financing must be found elsewhere.
Over the last years, substantial growth in private sector investment has been observed. Creative new business models are increasing private sector investment in projects, which range from large-scale infrastructure to targeted micro schemes[2]. Despite these positive trends, electricity infrastructure assets typically require large long-term funding that is not likely to generate a dedicated revenue stream for private investors, especially where large sections of the population have limited payment abilities. This is why many projects that aim to close the energy access gap by 2030 are not commercially viable, and therefore not the objective of the private sector.
What type of finance is available to fill the investment gap needed to make energy access projects viable?
Development Banks (National, regional and international)
Development Banks are usually state owned and have a broad mandate to finance development and structural reform. Their priority is therefore predominantly socioeconomic rather than purely commercial, which explains why they have a key role to play in filling the gaps left by governments and private companies in relation to access to energy. This is particularly true for large-scale energy projects with long maturation periods requiring long-term risky financing that commercial banks are reluctant to provide. Furthermore, many such large-scale energy projects have greater social rather than capital returns, and are therefore an obvious target for development banks.
In addition to addressing long-term funding needs, development banks can also play an important role in shaping and steering the national and regional financial development system by creating and providing financing instruments that better share risks between creditors and borrowers and over time. Furthermore, as established institutional players, developments banks can influence and support a proactive national and regional development strategy and help leverage resources by attracting other lenders and providing guarantees.
Despite their size, the lending capacity of development banks is relatively limited as most global savings are held as low-return assets in developed countries. If only a part of these assets could be channeled towards long-term investments in the real economy, that could provide a significant part of the investment needed in the developing world. Development banks at all levels ‒ national, regional and international – could play an important role in channeling financial resources from savers to development projects.
Official Development Aid (private foundations, national Governments and NGOs)
Official Development Aid (ODA) is given by governments and other agencies to support the economic, environmental, social, and political development of developing countries. It is distinguished from humanitarian aid by focusing on alleviating poverty in the long term, rather than on providing a short-term response. Aid effectiveness has been a hot topic in previous years, and without entering the debate, it is clear that development aid has made it possible to fund energy pilot projects in rural communities in some of the least developed countries that would have otherwise been impossible. While these pilot projects have only at best provided low levels of energy access to very few, they have served as the test and trial ground upon which some solid business cases have been built and which the private sector now is considering to scale up.
Although the SDG target 17.2 reiterates developed countries’ longstanding commitment to provide 0.7 % of their gross national income (GNI) in ODA to developing countries, only a handful of countries, mainly from Scandinavia and northern Europe, met these targets in the past years. While there is an upward trend in development aid disbursements to the energy sector in the least developed countries since 2006, it still falls far short of meeting the IEA investment requirements. Furthermore, recent political developments and continued economic stress in major donor economies, combined with the aid effectiveness debate, are causing some donors to rethink their development aid commitments, including possibly abandoning the commitment to provide 0.7 % GNI in ODA and reducing contributions to multilateral bodies such as the World Bank.
Notwithstanding an uncertain future for development aid generally, in recent years a growing trend of new partnership initiatives comprising public, private and philanthropic institutions from around the world has been observed. Such partnerships include the European Sustainable Development Fund, Africa-EU Energy Partnership (AEEP), ElectriFi, Africa Power Vision, Energies pour l’Afrique etc, and a large majority of them focus on the promotion of renewable energy and address the electricity sector.
Furthermore, there has been a proliferation of infrastructure- and energy-specific development funding as well as the creation of climate and green financing facilities, at the bilateral, regional and multilateral level. Such initiatives are often linked to climate-change policy or sustainable development and may or may not target energy infrastructure and/or access.
We may perceive that a new development finance paradigm is emerging, one in which traditional development aid is being replaced by a blend of public and private finance that includes a wider range of investors like development finance institutions, private equity managers, impact investors and institutional investors alongside NGOs and philanthropists. The result is an interlaced web of public and private interests and motivations, which has begun to exhibit a remarkable ability to raise large amounts of development finance.
Written by: Pia Lovengreen Alessi, Florence School of Regulation Advisor and WAME project coordinator
References
World Energy Outlook 2017 Special Report, Energy Access Outlook, IEA, 2017
Sustainable Energy for All, Global Tracking Framework: Sustainable Energy for All 2017: Progress Toward Sustainable Energy, World Bank, 2017
The role of development banks in promoting growth and sustainable development in the South, UNCTAD, 2016
