Results-Based Financing

From energypedia

Overview

Results-based financing (RBF) is form of Payment by Results and generally refers to the delivery of national or sub-national outcomes and outputs. RBF could be used by developing country governments (national or local), state agencies, or donor agencies to incentivize the provision of goods or services, create or expand markets, or stimulate innovation. Possible target outputs might include the number of new electricity connections that are provided in a defined area, or advanced cookstoves that are sold. Results-based financing is distinct from results-based aid which applies at a level above and is concerned with outcomes (such as number of households using electricity) rather than outputs (such as electricity connections).

For the off-grid solar marke, the RBF could be based on indicators such as: no of SHS systems installed, no of homes or businesses served and volume of energy (Kwh) produced. They can be either one time payment upon instalment of the system or distributed over lifetime to promote also after-sales services[1].

Definition

RBF instruments can be characterised by the following principles:

  1. Disbursement of funds is contingent on the delivery of pre-determined results (outcomes or closely related outputs).
  2. As far as possible, recipients have discretion over how results are achieved - this allows for product or service innovation.
  3. Independent verification acts as the trigger for disbursement.
  4. Incentives are non-discriminatory, in that all eligible service providers are able to participate on a competitive basis.


Types of Results-based Financing (RBF)

RBF is a very broad term, with a wide range of nomenclature already in existance[2]. Despite this, while there are a number of examples of different types of RBF mechanism being piloted or mainstreamed in other sectors, energy sector experience is limited mainly to output-based aid (OBA). Examples of results-based financing instruments include:

  • Advance market commitments, whereby a fixed quantity or price is offered for a product or service over a relatively short period of time in order to stimulate a market response[3];
  • Conditional cash transfers (CCTs), an instrument that been used primarily to transfer cash to poor households on the condition that they “make prespecified investments in the human capital of their children”[4], but which could potentially be used outside the social development sector to encourage certain social behaviors, such as adoption and use of an improved cookstove;
  • Inducement prizes, which are usually ‘ex-ante’, one-off incentives that are awarded against pre-determined criteria in order to spur innovation towards a pre-defined technological, commercial or social goal[5];
  • Output-based aid (OBA), an innovative approach to increasing access to basic services – such as infrastructure, healthcare, and education – for the poor in developing countries. OBA links the payment of public funding to the delivery of 'outputs' like connection to electricity grids or the provision of solar home systems. Service delivery is contracted out to a third party, which receives a subsidy to complement the portion of user fees that poor households are not be able to afford. The outputs are verified independently after the services have been delivered, and before payment[6];
  • Performance-orientated transfers (also called ‘output-based grants’), which are used by governments to drive the delivery of results by state or local governments, or by public utilities through transfers that “place conditions on the results to be achieved while providing full flexibility in the design of programs and associated spending levels to achieve those objectives”[7];
  • Vouchers, which are an alternative way of providing capital or revenue incentives for a particular product or service by directly stimulating consumer demand.


This list is by no means exhaustive, but the underlying principles of results-based financing apply to all the modalities described above. However, there is significant potential to broaden the application of results-based financing in the energy sector, in particular by experimenting with market-focused instruments that aim to catalyze private sector delivery and self-sustaining business models, as opposed to capital support for public service delivery (i.e. OBA). Further work is required to determine which situations, from an economic perspective, might benefit most from the use of results-based financing, but it has the potential to encourage a move away from a traditional focus on inputs and spending, towards a results culture that better articulates the value-for-money of one intervention over another.

Benefits

  • When the benefits are payed to the consumers, it can trigger deployment of off-grid technologies which were previously not affordable.
  • RBF can beneift a range of companies (from start-up to full growth) for deploying the off-grid technology
  • Flexible source of funding for off-grid companies as they are attached to the delivery of outcomes and not to how the funds are used to achieve it. This increases liquidity of off-grid companies.
  • RBF can be used to target certain market, technoloiges, geographical regions or consumer groups[8].

Limitations

Results-based financing should not be seen as a 'silver bullet', but as a potentially useful addition to the range of measures that developing country governments and their development partners might deploy to promote energy sector development. Commonly cited limitations of RBF include the need for agents to secure pre-financing, higher data collection and auditing costs, and the challenge of accurately setting the incentive to avoid rent-seeking whilst achieving the desired results.

Other challenges include: certain companies can make fraud outcomes (i.e installign the technologies but not delivering the adequate energy), can be expensive for the funding agencies in case of high demand for it, RBF that pays only after the service has been deliverd may not be suitable for earlier stage companies[9].

Opportunities

Aside from OBA there is limited experience with RBF in the energy sector. In part to build up this experience a number of programs and initiatives are actively exploring ways to pilot and mainstream RBF into their activities. These include:


Experiences with RBF

DFID/EnDev RBF Programme old Call for proposals

Under the DFID-funded RBF country pilot, EnDev has launched the following calls for proposals, to trigger market development for off-grid energy access:

Country Programme Date '*Download* 'Call for Proposals
Tanzania Lake Zone PicoPV 2014 (March)


2015 (February)
Vietnam Biogas Programme 2014 (March)
Benin Off-grid Energy Access 2014 (May)
Rwanda Sale of Solar Lighting Products to end-Users 2014 (August)
Rwanda Village Grids 2014 (November)




RBF - Case studies for Off-grid Solar

EnDev - Tanzania

Result-based Financing program for Solar Products in Tanzania

Energising Development (EnDev) is a program that supports development through energy access. In 2013, with the support of UK aid and the SNV Netherlands Development Organisation (SNV), it began a five-year RBF project in the Lake and Central Zone of Tanzania.

The RBF was structured to provide retailers and distributors with incentives for verified proof of sales of solar products in the target regions. There were two forms of the incentive: a product bonus installment to retailers and a capital bonus installment to suppliers, linked to retail sales volumes. The RBF was structured so that neither party could earn the incentive without the verified performance of the other party; the incentive was therefore dependent on cooperation between suppliers and retailers. Incentives are paid on Lighting Global–verified solar products and are linked to product performance. They range from €1 ($1.12) to €40 ($45); they are capped to limit oversubsidization. By the end of 2017, more than 60,000 Lighting Global–verified solar products had been sold under the RBF, and more than €1.3 million ($1.46 million) of the RBF fund had been disbursed as incentives[9].


World Bank - Kenya

World Bank facility for solar home systems under the Kenya Off-Grid Solar Access Project (KOSAP)

KOSAP is a World Bank–funded project, implemented by the government of Kenya, that aims to expand electricity access through off-grid solar products and solar mini-grids in Kenya’s underserved counties—the poorer and more remote regions in north and northeast Kenya. It includes an off-grid solar component of $42 million, made up of a $12 million RBF facility and a $30 million debt facility. SNV and SunFunder were chosen as implementation partners by the government of Kenya, following a competitive selection process. The facilities were launched in June 2019.

This facility competitively awards financial incentives to companies to compensate them for the up-front, ongoing, and opportunity costs associated with expanding into underserved counties. Counties are divided into service territories, and tenders are held for each service territory. Companies bid based on a financing amount per household that they estimate would be required to electrify the household and a sales target they estimate they can reach. The companies with the lowest financing requirements win, assuming they meet eligibility criteria, have proven track records, and can reasonably be expected to stay in the underserved county once the subsidy period comes to an end. For each tender, there is a percent cap for the maximum amount any individual company can receive, in order to ensure that there are multiple, competing companies in each service territory and customers have a meaningful choice of products and suppliers[9].

United Kingdom

The Renewable Heat

Initiative

The U.K. government instituted the Renewable Heat Incentive in 2011, in order to encourage a switch away from fossil fuel–based heating systems. The program subsidized each unit of heat produced from renewable energy. It encouraged commercial, industrial, and residential users to install renewable energy technologies, including biomass boilers, solar water heaters, and heat pumps.

Payments were made to domestic and nondomestic installers on the basis of each kilowatt hour (kWh) their product produced. The initial subsidy was £0.09 ($0.12) per kWh for heat and £0.10 ($0.13) per kWh for hot water. The annual subsidy for installers was to last 20 years for commercial installations and 7 years for home installations. On this basis, installers could expect to recover the costs of installation within five to eight years from the incentive. Payments received were tax free.

In 2017 the scheme came under intense scrutiny for overspending, and a public inquiry was launched. During the inquiry, allegations were made that some users installed heating systems to profit from the scheme rather than to meet genuine heating needs. In 2017 the subsidy was reduced, highlighting the risk to installers where payments are made over a long period, during which there is potential for policy change[9].

RBF - Case studies for Improved Cookstoves



Further Information



References

  1. The World Bank, 2020. The World Bank, 2020. Funding the Sun : New Paradigms for Financing Off-Grid Solar Companies- https://energypedia.info/wiki/Publication_-_Funding_the_Sun_:_New_Paradigms_for_Financing_Off-Grid_Solar_Companies
  2. ESMAP (2013)."Results-Based Financing in the Energy Sector: An Analytical Guide", p.45. The World Bank, Washington, DC
  3. Vivic Economics. 2010. Advance Market Commitments for low-carbon development: an economic assessment. Department for International Development, London
  4. Ariel Fiszbein and Schady Norbert. 2009. Conditional Cash Transfers: Reducing present and future poverty. The World Bank, Washington DC
  5. DEW Point. 2011. Evidence Review – Environmental Innovation Prizes for Development.Department for International Development, London
  6. Global Partnership on Output-Based Aid. 2012. "What Is OBA?". The World Bank, Washington DC
  7. Anwar Shah. 2006. A Practitioner’s Guide to Intergovernmental Fiscal Transfers. The World Bank, Washington DC
  8. The World Bank, 2020. Funding the Sun : New Paradigms for Financing Off-Grid Solar Companies- https://energypedia.info/wiki/Publication_-_Funding_the_Sun_:_New_Paradigms_for_Financing_Off-Grid_Solar_Companies
  9. 9.0 9.1 9.2 9.3 The World Bank, 2020. Funding the Sun : New Paradigms for Financing Off-Grid Solar Companies- https://energypedia.info/wiki/Publication_-_Funding_the_Sun_:_New_Paradigms_for_Financing_Off-Grid_Solar_Companies