Filling Gaps in the Financial Ecosystem for Energy Access Requires Financing the Last Mile

2018-12-13T10:03:32+00:00December 13th, 2018|Greening Finance, International Climate Finance|

Sub-Saharan Africa, a land of abundant energy resources and roughly 750 million people, is the least electrified region in the world. Two out of every three people there are in desperate need of reliable and affordable energy supply to power their homes and workplaces. Across the region, 60% of the population lives in rural areas and 22% of them have energy access; the region has an average household electrification rate of only 42%.

Achieving universal energy access is thus a critical step in unleashing Africa’s human development and economic growth potential. It will increase productivity through improved living and working conditions, and enable the provision of better education and health care. However, none of the needed progress on electrification, clean cooking, and other energy services would be possible without significant investment in energy services across the board – including grid connected and importantly off-grid distributed services.

As with many development goals, finance is the linchpin without which progress cannot be made. The investment required to achieve development goals far surpasses development and public budgets alone, to say nothing of the knowhow and resources private sector partners bring. Ensuring affordable and clean energy access is one of the United Nations’ Sustainable Development Goals (UN SDGs), specifically SDG7. Sustainable Energy for All (SEforAll), a global initiative launched by former UN Secretary-General Ban Ki-moon to engage stakeholders and catalyze action around SDG7 regularly surveys the landscape of investments in energy access, and has recently released its latest findings in its Energizing Finance 2018 report.

This report underscores the significant but insufficient progress made to date for financing electrification, as well as reveals serious underinvestment in clean cooking. Commitments for investments in electrification in the 20 high-impact countries (HICs) identified as priorities by SEforAll soared by 56%, increasing from $19.4 billion in 2013-14 to $30.2 billion in 2015-16. India came in on top, with a sharp increase in electricity finance by 121%, accounting for more than half of the global committed investment.

While progress in India and a few other countries such as Bangladesh and the Philippines is encouraging, financing is not flowing equally to the least electrified HICs. The SEforALL report notes that the investment trend for energy access in Sub-Saharan Africa remains stark and alarming. In 2015-16, the average committed investment in the Sub-Saharan HICs was $4 million, and the aggregate investment was a paltry $5.2 billion, less than one-third of India’s total investment. The report calculates that only 17% of total electricity finance in 2015-16 targeted Sub-Saharan Africa, while the energy access need going forward dictates that the region should account for upwards of 90% of electricity access finance.

Moreover, more investment is urgently needed for ‘last mile’ and off-grid connection to provide households with basic electricity access. The report observes that very little investment is being made in tier 1 or tier 2 electricity access, the lowest rungs on the ladder to plentiful, reliable, safe and affordable electricity. While much of the energy-sector finance goes to large-scale coal-fired generation, Energizing Finance 2018 finds “OGS [off-grid solutions] to be among the most cost-effective and quickest ways of providing energy access, especially in rural terrains.” Notwithstanding that finance commitments for OGS “nearly doubled between 2013-14 and 2015-16, growing from USD 210 million to USD 380 million per year … these investments remain a small portion (1.3%) of the total finance tracked.”

Too often the conversation (and action) around “mobilizing private finance” for development, whether for climate change, energy access, or other SDGs, focuses on “scale” in terms of volume of finance without recognizing that volume, quality, and geographic dispersal of projects are equally important.  In some places – like India – sharp increases in finance can be linked to clear policies incentivizing those investments, growing and dynamic local financial markets, and several large electrification projects often supported by the development finance community.  In other places, like Sub-Saharan Africa, these elements are not always present, and achieving development goals such as energy access will require parallel and coordinated efforts not simply to provide financing, but also to build a pipeline of projects, raise capacity, and strengthen enabling environments for private sector investment.

In particular, public and private finance institutions are frequently ill-equipped to provide financing at the level of small- and medium-sized local projects, where investment is most necessary for energy access. These types of investments can be challenging precisely because they are perceived to be earlier-stage and thus riskier, the investment sizes are smaller, and because in many parts of the world there are few financing institutions willing and able to directly finance these types of projects. These challenges are often coupled with market and country risks, weak market demand, and nascent local business and finance sectors, resulting in significant gaps for financing off-grid services. That these facets of the energy access challenge remain underfunded and underserved, putting the overall goals of SDG7 at risk, is particularly frustrating given that Shell Foundation and Catalyst Off Grid Advisors estimate that only $33 billion is needed to provide tier 1 through 3 off-grid and mini-grid access in Sub-Saharan Africa.

Blended finance – the practice of combining public or patient capital to catalyze private investment – is widely used by the development finance community, although its full potential may yet be realized:  A recent report from the Blended Finance Task Force notes that achieving the SDGs across the board will require a financial system oriented towards long-term sustainable investment and that this will require a “wider and more efficient use of blended finance”.

While many focus on the efficiency of blended finance, a “wider” use of blended finance necessarily means focusing on strengthening the linkages between projects on the ground, financial services to support those projects, and aggregation vehicles that can tap into the larger pools of capital. Fortunately, success stories are beginning to emerge. Shell Foundation’s energy access market development activities focus on creating enabling environments for market growth, supporting energy access solution providers, demonstrating financial viability to enhance market confidence, and providing flexible, early-stage financing to ultimately eliminate the financing barrier for last-mile and off-grid electricity access. This year, IFC (the private sector arm of the World Bank Group), Norfund and Yoma Strategic Holdings announced a $28 million investment into Yoma Micro Power to develop 2,000 micro-grid installations in Myanmar by 2022, providing electricity to households, schools, and other businesses.  And new sources of risk capital are emerging to create dedicated funds for energy access, such as the Microgrid Investment Accelerator, which is seeking to deploy $50 million by 2020 for clean energy microgrids in developing countries.

In order to achieve SDG7 – universal energy access by 2030 – the development, policy, and finance communities will need to creatively and aggressively deploy blended finance tools not simply to mobilize capital for larger grid-connected investments, but also to build a financial ecosystem for development that addresses the small-scale, local, household-level, and off-grid needs and solutions that are the battleground for SDG7’s remaining challenges.