Widening Access to Energy Services through 5Ps

ESCAP Bangkok, Thailand

26 September, 2013

Objective

• To assist poor households and micro-entrepreneurs to obtain access to sustainable, low-cost, clean energy supplies through microfinance

2020 Vision

• Dramatically scale up energy financing for the poor, without subsidies, across LDCs and other developing countries with high levels of energy poverty

Decentralized clean energy

Solar pumpsSolar panels

Improved cook stoves Solar lanterns

Solar home systems Biogas digesters Micro-hydro

More available, more reliable, more durable, greater operating life

Barriers to access1.Information barriers• Knowledge gaps• Reliability concern• Lack of green champions• Higher cost perception

2.Institutional barriers• Limited capacity to formulate green

policies and strategies• Weak policy implementation and

enforcement

3.Technical barriers• Lack of technical skills• Lack of certification facilities

4.Regulatory barriers• Legacy energy policies/regulations• State monopolies and power

purchase agreements• Discriminatory grid policies• Administrative barriers

5.Financial Barriers• Split incentives landlords/tenants• Higher risk management costs• Subsidies for conventional fuels• Lower returns on investments

• Higher upfront costs• Transaction costs

FSPs are well-placed...FSP Strengths

• Existing client-base

• Unrivalled knowledge of, relationship with and access to low-income people

• Experience, systems and discipline of managing credit operations

• Growing experience of product-marketing

• Growing equity and access to lines of credit and capital markets

• Scalable business model

Value Proposition for FSPs

• Protecting current lending portfolio (viability of core products)

• Growth of future lending portfolio – new product line in a growing market segment

• Hedging risk through product diversification > asset finance, working capital, consumer loans

• Increased customer base / loyalty

• New market segments: rural clientele

• Non-financial long term revenue stream (e.g. carbon credits)

…to offer the financing schemes needed by poor people

CleanStart Programme

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• Purpose: To provide access to clean energy to the poor in developing countries through microfinance : making markets work to make this happen

• Goals: To reach 2.5 million low-income people through 18 financial service providers (FSPs) in 6 developing countries

• Budget: $26.1 million over 6 years (2012-2017)

• UNCDF: ~$ 1 million

• Other Development Partners: $25.1 million

• Partner countries include Nepal and Uganda, with scoping studies underway or completed for Philippines, Cambodia, DR Congo, Tanzania, Ethiopia and Bangladesh.

Source: UNCDF

Four components

• Government, donors

• Commercial, wholesale banks

• Carbon brokers

• Research• Training• Communication

• Market research• Brokering

partnerships• TA to FSPs, energy

suppliers, end-user

• Awareness & confidence building

• Risk capital grants• Concessional loans

Finance for Clean

Energy

Technical Assistance for Clean Energy

Advocacy and

Partnership

Knowledge and

Learning

CLE

AN

STA

RT

Impact investment

Commercial

MissingMiddle

Incubation

AN

GEL

INV

ESTO

R

GRANT

GRANT

INVESTMENT

CREATION OF PIPELINE

INCUBATINGENTITIES

INVESTMENT PROPOSAL

Investment pathways

18 36 months0

Incubation Pathway

Impact Investment

Pathway

Incubation pathway

Impact investment pathway

Months

Commercial InvestmentPipeline development Incubation

Investment preparation

• Country assessment• Expression of interest• Request for proposal

• Challenge competition

• Smart subsidies• TA

• Due diligence• Deal structuring• Preparation of proposal

for Finance Institution/Fund Board

Investment pathways & time flow

18 36 0

Investment preparation

Pipeline development

Impact Investment

Commercial Investment

• Smart subsidies• TA

• Due diligence• Deal structuring• Preparation of proposal

for Finance Institution/Fund Board

GrantConcession

loan/guaranteeCommercial

finance

126 3024

Incubation activities

Market research; Designing financial products; Brokering partnerships between FSPs and energy suppliers; Developing FSP business systems and institutional capacity; Strengthening energy supply chains of technologies selected

for lending (e.g. quality assurance, standards development); Facilitating access to re-financing and alternative energy

streams (e.g. carbon credits); Building public awareness about the benefits of clean energy,

loan opportunities and customer rights; Facilitating knowledge exchange and linking with national and

global policy; Performance-based risk capital.

Finance for Clean Energy

Examples of incubation business targets

Finance to improved cook stove manufacturers in Cambodia Finance to agri-businesses in Nepal

Productive loan to ICS manufacturers aiming to expand business

GERES, supported by UNDP, has established an ICS manufacturers and distributors association. The association has already more than 250 members. The most challenging hurdle for manufacturers of ICS to expand their business is obtaining the required financial resources. New equipment and stock of ICS is required to run the business efficiently. The association is establishing a credit facility for the manufacturers and technical & financial support to run this facility is required.

Productive loan to small rural businesses in Nepal, processing Tea, Ginger or Dairy

Agriculture is the largest economic sector in Nepal. However, a majority of the farmers practice subsistence farming. UNCDF is currently developing new ways of assisting farmers to increase the value added and income they can derive by better managing agricultural value chains, involving micro, small and medium enterprises. Most farmers currently rely on firewood and kerosene for subsistence and processing. Simple processing machinery or solar dryers, for example, would add significant value to their businesses.

BoP financing product tools

Regular livelihood/consumer loan; Rental model; Layaway financing; Pay as you go or pre-paid model; Group loans; Enterprise or retailer financing (SME); Agent model (commission based); Indirect group financing (through energy service

provider); Hybrid SME and consumer financing.

Nepal financing ecosystem: NRREP/CREF & AEPC

Investors

End-user

Retail lending

Wholesale lending

Government Policy/Programme

Government

Commercial Bank

MFIRural/Dev.

Banks

Household Communities

Energy Service

Providers

Development Partners

Energy quality

assurance

AuditInvestor

Request for Proposal Nepal

• Executive Summary• Introduction• General Market Analysis• Overview of Target Market for Business Plan• Management and Operations• Roll-out and Phasing of Programme• Organization, Leadership and Partnership

Arrangements• Partnership Models and Innovation• Financial Projections• SWOT and Risk Mitigation Strategy• Technical Assistance Requirements

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Incubation Pathway: Key findings from RFP Nepal

Energy sector perceived as growth area 15 applications received in total; Most with direct / indirect experience in energy lending

Credible players & business plans & partnerships in place 6 out of 9 applications are consortiums

Wholesale FSPs (refinancing), Retail FSPs, energy suppliers, TA providers work together to minimize risk

Ambitious business plans with portfolio of small systems consumer market segment to mid-scale productive end-use market segment Commercial bank applicants want to directly finance larger systems (e.g.

micro-hydro) in addition to refinancing retail MFIs FSPs plan to link energy loans with income-generation loans & business

development services FSPs are interested to move more aggressively to fund agricultural value chain

related MSMEs

Business plans tested for robustness & primed for incubation funding At least three institutions in process of being funded by Q4, 2013