- Email: [email protected]
Sustaining RE
RE Finance
SUSTAINING RE Sustainability and Financing of Energy Supply in Rural Areas in Developing Countries During November and December 2004 the Department of Business Administration of the School of Industrial Engineering at the Universidad Politécnica de Madrid (UPM) in Spain launched an international survey to analyse the main factors that have a positive influence on the sustainability of electrification projects in rural areas. Carlos Rodríguez Monroy and Antonio San Segundo Hernández report on the survey findings and its implications for renewables.
A
questionnaire consisting of eleven questions was sent by e-mail to a group of more than 800 experts on energy supply from all over the World1. A total of 185 questionnaires were received. Answers from 69 different countries were received corresponding to more than 140 organisations. Forty-four Universities from all over the world responded to the survey, and major multilateral, bilateral and financial organisations were also represented (e.g. DFID (Department for International Development), UNDP (United Nations Development Programme), or the World Bank) (Figure 1). The survey2 was divided into three parts: 1. "Energy supply in developing countries", intended to identify key parameters and barriers in the sustainability of energy supply projects;
Figure 1: Responses by type of respondent
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2. "The role of agents in sustainable energy supply", focused on identifying the relevance of the main agents involved in energy supply and the key parameters that have influence in their positioning; and 3. "Financing of renewable energy projects in developing countries", which objective was to identify best practices when financing renewable projects in developing countries.
Energy supply in developing countries The aim of the first section of the survey, "Energy supply in developing countries", was to analyse the importance and potential of different proposals to strengthen sustainability of renewable projects in developing countries. Results obtained showed that 'Financial sustainability of projects' is the main parameter needed to assure long-term viability of electrification projects (85% of respondents consider that this element is the most relevant) whereas 'Multilateral support' and 'Environmental issues' are the least relevant topics when considering longterm viability of projects. There were important conclusions while studying responses from the different groups. Although all groups consider that 'Financial sustainability' is the main parameter, North American and Latin American respondents estimated that its relevance is much higher in relative terms. Additionally
private companies and analysts seem to be less sensitive to 'Demand-side' concerns when dealing with an electrification project, while Non Government Organisations (NGOs) are the groups that give most importance to this topic in relative terms. In the second question in this section, 'Financial innovation' and 'Private sector involvement' were the two parameters that respondents felt were the highest relevance to boosting renewable technology deployment in developing countries. Sixty percent of respondents estimated that the third parameter to consider was the appropriate 'Transfer of Technology' to developing countries. In the last question of this part of the research, 67% of respondents considered that 'Public-private coordination and partnerships (PPPs)' is the most relevant factor to strengthen sustainability of renewable projects, although 'Financial innovation' was also considered a very important element.
Author information Carlos Rodríguez has a PhD in Industrial Engineering and is Senior Lecturer at the Department of Business Administration of the School of Industrial Engineering at the Universidad Politécnica de Madrid in Spain. Antonio San Segundo has a degree in Industrial Engineering and an M.B.A. and he is working on his Doctoral Thesis in that Department Contact: Carlos Rodríguez Monroy PhD., Universidad Politécnica de Madrid, School of Industrial Engineering, www.etsii.upm.es Ing. Antonio San Segundo Hernández, Department of Business Administration José Gutiérrez Abascal, 2, 28006 Madrid, Spain E-mail: [email protected]
1471 0846/05 © 2005 Elsevier Ltd. All rights reserved.
RE Finance
The role of agents in sustainable energy supply The second part of the survey evaluated the importance of the role played by different agents in past electrification projects. Each of the major international development institutions, finance institutions, governments, the private sector and NGOs have a role to play in getting energy to the poor, being important to identify their main strengths and concerns when dealing with electrification projects in developing countries. Fifty-five percent of respondents considered that NGOs were the agents that have performed the best in past rural electrification projects. The 'private sector' is clearly seen as the agent whose role has been less relevant when dealing with these kind of projects as only 9% of respondents consider that its role has been very relevant. The second question in this part of the survey determined the importance of several factors in maximizing the impact of electrification projects implemented by NGOs. Sixtyseven percent of respondents considered that the main issue was to 'Provide assistance to local empowerment', while 63% estimated that the second factor to consider was to develop a 'Demand oriented approach' in electrification projects. Finally, the last question in this part of the questionnaire attempted to determine the causes that might justify lack of adequate private sector involvement in rural electrification projects. 'Lack of profitability' and 'Poor regulatory framework' were the main factors that respondents considered here.
Figure 2: Suitability of different instruments to finance renewable electrification projects in rural areas from a downstream point of view
Figure 3: Potential to contribute to renewable energy project deployment in developing countries. Average value by geographical area of responses.
Financing of RE projects in developing countries In the last part of the research, the objective was as previously expressed to identify best practices when financing renewable projects in developing countries. This was the most technical part of the survey aimed at identifying financing proposals that need to be strengthened in the future. The first question in this part of the survey asked about the importance of different topics that influence financial sustainability of renewable electrification projects. 'Micro financing' and linking electrification with 'Productive initiatives' were the leading issues that most of the respondents identified. The existence of 'Local schemes for collecting' was
www.re-focus.net
November/December 2005
reFOCUS 39
RE Finance
way of financing renewable projects according to respondents, and only 2% estimated that this instrument was very suitable. 'Renewable energy funds' were positively considered by all groups of respondents, especially in Latin America. It is also significant that in relative terms Africa's respondents estimate that the suitability of project finance tools is lower than the average.
Figure 4: Three main parameters that have potential to increase resource mobilisation to finance renewable electrification projects in developing countries and percentage of respondents covered. Three main factors modal weighted (modal weighted value calculated as the average of the two most frequent valuations)
considered as an important issue while 'Participation of local financial resources', was regarded as only an neutral element by most of respondents.
of productive initiatives' was the leading factor that influences financial sustainability, with Latin America's respondents also very concerned about that aspect. Responses by types of respondents such as multilateral and Respondents from Africa and the Rest of financial institutions, and especially NGOs, the World estimated that the 'Development considered that much more importance should be given to the development of productive initiatives or the existence of micro financing schemes. In the second question of this last part of the research, experts were asked about the suitability of different instruments to finance renewable electrification projects in rural areas from an upstream point of view. 'Renewable energy funds' were considered as the most suitable financial instrument to deal with renewable electrification projects in rural areas according to 72% of respondents (4.6 points). 'Project finance' was the second preferred option according to 61% of respondents. 'Mezzanine finance' or quasi risk-capital was clearly the least suitable
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November/December 2005
The third question in this part of the survey formulated the same question but taking into account the end-user point of view (downstream point of view). The objective was to identify the suitability of different financing proposals to afford energy supply for the final users. One half of respondents estimated that 'Revolving funds' were the most suitable instrument for end-users, while 55% agreed that the second best proposal was to link energy-supply with 'Productive end-user applications'. Clearly 'Leasing instruments' were identified as the least suitable option for financing renewable rural electrification projects from a downstream point of view with only 11% of respondents considering this instrument as very suitable. By geographical groups, respondents from Africa considered that 'Revolving funds' are the most suitable instrument, while North Americans said that 'Micro credits' are by far the most appropriate financial instrument. Respondents from Latin America and RoW were respectively the most critical towards 'Commercial loans', while North America's responses considered that 'Leasing' was the least suitable instrument in relative terms. (Figure 2). Finally at question ten, respondents were asked about their opinion on the potential of flexibile Kyoto Mechanisms and the Corporate Social Responsibility (CSR) tools of private companies to contribute to renewable energy project deployment in developing countries. (Figure 3). Fifty-three percent of respondents considered that Kyoto mechanisms have a very high potential to contribute to the financing and spreading of renewable energies, while the potential for CSR instruments was estimated only as medium-high. Among groups of respondents, those from Africa and especially AsiaPacific are the only ones that give much more
www.re-focus.net
RE Finance
importance to corporate instruments of the private sector in comparison with the flexibile Kyoto Mechanisms. The last question of the survey was intended to explore the potential of different proposals to increase resource mobilisation to finance renewable electrification solutions in developing countries. (Figure 4). Approximately 70% of respondents consider that 'Institutional support and good regulatory framework' is the most important requirement for increasing resource mobilisation with a modal weighted 4.59 valuation. 'Local empowerment in resource mobilising' and 'Innovative financing' are the following leading approaches with very close valuations among the majority of respondents. By type of organisations, multilateral and financial institutions rely the most on innovation in the financing area and agree that research and development is the least important issue. Finally, private companies consider that the main concern to focus on is the institutional support and the regulatory framework, although they agree that local empowerment is needed to assure resource mobilisation.
Conclusions There is a wide and growing consensus that energy is central to reducing poverty, improving health and the lives of all in developing countries. But sustainable energy provision will only happen if leading issues that affect poverty and relations among agents are identified, especially those concerning financial aspects of supply. Some important conclusions were extracted after the analysis of the survey. These propositions should be taken into account when considering new programs of electrification in rural areas, especially in interventions that aim at long-term sustainability of projects.
www.re-focus.net
Most respondents estimate that renewable energy funds are the preferred solution to deal with renewable energy projects from an upstream point of view, but there are important differences towards more innovative ways of financing like mezzanine products or portfolio risk management tools. With respect to the role of different agents, NGOs seem to be best performer in past renewable electrification projects, while the private sector is the most criticized agent with 17% of respondents estimating that its involvement has not been relevant at all. Lack of profitability and poor regulatory frameworks are the two main topics that justify inappropriate involvement of the private sector in rural electrification projects. When considering long-term viability of electrification projects the financial sustainability and the focus on demand-side needs are the most relevant parameters. Financing issues are considered as the most important element by 85% of respondents. When considering dissemination of renewable energy technologies in developing countries, financial innovation and also private sector involvement are the two main concerns that have the potential to increase the penetration of those technologies. If long-term viability is also considered, public-private partnerships are the best approach to organise supply according to the experts surveyed.
References 1. Rodríguez Monroy, C., San Segundo Hernández, A. (2004). "Survey of sustainability in rural energy supply projects". Available at www.gvep.org. 2. Rodríguez Monroy, C., San Segundo Hernández, A. (2005). "Survey of sustainability in rural energy supply projects. Results of the survey". Available at www.gvep.org.
November/December 2005
reFOCUS 41
SUSTAINING RE Sustainability and Financing of Energy Supply in Rural Areas in Developing Countries During November and December 2004 the Department of Business Administration of the School of Industrial Engineering at the Universidad Politécnica de Madrid (UPM) in Spain launched an international survey to analyse the main factors that have a positive influence on the sustainability of electrification projects in rural areas. Carlos Rodríguez Monroy and Antonio San Segundo Hernández report on the survey findings and its implications for renewables.
A
questionnaire consisting of eleven questions was sent by e-mail to a group of more than 800 experts on energy supply from all over the World1. A total of 185 questionnaires were received. Answers from 69 different countries were received corresponding to more than 140 organisations. Forty-four Universities from all over the world responded to the survey, and major multilateral, bilateral and financial organisations were also represented (e.g. DFID (Department for International Development), UNDP (United Nations Development Programme), or the World Bank) (Figure 1). The survey2 was divided into three parts: 1. "Energy supply in developing countries", intended to identify key parameters and barriers in the sustainability of energy supply projects;
Figure 1: Responses by type of respondent
38 reFOCUS
November/December 2005
2. "The role of agents in sustainable energy supply", focused on identifying the relevance of the main agents involved in energy supply and the key parameters that have influence in their positioning; and 3. "Financing of renewable energy projects in developing countries", which objective was to identify best practices when financing renewable projects in developing countries.
Energy supply in developing countries The aim of the first section of the survey, "Energy supply in developing countries", was to analyse the importance and potential of different proposals to strengthen sustainability of renewable projects in developing countries. Results obtained showed that 'Financial sustainability of projects' is the main parameter needed to assure long-term viability of electrification projects (85% of respondents consider that this element is the most relevant) whereas 'Multilateral support' and 'Environmental issues' are the least relevant topics when considering longterm viability of projects. There were important conclusions while studying responses from the different groups. Although all groups consider that 'Financial sustainability' is the main parameter, North American and Latin American respondents estimated that its relevance is much higher in relative terms. Additionally
private companies and analysts seem to be less sensitive to 'Demand-side' concerns when dealing with an electrification project, while Non Government Organisations (NGOs) are the groups that give most importance to this topic in relative terms. In the second question in this section, 'Financial innovation' and 'Private sector involvement' were the two parameters that respondents felt were the highest relevance to boosting renewable technology deployment in developing countries. Sixty percent of respondents estimated that the third parameter to consider was the appropriate 'Transfer of Technology' to developing countries. In the last question of this part of the research, 67% of respondents considered that 'Public-private coordination and partnerships (PPPs)' is the most relevant factor to strengthen sustainability of renewable projects, although 'Financial innovation' was also considered a very important element.
Author information Carlos Rodríguez has a PhD in Industrial Engineering and is Senior Lecturer at the Department of Business Administration of the School of Industrial Engineering at the Universidad Politécnica de Madrid in Spain. Antonio San Segundo has a degree in Industrial Engineering and an M.B.A. and he is working on his Doctoral Thesis in that Department Contact: Carlos Rodríguez Monroy PhD., Universidad Politécnica de Madrid, School of Industrial Engineering, www.etsii.upm.es Ing. Antonio San Segundo Hernández, Department of Business Administration José Gutiérrez Abascal, 2, 28006 Madrid, Spain E-mail: [email protected]
1471 0846/05 © 2005 Elsevier Ltd. All rights reserved.
RE Finance
The role of agents in sustainable energy supply The second part of the survey evaluated the importance of the role played by different agents in past electrification projects. Each of the major international development institutions, finance institutions, governments, the private sector and NGOs have a role to play in getting energy to the poor, being important to identify their main strengths and concerns when dealing with electrification projects in developing countries. Fifty-five percent of respondents considered that NGOs were the agents that have performed the best in past rural electrification projects. The 'private sector' is clearly seen as the agent whose role has been less relevant when dealing with these kind of projects as only 9% of respondents consider that its role has been very relevant. The second question in this part of the survey determined the importance of several factors in maximizing the impact of electrification projects implemented by NGOs. Sixtyseven percent of respondents considered that the main issue was to 'Provide assistance to local empowerment', while 63% estimated that the second factor to consider was to develop a 'Demand oriented approach' in electrification projects. Finally, the last question in this part of the questionnaire attempted to determine the causes that might justify lack of adequate private sector involvement in rural electrification projects. 'Lack of profitability' and 'Poor regulatory framework' were the main factors that respondents considered here.
Figure 2: Suitability of different instruments to finance renewable electrification projects in rural areas from a downstream point of view
Figure 3: Potential to contribute to renewable energy project deployment in developing countries. Average value by geographical area of responses.
Financing of RE projects in developing countries In the last part of the research, the objective was as previously expressed to identify best practices when financing renewable projects in developing countries. This was the most technical part of the survey aimed at identifying financing proposals that need to be strengthened in the future. The first question in this part of the survey asked about the importance of different topics that influence financial sustainability of renewable electrification projects. 'Micro financing' and linking electrification with 'Productive initiatives' were the leading issues that most of the respondents identified. The existence of 'Local schemes for collecting' was
www.re-focus.net
November/December 2005
reFOCUS 39
RE Finance
way of financing renewable projects according to respondents, and only 2% estimated that this instrument was very suitable. 'Renewable energy funds' were positively considered by all groups of respondents, especially in Latin America. It is also significant that in relative terms Africa's respondents estimate that the suitability of project finance tools is lower than the average.
Figure 4: Three main parameters that have potential to increase resource mobilisation to finance renewable electrification projects in developing countries and percentage of respondents covered. Three main factors modal weighted (modal weighted value calculated as the average of the two most frequent valuations)
considered as an important issue while 'Participation of local financial resources', was regarded as only an neutral element by most of respondents.
of productive initiatives' was the leading factor that influences financial sustainability, with Latin America's respondents also very concerned about that aspect. Responses by types of respondents such as multilateral and Respondents from Africa and the Rest of financial institutions, and especially NGOs, the World estimated that the 'Development considered that much more importance should be given to the development of productive initiatives or the existence of micro financing schemes. In the second question of this last part of the research, experts were asked about the suitability of different instruments to finance renewable electrification projects in rural areas from an upstream point of view. 'Renewable energy funds' were considered as the most suitable financial instrument to deal with renewable electrification projects in rural areas according to 72% of respondents (4.6 points). 'Project finance' was the second preferred option according to 61% of respondents. 'Mezzanine finance' or quasi risk-capital was clearly the least suitable
40 reFOCUS
November/December 2005
The third question in this part of the survey formulated the same question but taking into account the end-user point of view (downstream point of view). The objective was to identify the suitability of different financing proposals to afford energy supply for the final users. One half of respondents estimated that 'Revolving funds' were the most suitable instrument for end-users, while 55% agreed that the second best proposal was to link energy-supply with 'Productive end-user applications'. Clearly 'Leasing instruments' were identified as the least suitable option for financing renewable rural electrification projects from a downstream point of view with only 11% of respondents considering this instrument as very suitable. By geographical groups, respondents from Africa considered that 'Revolving funds' are the most suitable instrument, while North Americans said that 'Micro credits' are by far the most appropriate financial instrument. Respondents from Latin America and RoW were respectively the most critical towards 'Commercial loans', while North America's responses considered that 'Leasing' was the least suitable instrument in relative terms. (Figure 2). Finally at question ten, respondents were asked about their opinion on the potential of flexibile Kyoto Mechanisms and the Corporate Social Responsibility (CSR) tools of private companies to contribute to renewable energy project deployment in developing countries. (Figure 3). Fifty-three percent of respondents considered that Kyoto mechanisms have a very high potential to contribute to the financing and spreading of renewable energies, while the potential for CSR instruments was estimated only as medium-high. Among groups of respondents, those from Africa and especially AsiaPacific are the only ones that give much more
www.re-focus.net
RE Finance
importance to corporate instruments of the private sector in comparison with the flexibile Kyoto Mechanisms. The last question of the survey was intended to explore the potential of different proposals to increase resource mobilisation to finance renewable electrification solutions in developing countries. (Figure 4). Approximately 70% of respondents consider that 'Institutional support and good regulatory framework' is the most important requirement for increasing resource mobilisation with a modal weighted 4.59 valuation. 'Local empowerment in resource mobilising' and 'Innovative financing' are the following leading approaches with very close valuations among the majority of respondents. By type of organisations, multilateral and financial institutions rely the most on innovation in the financing area and agree that research and development is the least important issue. Finally, private companies consider that the main concern to focus on is the institutional support and the regulatory framework, although they agree that local empowerment is needed to assure resource mobilisation.
Conclusions There is a wide and growing consensus that energy is central to reducing poverty, improving health and the lives of all in developing countries. But sustainable energy provision will only happen if leading issues that affect poverty and relations among agents are identified, especially those concerning financial aspects of supply. Some important conclusions were extracted after the analysis of the survey. These propositions should be taken into account when considering new programs of electrification in rural areas, especially in interventions that aim at long-term sustainability of projects.
www.re-focus.net
Most respondents estimate that renewable energy funds are the preferred solution to deal with renewable energy projects from an upstream point of view, but there are important differences towards more innovative ways of financing like mezzanine products or portfolio risk management tools. With respect to the role of different agents, NGOs seem to be best performer in past renewable electrification projects, while the private sector is the most criticized agent with 17% of respondents estimating that its involvement has not been relevant at all. Lack of profitability and poor regulatory frameworks are the two main topics that justify inappropriate involvement of the private sector in rural electrification projects. When considering long-term viability of electrification projects the financial sustainability and the focus on demand-side needs are the most relevant parameters. Financing issues are considered as the most important element by 85% of respondents. When considering dissemination of renewable energy technologies in developing countries, financial innovation and also private sector involvement are the two main concerns that have the potential to increase the penetration of those technologies. If long-term viability is also considered, public-private partnerships are the best approach to organise supply according to the experts surveyed.
References 1. Rodríguez Monroy, C., San Segundo Hernández, A. (2004). "Survey of sustainability in rural energy supply projects". Available at www.gvep.org. 2. Rodríguez Monroy, C., San Segundo Hernández, A. (2005). "Survey of sustainability in rural energy supply projects. Results of the survey". Available at www.gvep.org.
November/December 2005
reFOCUS 41