Unlocking finances for Minigrid development in low income countries

By Dr Abdussalam Yusuf

Modern energy supply is critical to growth of rural economy and stemming rural -urban migration in
Africa. Centralized grid electricity supply will not reach the rural area in good time given the existing
supply deficit in urban area, the difficulties in accessing rural area. Decentralized supply such as
renewable energy-based minigrid has been recognized as the most suitable way to energizing rural
development but the main challenge has been the lack of access to finance. what financing
instruments and approaches can upscale minigrid development. How can the existing financing
system support the sustainable scale-up of renewable energy mini-grids through increased use of
commercial financing? This paper oput forwards some recommendation based on the experience of
Nigeria in promoting private sector-led rural electrification via minigrid

The paper will attempt to answer these questions:

• What are the peculiarities of renewable energy based minigrid electrification
 what are the financing needs for scaling up minigrid projects in developing
countries?
• What are the key barriers and enablers affecting the flow of finance for
decentralised electricity access for the poor?
• How can the successful financing models be replicated in other places
• What enablers are required for channelling capital into the minigrid market in low
income countries
 Snapshots of Nigerian experiences in offgrid electrification
o The minigrid regulation
o Rural electrification fund implementation guideline

What is peculiar about renewable energy based mingrids

 RE power are currently not commercially competitive with the fossil fuels which are
currently subsidized.
 operators are usually small scale and up starters lacking large capital to attract bank
finacing
 unit cost of renewable energy is relatively high
 Renewable energy systems are vulnerable to climate risks
 An emerging sector – business models are still being proven
 less bankable compare to utility scale
 serve low income rural communities

What is stopping capital flow into the minigrid market

Blockers of minigrid financing
Traditional financing entities do not have the right instruments to evaluate offgrid market
to enable them prioritise mini-grid projects
Lenders need better understanding of the minigrid market.
MGD need to look for a range of other funding sources.

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MGD need not just loans but a range of financial instruments; grants, subsidies and
consumer finance to make services are affordable;
start-ups also need smaller fund sizes and less bureaucracy than is typical of international
funds.

MDBs are experienced in using credit-based instruments in investable projects that have
lower transaction costs. Investing in utility-scale projects offer better returns from loans and
lower transaction costs when compared with funding large numbers of small decentralised
projects.
Lessons at the country-level
• Policy framework: high-level policies, e.g the NREEP containing capacity targets, tax
holidays and fiscal incentives to invest in decentralised energy access.
• Dedicated special purpose agencies, e.g REA that operates an active REF is useful
for drawing down resources from donors and governments, channelling funds to
different small-scale renewable energy projects and actors, and providing holistic
support services to build new energy markets.
• Diverse financial instruments for different energy actors: Agencies provide a range
of grants and affordable loans for users, investors, providers and suppliers, which
have helped households to switch to cleaner fuels, and encourages investment.
• National banks such as central banks and development banks are also able to use
their
 regulatory roles to encourage private sector investment.
 Mandate all commercial banks to have a mandatory mini-grid portfolio of at least
5%.

Who needs finance and

for what?
The financing needs for expanding decentralised, renewable energy access are extremely
varied and go far beyond payment for technology hardware.
All key actor are the target for energy access funding are energy users, energy providers
and governments. Financial intermediaries, like local banks, are also relevant.

What money is required?

Seed capital for project development eg concept design, feasibility analysis, licensing
Working capital eg to buy inventory, capital for growth period
Working capital fund Consumer subsidy / business model innovation
Risk mitigation instruments eg political risk insurance , Results-based financing
Where will these come from?
Equity, Loans(Concessional and Market-rate ), Grants(cash or kind)
Sources of finance include seed investors, impact investors, private foundations, venture
capitalists, development finance institutions, carbon finance providers, national or local
banks, private foundations, MDBs, bilateral donors, host country governments
and national power utilities

What are the enablers

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Financial
 Concessional finance to channel finance to energy providers and users
 Risk guarantees and risk mitigation instruments
 Capacity development
 Demonstrable and investable models
 Grants from rural electrification fund
 Mandatory portfolio of concessional loans from commercial banks
 Grants and loans from development finance institutions
 Domestic taxes

government
 enabling Policies and regulatory
 Market development eg resource mapping, feasibility studies, business development
 services
 simplified regulatory obligation

Finance barriers
What are the key barriers affecting the flow of international finance toward decentralised
energy access?
The barriers of investments in decentralised energy access such as the minigrid markets and
in developing countries include those related to
 market development,
 maturity of business models,
 political risk factors.
• funds’ goals, instruments and governance ; the high transaction costs involved in
channelling finance into lots of small projects (as
opposed to a few large projects) are a general barrier,

General barriers
 The general barriers listed below apply both to public and to private sector funders,
though clearly issues around investor returns are particularly important to private
sector funders.
• High risks (actual and perceived): political instability, regulatory uncertainty,
currency risk, low investor returns, an unproven business model and unreliable cash
flows (high collection losses due to nonpayment).
Sometimes the perception of risk is linked to a lack of sound investor knowledge of
the markets.
• Investor returns and short-termism. Investments in low income energy markets are
often longer term, higher risk, and generate a lower financial return.
Commercial investors (non-impact investors) are reluctant to spend time building
the relationships and market demand required to generate a decent return
• Investment size and transaction costs. The sums of finance often required by energy
enterprises in their start-up phase are often too small for mainstream investors,

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 banks, or even international donors. The transaction costs of funding many small
projects are high because of the due diligence and bureaucracy involved.
Need for some aggregators to package up many small projects as a way of lowering
overall financing costs or helping to obtain finance
 Policy and regulatory environment. the policy and rules around decentralised
energy can be unfavourable or confusing. A lack of clarity on grid extension plans
creates uncertainty, whilst tax and subsidy regimes may favour large-scale.
Governments may also send the signal to investors that small-scale, decentralised
energy projects are of low priority.
• Shortage of proven business models and good quality business plans. Funders are
looking for proven business models and well-developed business plans, a clear
understanding of risks and returns, and an indication that risks are being managed.
While
there are market pioneers on energy access, many providers still need to prove their
business model and to demonstrate scalability and replicability, which takes time

• Preference for loans versus grants. The finance

needs of the decentralised energy access sector require a mixture of grants, loans and
equity, both concessional and commercial. But at the early stage of innovation and policy
development for the sector there is a particular need for grant financing.

• Approaches of financial intermediaries.

MDBs also have a stronger inclination to invest in large-scale projects because
of higher transaction costs in funding lots of small
decentralised projects and they are less familiar with
this sub-sector.

Best practice examples

• A mixture of finance instruments, including grants and loans, targeting users, providers
and financial intermediaries.
• Interventions to build the market for off-grid energy, not just individual projects.
• Ability to channel large amounts of finance into lots of small-scale projects through a
single agency.
Role of the Central Bank of Bangladesh
Apart from IDCOL, the Central Bank of Bangladesh is also incentivising investment in
renewable energy through commercial banks, microfinance institutions and NGO s. It is a
domestic institution with a national mandate to provide finance to novel sectors that
remain un-catered for by mainstream banks.
The Central Bank of Bangladesh was the first central bank in the world to dedicate resources
to green projects. In 2005, it set up a refinancing scheme advising commercial banks on
finance for green energy, including solar home systems and biogas systems in off-grid areas.
The ‘green banking’ circular developed by the Central Bank requires commercial banks to
allocate 5 per cent of credit to environmental investments, including decentralised energy.

Below we examine how AEPC

and its Central Renewable Energy Fund are creating

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enablers for financing energy access in rural areas of
Nepal. Key design features include:
• Aggregating and channelling diverse government and donor funds for renewables.
• Combining finance with market-building efforts through support in policy and planning.
• A specific fund to channel grants and loans for smallscale renewable energy via
commercial banks and micro-finance institutions.
• Providing finance support for energy users (as well as providers) through grants, loans and
individual contributions.
Lessons from Nigeria: enablers of financing decentralised energy access
.
Policy enablers at the top of the value chain:
NREEP and SE4ALL target
Economic enablers for a range of energy access actors – investors, providers, support
services and users:
What policy and regulatory signals is required to incentivise potential investors including
commercial banks, microfinance institutions and suppliers to invest in decentralised
renewable projects.
The regulatory requirement for commercial banks to invest a proportion of their lending to
‘greener project’ also offers a policy incentive.
Such regulatory push in combination with financial incentives such as low cost loans
encourages mainstream banks to explore untested territories that rest outside their comfort
zones
Dedicated agencies to aggregate funds and projects: Dedicated `special purpose vehicles’
(SPVs) – or agencies – are very useful as they have specific capacities and a mandate which
enables them to draw down resources from donors and governments and channel them to
lots of small-scale projects and actors.
This model works well in case funders or investors are reluctant to channel funds to many
small decentralised energy projects due to high transaction costs