95% of 1.2 billion people without access to energy live in sub-Saharan Africa and developing Asia according to the International Energy Agency (IEA).
The traditional public approach in providing energy access has been for government entities to oversee the extension on an electricity grid. Even when private funds are available, public and private investment have been usually directed towards large-scale infrastructure and on-grid distribution due to the proven commercial viability and guaranteed return on investment. However, given that 80% of those without access to energy live in rural communities as conventional grid connections are limited in remote areas, extending the grid is not a viable solution.
In order to achieve universal energy access by 2030, will require an increase in funding of 400% over current investment levels as per IEA figures. Since such an increase in funding is unlikely to come from the public fund or the donors the IEA includes that a bulk of it will have to come from the private sector. Additionally, it is expected that 40% of the additional investments will be in distributed or decentralized off-grid solutions.
Distributed energy technologies are widely known to provide quicker and more cost-effective access to energy. This is especially the case since the emergence of telecommunications has allowed the private sector to use innovative approaches to extend energy access. Some of these approaches include crowdfunding, pay-as-you go schemes, and real-time monitoring technologies. Thus far, the most successful model of distributed service delivery has been through small entities and private small and medium enterprises (SMEs) as their small-scale and simple decision-making allows them room for more flexibility and innovation. Local SME’s can better understand the needs of local markets and create suitable services. They additionally create support services and distribution channels which in turn creates jobs and supports the local economy and most importantly creates a sense of ownership. While distributed energy does not necessarily have to be renewable energy, the use of renewable source can have a significant impact on the performance, value, and ultimate efficacy of distributed systems.
While there is a lot of value and potential in SMEs, they still face numerous policy barriers where national policies favor grid-based and larger energy projects or where fossil fuel subsidies are present can be an obstacle in the development of a distributed clean energy market. Other barriers relate to the lack of viable business models and local leadership to allow scaling up of successful projects. Similarly lack of capacities and skilled workforce for the installation, maintenance and service of the system. —-The challenges are further exacerbated by difficulty in accessing investment and financing options. There are a number of reasons for this, namely:
1) such businesses are often perceived as higher risk or low return and it is often difficult to obtain loans
2) energy projects in rural settings tend to take time as more time is needed to move from concept to conducting feasibility studies and business plans and as such the return on investment is long-term, whereas investors often prefer short-term returns
3) typically the investments needed are between a few thousands and a few million dollars which is a sum too small for mainstream investors and banks which leads to high transaction costs per beneficiary and thus higher interest rates
4) there are no coordinating agencies to mobilize and channel small scale financing from local banks to small companies and private initiatives.
As such, the government has an important role to play to support the work of SMEs in achieving universal energy access. With a majority of people without access to energy located in Africa and Asia, African policy-makers have opportunity of capturing the value of innovative enterprise-based energy access markets. However, they have an important role to play. First, governments must create an enabling environment through identifying the policies and regulations which overcome barriers for entry. Additionally, it is important to develop the needed capacity, not only technical capacities related to the operations of distributed energy systems, but also capacities in other sectors to enable the establishment and the functioning of a decentralised energy market structure. Financiers, policy-makers, and regulators need to understand the new and emerging market to be able to support it. Thirdly and most importantly, it is important to be able to mobilize financing for the SMEs to get businesses started and for other market players, such as suppliers, service providers and end-users to make a profit as well to keep the market going .
This article was previously published on the Renewable Energy World Magazine blog