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17.01.2019, Roots of Impact

Blueprint for an Outcomes Fund in Off-Grid- Clean Energy - new document

Despite the success of a number of private companies in the off-grid energy market, the profitability of this sector varies greatly, and its investment attractiveness is mixed. One major challenge is that it is not always commercially viable to extend off-grid energy solutions to the poorest, hardest-to-reach customers; therefore, addressing commercial attractiveness is critical to unlocking the potential of private sector clean energy initiatives for the poor.

We believe this challenge can be overcome by creating a direct economic incentive for reaching these markets with off-grid solutions and creating significant value for these communities. In this report, we outline a blueprint for an outcomes fund that incentivises positive impact for last-mile distribution and catalyses greater private investment in underserved energy markets.

The core premise of this outcomes fund is both simple and powerful: the fund tracks social outcomes for the customers these companies are trying to reach, using these outcomes as a basis for payments to the companies serving them. In this way, the fund ensures that organisations are rewarded for the quality of results they produce for their customers. This contrasts with current output-based models which focus on promoting the supply of products, instead of placing the emphasis on the end-customer’s welfare.

Moving the emphasis away from supporting specific products to rewarding companies for producing customer-focused outcomes will allow for greater flexibility in generating the desired results. In doing so, the outcomes fund promotes a bottom-up approach where enterprises can follow strategies more closely aligned with their own development plans.

The facility design includes a system to track customer outcomes, and then makes payments linked to these outcomes. This requires a robust capacity to measure and manage social impact, and in this blueprint, we use the Lean Data approach spearheaded by Acumen for impact measurement. Lean Data has a tested and affordable means of generating the necessary data in off-grid clean energy.

Setting the appropriate level of incentive is a major design challenge for this fund. Outcome-based incentives should be used to attract fresh investment or to deepen the impact of investments already made in commercially viable enterprises.

To define the appropriate incentive levels and maximise the efficiency of the fund, Roots of Impact and Acumen have tested a context-sensitive mechanism to ensure appropriate incentivisation for a range of enterprises. Instead of focusing on cost as the primary factor in determining the level of incentives offered, we include further variables as a basis for outcome-based incentives.

The iterative process within the fund will serve as its own refinement mechanism, whereby a track record of deals will result in the production of more and better data. This, in turn, will allow the fund to increase the accuracy with which it calculates and interprets the data and sets appropriate incentive levels over time.

The fund permits enterprises to plan and rely on certain volumes of cashflows stemming from their penetration into poorer markets, doing so in a way that appropriately rewards them for providing reliable services to these customers. The ultimate objective of the fund is to establish appropriate incentives to reward those entrepreneurs and investors who push the boundaries of pro-poor, off-grid energy supply.

Overview of the Outcomes Fund:

Download the full blueprint document here.