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27.07.2020, Anshul Patel (Bboxx), Ashish Kumar (Shell Foundation)

Digitizing & Unlocking Climate Finance (SDG13) – For the Off-Grid Energy Access Sector (SDG7)

INTRODUCTION

Energy access acts as a catalyst for the growth of developing societies and economies. Yet, clean energy still remains inaccessible for a significant portion of the global population, with globally ~840m people live in the off-grid regions, and ~1bn people have unreliable grid access with limited power available for lighting or appliances (for household or income-generating activities), as of 2019[1].  In the wake of COVID-19 uncertainties, it is likely that business, incomes  and funding will be under even more pressure, and the perils of energy poverty stands even more exposed now.

Climate markets provides an emerging opportunity for potentially new hitherto-untapped financing sources for the off-grid distributed energy sector (DRE). Interestingly, whilst US$57bn[2] is invested per year into global trading schemes for climate solutions by the governments and private sector, very little of this is directed to Africa. As an example, African markets constitute only 4% Clean Development Mechanism projects (CDM under the Compliance market) – most likely due to the lack of the enabling ecosystem and mechanism to efficiently track carbon displacement in those markets.

It is ironic that climate finance does not play a bigger role in the current momentum for SDG7 in Africa through clean distributed energy models, understandably as a result of several factors. Firstly, the carbon markets have a complex regulatory environment, and current structures do not cater for the high product volumes of distributed energy. Further, the transactional costs for monitoring, reporting and evaluation are prohibitive, and nearly impossible to manage for several thousand solar home systems. Finally, since off-grid solar solutions yield relatively low emission reductions per unit, the economics benefit is not justified for only availing carbon finance.

There’s some trends nonetheless which in fact highlight an opportunity here for the DRE sector. Owing to considerable growth of the DRE sector players over the last few years, there is a growing and rich data set on the performance of customers and. The governments and donors are further increasingly gearing up and coming together to build outcomes-based subsidy programs.

Through this understanding, over the course of 2019, Bboxx, South Pole and IBM (supported by Shell Foundation and the UK government) came together as a joint multi-stakeholder team to study, design and develop a novel concept and proof of concept (POC) that aims to attract new sources of climate finance (SDG13) towards the achievement of sustainable energy for all (SDG7).

The concept was coined as DDIG, or Distributed Digital Impact Gains, with the hypothesis that the DRE sector players can realise much more impact and strengthen their commercial models through a trusted platform that aggregates distributed energy, standardises processing, monitoring and evaluation – whilst providing innovative methods for capturing climate and energy-access focused financing.

Figure 1: Concept for Digital, Distributed Impact Gain (DDIG)

 

LEARNINGS from a PROOF-OF-CONCEPT IMPLEMENTATION

As a part of the POC, the DDIG platform was conceptualized with the intent of being a sector-wide market-neutral public good initiativerather than being exclusive to one player – open to a wide group of DRE players, as well as variety of sectors such as water access, clean cooking etc. that impact livelihoods of the less privileged. To advance this concept further, the POC work uncovered the need of establishing a governance structure to coordinate and manage the development activities across a wide network of stakeholders (as depicted below) – alongwith the need to formalize a consortium of various stakeholders towards the full implementation. The POC further helped understand the need of appropriate technological and standards frameworks that consortium needs to develop (more below), along with the need for endorsement by the host government to ensure a large-scale adoption and roll-out (Bboxx signed an MOU with the Govt of Rwanda towards these efforts). The POC also sought inputs from the other DRE players to obtain a sector-wide view on the conceptual design of the DDIG platform.

Figure 2: Conceptualized Structure of DDIG platform (doesn’t imply commitments)

Through a programmatic approach that is carefully governed and enhanced by blockchain technology, we see the DDIG provided opportunity to unlock climate finance at scale, and even further by monetizing the SDG’s “Beyond Carbon” value[3] such as energy access and health improvement. The approach can be accelerated by a governmental/public financial support. It should not be a one-off subsidiary which will distort the carbon market as well as the underlying distributed energy business, but rather an outcome-based finance alongside investors of emission reduction activities, which plays a catalytic role for this new approach toward climate finance for distributed energy and other activities.

Climate market mobilization

Through this PoC, both the supply and demand side of the climate market were examined, with a specific energy-access sector lens. Engagements were held with the standards bodies, a dozen of potential off-takers (demand-side), and with the off-grid Distributed Renewable Energy or DRE sector participants (supply-side) – consisting of the Solar Home Systems (SHS), Mini-grids, Solar Irrigation, LPG clean cooking and other players.

The most commonly traded product in climate markets today is the latter carbon offset. Whilst carbon offset is monetized currently to a very limited extent – it is also possible to reference, and measure other SDG related attributes, such as energy access, health, education etc. (see figure below). In principle these could be bundled together, or monetized individually, and the provenance of such transactions can be maintained through digital traceability – although significant amount of digital, standards and regulatory infrastructure need to be built to achieve that – and this DDIG concept was a stepping-stone towards that direction.

Figure 3: Example decoupling of Energy Access Token

The role of the standards bodies such as Gold Standard, Verra/VCS, I-RECs et alare also considered paramount in any climate market mechanism – and preliminary conversations also indicated how their standards are to be updated to facilitate introduction of DDIG like instruments in the climate markets. Further, the proposed DDIG concept also has the potential to also go beyond the current climate finance markets by inclusion of broader outcomes-based approaches. For example, results-based finance (RBF), and more recently subsidies, are gaining increasing attention in the off-grid SHS and mini-grid sectors. Through the creation of a reference standard that is digital and thereby traceable, there is also the potential to transform the delivery of outcomes-based funding. As an example, in 2019, the government of Togo launched an innovative subsidy model by contributing a proportion of payments an SHS customer is required to pay in its CIZO programme. FONERWA, the Rwandan green fund, has expressed keen interest to further develop and support the outcomes of this project.

Technology Working Prototype and Commercial feasibility analysis Through the POC, sample streams from Bboxx’s IoT enabled products were published onto a blockchain, and digitally processed to derive an impact value that could be verified and traded as shown in this video demonstration below.

The POC helped understand that the distributed ledger technology is potentially well-positioned for the DDIG application for its ability to maintain an immutable record of origination, and transactions, and thereby build critical trust in such a platform. Developing this further will require consideration of all stakeholders in the ecosystem, and specific attention to minimize operating and energy costs, and also the consideration of potential savings (or not) on the transaction costs for the digital monitoring, reporting and verification (MRV) of carbon displacement.

The commercial modelling and analysis for DDIG as a part of POC further provided some rich insights. Considering a baseline of carbon emission, each solar home systems generate small offset value (e.g. ~0.1 tCO2 per 50W SHS), translating into net additional income of US$2-3/SHS unit/year in a broad range of carbon-prices under the voluntary carbon markets. Other sectors, for example clean cooking, could derive US$3-6/instalment/year since they provide higher displacement value from fossil fuels.

While the primary vision of the platform is to accelerate energy access by increasing the role played by climate finance for the DRE sector, the POC also helped realized that the opportunity for DDIG is way beyond trading only climate assets. Its relevance extends towards providing a traceability platform for targeting outcomes funding and Results-based Financing (RBF) programs – which are increasingly commonplace for energy access programs (e.g. Nigeria world bank, EnDev programs in Kenya, Rwanda etc.).  One innovation that should be studied further in this regard is the digital subsidy program in Togo, which is open to the regulated sector players in country.

 

NEXT STEPS

The learnings from the DDIG POC in 2019 is now being applied to design and launch a broader programme of work which is more focused on the RECs market (rather than the carbon market) – with an aim to create a new market instrument called the D-RECs (Distributed Renewable Energy Certificates) customized for the DRE sector. Initial estimations indicate that this D-RECs market mechanism could potentially unlock ~US$100M/year of new climate financing for the DRE sector in the emerging markets by 2024, if the climate market adopts the instrument as designed and planned.

A ‘TaskForce’ has been formalised towards this D-RECs programme of work – with an aim to work towards achieving the following: a) Work with the standards bodies to design and create the new market instrument, b) Develop new financing mechanisms and structures and a digitsed tracking and traceability platform and process suited for the DRE players; and c) Execute an actual pilot transaction between corporate buyers (off-takers) already in discussions and the DRE players, via the necessary financial intermediaries and lenders (already engaged).

As this D-RECs work gears-up for the launch in the coming time, the TaskForce team welcomes inputs and participation interest from the off-grid renewable energy players, climate action donors/funders, corporates’ sustainability teams/off-takers – and other broad set of stakeholders involved in the climate finance ecosystem – towards catalysing and shaping up a potentially new market disruption.

Please read here the full-length article with detailed market, commercial and technical analysis. Views here are representative of the authors and may not represent the views of their organizations.

 

 


[1] Lighting Global (World Bank) Estimates, 2020. https://www.lightingglobal.org/resource/2020markettrendsreport 

[2] ICAP Emissions Trading Report, 2019 https://icapcarbonaction.com/en/?option=com_attach&task=download&id=614

[3] TPI Maximizing the impact of partnerships for the SDGs, 2018. https://sustainabledevelopment.un.org/content/documents/2564Maximising_the_impact_of_partnerships_for_the_SDGs.pdf

 

 

 

 

 

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