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IOREC: Key findings and recommendations for off-grid business

The International Off-Grid Renewable Energy Conference 2012 (IOREC) was jointly organised by IRENA, the ECOWAS Centre for Renewable Energy and Energy Efficiency (ECREEE) and the Alliance for Rural Electrification (ARE) as an official contribution to the Sustainable Energy for All initiative. IRENA published a conference document with key finding and recommendations. Here an excerpt about finance, business models and the market:

Financing and business models

There is a significant market for off-grid RE in areas with non-existent or unreliable access to electricity. The fact that over USD 36 billion is spent annually on kerosene lighting (USD 10 billion in sub-Saharan Africa alone) indicates the market potential. The need to provide technology and financing services in rural areas presents significant business opportunities. While successful and innovative business models are currently available, there is a need to scale up and local entrepreneurs are expected to play a central role in this effort. Innovative business models often focus on using local capacities to reduce operational costs, thereby stimulating development at local level and improving sustainability. 

Sustainable business models, which are mostly independent of public financial support, will be critical to ensure rapid enough off-grid RE deployment to meet the goal of universal electricity access. There is a strong link between sustainable business models, access to long-term affordable finance and provision of electricity for productive uses.

Access to finance is an important pillar supporting off-grid RE deployment. Off-grid finance consists of two components: the ‘downstream’ component focuses on end users (consumer finance), while the ‘upstream’ component focuses on enterprises (start-up capital, working capital, etc.).

 

Access to financial institutions and affordable lending terms for rural households are pre-requisites of successful downstream financing schemes. Consumer access to finance depends on the presence of an extensive network of financial institutions that provide outreach to rural areas. This challenge is accentuated in less populated areas, which often lack suitable institutions with the necessary outreach. In addition, it is important to ensure that financial institutions have the capacities to perform their role. In particular, they need to be sensitive to the characteristics of off-grid RE projects in order to better tailor their financial products.

Several different models for end user financing were presented at IOREC. The collective experience from Africa, Asia and Latin America suggests that tailor-made financing schemes, based on the end users’ cash flow and existing energy expenditure, are most effective. In addition, temporary guarantees (provided by public or other institutions) towards off-grid RE loans contribute towards demonstrating creditworthiness of rural households, thereby facilitating borrowing also for other needs.

Upstream finance for small and medium enterprises (SMEs) at different stages of project development is vital for increasing private sector role. For private micro-utilities in particular, there is often a critical finance gap in the initial stages of project development. Private finance will be essential to bridge this gap. However, unlocking private finance requires adequate de-risking measures.


IOREC highlighted that development funds, and in particular instruments such as grants, can have a role in the initial stages of market development. As the off-grid RE market matures, external financial support can be gradually phased out. IOREC also revealed the need for coordinated use of domestic, multilateral and bilateral funding sources, to lay the foundations of a sustainable market, for instance by investing in capacity building, infrastructure (e.g. local grids or other ‘non-generation’ assets) and various types of financial incentives (such as soft loans, guarantees, etc.).


Providing electricity supply for productive uses in rural communities is an important feature of sustainable business models, irrespective of technology approach adopted. This facilitates the growth of income generation opportunities and helps communities pay for energy services, thereby stimulating a sustainable market for off-grid RE.


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