Reducing risk for private investment in off-grid energy

By Oliver Waissbein – In 2011 Rwanda was literally in the dark– 89 percent of the country, about 9.4 million people, didn’t have power. It was one of the lowest electrification rates in the world.

Fast forward to today and it’s more than quadrupled the number of people with electricity and increased the electrification rate from 11 to 43 percent.

Falling solar prices
These impressive gains took place under the Electricity Access Rollout Program. And while the most progress has been made by extending the grid, there is also a nascent yet dynamic space for off-grid, private-sector independent power producers (IPPs).

More than 20 off-grid IPPs have signed agreements with the Rwandan power utility. Several factors have contributed to Rwanda’s success in providing off-grid electricity, including mini-grids (MG) and solar home systems (SHS).

In recent years, solar photovoltaic (PV) panels and batteries have become easier to get while costs have fallen dramatically. This is an international trend, but it’s not enough to explain Rwanda’s rapid achievements. Good policy has also played an important role.

What did Rwanda do?
Some key factors have been sector-level planning with specific targets for different electrification technologies, and provisions for identification of sites for deployment of off-grid electrification technologies.

These measures reduced investment risks for off-grid entrepreneurs and, together with further policy actions, have resulted in increasing interest from private investors and financial institutions.

However, with large numbers of Rwandans living in remote, rural areas without electricity, more work is needed to leverage private sector off-grid investment.

And this process needs to happen in many other countries if the vision of the Sustainable Development Goal 7 – to provide access to affordable, reliable and sustainable energy to about 1 billion people – is to be achieved.

De-risking framework for electrification investments
How can one systematically think about the role of policy in reducing risks for investments into infrastructure for off-grid electrification, given the highly context-specific nature of the problem?

In UNDP’s new report in collaboration with ETH Zurich, we provide a de-risking framework for electrification investments to help answer this question.

The theory involves designing policies to reduce or transfer context-specific investment risks, to get more private capital at lower cost. This accelerates electrification, while reducing the cost of electricity supply, resulting in savings for the public sector and the consumer.

Saving 25% in daily energy costs
In the report we analyzed Kenya and the Indian state of Uttar Pradesh, performing 32 interviews with investors, investment advisors and industry experts. Specifically, we analyzed the financing cost for solar PV-battery mini-grids and how they are driven by different types of risks.

We also identify a package of targeted de-risking measures and we evaluate their impact in bringing down the cost of capital. Based on these results, we estimate that public de-risking could mean a 25 percent reduction in consumers’ daily energy spending.

There are opportunities for policymakers in other developing countries to encourage investment in private-sector, off-grid solutions, however there will be challenges.

What is the right level of public subsidies for off-grid solutions, and how should they be structured? How can policymakers adapt to off-grid business models and markets that are evolving and innovating quickly?

While there may not be immediate answers to these questions, we hope that tools such as this de-risking framework can help governments to become responsive and understand the private sector perspective, and have an open dialogue to find solutions. For more you may read the full UNDP report