How Results Based Financing is spurring solar market development in Tanzania
In order to assure quality, only Lighting Africa approved products are considered under the RBF.
With only 14% of Tanzanians having access to electricity and a vast majority of the country expected to remain off-grid for the coming decades, innovative financing mechanisms are needed to spur last-mile distribution of clean energy solutions. SNV is among the first organizations world-wide piloting Results Based Financing (RBF) in the energy sector, aimed to overcome market failures constraining private sector delivery of modern energy services to isolated communities. The key feature of RBF is payment upon delivery, with the private sector expected to take the full risk until the moment of delivery of the contracted results.
In Tanzania, the RBF initiative was launched for pico-solar PV lighting applications in the Lake Zone, which is considered to be the first operational RBF fund functioning under the global Energising Development (EnDev) programme as managed by GIZ and RVO and funded by DFID. The RBF initiative is focused on the application of a temporary financial product in mainstream banking amounting to €1 Million that serves to assist the private sector in developing the market for pico-solar products in isolated rural areas. TIB Development Bank (TIB) has been selected to host the RBF incentive fund. After designing and setting up the RBF facility, SNV’s main role in this initiative is to broker relations amongst actors that ensure fair, transparent and verifiable financial transactions throughout management of the fund. Market intelligence research by SNV for the Lake Zone shows a particularly strong demand for solar systems, with more than 35-40% of rural households indicating solar as their preferred energy technology option for immediate purchase, while an average of only 3.5% indicates to have access to these products.
Considering this specific market context, the RBF scheme is designed to provide incentives to pico-solar import-suppliers and retailers / end sellers to bolster their investments in solar distribution chain development by rewarding these private sector players with incremental sales based performance incentives. In order to assure quality, only Lighting Africa approved products are considered under the RBF. The value of the RBF incentive applied to each unit of pico-solar products is calculated annually by SNV based on the performance of each pico solar product (brightness and run time) and an annual product incentive cap. As the market develops and economies of scale are achieved, the annual product incentive value will decrease by 25% at the outset of each year in which the RBF Fund is available to the private sector. The RBF program is open to the private sector from April 2014 until August 2017. An Advisory Group has been established, in which besides TIB Development Bank and SNV, the Tanzania Renewable Energy Association (TAREA), IFC-Lighting Africa and the World Bank are represented. Launched in February 2014, out of 11 applications from the private sector, five companies were selected in the first round of the RBF: Ensol, Global Cycle Solutions (GCS), Off Grid Electric, Sunny Money and Zara Solar; dealing in Lighting Africa approved products from manufacturers and brands including Omnivoltaic (Marathoner Beacon series), Greenlight Planet (Sun King series), One Degree Solar (Bright Box), FOSERA-based technology (M-POWER series), and D.light (S2, S20, S300, D2). Qualified sales for the RBF Fund have been deemed open as of May 2014 with each selected firm applying diverse and unique business models so as to reach last mile consumers.
Feedback from the private sector has been very positive: “This is not a project. This is a business proposition”, Malcolm Wigmore, Operations Director of Sunny Money said. Or as stated by Xavier Helgesen, CEO of Off Grid Electric: “This incentive is exactly the kind of support we need to rapidly expand energy access to the customers who need it most. We believe it is an ideal model because it accelerates the market without distorting it, and will do our best to demonstrate its effectiveness in practice.” Within three months of operation, four out of five suppliers initiated RBF qualified sales activities, three of them not being present in the Lake Zone previously and self-investing to open zonal offices to capture this new market. For companies like Off Grid Electric, GCS and Ensol, the RBF was the trigger to actually start operations in this new market.
The active presence of the newly established business operations in the Lake Zone led so far to 11 new pico-solar product-service options being market-available to rural consumers, while 111 new employments (25 full time by supplier jobs, 86 new sales agents) have been generated. Total sales for the first half of the year are ultimately benefitting close to 14,000 rural Tanzanians by extending access to modern energy services of lighting and communication to Lake Zone families, and results are increasing on a daily basis. Over €100,000 worth of incentives has been transferred to the private sector so far. A second RBF call is expected to be launched soon, aimed to incentivize another batch of companies to start last-mile sales in the Lake Zone.
The RBF played a crucial role in leveraging commercial loans and/or investment financing for above-mentioned companies, both for pre-financing RBF sales activities as well as for further scaling of their business operations. GCS used the RBF to leverage a $70,000 loan for scaling its operations. Off Grid Electric secured financing of the International Finance Corporation (IFC) amounting to $7 million to reach 100,000 households and small businesses in Northern Tanzania. This is part of the One Million Solar Homes initiative, announced by Tanzanian President Jakaya Kikwete, aimed to provide solar electricity for 10% of the nation’s population and generate more than 15,000 solar industry jobs by the end of 2017.