RBF: Accelerating private sector investment in the energy sector
Results Based Finance (RBF) can work as a useful accelerator to stimulate private sector investment in the energy sector in developing countries and increase access to energy. This was one of the outcomes of the side event ‘The Role of Results Based Financing in Realising Sustainable Energy for All’ which was organised by EnDev and SNV at the SEforAll Forum (New York City, 3-5 April 2017).
Through RBF private sector businesses get an incentive payment for the delivery of clean energy services. They only get this payment after delivery of the provided energy service. EnDev leads 17 RBF projects in 14 countries in Africa, Asia and Latin America. SNV is one of the key implementing partners of the EnDev programme, currently involved in five RBF projects.
The aim of the Partner Working Session was to share lessons learnt from RBF projects under the EnDev programme. In his introduction Gareth Martin, Head of the Energy team of DFID, stressed that RBF puts the risks on the private sector partners and not on the DFID development budget. “RBF creates value for money”, Martin stated. DFID is one of the six donors of EnDev, with a special focus on RBF. Marcel Raats, co-manager of the programme, highlighted the broad RBF portfolio within EnDev including cookstoves, solar and mini grid projects. “In some countries we really see promising results from RBF leading to scale in the market, especially in countries where the private sector is already more matured, like in Kenya, Tanzania and Vietnam. In lesser developed markets RBF triggers other effects like innovation, company start-up, coordinated market support, and serving market segments that are beyond commercial reach, Marcel Raats stated. He referred to the new EnDev study ‘Driving Markets to Scale’ with lessons learned from RBF projects.
Besides the two representatives from the public sector, two private sector managers joined the panel. Leonide Sinsin, director of solar company ARESS in Benin, mentioned that in Benin RBF is a proper market tool to encourage businesses. In Benin only 10% of the rural population has access to electricity. “With the RBF incentive, ARESS has been able to provide access to energy through solar devices to 40,000 people so far”, Sinsin explained. He further stressed the importance of only working with high-quality products that have been tested and certified. Furthermore he stressed that the RBF project has influenced the Benin government to decide on a tax exemption for solar lamps which has strongly increased competitiveness in the sector.
According to Ruben Walker, director of cookstove producer ACE (African Clean Energy), RBF provides a lot of flexibility to private sector to work with different business models. “RBF really can create a paradigm shift in market development and stimulates innovation”, Walker stated.
Gareth Martin further mentioned that RBF provides an incentive to companies to start up and boost their businesses. Through the RBF approach, businesses can get access to a loan more easily.
SNV Managing Director for Energy, Tom Derksen, who moderated the discussion, also asked the panel members for any barriers in the RBF projects. Leonide Sinsin mentioned that the validation process in Benin often takes more than two months, which means that he has to wait long for the incentive payment. “It would be good if we could shorten this verification process”, Sinsin stated. Furthermore he stressed that through the RBF more financial institutions – in particular in micro finance (MFIs) – could be motivated to step into energy which would lead to more competition and to a decrease in interest rates which are currently very high at 10% to 18%.
Marcel Raats added that RBF functions well as a means to mitigate risks for the private sector. He gave the example of a business that recieved a loan from a bank by using their participation in the RBF project as a quality conformation.
In his concluding remarks, Tom Derksen, highlighted the following outcomes from the discussion:
Although RBF is not the silver bullet, results-based finance is an important part of a broader toolkit to support market development for access to clean energy;
Get the incentives right. The incentives and indicators for results-based finance need to be carefully designed, taking into account local market dynamics to ensure the mechanism helps overcome market barriers;
RBF is scalable. Results-based finance will help scale up renewable energy markets provided that the design allows for flexibility and fits the local context.
Around 80 participants joined the discussion.