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close this bookEnergy as a Tool for Sustainable Development for African, Caribbean and Pacific Countries (EC - UNDP, 1999, 89 p.)
close this folderCHAPTER 2: THE SUB-SAHARAN AFRICA REGION
View the document(introduction...)
View the documentIntroduction
View the documentMoving Forward
View the documentChallenges and Opportunities
View the documentEnergy in Africa Today
View the documentRegulatory and Legal Frameworks
View the documentBuilding Sustainable Energy Enterprises
View the documentFinancing
View the documentEnergy Prices and Economic Incentives
View the documentTechnology Development and Standards
View the documentRegional Energy Trade and Cooperation
View the documentInstitutional Strengthening and Professional Development
View the documentGhana - Serving Increasing Demands
View the documentMali - Reforming Institutions and Widening Access
View the documentZimbabwe - Stimulating Growth through Reform and Diversification
View the documentPolicies to Promote Sustainable Energy in Sub-Saharan Africa

Building Sustainable Energy Enterprises

Sound regulatory frameworks are only a first step towards a sustainable energy strategy. The huge expansion in the numbers and diversity of actors and skills that such strategies involve is a key challenge for their realisation in most African countries. Governments must nurture a capable, motivated, and vigorous sustainable energy sector until it becomes self-sustaining. Actors in this emerging sector include REEF equipment manufacturers, assemblers, importers, distributors, and retailers; equipment installers and operators such as renewables-based independent power producers and energy service companies; energy managers and consultants for the industrial and commercial sectors; technical support service providers for small users of RETs and energy efficiency devices; and NGOs.

"Governments must nurture a capable, motivated, and vigorous sustainable energy sector until it becomes self-sustaining."

This diversity of actors implies a great variety of possible business/market models and supporting activities. Most of these are relatively new and untested, especially in Africa, where the infrastructure for delivering REEF services hardly exists in most rural areas. Consequently, there are presently few African best practice models to copy or adapt.

NEW DELIVERY STRUCTURES

A number of business structures and operating models have been fairly successful in some African contexts. Four approaches deserve special mention.

· Public/private sector joint ventures: Public energy utilities cannot easily shift from their traditional large-scale and centralised supply business to small-scale and dispersed REEF activities. They can, however, supply technical and managerial know-how to independent operators, or share financing, risk, and management functions in some form of joint venture. In Tanzania, for example, the public utility Tanesco has worked with the town of Urambo to establish and operate a diesel-based electricity cooperative.

· Energy Service Companies: ESCOs were originally intended to improve energy efficiency by giving small energy users access to the technical expertise and financial muscle of the professional energy manager. In this context, ESCOs provide complete packages of technical and financial analysis, implementation, maintenance, and financing, and are paid relative to performance: they get a commission for savings achieved, for example. This useful model is also being applied increasingly to the delivery and maintenance of decentralised renewable energy systems, especially PV solar homes. ESCO-based PV delivery has been implemented in the Dominican Republic, Morocco, Indonesia, and Bolivia and is currently being tested in Zambia. In all these cases the ESCO owns the equipment and is paid a monthly service fee by the users. In the case of Bolivia the fee is about US$8 for a relatively large 50W system, excluding replacement lamps; that is about as much as a family without a PV system spends just on candles, lighting kerosene, and torch batteries.

However, few, if any, rural energy ESCOs are presently able to recover their costs. Most of them must depend on some form of operational subsidy or grant. This support could probably be eased off as technology costs fall and as ESCOs gain experience and market size and reduce their operating costs. In the mean-time, these potentially valuable organisations require substantial and careful nurturing (see Box 2 for an illustration from the Ivory Coast).

· Project-led capacity building: Implementation projects often pay insufficient attention to building institutional and market capacity. Good project design can be extremely effective in forcing private sector developers to build up comprehensive energy delivery services. A good example is provided by the European Commission’s Regional Solar Pumping Programme in nine countries of the Sahel (see Box 3).

· Community associations and cooperatives: Community cooperatives were the backbone of rural electrification in the USA and some other industrialised countries and, increasingly, in the developing world, for example in Bangladesh. They and other forms of micro-scale collectives deserve careful consideration and appropriate support in Africa. They can contribute greatly to social empowerment by aggregating political voice, technical and managerial know-how, and financial creditworthiness. By scaling up energy demand, they can reduce unit supply costs and open the door to larger-scale options than are possible for individuals, including diesel or RET-based mini-grids, and medium- to large-scale biomass production (see Box 4 for examples from Morocco, the Philippines, Brazil, and the Sahel).

Box 2. Developing Energy Service Companies in the Ivory Coast

Recent electricity price rises have greatly increased the cost-effectiveness of energy efficiency in the Ivory Coast, especially for air conditioning (where savings of 50% can be economic) and for improvements to building structures. Despite these price rises and substantial development assistance for energy audits, training, demonstration, and information dissemination, energy efficiency markets still have not emerged. One main reason is that there is a conflict of interest between equipment providers and users. Firms that install and maintain electrical equipment are unwilling to form ESCOs because of the complications and risks which arise from payment by performance (i.e. according to the energy and monetary savings achieved). But energy users are unwilling to pay for more efficient equipment without guarantees of improved performance and savings.

A Small Grant GEF/World Bank project is now attempting to nurture the ESCO market. Model performance-based contracts borrowed from American and European practice are being adapted to local conditions and law. Training is being provided to potential stakeholders (beneficiaries, service providers, and bankers); to three candidate ESCOs, especially on the preparation of project feasibility studies and business plans; and to a manager who will appraise conservation projects and related contracts and oversee a grant fund designed to buy down some of the financial risk of the project.

The two-year project is expected to establish at least 20 performance-based contracts and at least two ESCOs. Based on these pioneering examples, it is hoped that more companies will be established in the Ivory Coast, and that these will form a nucleus for similar developments in neighbouring countries.

Some countries in SSA lack a culture of small-scale entrepreneurial businesses. In such cases, help may be needed to provide education and training in business management, project identification, and the preparation of bankable project proposals. These issues are being addressed by the Financing Energy Services for Small-Scale Energy Users (FINESSE) programme, which was initiated jointly in 1989 by the World Bank, the Netherlands Ministry of Development Cooperation, the US Department of Energy, and UNDP.

OPERATION AND MAINTENANCE SUPPORT SERVICES

The introduction of any new technology must include good quality operation and maintenance (O&M) support services if markets for the technology are to prosper and grow. The key issue in this context is access to technicians and spare parts. Although this seems obvious, many RET projects in Africa have failed because they ignored this cardinal rule or assumed that the private sector would take care of it. Providing these services is a particular challenge in SSA, because market infrastructure in general is at an early stage of development and because many installations will be scattered in low-density rural settings.

"The introduction of any new technology must include good quality operation and maintenance (O&M) support services if markets for the technology are to prosper and grow."

These challenges can be eased through careful planning based on a bundling approach. Large installation projects have lower unit O&M costs, as well as larger revenues to meet them, and have been found to be more sustainable than small projects. Rural installations can be grouped into geographic clusters and rural initiatives can be mixed with lower cost peri-urban installations. Nevertheless, credit financing or other forms of help are usually needed for the early establishment phase of these services, and training programmes are needed in most countries to develop and sustain a critical mass of expertise.

INFORMATION, PROMOTION AND DEMONSTRATION

REEF business development needs several types of strong backing, which the private sector can rarely provide for itself. First and foremost, clear signals from government that demonstrate a commitment to sustainable energy - perhaps backed by implementation targets - are crucial for building market confidence. Governments might consider establishing independent high-profile agencies to promote, support, or oversee REEF business development. Government promotional campaigns backed by good information are also needed to raise the profile and explain the benefits of energy efficiency and renewables to both the formal business and finance sectors and also to households and the small-scale service sectors.

Box 3. Building PV Business Capacity through Project Design

The Regional Solar Pumping Programme was launched in 1986 by the European Commission. It installed nearly 700 solar PV drinking water pumps and 1000 PV community systems (totalling some 1,300 kWp) in remote rural areas of nine countries in the North African Sahel. The total project cost was about 70 MECU. A recent survey showed that more than two-thirds of the systems are still functioning.

One key feature of the project was the inclusion of challenging performance guarantees in the call for tenders. Candidate suppliers were asked to provide five-year guarantees for the equipment and to respond to requests for repairs within a maximum 36 to 72 hours (depending on the country). As a result, the European supply companies were forced to hand responsibility for installation and the maintenance contracts to a local company in each country. Each company was given training and a stock of spares. Many of these companies are still in business, with a steady rise in turnover as they expand their activities as suppliers of PV systems. The financing mechanism developed for the project, based on paying for the water produced by the PV systems, also helped build sustainable business capacity for delivering and servicing the PV systems.

Box 4. RET Financing Schemes in Practice

NGO-managed operators plus cooperatives

In Morocco the NGO Migrations et Développement (M&D) has helped electrify nearly 100 villages in a remote, mountainous area through diesel-based mini-grids, using a model in which local operators provide electricity to a village cooperative on a fee-for-service basis. The NGO helps the villagers form an association to own, manage, and finance the electrical system. The association raises some 40% of the capital cost and a further 10-20% as costs-in-kind (for labour, poles, etc.), the balance coming from a European Commission grant which M&D distributes. To minimise costs and maximise benefits, M&D bulk purchases equipment, insists that all households are connected, and supports the association in working out least-cost and sustainable service standards and tariffs. The government is recognising the benefits of such informal initiatives and of their integration into the public-sector national electrification programme.

Loan aggregation via cooperatives

In a Dutch-funded project in the Philippines, the Development Bank of the Philippines (DBP) agreed to finance PV solar homes but only to village cooperatives, mainly to avoid the high costs of servicing many individual small loans. The DBP leases out the systems, so that it owns the panels as collateral. But if a cooperative has to return a PV panel because of payment defaults, the DBP would have little use for it, so the dealer who supplies the PV systems has to agree to buy back such panels from the DBP. Another financial safety net is provided by the cooperatives’own funds, which can usually carry for a time the payments of individuals who run into financial difficulties.

Concession funding for public sector objectives

In the poor, rural Minas Gerais district of Brazil (population 1.4 million) most people lack electricity and there is little prospect of grid extension. The government is giving paid concession contracts to a local company to equip schools with PV lighting. This provides entry capital for the company to widen its services’ provision on reasonable repayment terms to households, health clinics, community centres, and so forth. PV owners lease hardware for a monthly fee which is not greater than their payments for low-quality lighting such as candles and torch batteries.

Payments for RET energy services

These have been used successfully to fund the recurrent operational and maintenance costs of renewable energy systems - costs which are often overlooked in project design. A good example is the European Commission’s Regional Solar Pumping Programme in the Sahel (see Box 3), in which village associations pay for the main project output - water. Payments cover the salary of the villager who manages the system plus day-to-day upkeep, the annual maintenance contract, and a deposit fund towards the eventual replacement of the system. In most cases, payments have been regular and sufficient to ensure financial sustainability.

"Recent ESMAP surveys in Uganda, for example, have revealed astonishingly high rates of diesel-based rural electrification and willingness-to-pay very high amounts for quality energy services."

Experience has shown that many other kinds of information are also needed but scarcely exist in most African countries, including:

· data describing renewable energy resources (e.g. wind speeds, solar insolation, small-scale hydro resources, forestry and other biomass residues, and sustainable production from on-farm tree-growing as well as formal plantations and natural forest management); and

· market assessments of the potentials and economics of both energy efficiency (e.g. energy audits in industry, offices, hotels, etc.) and alternative forms of on- and off-grid decentralised energy supply. This will include population density, income and its distribution, distance from the grid, costs of grid extension, etc.

The importance of greatly improving information about rural energy markets can hardly be overestimated. Recent ESMAP surveys in Uganda, for example, have revealed astonishingly high rates of diesel-based rural electrification and willingness-to-pay very high amounts for quality energy services. This information has profound implications for energy planning and market development (see Box 5).

"In fact the US National Rural Electric Cooperative Association has found that informed participation is the most important single success factor in all the solar PV projects that it has analysed."

· Demonstrations of best practice in technologies, delivery systems, and institutional arrangements can be particularly effective in catalysing further activities. These need not be costly. In Ghana, for example, PV-based Solar Service Centres, established by the Kumasi University of Science and Technology to charge and provide distilled water for batteries on a commercial basis, have played a critical role in demonstrating the technology and opening up new markets for PV.

UNDERSTANDING THE DEMAND SIDE OF THE MARKET

A better understanding of the needs and aspirations of the potential beneficiaries of RETs is badly needed. Many efforts to promote RETs in SSA still retain elements of top-down, we-know-what-they-need thinking.

At the project level, informed choice is particularly important with respect to setting priorities. Informed participation approaches should be used in project design to offer target communities choices between productive services (e.g. irrigation pumps, other motor power) and consumption (e.g. radio and television), and the choice of whether to invest in energy at all or in other income-generating infrastructure such as roads, trucks, or a better water supply. Choices should also be offered when attempting to strike the right balance between performance and cost, and when making tradeoffs between capital and running cost, reliability, maintenance, and dependability. Experience shows that informed participation is one of the principal success factors in decentralised energy projects. In fact the US National Rural Electric Cooperative Association has found that informed participation is the most important single success factor in all the solar PV projects that it has analysed. Conversely, if communities do not agree on project design and goals, projects will sooner or later fail.

"Consumers must be offered a range of technologies that provide choice with respect to which energy services they want, the level of service they want, and the types of technologies they use."

Understanding the demand side of the market will be crucial as the transition from project to market dissemination of RETs is made. Consumers must be offered a range of technologies that provide choice with respect to which energy services they want, the level of service they want, and the types of technologies they use. This concept has been followed with great success in the development of the PV market in Kenya, as outlined in Box 6.

Box 5. Informal Rural Electrification and Willingness-to-pay in Uganda

As in some other African countries, rural electrification is occurring rapidly in Uganda without the help of government or the public utility. A recent ESMAP survey (Tuntivate, 1997) discovered that there are more rural and peri-urban households with private access to electricity (from car batteries) than there are public sector grid-connected households in the whole country. They pay a kWh price of US$2.5 or more, over 20 times the state utility’s US$0.10 urban tariff. The survey also found that the average rural household spends over US$10 per month on candles, lighting kerosene, dry cell batteries, and recharging car batteries. This amounts to a national total of US$320 million annually, mostly for imported goods. With credit financing on reasonable terms, a similar sum would buy each household a substantial (40-50W) PV solar home system. The survey uncovered at least 50 MW of privately installed diesel generation in rural and peri-urban areas, mostly used very inefficiently, with load factors of around 5%, as a standby against power cuts on the grid. This capacity is growing by some 10 MW annually and has reached one-third of the public utility’s grid-connected capacity of 155 MW (in 1995). Legislation which would allow equipment owners to connect and sell power to neighbours is under discussion. If implemented, the resulting micro-grids should bring about dramatic improvements in service benefits, energy efficiency, and lower kWh prices. There is a huge potential across SSA for accelerating these processes, which could form a basis for a major transition to economic renewables-based operation as RET costs fall.