In 2011, Rwanda had one of the lowest electrification rates in the world. About 9.4 million people making up 89% of the population lacked access to electricity. But the country has come a long way since then, more than quadrupling the number of people with electricity access under its Electricity Access Rollout Program, and increasing the electrification rate from 11% to 43%. While the majority of progress has been made by extending the grid, there is also a nascent yet dynamic space for off-grid, private-sectorindependent power producers (IPPs), with over 20 off-grid IPPs already having signed cooperation agreements with the Rwandan power utility. Several factors have contributed to Rwanda’s success in providing electricity access through off-grid solutions (mini-grids (MG), solar home systems (SHS)). For example, in recent years, the availability of core components (photo-voltaic (PV) panels, batteries) has increased while costs have fallen dramatically, driven by global deployment. But these international trends alone are not enough to explain Rwanda’s rapid achievements. It was good policy that enabled Rwanda to profit from these international trends.
So 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 sections of the population living in remote, rural areas still lacking electricity access, more work is needed to leverage private sector investments for off-grid technologies to achieve universal electrification not just in Rwanda, but also to provide access to affordable, reliable and sustainable to about 1 billion people globally as envisioned by SDG7.
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 derisking framework for electrification investments to help answer this question.
The theory of change behind the framework involves designing policies to reduce or transfer context-specific investment risks, resulting in increased access to private capital at lower financing cost. This accelerates electrification, while reducing the cost of electricity supply, resulting in savings for the public sector and for the end-consumer. 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 analyze the financing cost for solar PV-battery mini-grids and how they are driven by different types of risks (see Figure 1). We also identify a package of targeted derisking measures, and evaluate their impact in terms of bringing down the cost of capital. Based on these results, we estimate that public derisking measures could result in a circa 25% reduction in daily energy spends for end-users.
Figure 1: Contribution of different investment risks to cost of financing for solar PV-battery mini-grids in Kenya. Source: UNDP/ETH Zurich
Similar to Rwanda, the opportunity is for policymakers in other developing countries to also create enabled investment environments for private-sector, off-grid solutions. There will be challenges. For example, what is the right level of public subsidies for off-grid solutions, and how to best to structure these subsidies? How can policymakers adapt to off-grid business models and markets which are quickly evolving and innovating? While there may not be immediate answers to these questions, we hope that tools like this derisking framework can support governments in being responsive, understanding the private sector perspective, and having an open dialogue on finding policy solutions.
For more information, please visit www.undp.org/DREI