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FINANCING RURAL ELECTRIFICATION IN DEVELOPING COUNTRIES WORKSHOP Renewable Energy House, Brussels 23 April 2008 Background The Alliance for Rural Electrification (ARE) organised a workshop with the theme: Financing Rural Electrification in Developing countries - a twofold perspective: the EU and the renewable energy Industry’ on 23 April in Brussels. Within this workshop, representatives of the European Commission introduced the tools that the EU has developed to promote renewables within developing countries and the role of the renewable energy industry therein.
The EU has committed funds and resources to enhance and increase energy access within developing countries, to develop innovative financing instruments and to promote public and private partnerships to scale up investment in renewable energies. The three main financial instruments presented at the workshop included: 1. The Global Energy Efficiency and Renewable Energy Fund (GEEREF) 2. ACP Energy Facility and 3. ENRTP – Thematic Programme for Environment Financial instruments 1. The Global Energy Efficiency and Renewable Energy Fund, (GEEREF) Structure The GEEREF is set up as a global public-private partnership. It offers new risk sharing and co-funding options for various commercial and non-commercial investors. The GEEREF will actively engage in the creation and funding of regional sub-funds. In this way, GEEREF will be tailored to the specificities of regional energy efficiency and renewable energy markets. It will bring in local expertise and mobilize additional private sector funding. The Fund will engage professional fund managers. An example on how it works is a possibility to involve the renewable energy industry based on joint ventures established between the industry and a local partner in a developing country. The joint venture could be submitted for funding to one regional fund (where GEEREF would have invested). This regional fund would buy off shares of the joint venture and will participate to the company as shareholder. The profit would be subordinated to the private partners (renewable energy industry and local private partners) with a return from 4 to 10%. There are already a number of proposals on the pipeline suitable for GEEREF investment ready to kick off from the month of May 2008.
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Geographical Scope The GEEREF will support regional funds for sub-Saharan Africa, including the Caribbean and Pacific Island States, Latin America, Asia, North Africa and other EU neighboring countries. Priority will be given to investments in countries with energy efficiency and renewable energy policies that are conducive to private sector engagement. Technology Scope The Fund will provide equity finance to a broad mix of energy efficiency and renewable energy technologies. The emphasis is on deploying technologies with a proven technical track record in regions that are currently ignored by commercial investors. Small hydro and biomass could comprise a large part of investment prospects, with on-shore wind also offering significant potential. Solar energy could provide stable solutions for remote areas. Beneficiaries The GEEREF will support renewable energy and energy efficiency project developers and SMEs. The focus will be on projects below €10 million as these are mostly ignored by commercial investors and International Finance Institutions. In addition to utility-based projects, investments will include manufacturing and assembly businesses, consumer, SME, and micro-finance intermediaries. What type of support will be provided? The major part of the Fund will be used to provide risk capital to different types of renewable energy and energy efficiency investment projects. Capital will be provided at affordable "patient" terms whereby the degree of patience will reflect the degree of local and global benefits offered by the sub-funds and their underlying projects. GEEREF participation will range from between 25 to 50% for medium to high risk operations to 15% for low risk operations. In addition, the Fund will include dedicated technical assistance funds. These will amount to 10-20% of the total fund size depending on the actual needs for capacity building which is likely to be greater in less developed economies. Through this feature, local and international technical expertise can be employed to improve project proposals and business plans in parallel with developing the investment pipeline. Both actual provision of risk capital and technical assistance will make the Fund a 'one stop shop' which will reduce transaction costs and improve overall performance of the Fund. Fund size and ‘leverage’ potential The initial funding target for the GEEREF is set at €100 million. This will allow for global coverage. Depending on the share of private sector involvement, GEEREF's ‘leverage factor’ – the amount of additional capital it can mobilise - is expected to be as high as 10. This is considerably higher than for conventional development aid schemes that ask for co-funding at most in the range of 50–70%. On the basis of initial funding of €100 million, additional risk capital of up to €1 billion could be mobilised under ideal conditions.
2. On ACP Energy Facility Grants (€220M) will be offered to co-fund energy-related projects located in ACP countries which would help alleviate poverty in those countries. The ACP Energy Facility aid for development is committed to the Millennium Development Goals to reduce poverty and should only be targeted to the poor. Energy plays a crucial role in
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the fight against poverty, and this fact is acknowledged not only by the international community but also by the poor people, since they are ready to spend a high share of their income on electricity. The call for proposals launched by the ACP energy facility had 3 main components: • • •
Access to energy Improving energy management and governance, and Improving cross border cooperation in the energy sector
Eligible Activities in Energy Sector: • • •
Infrastructure Management & governance Cross-border cooperation
Funding for next call depends on currently ongoing discussions under 10th FED with the ACP countries. If enough money is committed for the energy sector (this would depend on the priorities allocated by the ACP countries), a second Facility could be launched by the end of the year, where there would be also a component of access to energy and a component of improving energy management and governance. 3. Thematic Programme for Environment and Sustainable Management of Natural Resources including Energy (ENRTP) A thematic programme for the environment and sustainable management of natural resources, including energy, was established to address the environmental dimension of development and other external policies as well as to help promote the European Union’s environmental and energy policies abroad. A four-year strategy addresses the following challenges, which have a profound effect on the lives of poor people: rapidly degrading of key ecosystems, climate change, poor global environmental governance and inadequate access to and security of energy supply. The response strategy is based on the following priorities: • Assisting developing countries to make better progress on integrating environmental sustainability in decision making and thus underpin achievement of all the Millennium Development Goals by building capacity, supporting the involvement of civil society and developing innovative approaches; •
Promoting implementation of Community initiatives and agreed commitments (including those under Multilateral Environmental Agreements) on environment and sustainable management of natural resources, including energy at international and regional level and across national boundaries;
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Improving environmental integration and promoting coherence in EU policies affecting third countries through methodological work and enhancing expertise;
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Promoting EU environmental policies abroad by strengthening international environmental governance, negotiation and monitoring, assisting the operation of MEAs and other processes, supporting coherent international policy development across the three pillars of sustainable development and
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Promoting EU energy policies abroad, in particular sustainable energy options in partner countries and regions by support for policy development and through innovative funding mechanisms.
Support for sustainable energy options in partner countries and regions The objective is to integrate sustainable energy in development plans and strategies (notably poverty reduction strategies) at regional, national and local levels. This can be done by: 1. Developing institutional support and technical assistance, as well as strengthening capacity in policy development, regulation and energy planning, including through support for twining initiatives to share the EU experience and to establish links with key countries, and for well targeted public procurement. 2. Enhancing the role of energy as a means to create income generation for the poor, and to protect/increase income generation for other energy end users by setting up a critical mass of human capital with up-to-date knowledge and expertise in the private sector, in particular in the energy services and targeted end-use sectors. An important component of the programme is flexibility in the choice of implementing partners, allowing partnerships with, among others, community-based organisations, research organisations, civil society, the private and financial sectors and international bodies and organisations. As a part of the DCI, the thematic strategy can involve countries from almost all over the world to address global challenges. The strategy will be implemented through a combination of different mechanisms in accordance with the Council (Financial) Regulation and the options provided for in Article 25 of the DCI, in particular calls for proposals, direct agreements, joint management, and tenders for services.
Lauha Fried, May 2008 Policy Officer, ESHA Lauha.Fried@esha.be