United Nations Environment ProgrammeDivision of Technology, Industry & Economics (DTIE)

Lawrence AgbemabieseEnergy Branch

BioEnergy for Poverty Eradication: Enhancing the Role of Small/Medium

Energy Enterprises

Financing biofuels and Jatrophaplantation projects with special

emphasis on Clean Development Mechanisms

November 13 – 14, 2006

Accra, Ghana

Overview

““Big PictureBig Picture”” issues: Poverty, Environment, and issues: Poverty, Environment, and Sustainable EnergySustainable Energy11

The Case for Energy SMEsThe Case for Energy SMEs22

33

Building on experiences: Resources and Building on experiences: Resources and StrategiesStrategies

44

Energy SME Promotion: Gaps, Models and Energy SME Promotion: Gaps, Models and ExperiencesExperiences

The vast majority of AfricaThe vast majority of Africa’’s 700 million people lack modern s 700 million people lack modern energy and the opportunities these representenergy and the opportunities these represent

A normal view in rural Africa…

Poverty-environment relations

Population pressure > ecological carrying capacity

Environmental degradation: global and

local drivers

Capit

al

dissip

ation

+

Poverty

Childr

en as

assets

+

Resource dissipation

+

High discount rates +

Resource loss+

Polluti

on,

resour

ce los

s+

Ill-health

Resource productivity loss

+

Policy failures, conflicts, induced

migrations, disasters,

unfavourable terms of trade…

+

Adapted from Poverty-Environment Partnership, 2005

Sources of energy demand growth

p Energy can play a critical role in helping to achieve the Millennium Development Goals (Energy for the Poor, DFID, 2002)

p An energy path dominated by traditional or fossil fuels will be locally and globally costly from an economic, social and environmental perspective.

The Energy-Development Dilemma

But…

‘Environmental Kuznet’s Curve’ revisited

Per capita income

Environmental degradation

Worsening environment Improving

environment

Adapted from D.W. Pearce, 2005

Ymax

Breaking out of poverty: Some priority areas

Poverty Eradication and Environmental Sustainability

Access to clean

water and sanitation

Access to sustainable

energy

Soil conservation

Ecosystem protection-restoration

Population management

o From centralized, large project, energy-by-wires and tanker trucks to decentralized, local enterprise and market driven. From centralized to decentralized.

Emergent energy-development paradigms

o From government or big company driven, top-down, prime contractor-subcontractor relationships to partnerships of businesses, NGOs, governments and others each adding value and each achieving its objectives. From contracting to partnering

o From project finance, “belts and suspenders” 20% dollar denominated IRRs with 5-7 year “exits” to market entry, equity growing, local finance, built on a triple bottom line of profit, development and environment. From project financing to investing.

p The value of the small, local enterprise to the delivery of energy has been empirically demonstrated.

The Case for Energy SMEs I

p SMEs are perhaps the most important and weakest bone in the sustainable energy and sustainable development skeleton.

p As the delivery vehicle for government programs, national contracts and multinational corporations, SMEs are crucial to success.

“Empowering local entrepreneurs and enterprises is key to developing the Tier 4

markets” (the 4 billion people at the Bottom of the Pyramid)

The Case for Energy SMEs II

C.K. Prahalad & Stuart L. HartThe Fortune at the Bottom of the Pyramid

The Case for Energy SMEs III

……provide efficiently packaged small scale provide efficiently packaged small scale energy services for a variety of energy usersenergy services for a variety of energy users11

……provide low cost alternatives to provide low cost alternatives to grid extensiongrid extension22

……exist in a wide range of possible business exist in a wide range of possible business modelsmodels33

……often provide significant social and often provide significant social and environmental returnsenvironmental returns44

SME can be key players in the development of the bioenergy chain and associated energy services

because they…

To successfully deliver energy services, what do SMEs need?…

……yes, yes, ““Financing.Financing.”” But that alone is insufficient!But that alone is insufficient!11

Information and trainingInformation and training22

Seed and Seed and ““secondsecond--stagestage”” financefinance33

Business systems and toolsBusiness systems and tools44

Customer credit through 3Customer credit through 3rdrd Party institutionsParty institutions55

Enterprise development assistanceEnterprise development assistance66

p Gifts and Grantsp Government Subsidiesp Development

Assistancep Guaranteesp Insurancep Concessionary Loans p Commercial Loans

p Concessionary Investment

p Commercial Investment

p Supplier Creditp Customer Up-front

Paymentsp Entrepreneur’s capital

What sources of funding currently exist to support SMEs?…

àGifts and Grants

àSubsidies

àDevelopment Assistance &Specialized Programs

àConcessionary Loans &Investments, Micro-credit

àEntrepreneur’s Equity

àCustomer Down Payments &Supplier Credit

àCommercial Loans, Investment,Insurance & Guarantees

Public Sector Private Sector

Development Commercial

Finance Spectrum I

Gifts and Grants

Subsidies

Development Assistance &Specialized Programs

Concessionary Loans &Investments, Micro-credit

Entrepreneur’s Equity

Customer Down Payments &Supplier Credit

Commercial Loans, Investment,Insurance & Guarantees

Governments, Multilateral Programs

Financial Intermediaries, NGOs,micro-lenders

Banks, Funds & other financial institutions

Public Sector Private Sector

Development Funds Commercial Funds

Finance Spectrum II

Development Assistance &Specialized Programs

Concessionary Loans &Investments, Micro-credit

Entrepreneur’s Equity

Customer Down Payments &Supplier Credit

Gifts and Grants

Subsidies

Commercial Loans, Investment,Insurance & Guarantees

Gaps:1. Too few intermediaries.2. Too little seed capital.3. Too little reasonably priced growth capital.4. Insufficient consumer &micro-enterprise finance.

Public Sector Private Sector

Development Commercial

Finance Spectrum III

Operations/Growth

BusinessPlanning

RollOut

Concept

AggregateInvestment

Investment Timeline

Expansion

Pilot

Asset-based financingSeed

Capital

EquityEquity DebtDebtGAPGAP

The finance gap in energy SME development terms

Upstream Downstream

p Expanding the number of intermediaries providing services and financing to SMEs.

p Increasing the available seed capital.p Increasing the available pools of next

stage capital.p Providing capital at realistic return

expectations = 6% to 10% ROI on an IRR basis.

p Expanding available consumer finance.

How can these gaps be closed?

Energy SME Promotion: The REED Model

Energy SMEEnergy SMEEnergy SME

NGOs / Dev.NGOs / Dev.organisationsorganisations

Financial Financial InstitutionsInstitutions-- 2nd stage financing2nd stage financing

StartStart--upupFinancingFinancing

EnterpriseEnterpriseDevelopmentDevelopmentServicesServices

Enabling Enabling GovGov’’tt policiespolicies

Energy services and products for rural and

urban clients

Description of business: Jatropha biofuel production

Financing: $8,000; 3yr loan; 5% interest

Case Study: RCI, Zambia

Description of business:

Jatropha oil powered multifunctional platforms to peel, ground cereals and charge batteries

Seed Financing: $15,000; 5yr loan; 10% interest

Case Study: Bagani, Mali

Business As UsualØ Project centered

Ø Top-down, donor driven

Ø Large, politically visible

Ø Planned in full, in advance –rigid

Ø Govt to MDBs/RDBs to apex organizations to contractors for fixed time and cost

Alternative ModelØ Enterprise centered

Ø Driven by local markets

Ø Small, medium sized

Ø Incremental, flexible and responsive

Ø Partnerships of value adding entities, driven by bottom line of service delivery and sustainable market presence

What’s new here..?

Social + EnvironmentInvestors

StrategicInvestors

Donors, GovernmentsFinance Partnerships

Enterprise Dev. Partnerships

Replication Partnerships

Energy Service Partnerships

Finance SpecialistsEg. E+Co

Country NGOsEg. Enda, Kite

SMEs Utilities

Energy Administrations,Govt Agencies

Donors,UN Agencies, etc

Multi-level public-private partnerships committed to making it work…

AREED Investments 2000 - 2006

- 50,000 100,000 150,000 200,000

RCI

Energie R II

Ubwato

Rasmas

Chavuma

VEV

BETL

Energie R

AME

Kalola Farms

Aprocer

M38

Anasset

Seeco

Lambark

Gladym

Eco'Home

En

terp

rise

s

Size (US$)

Type 1 Investment: Proof of Concept• e.g., Jatropha, crop drying, solar grinders.

• Very low risk-adjusted returns.• High Innovation impact on sector dev.• Typical Loan Size: $25,000• Ave defaults: 30%• Ave returns: <3%

Type 3 REED Investment: Expansion• e.g., Urban LPG, efficient lighting• Moderate risk-adjusted returns• High direct impacts• Low Innovation impact• Ave Loan Size: $130,000• Ave defaults: 10% • Ave returns: 5% - 8%

Type 2 REED Investment: Commercialization• e.g., Waste to energy, rural LPG• Low risk-adjusted returns•Ave Loan Size: $70,000• Ave defaults: 15% • Ave returns: 3%-5%

Some REED results and lessons

Partnering with UNIDO to adapt REED approach Partnering with UNIDO to adapt REED approach to the to the bioenergybioenergy sector: raising awareness and sector: raising awareness and providing training through UNEP providing training through UNEP NCPCsNCPCs..

11

UNEP Risoe UNEP Risoe CenterCenter is developing guidelines and is developing guidelines and baseline methodologies to promote financing of baseline methodologies to promote financing of bioenergybioenergy enterprises under the CDM.enterprises under the CDM.

22

Due Diligence Guidelines for both energy crops Due Diligence Guidelines for both energy crops and forest residues have been developed by and forest residues have been developed by UNEP collaborating Centre, BASE.UNEP collaborating Centre, BASE.

33

Feasibility study of local Feasibility study of local biodieselbiodiesel production for production for use in telecommunications applications has just use in telecommunications applications has just been completed and available to the public.been completed and available to the public.

44

Next steps at UNEP in support ofenergy SME development

UN EnergyUN Energy——Created to coordinate UN agencies Created to coordinate UN agencies input to CSD.input to CSD.

11

G8 Global BioG8 Global Bio--energy Partnership: Initiated at energy Partnership: Initiated at Gleneagles Summit. FAO runs small secretariat Gleneagles Summit. FAO runs small secretariat in Rome.in Rome.

22

International BioInternational Bio--energy Platform. Launched by energy Platform. Launched by FAO at CSD 14 to help address the FAO at CSD 14 to help address the sustainability of sustainability of bioenergybioenergy..

33

UN Biofuels Initiative. Coordinated by UN Biofuels Initiative. Coordinated by UNCTAD, supported by UN Foundation, UNCTAD, supported by UN Foundation, operates with participation of FAO, UNDP, operates with participation of FAO, UNDP, UNEP, and UNIDO.UNEP, and UNIDO.

44

Some intergovernmental opportunities for bioenergy development

Some intergovernmental opportunities for bioenergy development

UNDP Energy and Environment Programme: UNDP Energy and Environment Programme: Targets biofuels in the context of energy for Targets biofuels in the context of energy for sustainable development.sustainable development.

55

Global Environment Facility: Deals with Global Environment Facility: Deals with bioenergybioenergy projects under its renewables and projects under its renewables and climate change program.climate change program.

33

World BankWorld Bank’’s s bioenergybioenergy related activities: related activities: currently under the currently under the BioCarbonBioCarbon Fund.Fund.

44

0

500

1000

1500

2000

2500

3000

3500

Per

Cap

ita

En

erg

y C

on

sum

pti

on

Rat

es

(Wor

ld R

egio

ns)

Asia** Africa China*** LAC Non-OECDEurope

MiddleEast

FormerUSSR

OECD

…Promoting energy SMEs to significantly expand access to

energy services in Africa

Our expectations…

…and help win the race against poverty

…while preserving and restoring our environment for the survival of present and future generations, in a peaceful

and prosperous world!

United Nations Environment ProgrammeDivision of Technology, Industry & Economics (DTIE)

Thank you!

☺lagbemabiese@unep.fr