Productive Energy Use: A Catalyzer for Rural Energy and Water Access

By Setu Pelz

Pico-solar lighting and solar home systems have proved themselves as revolutionary entry-level energy access technologies for low-income rural communities. See IDCOL’s success in Bangladesh, and recent multimillion-dollar investment in Berlin-based SHS energy access company Mobisol, active in East Africa. These technologies have kick-started a base-of-the-pyramid push toward energy independence, and it is critical to continue this forward momentum in order to deliver a real long-term solution for rural energy and water access.

Next-generation energy access solutions must expand across multiple energy sources, enable productive usage, deliver economic independence and effectively scale, in order to provide future-proof useful energy and water to rural communities and help them truly rise out of poverty. The recently released Energy Access Tier Framework from the World Bank describes this in more detail. Innovative nano- and micro-grid technology solutions are being developed at a tremendous rate. Nevertheless, practitioners active in this space of decentralized rural electrification still face the inherent financing challenges of developing sustainable business models, satisfying non-standardized risk mitigation requirements across different funding sources and securing project financing in the void between microfinance (<$10,000) and development finance (>$5 million).

These challenges can give rise to a potential trade-off situation where financiers require the project developer to demonstrate strong project cash flows and mitigate perceived risks in order to secure project financing whereas the community needs to able to afford and truly benefit from the energy and water service provided.

Generate wealth, capture revenue

The obvious question then is how to balance this potential trade-off in practice; or if we think out of the box, how to turn this trade-off into a win-win-win situation. This is where encouraging productive energy use (PEU), alongside household energy consumption, is proving itself as an ideal strategy for the community, the micro-grid developer and financiers.

In simple terms, the fundamental resources (energy and water) needed to operate local wealth-generating businesses are provided alongside access to capacity-building and low-cost PEU equipment with the goal of capturing a portion of the new wealth generated as project revenue in order to satisfy the requirements for commercial investment.

PEU comes in many forms and is driven by diverse business models depending on the local context, resources available, local capacities and traditional industry. Insightful papers by GIZ and IIED go into extensive detail on methodologies, benefits and pitfalls of a PEU-based approach, and we need to continue the learning process as new and innovative, needs-based business models are developed almost as quickly as energy becomes available. At RVE.SOL, we argue that the significant productive potential in rural cottage industries are key to the successful implementation of energy access projects, and a crucial step toward unlocking this industry is the delivery of fundamental resources and the creation of a market for clean energy PEU technologies.

Challenges

Despite encouraging results from pilot projects, further cross-sectoral communication, standardization of regional risk mitigation procedures, development of common payment collection technologies, convergence of common business models and transparent dissemination of lessons learned through PEU-driven projects are needed in order to bridge this financing gap.

Financiers need to be convinced that a detailed understanding and analysis of revenue derived through household energy consumption alongside diverse PEU activities in the decentralized rural electrification space can replace the traditional power purchasing agreement as is the norm for larger grid-connected renewable energy projects. In addition to this, an increased focus needs to be placed on the development of local and national value chains and micro-financing mechanisms that enable implementation of productive use technologies.

The United Nations' recently proposed Sustainable Development Goals set ambitious targets for energy access, financial inclusion and economic development. We believe it is critical that the energy access industry, the financial sector, policy makers and governments take PEU into consideration if we are to collectively reach these goals.

Image credit: RVE.SOL

Setu Pelz is a renewable energy engineer with RVE.SOL managing project development from pre-feasibility through to financial close. Passionate about creating positive social and environmental impact, he has consistently devoted his career to the renewable energy sector, starting in on-shore and off-shore wind energy O&M, and transitioning to wind energy consultancy while moving across Australia, Germany and the UK.