De-risking Energy Projects through Community Engagement and Financial Inclusion

Providing first-time electricity to more than 1 billion people around the world is not a task for the fainthearted. In fact, it is quite risky.

Despite the risks, the private sector is interested. According to the International Energy Agency, emerging markets in Africa, South East Asia, the Middle East and Latin America will make up almost half of all new global energy demand between now and 2040. India and China make up the remainder of global energy growth. Meanwhile, traditional markets like the EU, US and Japan will experience decreased energy demand.

One of the challenges to tapping this potential is that these emerging markets host the world’s poorest people. Without access to affordable and reliable energy, these potential customers have few means of escaping poverty. But with access to energy, these communities could accelerate their business growth and become strong and loyal customers.

Solving this conundrum has been the focus of considerable effort in recent years. The seventh U.N Sustainable Development Goals is dedicated to sustainable energy access, and has spurred the creation of the multi-national initiative Sustainable Energy for All. In 2016, the US Congress passed The Electrify Africa Act, supported by the multi-agency US Power Africa initiative. All of these initiatives recognize that private sector investment is critical to the success of their common goal of alleviating energy poverty.

Many special purpose mechanisms including loan guarantees and blended finance instruments have reduced power sector investor risk and increased the amount of electricity available in energy-poor countries. Off taker risk, however, remains a significant and extremely complex challenge. Off taker risk refers to the risk that electricity customers will not pay their bills. This risk of non-payment can be divided into three broad categories: (1) Government customers, (2) Industry customers, and (3) Individual customers.

For the first two customer classes, there are sources of data, such as credit ratings and balance sheets, which can be used to create guarantees and mechanisms that mitigate risk. However, there are few mechanisms to mitigate the risks of individual customers in emerging markets. Individuals in energy-poor communities are the very demographic that NGOs like Global Communities have successfully worked with for decades. Our experience shows that individual customer risk can be overcome through the right combination of community-led interventions and access to finance.

Below are some of the community-level risks that are specific to energy projects. For each risk, we show how traditional tools and techniques in Community Engagement and Financial Inclusion can help to overcome them.

Risk: Getting Data That Enables Reliable Site Selection Decisions

Good data is often difficult to find — or simply non-existent — in emerging markets. There is little hard data about energy-poor communities: no income data, no credit scores, and no history of payments. Surveys that assess the ability and willingness to pay for energy do not accurately represent the actual likelihood of payments.

Data approximations thru Big Data partners can give the process a leg up, followed by community surveys. To increase the fidelity of the data and the quality of the project, this data should be verified through peer-driven, transparent dialogue. This process should then be followed by peer-driven and transparent process for the selection of the initial customers. A peer-driven process increases the likelihood of payment, reducing default rates.

Risk: Revealing and Mitigating Potential Flaws at the Site/Community Level

Building trust and obtaining buy-in of the community can make or break the ultimate success of the project. If done well, it can greatly reduce areas of risk, while getting it wrong can cause project failure.

A community-led co-design process helps identify well known and lesser known project risks, which are then shared by the community. Fully representative community engagement also reduces factionalism and increases buy-in within the community to ensure that the community is fully invested in the project.

Risk: Designing Financial Options for Affordability

One of the most pervasive challenges in alleviating energy poverty at the community level is what to do when demand for electricity or power is there, but affordable payments options are not.

Financial Inclusion tools, including mobile money accounts, PAYGO, cooperatives, and village savings and lending groups, can increase access to electricity for previously underserved communities. As important, community-led decision-making on financial inclusion mechanisms increases uptake, sustainability and growth. Because additional households and businesses are able to subscribe to the system, they increase the customer base. In turn, lending options for growing businesses help increase access to energy services.

Risk: Ensuring Project Sustainability & Growth

Economic growth is one of the principal advantages of energy access. Yet communities that have never had this access need support to accomplish this result. That support is most effective in the form of trainings on business and financial planning, the establishment of cooperatives or other community business structures, and micro loans and/or incentive grants for small and medium businesses. Social engagement mechanisms including support groups, volunteer networks and leadership groups can also have a significant impact on the success of a project.

Mitigating the risks associated with investing in emerging markets, especially those dominated by the energy poor, can be challenging. While tremendous progress has been made, there are few mechanisms available for individual customer off taker risk. Investors and project developers can harness proven Community Engagement and Financial Inclusion methodologies to mitigate these risks, strengthen customer demand and increase the likelihood of overall project success.