How To Ease Energy Poverty Through Smart Funding

OPEC should review its aid funding models to help powerAfrica, writes Dr Ricardo G Barcelona

Good souls bemoan Africa’s energy poverty. While money flows freely, African aid is a story of unfulfilled dreams and broken promises. OPEC – oil exporting and producing countries – could change this by playing a smarter game in grant giving and impact investing.

The OPEC bloc earns $3.28bn on a good day, or half a billion when they have a “bad hair day”. The OPEC Fund for International Development (OFID) has disbursed $4.8bn since its launch in 2007.

Out of the $464.4mn aid dished out by OFID in 2017, Africa ($266.8mn) and Asia ($110mn) received the lion’s share. While some small-scale wind or solar power projects were funded, around 60 per cent went of the monies went to trade financing. So, for OFID to achieve “higher levels of financing and bolder policy commitments, together with a willingness to embrace new technologies on a wider scale”, they must integrate impact investing into their gift giving.

Corruption, bureaucratic leakages, and poor governance, are well known snag points in Africa. They impede the effective use of aid. At worst, these weaknesses are seen to perpetuate under-development by encouraging a culture of dependency. However, these are not legitimate reasons to do little, or nothing, to ease Africa’s energy poverty. Less than half of the people have access to energy in most countries, with South Africa as the only exception.

Corruption, bureaucratic leakages, and poor governance, are well known snag points in Africa. They impede the effective use of aid. At worst, these weaknesses are seen to perpetuate under-development by encouraging a culture of dependency. However, these are not legitimate reasons to do little, or nothing, to ease Africa’s energy poverty. Less than half of the people have access to energy in most countries, with South Africa as the only exception.

Scaling up aid may prove the easier task. Making grants work and earn their keep is more challenging. Here are some thoughts:

Massive energy supply increases are needed

To ease energy poverty, a massive increase in supplies is called for. Small commitments in wind or solar power, while laudable, may hardly make a dent. Kenya’s access to energy is estimated at 55 per cent, on a power system with 2,351 MW installed capacity. To create full energy access, its capacity may have to double, together with massive investments in interconnections and distribution networks. To meet its clean energy ambition, Kenya would have to rely on its under-utilised geothermal and hydro resources, each accounting for 1,105 MW and 705 MW of existing capacity (or 76.9 per cent), to expand.

While hydro power’s development risks are better understood, geothermal poses greater technical and financial risks, particularly in exploring for steam. To make geothermal work, as Kenya is finding to its benefit, governments must undertake the exploration risks. Once steam is found and developed, private capital can be brought in to build geothermal power facilities.

This offers an opportunity for OFID to make bolder commitments. Aid could be provided as seed capital to explore geothermal steam, following a portfolio approach of developing several fields under one package. OFID may open a financing facility to private exploration firms, as service providers, as a way to expand access to technical capabilities.

OFID would then become the co-owner of successful fields with the Kenyan government. They could operate the field and sell the steam to power developers, with earnings ploughed back to fund future ventures. Alternatively, the owners may decide to sell the developed field, allowing for reinvesting of the cash proceeds. Given this financial discipline, OFID could expand its commitments on a self-sustaining basis.

However, failed explorations would see the aid written off, which brings OFID to its present situation: Once disbursed, aid money is never ever seen again. Admittedly, the greater challenge is to control for abuses, where projects become aid extraction mechanisms to enrich the few. There is no easy answer for this, other than the threat of withholding future aid.

Incentives for exploration

To provide incentive for success, OFID could re-invest any cash proceeds with the steam exploration project, or with the power developer, allowing them to gain execution speed and expand their scale. In contrast, failed explorations may see their access to future funding progressively curtailed.

The funding approach places OFID in a better financial position. With failures, they are no worse off as a grant donor. Once the money is disbursed, no returns are expected. However, with success, money is made available to scale up. In due course, success bequeaths success – to kickstart a virtuous circle of expanding energy access, raising income, and inculcating self-reliance.

Dr Ricardo G Barcelona is the author of ‘Energy Investments: An Adaptive Approach to Profiting from Uncertainties’, a book which examines the uncertainties surrounding global fuel and power markets.

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