In many ways, the ag-energy nexus presents a classic “chicken or egg” challenge. Agricultural activities need reliable energy services to commercialize and grow. Meanwhile reliable and meaningful sources of energy demand, like those from commercial agriculture, are needed to sustain rural energy delivery. At this intersection, there is a crucial role for the public sector to play in providing the incentives to stimulate demand and direct investment in the energy infrastructure itself.
There are many design challenges and disincentives for technology providers when it comes to the ag-energy opportunity. Agricultural needs vary by geography and value chain, and it is difficult for technology providers to first tailor their solution and then reach enough customers to justify the investment in the product modification. Most ag-energy opportunities involve some form of asset, input, or trade finance. However, private finance providers are generally convinced (often with good reason) that the risks and transaction costs in agriculture are too high. Strong entities are needed to deliver products and services to rural farmers.
The existing systems are fragmented, and in many situations the channels don’t exist and are too costly to build. New technology solutions require education and training but there is rarely room in the thin margins of rural agriculture or energy businesses to cover these costs. Without established channels, appliance and processing equipment manufacturers will often only focus on customers in more profitable markets, rather than those that are poor, hard to reach, and engaged in seasonal activity. As a result, many proven technologies have not been adopted, as the cost and difficulty of design, manufacture, distribution and servicing have been too high. However, as clean technologies such as electric motors and energy storage continue to mature and scale globally, there is an opportunity to bring them into rural development settings to power growth.
Five Key Challenges
To make advances in the ag-energy nexus there are five key challenges that need to be addressed:
1. Technology: The industry needs modular technology solutions that can be adapted to fit specific energy needs.
Large-scale solutions that may work for large-scale agroindustry rarely fit the market need for smallholder farmers and the small and growing agribusinesses that serve them. Solutions are often too expensive and oversized for smaller or seasonal activities. There is a gap in energy systems that are powerful but modular with the ability to scale to fit the size and cost requirements for small, but growing operations.
2. Behavior Change: The behaviors of smallholder farmers and rural economic models are deeply rooted.
Whatever the theoretical economic argument for new solutions, risk averse consumers will approach new products cautiously. Often new technology requires smallholder farmers to seek out a solution, learn new hardware, take on debt, and adopt new practices. To succeed, enterprises need to take on the difficult tasks of marketing to risk-saturated farmers and training them to overcome barriers to adoption.
3. Business Model: Elegant technology design and pilot performance will not guarantee scale and impact.
Many technologies have been proven and yet still have not been adopted because there are few sustainable enterprises able to drive a tailored solution into the market and then scale it. Getting these solutions into the hands of farmers is difficult as customers are spread widely in hard to reach places. This function is typically delivered or subsidized by the public sector in many places but is often lacking at the last mile. Finetuning the right delivery model and enabling infrastructure are critical to the success of ag-energy solutions.
4. Access to Finance: Products and services often need to be paid for up front, but cash flows are seasonal, margins are thin, and farming is subject to seasonal and year-on-year unpredictability and climate change.
Upfront costs are difficult to justify for a return on investment far in the future. Financing enables the upfront cost to be repaid over time, aligning the cost with the payoff that it delivers. However, rural customers are generally considered unbankable. The creditworthiness of agribusinesses and the rural context in which they operate is poorly understood by traditional financing institutions. Instead, embedding financing into the technology solution has often been the answer. To be successful, providers then have to build the service, deliver it to the customer, and develop a credit function so customers can pay for it. Unsurprisingly, this can prevent new products and services from reaching the market. Creative financing models with a better understanding of these rural customers are being developed but are not yet widespread.
5. Siloed Support: Private, public, and philanthropic support typically organizes around either energy or agriculture but rarely considers both.
Each sector has its own lens, priorities, actors, experts and language. This divide can result in competition for, or jealous guarding of, resources internally and leave cross-over agenergy opportunities under-funded. Long term, integrated policy and public-sector planning can defuse competition for limited budgets and help avoid the political challenges such competition for resources can create.
Excerpt of: The Opportunity at the Nexus of Energy and Agriculture (Factor[e] Ventures, 2020)