Success factors for transforming energy access markets with Results-based Financing

The 17 RBF projects implemented under the EnDev programme have produced valuable lessons. These cover each stage of a project, from designing, planning, and budgeting incentive structures to selecting companies, external support and verifying results. Energy access markets vary from country to country, are influenced by their social, economic and policy context, face different challenges and present specific opportunities. There is no single ‘blueprint’ for a perfect project — but there are only ways to increase the likelihood of success.

  • Tune in to the market and the economy The more a project understands the market and its context, the better it can anticipate market dynamics and the effect an RBF project might have on market transformation. That, in turn, makes it more likely that a project will offer the right incentives to the right stakeholders who can stimulate and sustain sector development.
  • Reflect whether RBF is the right tool RBF is one tool in the development corporation toolbox. A thorough market analysis needs to confirm that RBF is the best available tool to overcome market failures — most often it must be used in combination with other interventions and capitalise on previous measures or other programmes. RBF is seldom a stand-alone tool.
  • Be clear about what you want to achieve RBF project design will vary depending on a project’s focus, i. e. whether you aim to support overall market development or to improve access to energy services and technologies for a very specific — and possibly vulnerable — customer group. While the two objectives are not exclusive nor contradict each other, the latter one requires special attention and targeting.
  • Join forces — coordinate, collaborate and harmonise approaches It is not unlikely that the targeted sector is also supported by other development partners and national government programmes. A sound RBF project should complement these and identify which market barriers remain unaddressed, where to seek cooperation and leverage synergy effects.
  • Incentives: For ‘what,’ to ‘whom’ and ‘how much’? Setting the right incentives is one of the most crucial parts of RBF projects. Be clear about the bottlenecks you want to address and offer the incentives to the right actors (‘who’) for the right result in the supply chain (‘what’). Be thorough when setting the incentive value (‘how much’) — but know you can adjust it if needed. It is more important to capture companies’ interest through attractive incentives in the beginning and subsequently reduce them step-by-step than starting too low and discouraging the private sector from participating at all.
  • Be willing to invest in technical assistance if needed Experience has shown that RBF projects rarely lead to success without accompanying technical assistance and capacity building. Building capacities and triggering a learning curve for all stakeholders involved is the key to actually achieving results and ensuring sustainability.
  • Take the time to find a fund manager A good fund manager can be the bridge between the RBF project and a long-term, sustainable market. Finding one might not be easy, but it may be worth taking the time to search for a financial institution or other actor with a genuine interest in energy access markets. If the local financial sector becomes more active in the energy access sector, it can help to overcome the financing bottleneck — be it working capital for companies or attractive financing schemes for consumers.
  • Be pragmatic about verifying and clear about paying Results matter. Projects — as much as companies — need to have a verification system that is reliable and cost efficient. This means balancing phone and field verification efforts and choosing an appropriate sample size. It is essential to make criteria unambiguous and to be straightforward about how and with which frequency companies will receive their payments. Using digital tools can greatly simplify the process by improving data management and quality.
  • Put your market intelligence to use Each RBF project generates a lot of data (mainly due to verification requirements, see chapter 4, p. 58 et seq.) about products sold, service quality, typical customer profiles, etc. While complying with data protection rights, an aggregated, anonymised analysis and sharing of this market intelligence can help both the private and the public sector to further develop their insights into market dynamics. Companies usually appreciate any feedback on how to improve their business, and energy access data can help governments to finetune policies and regulations. Last but not least, sharing lessons on what works and what does not can contribute to further fine-tuning interventions for market developments.
  • Dynamic markets require adaptive management Designing and steering RBF projects is like navigating a ship on the high sea. External events (such as natural catastrophes and pandemics), changes in the enabling environment and national policies, new donor initiatives, price fluctuations on global markets and changing consumer priorities (to mention but a few) require a constant re-assessment and — if necessary — a readjustment of initial strategies. Annual RBF review sessions, at which a steering committee reviews result achievements, market uptake and new framework conditions, have proven to be crucial for adapting the RBF design to new market realities.
  • Do not stay forever — plan for exit RBF projects should already plan their exit in the design phase, encourage early movers, avoid unsustainable retail prices and communicate the gradual phase-out of incentives early on. Although markets continuously evolve, mature markets should be able to serve energy access needs by themselves (serving non-commercial customers being the exception to this rule as these require some form of public support). The ultimate objective for any market support intervention is thus to become redundant.

Once the RBF project closes, a new updated market analysis needs to reveal which market barriers have been overcome, which ones remain and whether there are new barriers to take into consideration. Local markets develop dynamically: new technologies, business models, changing customer preferences and policy objectives are exposed to continuous evolution.

Excerpt from: “Transforming energy access markets with Results-based Financing: Lessons from 7 years of implementation under EnDev’s RBF Facility financed by UK Aid”, endev / 2021