Savvy Financing for Rural Energy in Central America

For national governments and international development agencies, access to energy is considered an integral part of development goals. In line with UN Secretary Ban Ki-moon’s Sustainable Energy for All initiative, which calls for universal access to modern energy services by 2030, every Central American government cites expanding rural energy options as a national goal. The construction of the SIEPAC interconnection system from Guatemala to Panama, now nearly complete, will integrate the electrical grid across Central America and facilitate energy trading across national boundaries. But it will not automatically connect the 7.7 million Central Americans who have limited access to electricity and rely mainly on traditional biomass for energy.

The technology for off-grid solar home systems is available; financing is trickier. | Source: Panama's Office of Rural Electrification

Although small-scale power generation technology—including renewable options such as solar photovoltaic (PV), small wind turbines, small hydropower and biomass generators—is advancing quickly, financing is a consistent challenge. Government subsidy levels for electrification  in Central America range from between 20 and 30 percent in Costa Rica to 85 percent in Honduras. Governments and international development organizations typically subsidize grid connection initially, with financial support phasing out as electricity consumers take over the costs of operation and maintenance. Though this model has facilitated a dramatic increase in electrification in Central America, “last-kilometer” electrification makes little economic sense in areas where peoples’ ability to pay for energy remains low. In extreme cases, if users can’t afford a replacement, electrification initiatives effectively have the lifespan of a single light bulb.

Projects that pair income generation with power generation illustrate how off-grid rural electrification initiatives might be financially self-sustained. One national-level initiative is Nicaragua’s Off-grid Rural Electrification Program, or PERZA. The program, funded in large part by the World Bank, follows the standard model of subsidizing the installation of mini-hydro systems and solar battery charging stations and letting power consumers more or less take it from there. PERZA, however, adds one important twist: microfinance. The program came after several failed payment schemes in Nicaragua—one in which people could charge batteries for a fee and another that required families to subscribe to a monthly electricity fee. Studies showed that much of the rural population was willing to pay between $5 and $13 a month for electricity—often not enough to keep the lights on all month. Thus the idea behind PERZA was that, when given access to training and small loans, rural residents would be able to start businesses and generate income, which they would then be able to spend on energy.

PERZA funding closed at the end of 2011, but not before 6,863 rural households in Nicaragua were electrified through solar home technology, seven solar PV charging stations were installed and four mini-hydro systems were constructed. More importantly, though, the program provided a framework for its own long-term financial well-being. Over 3,000 people participated in workshops and meetings through PERZA; 43 business plans were developed and 10 microfinance institutions now offer loans for rural electrification. According to the 2012 Climate Scope report, Nicaragua now has the highest level of green microfinance penetration in Latin America and the Caribbean, with 10 institutions offering green microfinance loans to thousands of low-income borrowers. Only time will tell whether the advent of microfinance helps sustain rural energy systems in Nicaragua for decades, but PERZA is an early example of a national-level attempt at integrating electrification with bottom-up small business development.

Other innovations in financing rural energy expansion are occurring at smaller scales. Soluciones Comunitarias, a social enterprise in Guatemala, gives “innovators” products such as solar lamps, efficient light bulbs, and mini solar panels that power cell phone chargers. The innovators—mostly women—sell the products to their network, repaying Soluciones Comunitarias and keeping a commission. This microconsignment scheme is distinct from microfinance in that it replaces loans of start-up cash with loans of actual products, the costs of which are recouped only upon sale. Consignment avoids the risk of predatory lending and also introduces new products to the market, since there can be no demand for goods that people are simply unaware of. Soluciones Comunitarias first noticed the power of the so-called “demonstration effect” with eyeglasses, but it has since been proven for rural energy technologies as well. Solar lamps—previously unheard of in the regions the company serves—are now the social enterprise’s most demanded product.

Carolina Abarca Calderon, an organizer in the women’s group APORTES in Costa Rica, created these visual instructions for using a clean-burning stove that heats pots while transforming biomass into biochar, a soil amenity. | Source: SeaChar

In Costa Rica, SeaChar, a Seattle-based non-profit, and APORTES, a women’s group in the Los Santos region, are using the demonstration effect to create a market for ‘carbon-negative’ energy. Their Estufa Finca project promotes a clean burn stove that heats pots while transforming biomass into biochar, a form of charcoal that can be used as a soil amenity. A 2011 pilot project in Los Santos, Costa Rica, home to Ngöbe migrants from Panama, showed vastly reduced carbon monoxide and particulate matter emissions from the new stoves, with about 800 grams of biochar produced per meal. The stoves, which can be made very cheaply out of a bucket and roofing material, have been proliferating, both through actual sales and through demonstration projects in other communities. SeaChar is now implementing a buy-back program in which they pay families $5 per sack of biochar (sacks averaged 8.5 kilograms, or about 10 meals worth of biochar) to be used in demonstration community gardens. The hope is that once people see improvements in crop yield, the biochar can be marketed to the general public through Costa Rica’s organic farmer’s market, Feria Verde.

While the efficacy of these rural energy financing initiatives are still being tested, the impulse to simultaneously dispense new technology and create self-sustaining markets for them is a logical one. Such schemes may help address some researchers’ concerns that increased access to energy in Latin America has not been coupled with a significant reduction in rural poverty. Though rural energy is not a panacea, creating access to capital along with access to energy will likely increase the chances that rural energy expansion will indeed lead to co-benefits such as improved indoor air quality and drinking water, access to communication technology, mobility for women, and higher educational achievement. When it comes to rural energy access, it’s sometimes the financing mechanism—not the technology—that’s the real innovation.

Go to Source