1. United Nations Environment Programme Division of Technology, Industry & Economics (DTIE) Eric Usher Deputy Coordinator, Energy Branch eric.usher@unep.fr SME Enterprise Development A small agency’s perspective Energy Week 2006 March 6 th, 2006, Washington

2. Example Enterprises Usiss, Mali Business: Solar Crop Drying Stage of Sector Dev.: Very Early proof of concept phase AREED Support: $18,000, 4 yr loan and enterprise development support from MFC, E+Co Status: Operating. Repayments current. BETL, Tanzania Business: Logistics company coordinating ag. wastes for fuel substitution Stage of Sector Development: Early commercialization phase AREED Support: $50,000 3-yr loan and Enterprise Dev. Support from Tatedo, E+Co Status: Increased sales from 500 Mt to 1200 Mt per month Repayments current.

3. Example Enterprises Anasset, Ghana Business: LPG distribution Stage of Sector Dev.: replication phase AREED Support: $38,000, 4 yr loan and enterprise development support from KITE, E+Co Status: Repayments current, expanding with bank financing. KPBS, Zambia Business: Charcoal production from sawmill waste Stage of Sector Dev.: Proof of concept phase AREED Support: $73,000, 4 yr loan and enterprise development support from CEEEZ, E+Co Status: Construction of 15 kilns completed. Production, distribution and sales of charcoal started Feb 2003. Enterprise folded in 2004

4. AREED African Rural Energy Enterprise Development EntrepreneurEntrepreneur CustomersCustomers Seed Financing Enterprise Development Services Energy Services Demonstrating that needed energy services can be delivered on a sustainable commercial basis by clean energy SMEs.

5. AREED African Rural Energy Enterprise Development What defines Seed Finance Typically 3-5 year loans in local or US currency. Concessionality –Elevated risk appetite –Provision of enterprise development services => Terms/conditions are not standardised, but rather are flexibly matched to what the enterprise can handle

6. AREED Portfolio Distribution of Enterprises by Technology Type Biofuels 12% Energy Eff. 26% LPG Dist. 21% LPG Stove mfc 3% Solar PV 18% Solar Thermal 15% Wind 6% AREED African Rural Energy Enterprise Development

7. Type 1 Investment: Proof of Concept e.g., Jotropha, crop drying, solar grinders. Very low risk-adjusted returns. High Innovation impact on sector dev. Typical Loan Size: $25,000 Ave defaults: 30% Ave returns: -5% Type 3 REED Investment: Replication e.g., Urban LPG, efficient lighting Moderate risk-adjusted returns High direct impacts Low Innovation impact Ave Loan Size: $130,000 Ave defaults: 10% Ave returns: 5% - 8% Type 2 REED Investment: Commercialization e.g., Waste to energy, rural LPG Low risk-adjusted returns Ave Loan Size: $70,000 Ave defaults: 15% Ave returns: 3%-5%

8. AREED Portfolio AREED African Rural Energy Enterprise Development Portfolio Observations 3% to 5% Financial returns are achievable Non financial returns can also be significant Enterprise development costs are high 20 to 50 cents on each dollar invested Public Perspective After costs, we still see a positive cash flow model Private Perspective Enterprise development can be a less costly means of generating project pipeline Supporters: UN Foundation, GEF, German BMZ, SIDA, Dutch, Domini, FMO, US AID

9. Barriers to Scale-Up Enterprise Level: Gap still exists between seed finance and follow-on investment Sector Level: Seed finance needs to break its reliance on the donor/foundation community Why aren’t mainstream energy investors providing seed financing today ?  Enterprise development costs  Insufficient risk adjusted returns But, can we move this model to the middle of the road ?

10. Returns Enhancement Seed Capital Window Transaction Cost Sharing Sustainable Energy Fund Enterprise Development Support Seed Capital Seed Capital Access Facility (SCAF) Closing the Gaps - Seed Capital Access Facility (SCAF) Commercial Energy Fund Development Finance Commercial Investors Local Banks Investment Capital Clean Energy Enterprise - Timeline Concept Project devmt, pilot Business planning Aggregate Investment Growth Roll out Seed Fund

11. In markets where small scale clean energy is economically viable,....why aren’t banks lending ?.… and, what can be done about it ? Example 1 – Indian Solar Loan Programme –State of Karnataka, Solar Home Systems, 2003 - 2006 Before: many SHS vendors, small total sales, no bank lending During: consumer finance programme offered through Canara bank and Syndicate bank, interest rate subsidy, 16,000+ systems financed, other banks starting to lend After: subsidy phased out, banks continuing to lend, although lose market share in an increasingly competitive credit market Real Driver -> access to financing provided through 2076 bank branches Financing the Customers of SMEs

12. Solar Water Heaters Market Growth in Tunisia 1985-2003 0 2000 4000 6000 8000 10000 12000 14000 16000 18000 20000 1985198619871988198919901991199219931994199519961997199819992000200120022003 m² of installed SWH GEF Project Example 2: MEDREP -Tunisia ProSOL Programme –Domestic Solar Hot Water, 2005 - 2006 Before: solar thermal market small although near tipping point as shown by previous WB GEF programme, 35% energy subsidy for LPG, no bank lending 2005 29,000 m 2 During: SWH financing offered through 3 Tunisian banks, interest subsidy + energy subsidy extended to SHW + utility billing, 9,000 systems in 2005. After: ?? The real driver -> policy change + utility billing.

13. Loan Programme Observations Various soft barriers exist that prevent banks from lending Bank engagement is not gradual, but rather follows somewhat of a step function (ie herd instinct) Multi-stakeholder engagement is key to successful interventions. Credit engagement can provide a strong feedback loop to policy makers.

14. www.unep.fr/energy/finance www.areed.org The challenge of supplying small scale energy services is NOT a lack of technology, business models, capital or the ability to pay; it is the MISMATCH between the needs of the enterprise and the types of financing currently available. Phil Larocco, E+Co Eric Usher Eric.Usher@unep.fr THANK YOU!