BLENDED FINANCE JUNE 2018 Expanding Electrification to Low-income Households in Rural Ghana with Microfinance This learning note is part of a series developed by the Global Partnership on Output-Based Aid (GPOBA) to analyze and showcase experiences where results-based finance (RBF) has been used to leverage private finance through a blended finance approach. However, in rural and remote areas, where national grid extension is costlier and more challenging in the short-term, access rates were much lower at around 38 percent. 2 In these areas, off-grid renewable energy systems are a more cost-effective alternative for meeting electrification goals, but lack of access to capital for upfront payment of these technologies in addition to low awareness of the potential benefits of Overview solar power remained challenges. In Ghana, blended finance helped improve Background and Enabling Environment affordability for rural Ghanaian household The government of Ghana initiated a National investments in off-grid renewable energy Electrification Scheme in 1990, with the objective of technologies. Local banks extended credit blended reaching universal access to reliable electricity by with concessional finance from the World Bank to 2020. As a result, access to electricity nearly doubled rural low-income households for acquisition, between 1990 and 20083. These efforts focused installation and maintenance of solar home systems primarily on extension of power from the grids to (SHSs). An output-based aid (OBA) grant was meet the growing demand for electricity in Ghana, provided to reduce the up-front cost for SHSs, and thereby excluding many rural communities too enhance affordability of the financing package. remote for cost-effective grid expansion. Development Challenge In rural areas, off-grid renewable energy systems became increasingly viewed as an attractive At the time of project preparation in 2008, the alternative for meeting electrification goals. Solar electrification rate in Ghana was relatively high for photovoltaic (PV) systems have been identified as the Sub-Saharan Africa, at 61 percent of the population.1 lowest-cost technology best suited for delivery of 1World Bank. Sustainable Energy for All (SE4ALL) Database. Access 2 Ibid. to electricity (% of population) World Bank; Washington, DC. 3 Ibid. https://data.worldbank.org/indicator/EG.ELC.ACCS.ZS electricity to these areas. However, at the time of the rural banks contributed the remaining 20 percent GPOBA project appraisal, renewable energy of the credit\ from their own resources. technologies were not widely used at the rural The microloan was used to pay for an SHS package, household level for multiple reasons, including: (i) which included the hardware, installation, limited household ability to pay; (ii) limited financial maintenance, and one battery replacement for a one service provider product offerings to improve to three-year period with monthly repayment. consumers’ ability to pay; (iii) lack of familiarity with Available SHS technologies varied in size from 10 solar technologies and skepticism surrounding their watt-peak (Wp) to 50 Wp, allowing flexibility for quality; and (iv) lack of maintenance services and consumers to choose between different low-cost limited solar PV supplier presence in rural areas of options. The technology was supplied by Ghana. participating private vendors pre-approved under the In 2007, the World Bank and the government of program, who were members of the Association of Ghana approved the International Development Ghana Solar Industries (AGSI).5 Association (IDA) / Global Environment Facility (GEF) The OBA grant was channeled in the form of a partial Ghana Energy Development and Access Project subsidy on behalf of purchasers directly to private (GEDAP). The project maintained a development solar suppliers to cover 50 – 60 percent of the total objective focused on improving electricity cost of the SHS package or solar lantern. The distribution efficiency and broadening electricity household paid for the SHS at this subsidized rate via access rates, and included a solar PV sub-component a 10 percent down payment and the remaining to help facilitate increased access to solar amount in monthly installments through the loan. electrification products through commercial financing Loans were not extended for solar lanterns, which to rural communities. Technical assistance was were relatively inexpensive compared to the SHSs. provided through a GEF grant, which helped build The OBA subsidy funding was provided in a tiered capacity for the solar dealers and rural banks. structure, whereby smaller solar PV systems and However, even with the option of long-term credit, lanterns used by the poorest households received a many households were still unable to afford the higher percentage subsidy.6 monthly payment for a typical solar PV system. 4 In addition to the technical assistance provided Blended Finance Approach through GEF, awareness building and marketing were also provided for households to familiarize them with In 2009, a Global Partnership on Output-Based Aid the technology, financing options and private (GPOBA) US$4.35 million grant was approved as providers. additional financing to the GEDAP project to improve households’ ability to purchase and use solar PV systems. ARB Apex Bank Ltd., a government- Results regulated umbrella-like bank for the country’s rural The overall blended finance lending scheme helped microfinance banks was the implementing partner. increase accessibility for solar technology in rural Interest-rate margins for Apex Bank are regulated by Ghana. The IDA-funded line of credit helped the local the government and are therefore significantly lower banks address limited liquidity issues and extend than other unregulated financial institutions in the microcredit that allowed for spreading the debt country. GEDAP extended a line of credit through service over one to three years. Further concessional Apex Bank to rural banks to facilitate their financing blending was achieved through the OBA subsidy, of household loans for solar home systems (SHSs). which effectively reduced the overall loan cost to The line of credit covered 80 percent of the loan and meet the limited ability to pay of the targeted rural 4 Ibid. “Developing rural markets for solar products: Lessons from Ghana.” 5 Elsevier Inc.; Energy for Sustainable Development 31 (2016) 178–184. GPOBA (Global Partnership on Output-based Aid). (2016). Lessons Learned: Improving Rural Energy Access through Solar Home Systems 6World Bank. (2008). Official Documents - Commitment on Solar PV in Ghana. Note 12. Washington, DC: World Bank Group. / William F. systems to increase access to electricity services in Ghana. Steel, Nana Akua Anyidoho, Frank Y. Dadzie, Richard H. Hosier. Washington, DC: World Bank Group. FIGURE 1. Financial Flows Structure consumers. By enhancing affordability, the OBA and increase access to a segment of the population subsidy added reassurance to the private sector who otherwise would not benefit from national grid stakeholders – private solar PV suppliers and lenders access in the near to mid-term future. The program – through demand generation and market capacity saw additional growth with the quantity of solar demonstration and strengthening, effectively helping dealers increasing from three to seven by project to crowd-in private investment. end.8 The prices of solar panels, LEDs, and solar systems declined rapidly from the time the project Approximately 100,000 individuals benefitted from began. The continuation of this trend to the present access to off-grid renewable energy, surpassing and beyond will mean that future systems will be original project targets. An estimated US$1.6 million more affordable and less reliant on subsidies for in loans was provided through 12 participating rural widespread market uptake. banks, and repayment rates in most districts registered at over 90 percent. 7 Success Factors9 The OBA project is considered a major success and The confidence of private sector financiers and has been used as a model for later renewable energy suppliers in the market was bolstered during the and microfinance projects, helping to open a market project by a high willingness to pay for the 7GPOBA. (2016). Lessons Learned: Improving Rural Energy Access 9Additional details surrounding GPOBA project lessons learned can through Solar Home Systems in Ghana. Washington, DC: World Bank be found in: GPOBA (2016): Lessons Learned: Improving Rural Group. Energy Access through Solar Home Systems in Ghana. 8Ibid. / World Bank. (2014) Grant Reporting and Monitoring (GRM) Report. Washington, DC: World Bank. technology. Packages offering LED televisions were a loan, and to recover payments from remote considered especially desirable by large numbers of households. These officers also served as a bridge rural consumers.10 The solar PV systems also proved between private dealers and the household clientele to be readily reclaimable in cases of non-repayment, in relation to technical questions and maintenance, further increasing the willingness of lenders to take which was critical for sustainability. on the credit risk. Program sustainability also benefited from the Capacity development and market mobilization required verification component and importance proved instrumental to project success. GEF funding placed on maintenance, which was crucial for loan paid for technical assistance to the banks to repayment. The verification step rested risk and familiarize them with lending to households for solar responsibility on the private sector, and guaranteed PV systems. At the community level, rural banks quality service for installation and maintenance to the utilized Solar Project Officers to help raise awareness households. Well-functioning systems resulted in about the technology, market the products, support higher repayment rates. consumers on the administrative hurdles to apply for References About GPOBA World Bank (2007) Official Documents – Commitment Paper on Solar PV systems to increase access to electricity services in Ghana. Washington, DC: World Bank Group. The Global Partnership on Output-based Aid (GPOBA) provides innovative financing GPOBA (2014). Beneficiary Assessment: Solar PV Systems for solutions that link funding to actual results Rural Poor in Ghana” Final Report (internal document). achieved. Our results-based financing (RBF) Washington, DC: World Bank Group. approaches provide access to basic services like water and sanitation, energy, health GPOBA. (2016). Lessons Learned: Improving Rural Energy and education for low-income families and Access through Solar Home Systems in Ghana. Note communities that might otherwise go Number 12. Washington, DC; World Bank; 2016. unserved. Steel, W. F., Anyidoho, N. A., Dadzie, F.Y., Hosier, R.H. (2016). Developing rural markets for solar products: By bringing together public and private Lessons from Ghana. Elsevier Inc.; Energy for Sustainable sector funders to maximize resources, and Development 31. 178–184. designing effective incentives for service providers to reach underserved low-income World Bank. (2014) Grant Reporting and Monitoring (GRM) communities, we give people the chance for Report on Solar PV Systems for Rural Poor in Ghana. a better life. Visit www.gpoba.org to learn Washington, DC; World Bank. more. World Bank. (2016) Implementation completion and results report on a Global Environment Facility Grant in the amount of $5.5 million and a GPOBA Grant in the amount of US$ 4.55 million to the Government of Ghana for the Energy Development and Access project. Washington, DC: World Bank. 10 Ibid / World Bank. (2014). GRM Report.