Blended Finance, Clean Energy, and Lasting Peace in Colombia
Working with the Colombian Government, USAID’s Mission in Colombia and INVEST recently kicked off a new activity — Colombia Energy for Peace — which was designed to provide rural regions in Colombia with clean energy for productive use activities. In this interview, INVEST Strategic Investment Advisor Robin Young explains the connection between blended finance, clean energy, and lasting peace.
By Emily Langhorne, INVEST Communications Specialist
In June 2016, former Colombian President Juan Manuel Santos signed a cease-fire accord with the revolutionary group Fuerzas Armadas Revolucionarias de Colombia (FARC), taking the first step towards ending a violent civil conflict that began in 1964. The following year, the FARC disarmed, handing its weapons over to the United Nations, and formally announced its transition into a legal political party.
The peace agreement lays out processes for dismantling the illegal drug trade, which had played a role in financing the FARC’s activities, and creating a system for providing truth and reparations to victims of the conflict and their families. However, a significant portion of the accords focuses on developing Colombia’s rural regions. Unequal land ownership contributed to the start of the conflict, and years of violence and instability have hindered the development of rural areas, exacerbating the country’s rural poverty, which remains significantly higher than in urban areas.
By prioritizing a commitment to rural development within the accords, the Colombian Government acknowledged that addressing the insufficient infrastructure in these areas is essential for ensuring a lasting peace. Less than three percent of Colombia’s population lacks access to electricity, and these people reside in remote areas, most of which have been under the control of armed groups for decades. With no access to electricity, these communities have been unable to modernize their farming practices, improve production processes, link their products to markets, or increase their educational attainment.
Working with the Colombian Government, USAID’s Mission in Colombia and INVEST recently kicked off a new activity — Colombia Energy for Peace — designed to provide these regions with clean energy for productive use. I recently sat down with INVEST Strategic Investment Advisor Robin Young to learn more about the connection between blended finance, clean energy, and lasting peace.
The following interview has been edited for clarity and length.
Emily Langhorne: How does creating abundant, reliable, low-cost energy contribute to the success of Colombia’s peace process?
Robin Young: In ending a conflict that lasted for decades, the Colombian Government committed to bringing development to areas of the country that were abandoned during the conflict or had never been supported in the first place. These areas, which are a strategic as part of the peace accords, are part of the Programas Desarrollo con Enfoque Territorial or PDETs. The 16 PDETs cover 36 percent of the country’s territory and are home to 6.6 million Colombians. They really need to be supported, and the government has been working with the communities to develop plans to do so, including plans for electricity expansion. USAID Colombia has aligned its strategy to support PDET initiatives.
This project is focused on connecting a relatively small number of people because of its focus on producer clusters, which makes it different than the work INVEST has done on solar energy in African markets. However, geographically, it focuses on a huge area of the country. Colombia has a diverse and complicated geography — it’s mountainous and full of jungles — and this activity is focused on providing energy from local, sustainable mini-grids to the unconnected clusters of producers living within these remote areas.
The driver behind electricity as a part of the peace accords is that it will bring connectivity to markets and enhanced services for these communities that have been somewhat abandoned. With a source for consistent, reliable energy, they will have stable, low-cost electricity for productive uses so that people can perform more value-added activities and increase their incomes, and there will be enough electricity to operate some of the important social services — health clinics, schools, community meeting spaces, or local government offices.
Langhorne: Could you describe the approach that USAID and INVEST are taking in delivering electricity to these communities? How is it innovative?
Young: A lot of development programs designed to bring energy to Colombians living in rural areas have focused more on solutions for individuals, like solar home systems, which are generally for households. One aspect that’s different here is the focus on productive uses of electricity. We’re looking at bringing in sustainable, solar energy via mini-grids with a battery storage. The cost of the technology required for solar and battery systems has come way down, which makes sustainable, clean energy a lot more viable and scalable for productive use, and mini-grids have a high capacity for electricity generated in terms of both quantity and quality.
Our approach is to develop a mini-grid model that is attractive and affordable to the communities while also being profitable and attractive to the private sector. By standardizing technology and aggregating equipment procurement and construction across multiple mini-grid sites, we can better control the upfront investment required as well as the ongoing operating costs, which makes this activity more appealing to investors. One of our goals is to displace diesel generation, which is extremely costly in terms of operations, repair, and maintenance. In contrast, ‘solar + storage’ is much less costly to operate and maintain.
In each of the selected PDETs, we intend to develop a ‘productivity hub,’ which is basic infrastructure built and co-located alongside the solar grid. It’s a physically secured place with quality and assured energy as well as some other assets such as equipment, meeting rooms, and internet. Within this shared infrastructure, multiple producers can take advantage of electricity provided by the mini-grid. For example, perhaps multiple groups of cacao or coffee growers could come to this shared space to perform milling and drying needed to process their crops, or farmers could share refrigeration for perishable goods. Quality should improve as well.
Using the productivity hub model, USAID can leverage and enhance the economic activities that are already going on in a region and which the market would reward for added value made possible with access to energy. To make the model work for communities, we’ve got to understand what local anchor businesses could really benefit from electricity. For instance, could a productivity hub help a local carpentry industry to run more efficiently? Could freezers improve the market reach for local fisheries? Could it help spur nature tourism, which is expected to grow rapidly in Colombia post-COVID and depends on stable electricity? Each hub will be a bit unique because it’s not a cookie-cutter approach — it needs to be designed for the community.
I’m speaking mostly about productive use because that’s the focus of the hubs. There will also be some communal hook-ups from the mini-grid to, say, local schools, clinics, or community centers that will improve community well-being, but it’s the potential economic productivity of the hub that will drive the grid’s creation and economic sustainability because it’s increased productivity and incomes that lead to the ability to pay for electricity.
Langhorne: This activity is currently in stage one of four: site selection and design. Could you describe what this phase looks like?
Young: Colombia’s Agency for Territorial Renovation, which is a government entity responsible for this kind of development program, and USAID Colombia went through the process of prioritizing 15 potential sites from all the PDETs. For phase one, INVEST is helping USAID select five to 10 of these sites to build productivity hubs and the accompanying mini-grids as well as demonstrate their viability.
We have broken this phase into two parts: first, determining the sites that have significant potential in their productive activities for an economically successful hub and mini-grid, and second, creating a specific engineering design for each of these mini-grids and hubs tailored to the needs of the local producers and community.
INVEST has partnered with a consortium of firms to help narrow down the sites based on a variety of selection criteria. Tetra Tech, an international engineering firm, is leading it. Another member, Aprotec, is a Colombian alternative energy engineering firm that has a lot of experience working in solar in rural communities. The other two firms are bringing special technology. TFE Energy has custom software that uses GIS satellite data for rural electrification planning, and Odyssey has a platform that does data-and financial modeling, which is important because once all this data is collected, we need to use it to decide, ‘Well, which sites really make the most sense from an energy perspective and from an economic demand perspective, and what are the projections?’
The technical, engineering, economic, social, and political criteria will all come together in measuring the viability of a site, from the perspective of private investment. For example, this list of criteria has questions like, ‘Does it have solar radiation year-round and does the sun’s energy throughout the year complement local production timelines? What are the productive activities going on in the area? If they had energy, how might they grow? Is land available for building the mini-grid and productivity hub? Is the local community willing and able to pay for energy? What kind of local social cohesion and political cohesion is needed to ensure that this activity will work? Will the site be of interest to the private utilities and investors?’
We need to have reliable data and accurate projections when trying to attract private investors and utilities to take on these projects. For example, when evaluating sites, we are careful about determining the amount of electricity needed and how demand could grow over time, deciding, for instance, ‘Should we plan to build a one-megawatt mini-grid or a five-megawatt one at this site?’ There’s a big difference in the capital required to build those two projects, and we don’t want to overbuild. If too much is built, it’s a waste of money because it just sits there. If a site is underbuilt, and it has to be added onto in the future, then that can cost more overall.
We also emphasized that that there must be site visits and field research during the selection phase because the social engagement aspect of this work is very important. While the community’s role in the productivity hubs, for instance whether they will own or operate them, is still to be determined, we absolutely need to have local buy-in and engagement from the beginning. There must be a significant level of effort dedicated to making sure that the site chosen, and then the design of the hub, really meet the needs of the producers living in the area. At the end of the day, they’re the ones who will use or not use the productivity hub. It’s not a gift, the energy. They’re going to have to pay for it, so their involvement is critical.
Langhorne: What role does private sector engagement play in this approach?
Young: Private sector engagement is important in building, operating, and maintaining the mini-grids and productivity hubs and for leveraging the private capital to help finance this activity.
From the beginning, we looked at the sites that have the highest potential to benefit from electricity, increasing the productivity and profitability of businesses, so that we could potentially attract private investors to help finance the mini-grids and attract private utility companies to come in to help set up and run them.
A part of the activity is setting up an investment vehicle to finance the construction of the mini-grids, and USAID plans to put catalytic capital into that vehicle to de-risk investment and make it more attractive for other investors and commercial capital. There’s an upfront capital investment that needs to happen for the construction of the sites. Building the mini-grids and productivity hubs has costs — equipment, solar panels, battery storage, everything needed for the site. All this, including the financial vehicle, will be designed by the project, but by providing catalytic capital upfront, USAID can help mitigate the risks, enhance returns, and bring in other actors.
Right now, we’re selecting sites that have high potential to grow their production and incomes and where people can and are willing to pay for electricity, but these are marginalized areas, so we’re also thinking about how we can employ different methods down the line to get the cost of electricity down. Standardization and aggregation over multiple sites will reduce costs, but a mix of concessional capital and subsidies will be necessary as well. All of this is still to be designed at a later stage, but, once we have a financing vehicle structure, USAID plans to contribute catalytic capital to that vehicle and look at the possibility of leveraging new government subsidies for solar to help buy down the cost of electricity for users.
We’re working with the Government of Colombia to see if some of the current subsidies, for instance for diesel or individual systems, could be redirected to bring down the fee charged to customers using energy generated by the mini-grid.
Colombia has subsidies for diesel, which is expensive. It’s not clean or sustainable energy, and a dependence on diesel creates the potential for corruption: it can be syphoned off, sold, used for illicit activities, etc. Additionally, in October 2020, the Colombian Ministry of Mines and Energy passed a resolution to pay subsidies to help low-income clients in unconnected regions afford individual solar systems. USAID is hoping to work with the Colombian Government to see to what extent some of those subsidies could be reoriented to help make the energy that will power the productivity hubs affordable for rural producers of goods and services.
Because these mini-grids will be off-grid, if they generate excess energy, it can’t be sold back to the main grid and then sold elsewhere, which is often a part of the solar model. Success is really going to depend on the local producers’ absorptive capacity for electricity and their ability to pay for it. So, if it costs $20 a month for energy, and people in the area can’t afford that, a subsidy could help offset that difference. The goal isn’t to subsidize 100 percent or give out energy for free but instead to cover the difference between what people are able to pay and what the utility company has to charge to be viable. The peace dividend, the improvements in production and incomes, the electricity for public services, and the elimination of diesel subsidies justify this subsidy, which would still be much less than the current diesel subsidies.
Langhorne: To what extent is USAID’s involvement in this activity creating additionality?
Young: In this case, I think USAID’s work is very much creating additionality. There’s been research done about mini-grids that says while they require a higher upfront investment than, say, doing individual solar home systems, they bring higher-quality energy in larger quantities, meaning that they can provide power for a lot more folks and for productive-use activities, unlike small solar units.
Because there’s an upfront cost and a lot of risks involved in mini-grids, the private sector can be hesitant or unable to raise the capital needed to build them. That’s where blended finance can really bring down the risk and help speed up the rate of return on a project because a development agency is putting in capital that’s concessional and doesn’t need a return. Therefore, when you blend concessional capital with other capital, it helps that other capital achieve its expected return, which the project might not have been able to do on its own.
A mini-grid may be built for an industrial park for productive activities outside some of the big urban areas, but private capital and utilities aren’t just going to go out to challenging, distant rural locations on their own, so there’s big development additionality here. I think blending is absolutely necessary to get these mini-grid systems up.
It’s similar with productivity hubs. The producers and very small businesses in these areas would never have the capital required to get connected without outside support. Designing the sites up front, getting the private sector engaged to assure that it’s built right and that they can do the ongoing operations and maintenance, and ensuring that the community is willing to pay for electricity, as this activity has done — that’s all really important in making it sustainable.
Another way we may see additionality will be over the longer term in the replicability of this model. We hope to implement it in five to 10 sites for this activity, but there are dozens if not hundreds of sites in Colombia that could benefit from the model if it’s successful. The designs developed could be adapted and then replicated throughout the country, which would add another huge level of additionality for this project.