Key Messages on “How to Design, Implement and Replicate

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Key messages on “How to design, implement and replicate sustainable small-scale livelihood-oriented bioenergy initiatives, based on the Technical Consultation held in FAO, Rome, 28-29 October 2009

1. Some facts and figures on rural energy situation in developing countries are daunting and show that something has to be done about it.

Three billion people rely on unsustainable biomass-based energy resources (UNDP/WHO 2009 1) and 1.6 billion people), mostly rural poor lack access to electricity (IEA 2002 2). This situation entrenches mass scale poverty and perpetuates the unsustainable use of traditional solid biomass (wood, charcoal, agricultural residues and animal waste), in particular for essential cooking and heating energy services.

Two million people die every year due to indoor burning of solid fuels in unventilated kitchens . Some 44 percent of these deaths are children; and among adult deaths, 60 percent are women (UNDP/WHO 2009 3) .This makes indoor air pollution the fourth leading cause of premature death in developing countries.

National policies and programs aimed at providing broader access to energy services for the rural poor will significantly contribute to sustainable development and achievement of the Millennium Development Goals . This can be significantly supported and partially achieved through the design and implementation of livelihood-oriented, gender sensitive small-scale bioenergy schemes, adapted to local conditions.

1 UNDP/WHO 2009 report, The Energy Access Situation in Developing Countries, A Review Focusing on the Least Developed Countries and Sub-Saharan Africa, http://www.undp.org/energy.

2 IEA 2002. World Energy Outlook. Chapter 13. Energy and Poverty. http://www.iea.org/weo/database_electricity/WEO2002-Chapter%2013.pdf

3 UNDP/WHO 2009 report, The Energy Access Situation in Developing Countries, A Review Focusing on the Least Developed Countries and Sub-Saharan Africa, http://www.undp.org/energy.

1 2. Experience and studies show that small scale bioenergy can really improve the livelihoods of rural people in a sustainable way and with limited risks.

Box 1: What do we mean by “small-scale”? Small-scale bioenergy should not focus on the geographical scale of the bioenergy system or the scale of production. Rather it should be defined by two other criteria, i.e. • small-scale farmers are adequately involved in decisions and benefits along the value chain, and • rural communities benefit from the bioenergy development initiative This definition allows for the inclusion of co-operatives and outgrower schemes, whereby small-scale farmers supply the feedstock to a large processing plant, thereby reducing risks of land losses and guaranteeing an additional source of revenues to local farmers. Another advantage of this broader scope is that collective action by a large number of small farmers can deliver big results. So “Small Scale” does not always mean “small impact”.

Recent studies on small scale bioenergy development schemes by UN agencies e.g. UNDESA, UNEP, FAO 4, and experience from other organizations like SNV, Practical Action, GVEP-I and FACT Foundation, show that, with the right design and support, Sustainable Small-Scale Livelihood-oriented Bioenergy (SSLB) initiatives can provide improved access to sustainable and affordable energy services and enhance livelihoods for rural people and resilience to climate change, without negative impact on food production and the environment.

Appropriately developed and affordable small-scale bioenergy can increase local people’s resilience – hence adaptation to climate change - by reducing their dependence on external and expensive fuel, and through raising rural income by providing new value chains for agricultural products. On the other hand, they also limit the use of firewood and traditional stoves, thereby contributing to food security, improved health and climate change mitigation (examples include use of ethanol or biogas cook stoves and biodiesel to propel food processing units or water pumps). Therefore small scale bioenergy can contribute significantly to climate change mitigation and adaptation as well as to food security and poverty reduction with limited risks compared to other types of bioenergy development schemes.

Several recent reports have emphasised the need to promote the use of bioenergy for poverty reduction. Examples include the recent report by the German Advisory Council on Global Change (WBGU) on "Future Bioenergy and Sustainable Land Use" 5 and USAID-Asia report on “Biofuels in Asia - An analysis of sustainability options” 6

4 See for instance a recent study on ”Small-scale bioenergy initiatives: Brief description and preliminary lessons on livelihood impacts from case studies in Asia, Latin America and Africa” - available at http://www.fao.org/docrep/011/aj991e/aj991e00.htm

5 German Advisory Council on Global Change (WBGU) 2009 "Future Bioenergy and Sustainable Land - Earthscan – available here http://www.wbgu.de/wbgu_jg2008_en.pdf

6 USAID-Asia 2009 Biofuels in Asia- An analysis of sustainability options – May 2009 – Available here http://www.cleanenergyasia.net/upload/resources/file/file_510.pdf

2 3. However developing and replicating SSLB initiatives is easier said than done. Despite promising examples, many challenges lie ahead to scale up SSLB in order to reach significant impact. But many of these challenges are similar to those of other commodity chains, for which significant experience on how to address them already exists.

The Technical Consultation on sustainable small-scale livelihood-oriented bioenergy (SSLB) held by FAO in October 2009 identified a series of success and constraining factors regarding the implementation and replication of SSLB initiatives. The main lessons drawn from these factors can be summarised as follows:

(i) SSLB should not be considered in isolation, but rather as part of sustainable livelihood and rural development strategies .

This integration of bioenergy in a broader perspective has many advantages, i.e. • In particular it is more likely to foster virtuous circles between household and productive uses of bioenergy. In that way, it better grasps the role of sustainable energy supply in the achievement of most of the MDGs, and climate change adaptation and mitigation. • It ensures that the issue of competitive use of biomass for energy and other key local needs such as animal feed, soil management and/or construction material is given appropriate consideration. • It favours the use of by-products in line with a ‘zero waste approach’. This brings about advantages in terms of energy efficiency, GHG emissions, income generation opportunities, and reduction of energy-food competition through more integrated food-energy systems. • It ensures that comparison between different renewable energy options is carried out as part of the local decision-making process. • It might allow for the use of perhaps more attractive entry points – in terms of external support – for SSLB, such as sanitary purposes of biogas promotion. • It forces consideration of the impacts of SSLB initiatives outside the initiative itself and its players - for instance the food security and other indirect impacts of the SSLB operation impacts on people and natural resources outside its coverage.

(ii) Get the financial mechanisms right. While profit-making/entrepreneurial character is an essential ingredient of success and sustainability, some financial incentives for SSLB (donor grants, tax breaks, government subsidies, etc) are often needed in the early phases, while subsidies to conventional energy sources need to be reviewed.

Grant funding will never be sufficient to cover the programmatic and capital investment costs of achieving universal access to clean energy services in low income countries. For this reason, organisations involved in small enterprise support programs must themselves have a business model that is financially viable, and can be scaled up using as much local capital and local capacities as possible. But finding the right balance at the right time between grants and profit-making business is especially crucial and complex when dealing with the rural poor. A commonly accepted concept in the rural energy sector is that subsidies should be transparent, linked to the economic development they are supposed to promote, and include an

3 exit strategy. More details on the role of subsidies, drawn from the technical consultation and recent studies, are summarised in Box 2.

Box 2: The balancing act regarding the role of subsidies in SSLB initiatives Effective subsidy-type incentives should have the following features (ESMAP, 2005): • If incentives are intended to increase energy access for poor households, they should be carefully targeted so that they are efficient and effective. An example is the so called lifeline rate, whereby a subsidised rate is offered to households for a “subsistence” level of consumption, for example up to 50 kWh per month or a few kilograms of fuel. • Subsidies should be suitably long-term and predictable to provide the intended incentive, but with a sunset clause which phases them out and encourages developers to continue to advance the technology until it is cost competitive with conventional alternatives without subsidies. • Incentives should not impose a fiscal obligation that is likely to compromise the financial stability of the responsible agency. Incentives must not be so large as to be a serious drain on public resources and not be too “politically charged”. Examples of such neutral subsidies include cross subsidy from one consumer sector to another (e.g. urban to remote consumer), or from the future to the present (subsidies during early phases with cost recovery in subsequent phases). • Incentives should be designed so as to minimize the potential for corruption. Systems that involve complex, multi-tiered monitoring and verification structure invite abuse. Such systems are only as robust as those monitoring schemes, and their outcomes can only be as successful as those schemes are effective. • Incentives should encourage, not undermine, entrepreneurship. Incentives that are intended to develop and commercialize a given technology should be directed to the appropriate point in the chain of commercialisation, e.g. - R&D during demonstration and outreach phase - Consumer awareness, access to market, after sale services during the market scale up phase; • Incentives should be based on performance, rather than capital investment alone. This keeps the exposure to performance risk at an adequate level, and this can be a strong guarantee of quality. • Incentives should extend flexibility for the investor and/or consumer to choose from among a range of technological and institutional options, so as not to predetermine a specific winning option.

Source: ESMAP, 2005 7

In the end what matters is adequate access to affordable finance when needed throughout the lifespan of the SSLB initiative, both for the producer and the consumer. One can consider three levels of support over time, from the start-up support (e.g. grants, gifts, subsidies) though concessionary loans and microcredit to commercial loans/business investment. The middle level is where there is a distinct lack of available financing mechanisms and investors due to: • Too few intermediaries. • Too little seed capital. • Too little reasonably priced growth capital. • Insufficient consumer and micro-enterprise finance.

Figure 1 presents suggestions regarding what the public and private sectors might fund, and what stage of the development cycle of initiatives and innovation chains they would do it. 8

7 ESMAP 2005. Advancing biofuel for sustainable development – Guidelines for policy makers and investors. Volumes I, II and III, World Bank, April 2005. 8 Adapted from IPCC, 2007: Technical Summary, in Climate Change 2007: Mitigation, Contribution of Working Group III to the Fourth Assessment Report of the IPCC.

Carbon finance mechanisms (including REDD and perhaps adaptation funding in time) might provide additional opportunities in support of SSLB.

The Annex presents ideas on business model innovations that provide small-scale opportunities in bioenergy supply chains.

Getting financial mechanisms right also implies the need to review subsidies to fossil energy, which frequently undermine investment opportunities in small scale renewable energy, including SSLB.

(iii) Inclusive business models 9 are an essential ingredient for successful SSLB.

Entrepreneurship and business orientation are key ingredients for success but they must act in support of local development and local people. Promotion of inclusive business models through local enterprises that can deliver at least affordable energy and perhaps improve other livelihood assets, in a sustainable way, is therefore crucial for SSLB. Among existing inclusive models, those linking large-scale companies and community-level actors (e.g. through contract farming or smallholder share ownership down the value chain) have potential, if fairly structured, to mitigate some of the main risks related to large scale liquid biofuel development.

9 Inclusive business models can be defined as those which do not leave behind small-scale farmers and in which the voices and needs of those actors in rural areas in developing countries are recognized. Inclusive business is not corporate philanthropy, which has inherent limitations of scope and budget. Rather, it is the search for sustainable business models that "do well by doing good”. More details can be found here: www.inclusivebusiness.org .

5 (iv) Successful inclusive businesses require strong partners, and therefore often the social empowerment of concerned communities and farmers.

Community/small farmer involvement in the business operation often requires their social empowerment through some type of collective organisation, of which cooperatives are one type while producer groups, user groups and unions are others. Useful lessons on this topic can be drawn from different programmes and projects on bioenergy and other rural product projects in developing countries.

(v) Start by improving existing technologies before introducing new ones, and guarantee adequate availability of raw material and affordable local technological support.

Starting from existing technology improvement has more chances to lead to early adoption and significant impact given the time it usually takes to learn about and internalise new technologies. Whatever the technology promotes, ensuring adequate availability of raw material can be a challenge and should not be overlooked.

Moreover ensuring good quality and affordable technical support is crucial. This therefore requires the inclusion of capacity building programmes in SSLB development.

Finally, the selection of technologies should ensure that it has positive impacts on labour and livelihood options for both men and women.

(vi) An enabling policy environment and planning over the long term on the part of governments is important to ensure sustainability and replication of small-scale bioenergy initiatives.

SSLB initiatives can be successfully developed without an enabling policy and institutional environment. However, without these, they will just remain “islands of success”, with little upscaling and sustained impact. It is therefore crucial to promote SSLB initiatives among governing bodies and politicians who in most countries drive energy policy decisions. This is particular the case at local government level as both elected local council members and government can jointly provide a suitable institutional framework for participatory planning as well as legal and financial support for the replication and upscaling of SSLB initiatives.

However SSLB can struggle when compared to other commercial energy (renewable or fossil) schemes because it is more difficult to get SSLB initiatives on the agendas of governing politicians This difficulty can arise from any number of factors such as a perception of SSLB technological inferiority or simply a lack of political capital amongst the target communities of SSLB initiatives, or distortionary impacts of existing subsidies and supports to fossil energy. Until SSLB is seen as a valuable and viable alternative (possibly interim) energy strategy by the political establishment, it will prove difficult to properly address the issues identified.

6 Governments need to create favourable frameworks and regimes through a lot of active management and engagement - everything from brokering and interacting with industry/smallholder lobbyists through to monitoring and enforcement support, including frameworks for decision making and implementation, and/or fiscal and regulatory regimes.

(vii) Plan for the long term in developing successful SSLB initiatives

Many of the most successful SSLB examples have operated over a substantial period of time - even though this may not have been the intention at the time of the initiative's inception. Long-term time horizons demonstrate commitment and belief in the eventual benefits of SSLB. Also, persistence and presence may be the best asset in swaying the political tide in favour of SSLB.

(viii) Better knowledge management and stronger partnerships are a way forward to increase the quality and quantity of support to SSLB implementation by development agencies involved in this field.

A lot of development agencies are involved in SSLB promotion, both concerning applied research and field implementation. At this stage: • Better management of the knowledge accumulated within these players would help improve the quality of delivery. But it is essential to achieve this in a manner that is cost effective and does not add an additional burden to the existing work load. • Depending on the nature of partnerships and what role in the innovation system they are supposed to be playing, bilateral deals may or may not be a better way to promote field implementation than a multiple-player mega-programme, i.e. o If the role is as knowledge broker then a larger group may have benefits; o If it is to implement an agricultural initiative it may be a smaller group but involvement from several partners (local governments, local farmer groups, national governments, technical specialists, investors etc) may still be needed. • It is crucial to ensure that adequate, affordable and reliable information is provided to the actual users on the ground, in order to avoid the frequent situations where smallholders and other local actors are not getting trustworthy info on technology, markets etc.

7 ANNEX - Table 1: Business model innovations that provide small-scale opportunities in biofuels supply chains (IIED 2009 10 )

Cooperative Outgrower mills Sliding-scale schemes Intermediary energy

Share traders pricing Purchase ownership contracts Transport Subsidised

Business Small-scale contractors multifunction Land leases arrangements facilities Limited platforms to include aimed at options given Utilising Sharecropping small-scale local high capital existing Subsidised owners end-uses costs of distribution improved Management and biorefineries systems appliances contracts enterprises Supply (e.g. networks

contracts of rural retail Use of Joint ventures with outlets unrefined oil (e.g. larger aimed at rather than community land refineries farmers) refined inputs = shares and biodiesel in the business) distributors

FARMING MILLING REFINING DISTRIBUTION END USES

Active Support to promotion of positive small-scale Employment models through milling laws regulation, operations, Support to off- information, e.g. via Holding grid model supply of developers energy Local content contracts and prototypes accountable schemes requirements brokerage to job

Range of projections in Subsidies as Underwriting support approved above community to promising investment Options for business joint contracts government involvement equity policy support models

Subsidised finance and insurance schemes

Fiscal incentives (e.g. tax breaks, reduced concession fees)

Local supply quotas (e.g. Brazil’s Social Fuel Seal)

Active support: information, guidance, research

10 IIED 2009. Biofuels in Africa: growing small-scale opportunities. IIED Briefing – Business models for sustainable development. http://www.iied.org/pubs/display.php?o=17059IIED