Results-based financing in the
energy sector: incentives and
sustainability
Report prepared for OECD/DIE
technical worksho...
2
ESMAP is a global technical assistance program
administered by the World Bank and situated in the
World Bank’s Sustainab...
3
The choice of whether and how to use a results-based approach
involves a horizontal (modality) and a vertical (target) q...
4
• How closely related is the desired goal to the indicator?
• Is the indicator likely to generate perverse incentives or...
5
The ‘appropriate’ incentive requires the balance of stronger
incentives with greater risk
Results-based financing in the...
1. the extent to which the agent can control the risks that are shifted
onto them
2. the ease with which both parties can ...
7
Balancing the incentive effect with other considerations: biogas
digestors in Ethiopia
Results-based financing in the en...
8
risk/incentive characteristics
— some agents will have much better access to finance or be able to
control the results b...
Company Profile
Vivid Economics is a leading strategic economics consultancy with global
reach. We strive to create lastin...
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Results-based financing in the energy sector: incentives and sustainability

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Prepared by the Energy Sector Management Assistance Program, this presentation was given at the OECD Technical Workshop on Results-Based Funding, 19-20 May 2014, run by the OECD Development Assistance Committee (DAC) Network on Development Evaluation together with the German Development Institute (DIE).

The DAC Network on Development Evaluation (EVALNET) contributes to better development results using evaluation to build a strong evidence base for policy making and for learning.

More on DIE: http://www.die-gdi.de/en/
More on EVALNET: http://www.oecd.org/development/evaluation/

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Results-based financing in the energy sector: incentives and sustainability

  1. 1. Results-based financing in the energy sector: incentives and sustainability Report prepared for OECD/DIE technical workshop on results-based funding 20th May 2013
  2. 2. 2 ESMAP is a global technical assistance program administered by the World Bank and situated in the World Bank’s Sustainable Energy Department in Washington, DC. ESMAP’s program includes both regional and country-focused activities implemented by the regional units of the World Bank, and global initiatives managed by the ESMAP core program unit. The ESMAP core unit of about 25 staff is responsible for the day-to-day management of the program, following the strategy laid out in ESMAP’s Business Plan as approved by the CG. The unit comprises teams working on energy access, clean energy, energy efficient cities, energy assessments and strategy, results- based approaches for energy sector development, gender, small island developing states, communications, and monitoring and evaluation. Introductions Results-based financing in the energy sector: incentives and sustainability
  3. 3. 3 The choice of whether and how to use a results-based approach involves a horizontal (modality) and a vertical (target) question These considerations will often intertwine Results-based financing in the energy sector: incentives and sustainability Funding modality (horizontal) Conventional Conditional Indirect/ programme/ government Budget or programmatic support RBA Direct/ project/ provider Upfront project support RBF Delivery both funded and implemented by principal Principal = agent Funding target (vertical) Figure 1. Instruments can be placed on a horizontal and vertical dimension Source: Vivid Economics
  4. 4. 4 • How closely related is the desired goal to the indicator? • Is the indicator likely to generate perverse incentives or unintended consequences? Proximity to impact • How easy is it to observe the indicator? • How easy is it to verify observations? Ease of measurement • Will factors outside of the control of the agent also influence the indicator? • Are measurements precise enough to detect changes over short periods of time? • Can the indicator be easily explained? Appropriate incentive effect Results-based financing in the energy sector: incentives and sustainability The ‘horizontal’ modality question involves balancing the incentive effects with 2 other considerations It must be close to impact, easy to measure and provide an appropriate incentive effect Figure 2. Three key factors to consider when adopting a conditional approach Source: Vivid Economics
  5. 5. 5 The ‘appropriate’ incentive requires the balance of stronger incentives with greater risk Results-based financing in the energy sector: incentives and sustainability Stronger incentives for performance Greater risk Figure 3. Stronger incentives and more risk for agents are two sides of the same coin Source: Vivid Economics
  6. 6. 1. the extent to which the agent can control the risks that are shifted onto them 2. the ease with which both parties can observe the relevant results (‘clear line of sight’) 3. the length of time that the agent needs to bridge with finance until he receives the results-based payments 4. the cost base of the agent varies according to the quantum of results delivered 5. the additional investment required to deliver the results does not entail a significant proportion of the agent’s (potential) resources 5 key factors that can influence the risk/incentive trade off 6Results-based financing in the energy sector: incentives and sustainability
  7. 7. 7 Balancing the incentive effect with other considerations: biogas digestors in Ethiopia Results-based financing in the energy sector: incentives and sustainability Number of installations Number of installations provided by BCEs Use characteristics Proximity to impact Does not measure use; including availability of appliances and application of bio-slurry Increases emphasis on private sector, but does not include use or guarantee commercial sustainability Ease of measurement Monitoring framework is in place, independent verification through CSC Monitoring framework is in place, independent verification through CSC Appropriate incentive effect Captures appliance and bio-slurry use, possibility of adding incentive for injera mitad Measured by CSC within planned extension of the monitoring framework Measured less frequently; requires greater pre- finance Easy to explain and can be measured at monthly intervals Easy to explain and can be measured at monthly intervals Suitable result?  ?  Figure 4. Stronger incentives and more risk for agents are two sides of the same coin Source: Vivid Economics
  8. 8. 8 risk/incentive characteristics — some agents will have much better access to finance or be able to control the results better — does risk increase or decrease with greater scale? — diversification benefits but less ability for agent to control other factors — significant externalities would support RBA approach — leakage risk associated with REDD+ — significant economies of scale would support RBA The risk/incentive trade off will also influence the vertical question Results-based financing in the energy sector: incentives and sustainability But other factors are also important
  9. 9. Company Profile Vivid Economics is a leading strategic economics consultancy with global reach. We strive to create lasting value for our clients, both in government and the private sector, and for society at large. We are a premier consultant in the policy-commerce interface and resource and environment-intensive sectors, where we advise on the most critical and complex policy and commercial questions facing clients around the world. The success we bring to our clients reflects a strong partnership culture, solid foundation of skills and analytical assets, and close cooperation with a large network of contacts across key organisations. Contact us: 131-151 Great Titchfield Street London W1W 5BB Author contact details: John Ward T: +44 7790 613951 E: John.ward@vivideconomics.com Practice areas Energy & climate change Development economics & finance Competition & strategy Innovative policy Infrastructure & resources Results-based financing in the energy sector: incentives and sustainability 9

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