Design of financing instruments for electrification in Madagascar

Solar panel in rural area

The Republic of Madagascar is the fourth biggest island in the world and a global hotspot for biodiversity due to its location in the Indian Ocean and its diverse landscape. The country's mountainous landscape, however, causes challenges for the rural electrification. The electrification rate is only around 10% in rural areas. The limited access to the national electricity grid in those areas creates a high demand for decentralised solutions, such as solar home systems (SHS) or mini-grids.

In 2015 the Government of Madagascar adopted a new energy policy that aims to provide electricity to three quarters of the population by 2030. Apart from extending the national power grid, the energy policy aims to increase its efforts on decentralised solutions that are based on renewable energies. However, one of the main obstacles to successfully increasing the electrification rate in Madagascar is the access to affordable and suitable finance though appropriate financing mechanisms.

The National Electricity Fund (Fonds National de l’Electricité, FNE) has been established to support rural electrification with renewable energies through investment subsidies. The Fund will be restructured in 2018 in order to provide additional financing products (credit schemes and guarantee schemes). As part of the project “Electrification with Renewable Energies in Madagascar”, GIZ is supporting the Malagasy Ministry of Water, Energy and Hydrocarbons and the Rural Electrification Agency with this restructuring process.

adelphi and its partner CES prepared a study on suitable conditions for different RE finance instruments that could be offered by the restructured Fund (Fonds National de l’Énergie Durable, FNED). To this end, adelphi analysed the Malagasy banking sector and financing terms for funded RE projects. For the study also a methodology to identify appropriate funding conditions and a suitable mix of funding instruments for RE projects was developed. In addition, the project team proposed recommendations for terms of financing products offered by the Fund.  All final recommendations aim to shape the conditions so that RE projects are made bankable and FNED is given maximum leverage.