Innovative Financing Models for Rural Electrification in the Eastern Cape, South Africa Thobile Maphosa 1761949 1761949@students.wits.ac.za 082 053 4583 A research report submitted to the Faculty of Commerce, Law and Management, University of the Witwatersrand, in partial fulfilment of the requirements for the degree of Master of Management in Energy Leadership Johannesburg, 2022 Supervisor: Dr Ogundiran Soumonni mailto:1761949@students.wits.ac.za ii DECLARATION I, THOBILE MAPHOSA, declare that this research report is my own work except as indicated in the references and acknowledgements. It is submitted in partial fulfilment of the requirements for the degree of Master of Management in Energy Leadership at the University of the Witwatersrand, Johannesburg. It has not been submitted before for any degree or examination in this or any other university. Name: THOBILE MAPHOSA Signature: Signed at PRETORIA On the 20th of June 2022 iii TABLE OF CONTENTS DECLARATION ............................................................................... ii LIST OF TABLES ........................................................................... vi LIST OF FIGURES ........................................................................ vii LIST OF ACRONYMS .................................................................. viii CHAPTER 1. ............................................................................. INTRODUCTION 10 1.1 PURPOSE OF THE STUDY .......................................................................................... 10 1.2 CONTEXT OF THE STUDY .......................................................................................... 10 1.2.1 THE STATE OF ELECTRIFICATION IN THE SADC REGION ........................................... 15 1.2.2 POST-APARTHEID HISTORY OF ELECTRIFICATION IN SOUTH AFRICA .......................... 18 1.3 RESEARCH PROBLEM ............................................................................................... 20 1.4 RESEARCH QUESTIONS ........................................................................................... 23 1.5 SIGNIFICANCE OF THE STUDY.................................................................................... 23 1.6 DELIMITATIONS OF THE STUDY .................................................................................. 25 1.7 DEFINITION OF TERMS .............................................................................................. 25 1.8 ASSUMPTIONS ......................................................................................................... 28 1.9 CHAPTER OUTLINE .................................................................................................. 29 CHAPTER 2. ................................................................ LITERATURE REVIEW 31 2.1 INTRODUCTION ........................................................................................................ 31 2.2 THE SOUTH AFRICAN OUTLOOK ............................................................................... 31 2.3 DRIVERS AND BARRIERS TO RURAL ELECTRIFICATION ................................................ 36 2.3.1 DRIVERS OF RURAL ELECTRIFICATION ..................................................................... 36 2.3.2 BARRIERS TO RURAL ELECTRIFICATION (RE) ........................................................... 39 2.4 FINANCING MODELS FOR RURAL ELECTRIFICATION .................................................... 42 2.4.1 PUBLIC FINANCE..................................................................................................... 44 2.4.2 PRIVATE FINANCE ................................................................................................... 46 2.5 FINANCING OF ENERGY INNOVATION ......................................................................... 49 2.6 RENEWABLE ENERGY: INNOVATIVE TECHNOLOGIES AND FINANCING ............................ 53 2.6.1 INNOVATIVE RENEWABLE ENERGY TECHNOLOGIES .................................................. 53 iv 2.7 OFF-GRID ELECTRIFICATION .................................................................................... 55 2.8 ADAPTIVE FINANCING THEORETICAL MODEL .............................................................. 60 2.8.1 ADAPTIVE MARKETS HYPOTHESIS ........................................................................... 61 2.9 PROPOSITIONS ........................................................................................................ 64 2.10 CONCLUSION ..................................................................................................... 64 CHAPTER 3. ................................................. RESEARCH METHODOLOGY 68 3.1 RESEARCH SETTING ................................................................................................ 68 3.1.1 POPULATION .......................................................................................................... 69 3.2 RESEARCH APPROACH ............................................................................................. 70 3.3 RESEARCH DESIGN ................................................................................................. 71 3.4 RESEARCH DESIGN: QUALITATIVE METHODS ............................................................. 71 3.4.1 KEY INFORMANT INTERVIEWS .................................................................................. 71 3.4.2 DATA ANALYSIS AND INTERPRETATION ..................................................................... 75 3.5 QUANTITATIVE METHOD ........................................................................................... 76 3.5.1 SECONDARY DATA.................................................. 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BOOKMARK NOT DEFINED. 3.5.2 DATA ANALYSIS AND INTERPRETATION .................................................................... 76 3.6 PROCEDURE FOR DATA COLLECTION ........................................................................ 77 3.7 LIMITATIONS OF THE STUDY ...................................................................................... 78 3.8 VALIDITY AND RELIABILITY ........................................................................................ 79 3.8.1 EXTERNAL VALIDITY (GENERALISABILITY) ................................................................. 79 3.8.2 INTERNAL VALIDITY ................................................................................................. 79 3.8.3 RELIABILITY ............................................................................................................ 80 3.8.4 OBJECTIVITY .......................................................................................................... 80 3.9 ETHICAL CONSIDERATIONS ....................................................................................... 80 3.9.1 RESEARCHER’S ETHICAL RESPONSIBILITY TO RESEARCH PARTICIPANTS ..................... 81 3.9.2 RESEARCHER’S ETHICAL RESPONSIBILITY TO THE SCIENTIFIC COMMUNITY ................. 82 3.9.3 INFORMED CONSENT .............................................................................................. 82 3.10 CONCLUSION ..................................................................................................... 82 CHAPTER 4. ......... PRESENTATION AND ANALYSIS OF RESULTS 83 4.1 INTRODUCTION ........................................................................................................ 83 4.2 DESCRIPTION OF PARTICIPANTS ................................................................................ 83 4.2.1 RESPONSE RATE .................................................................................................... 84 4.3 FINDINGS AND DISCUSSION PERTAINING TO PROPOSITION 1........................................ 85 4.3.1 ANALYSIS OF THE RESPONDENTS’ PERCEPTIONS OF THE DRIVERS OF RURAL ELECTRIFICATION 86 4.3.2 ANALYSIS OF THE RESPONDENTS’ PERCEPTIONS ON THE BARRIERS TO RURAL ELECTRIFICATION 88 4.4 FINDINGS AND DISCUSSION PERTAINING TO PROPOSITION 2........................................ 90 4.4.1 ANALYSIS OF RESPONDENTS’ PERCEPTIONS ON FINANCING MODELS THAT CAN BE DEPLOYED TO SPUR RURAL ELECTRIFICATION ....................................................................................................... 90 4.5 FINDINGS AND DISCUSSION PERTAINING TO PROPOSITION 3........................................ 91 v 4.5.1 ANALYSIS OF RESPONDENTS’ PERCEPTIONS ON HOW INNOVATIVE FINANCING CAN BE USED TO PROMOTE RENEWABLE ENERGY TECHNOLOGIES INNOVATION IN RURAL AREAS .................................. 91 4.5.2 ANALYSIS OF RESPONDENTS’ PERCEPTIONS ON REGULATION / LICENSING IN PROMOTING RURAL ELECTRIFICATION ........................................................................................................................... 92 4.5.3 ANALYSIS OF RESPONDENTS’ PERCEPTIONS ON THE IMPORTANCE OF OFF-GRID TECHNOLOGIES IN RURAL ELECTRIFICATION ................................................................................................................ 93 4.6 SUMMARY OF THE FINDINGS ..................................................................................... 94 CHAPTER 5. .................................................................................... DISCUSSION 95 5.1 INTRODUCTION ........................................................................................................ 95 5.2 DEMOGRAPHIC PROFILE OF RESPONDENTS ................................................................ 95 5.3 DISCUSSION PERTAINING TO PROPOSITION 1 ........................................................... 96 5.3.1 DRIVERS OF RURAL ELECTRIFICATION ...................................................................... 96 5.3.2 BARRIERS TO RURAL ELECTRIFICATION .................................................................... 96 5.4 DISCUSSION PERTAINING TO PROPOSITION 2 ........................................................... 97 5.4.1 TRADITIONAL AND INNOVATIVE FINANCING MODELS ................................................... 97 5.5 DISCUSSION PERTAINING TO PROPOSITION 3 ............................................................. 98 5.5.1 INNOVATIVE FINANCING AND RENEWABLE ENERGY TECHNOLOGIES ............................ 98 5.5.2 THE IMPORTANCE OF OFF-GRID TECHNOLOGIES IN RURAL ELECTRIFICATION .............. 98 5.5.3 RELEVANCE FOR THEORETICAL FRAMEWORK: ......................................................... 99 5.6 CONCLUSION ........................................................................................................ 101 CHAPTER 6. ................. CONCLUSIONS AND RECOMMENDATIONS 103 6.1 INTRODUCTION ...................................................................................................... 103 6.2 CONCLUSIONS REGARDING RESEARCH QUESTION 1 .................................................. 103 6.3 CONCLUSIONS REGARDING RESEARCH QUESTION 2 .................................................. 104 6.4 CONCLUSIONS REGARDING RESEARCH QUESTION 3 .................................................. 105 6.5 RECOMMENDATIONS .............................................................................................. 108 6.6 SUGGESTIONS FOR FURTHER RESEARCH ................................................................. 110 REFERENCES ............................................................................ 112 vi LIST OF TABLES Table 1: Population Growth and Rate of Electrification in South Africa (1996 - 2018) 32 Table 2: Main renewable energy sources and usage forms ........................................ 54 Table 3: Consistency matrix: research questions and propositions............................. 66 Table 4: Profile of respondents ................................................................................... 73 Table 5: Braun and Clarke's Six-Phase Framework - Thematic Analysis .................... 75 Table 6: Categories and sizes of target population/sample ......................................... 84 Table 7: The drivers of rural electrification .................................................................. 87 Table 8: The barriers to rural electrification ................................................................. 88 Table 9: Financing models .......................................................................................... 90 Table 10: Innovative financing models and rural electrification ................................... 90 Table 13: Innovative financing and renewable energy technologies ........................... 92 Table 12: Regulation / licensing for rural electrification ............................................... 92 Table 13: The importance of off-grid technologies in rural electrification .................... 93 Table 14: The role of respondents in the organisation ................................................ 95 vii LIST OF FIGURES Figure 1: Financial instruments and structures in clean energy innovation ................. 51 Figure 2: The Adaptive Markets Hypothesis - compatible theory of finance and capital. .................................................................................................................................... 60 Figure 3: The Convergent Parallel Mixed Methods DesignError! Bookmark not defined. Figure 4: Categories and sizes of target population/sample ....................................... 85 Figure 5:Identified drivers of rural electrification extracted from the interview ............. 86 Figure 6: Identified barriers to rural electrification extracted from interviews ............... 88 viii LIST OF ACRONYMS CDM Clean Development Mechanism CIF Climate Investment Fund CSIR Council for Scientific Industrial Research DER Distributed Energy Resources DG Distributed Generation DOE Department of Energy ESMAP Energy Sector Management Assistance Program FBE Free Basic Electrification FGD Focused Group Discussions GEF Global Environment Facility GPOBA Global Partnership for Output Based Aid IEA International Energy Agency INEP Integrated National Electrification Programme MFI Micro-Finance Institution NDP National Development Plan PPIAF Public-Private Infrastructure Advisory Facility PPP Public-Private Partnership PV Photovoltaic RDP Reconstruction Development Programme RE Rural Electrification ix REA Rural Electrification Agency RECS Rural Electrification Collective Scheme REIPPPP Renewable Energy Independent Project Producer Procurement Programme REP Renewable Energy Project RET Renewable Energy Technology ROI Return On Investment SADC Southern African Development Community SANEDI South African National Energy Development Institute SAPP Southern African Power Pool SHS Solar Home Systems SDG Sustainable Development Goal SSA Sub-Saharan Africa SSEG Small Scale Embedded Generation UN United Nations 10 CHAPTER 1. INTRODUCTION 1.1 Purpose of the study This research report is based on a case study that examines innovative financing models for rural electrification in the Eastern Cape, South Africa. This qualitative study examines innovative financing models deployed to extend electricity in rural areas and promote renewable energy technology innovation in the Eastern Cape, South Africa. 1.2 Context of the study One of the fundamental enigmas threatening the livelihoods of millions of impoverished people worldwide is energy insecurity (Chauhan & Saini, 2015). The overwhelming majority of the global population lives in developing countries, and more than one-third of developing countries are rural areas with no access to commercial forms of energy (Chauhan & Saini, 2015). Yet, rural electrification is moving at a painfully slow pace in most of the developing world. In many African and South Asian countries, it is even less than rural population growth (Barnes, 2010). Electrification is critical for improving rural people's socioeconomic conditions, contributing to economic development, and promoting livelihood security by supplying electricity as a productive input in agriculture and rural industries, improving people's quality of life (Thapa et al., 2020). Furthermore, a large proportion of the global population lives in the countryside; therefore, focusing on sustainable rural electrification is another critical factor in protecting our environment, particularly when it comes to climate change and global warming (Barreto, 2018). Various scholars like Ngoepe et al., (2016), Aswat et al., and Battacharyya (2016) have investigated concepts such as renewable energy technologies, the impact 11 of fossil fuels, drivers and barriers to rural electrification, funding methods, and environmental impact in the study of rural electrification. Rural electrification in developing countries is moving at a snail's pace due to high costs, necessitating a significant capital investment and extensive program planning. The expenses include the purchasing and transportation of the equipment and system components and the acquisition or development of expertise for installing, operating, controlling, and maintaining the systems. Aside from the initial capital and planning costs, decentralized electrical systems, such as photovoltaic (PV), solar home systems (SHS) and renewable energy technologies, are typically expensive compared to the average individual income in developing countries. Therefore, securing financing is a critical step in expanding decentralised electricity in developing countries, whether via photovoltaic (PV) systems or other means. Over the past two decades, rural electrification has gained prominence as a viable means of improving living conditions (Benavente et al., 2019). Most government policies have made rural electrification a priority to minimise the gap between those who have and those who do not yet have access to electricity (Mainali & Silveira, 2011). Several governments also attempt to deal with the persistent affordability gap that has made rural electrification subsidies dependant (Phillips et al., 2020). Regarding access to electricity, South Africa is atypical of sub-Saharan Africa (SSA), having a unique array of threats and opportunities (CSIR, 2017). South Africa is an energy-intensive, medium-income economy with an annual per capita consumption of 4,326 kWh. Approximate 9 per cent of 45GW generation capacity in South Africa is renewable, while 86 per cent is coal-based (DOE, 2019b). Therefore, there is a tremendous potential for renewable energies to accelerate the transition towards a more efficient environment. South Africa’s electrification is atypically high at 91 per cent, urban electrification at 92 per cent and rural electrification at 90 per cent. Compared to an average of 48% in the sub-Saharan area with a rural electrification rate of 32 per cent in 2018 (Worldbank, 2018). According to the South African National Energy Development Institute, despite South Africa’s success in its programmes for electrification of 12 rural areas compared to its counterparts in SSA, more than three million people residing in rural areas still lack access to electricity, according to the South African National Energy Development Institute (SANEDI, 2019). As a result, approximately four million rural households in South Africa rely on fuelwood for heating and cooking (Ningi et al., 2020). The Eastern Cape is the second largest province in South Africa, and it has historically lagged behind the majority of the country’s provinces (PMG, 2011). The unemployment rate is the highest at 37 per cent StatsSA (2019), and the region suffers abject poverty. An approximated 67 per cent of the Eastern Cape’s population is multidimensionally poor and lives below the poverty datum line. Westaway (2012) argues that the legacies can be attributed to apartheid, where the provincial administration of Eastern Cape have inherited the largely poor Transkei and Ciskei., Ningi et al. (2020) further attest that almost 36% of people in the province relies solely on social support or grant. It is one of the regions with the highest rural population. Some communities still rely on alternative energy sources such as paraffin, wood and cow dung for different household activities, including lighting, cooking and food preservation, despite progress in other provinces, reducing reliance on energy sources associated with human and environmental illness. The initial expense to connect new rural customers is a barrier that remains an expensive proposition. Public financing that addresses affordability issues will be required for countries to achieve universal access (Phillips et al., 2020). The challenges have led to the upsurge of alternatives to grid solutions (off-grid), primarily in the rural areas where despite the continuous expansion of the electricity grid, some areas are still inaccessible and disperse (Benavente et al., 2019). The low and middle-income countries facing electricity challenges today are dealing with a new playbook of potential solutions. The solutions include drivers such as technological developments in distributed energy systems, monitoring and payment systems, and end-use equipment efficiency that will make off-grid electricity systems the lowest-cost and most desirable choice for the majority of unconnected rural communities (Phillips et al., 2020). 13 The fall of solar and battery prices, production of ultra-efficient equipment and appliances lead to a very different collection of potential paths for future electrification (Olówósejéjé et al., 2020). The International Energy Agency (IEA) estimates that over the coming decade, more than 70% of the rural population in the world gaining electricity will rely on the low-cost solutions of off-grid systems (IEA, 2017). The success of rural electrification will also be dependent on the transition from the conventional grid extension approach, and the rate of adaptation of innovative technology and finance approaches for off-grid solutions, especially in the SSA region (Vanadzina et al., 2019). The region needs to reconsider some of the enormous capital investment intended for expanding centralised generation. Simultaneously adopt Distributed Generation (DG) energy technologies that are modern, efficient, and based on sustainable resources, removing negative externalities associated with environmental pollution (Soumonni & Soumonni, 2011). The South African government plans to electrify or achieve universal electrification by 2025 (97 per cent in the case of traditional households) (Scharfetter & Van Dijk, 2017). For this purpose, both grid-tied and high-quality and cost-effective off-grid technologies are being used (Jamal, 2015). Financing models are critical in developing strategies for expanding electricity access about dealing with high connection costs and low affordability, mobilising financial resources, designing system ownership and management models, and supporting productive use of energy for development (Phillips et al., 2020). A literature review on financial models for rural electrification has shown that various schools of thought exist around this study. Some scholars argue in favour of different models Estache (2006), while Kouassi and Pineau (2011) state that Sub-Saharan African countries rely on public finance for rural electrification (capital and maintenance expenditures). However, introducing new decentralised or off-grid energy technologies with the global objective of carbon reduction has increased participation or interest from the private sector. Scholars such as Eberhard et al. (2014) and Roy and Nightingale (2010) support private finance. There is also a group of writers who favour the combination of public and private funding in the form of a public-private partnership. Scholars such as Ajakaiye and 14 Ncube (2010) and Twesigye (2019) contend that rural electrification is structurally unprofitable and indispensable to social and economic development. Therefore, even in developed countries, it has never been the product of a purely commercial strategy and will never be done with private funding, but it requires substantial public financing. In the context of the Eastern Cape, this is inconclusive, and it forms one of the primary motivations for this research. A critical insight from this study is that the literature suggests a correlation between financing models for rural electrification and the country's national context. The recent surge in renewable energy technology innovation has led to a growing interest in innovative financing models, especially for electrifying rural communities (Bhattacharyya, 2013). South Africa is currently heavily reliant on fossil fuels. Approximately 90 per cent of its electricity is generated from low-cost coal (DOE, 2019b), and in 2019, coal contributed 200 210 GWh, which constituted about 92 per cent of the energy mix (Eskom, 2019). However, it remains the highest emitter of carbon dioxide in Africa (~45 per cent of the continental total) and seventh in the world (Joshua et al., 2020). Lower access rates, as well as a scarcity of reliable and affordable electricity, pose a threat to Africa's rapid economic development (Olanrele, 2020). According to the World Bank's analysis of the SSA economy, technical innovations, particularly in solar energy, offer the potential for rapid progress in electricity provision by integrating grid expansion with mini-grids and home-scale systems (Chuhan-Pole et al., 2018). However, leapfrogging traditional phases of national grid-based electrification will necessitate a mix of different systems to meet various needs. Therefore, leveraging the private sector will be critical to scale-up electrification (Calderon et al., 2019). Soumonni (2013) contends that African countries can and should strive to advance through the entire innovation cycle, particularly in renewable energy. Systems of innovation (SI) have the potential to increase access to electricity, and the concept of "learning" is considered a significant driver of innovation and production (Soumonni, 2013). 15 The concept of learning is central to SI thinking. It can be viewed as a mechanism of technological transformation accomplished through diffusion, adoption of innovations created elsewhere, and incremental or gradual innovation. (Viotti, 2002). According to (Lundvall, 2016), in the context of non-industrialised or late industrialising economies, much of the implicit and localised learning occurs through the DUI (Doing, Using and Interacting) mode. As evidenced by key national planning strategies such as the National Development Plan (NDP), the National Systems of Innovation (NSI) is a critical concept in South African policy discourse. The country's potential for innovation is attributed to its future industrial development, which leads to social and economic growth (Manzini, 2015). Social and economic growth depends on both imported and local innovations. The innovations' effect depends on their extent of dissemination across society and industry (Cunningham, 2012). Therefore, innovation in financial models and technology are potential accelerants for unmet electricity sectors in the Eastern Cape, South Africa and other sub-Saharan African regions to leapfrog to clean energy to expedite electricity access in rural communities (Batinge et al., 2017). 1.2.1 The State of Electrification in the SADC Region The Southern African Development Community (SADC) region has a rural population that people characterise in the base segment of the economic pyramid. Due to their economic vulnerability and position at the periphery of the market economy, the financial disparity between rural electrification costs and affordability is enormous (C. G. Monyei et al., 2018). The funding mechanisms required to make rural electrification feasible generally include finance of electricity through Public, Private and Public-Private Partnerships (PPPs). The PPPs play a pivotal role in optimising and developing innovative funding solutions to ensure suitable production and distribution of electricity, especially in rural areas (Ngoepe et al., 2018). According to Mainali and Silveira (2011), identifying novel strategies of attracting capital and increasing funding is vital to rural electrification and, eventually, rural development. Experts suggest that focusing on end-user financing as offered by Micro-Finance Institutions (MFIs) could be 16 instrumental as it increases the viability of financing mechanisms to make Renewable Energy Technologies (RETs) more affordable, especially in the rural areas in most African countries (Soumonni, Oji & Ojah, 2016). In SSA countries, rising rural marginalisation has resulted in profound economic development challenges and has sat alongside a surge in energy-poor households in rural communities due to lack of access to electricity (IEA, 2011) and (Ikejemba et al., 2017). This is evidenced in the significant variation in the rates of electricity access throughout rural and urban areas and between income groups (Prasad, 2011). Hence, in attempting to close the widening divide between urban and rural areas, several countries in SSA have adopted other interventions, notably the Solar Home Systems (SHS) (Moner-Girona et al., 2018). However, despite the widespread dissemination of the SHS, there has been no discernible or systematic decrease in rural “peripheralisation”1 and poverty alleviation (C. G. Monyei et al., 2018). Conversely, South Africa is an appropriate example of how the SHS intervention unwittingly created instances of rural peripheralisation. Despite substantial government expenditure on SHS, an assessment of South African socioeconomic effects shows that households' energy needs are rarely satisfied because of the low power capabilities of the system, according to Azimoh et al. (2016). Numerous elements are impediments liable for hindering high levels of rural electrification, amongst which are, lack of favourable or enabling policies; geographic locations and setup of rural communities and finally, poverty or low- income status of rural communities versus the high cost of grid connections (Yadav et al., 2019). Traditional financing methods, which are the main financing instruments, are debt and equity, including senior debt, venture capital and project finance (Justice, 2009) and (Olmos et al., 2012). These models are preferred for large-scale financing of projects, mainly through integration with regions, as validated by the goals of economies of scale and efficiency, the reliability and security of supply (Moner-Girona et al., 2018). However, the models 1 The meaning of “peripheralisation” in this context has been extended to include discrimination in quality and quantity of electricity access to households of the same income bracket due to their proximity to the national grid. 17 have not moved the needle towards universal rural electrification significantly (Vanadzina et al., 2019). The rural populace has continuously benefited from government funding. It is also said that no country in the world has achieved complete electrification without significantly subsidising connections for last-mile households (Guay, 2018). However, the high dependence on public funds makes energy projects multitudinously uncertain and difficult to manage. They have characteristics such as protracted durations, extensive budgets, multiple stakeholders, and uncertainty that are difficult to model, execute and manage effectively (Ikejemba et al., 2017). Rural electrification funding is complex, and novel, innovative business models, must be built to realise higher private sector investments (Kyriakarakos et al., 2020). To address the challenge of funding Renewable Energy Technologies (RETs), various strategies and models have been built or developed to enhance adoption and stimulate economic development (Carley et al., 2012). These include (i) the public control model through a partner organisation; (ii) the bank and microfinance model (iii) the local business model (Roy, P., & Nightingale, K, 2010). The critical features identified from these models are a substantial financial sponsor and credit access; local control of financial resources; business approach; local involvement and approaches; technical expertise and low project complexities that public agencies can manage. Experts suggest that Renewable Energy Projects (REP) investments should focus on end-user financing, micro to medium-sized companies, small scale project funding for aggregate community development, and household finance (Soumonni, Oji, & Ojah, 2016). Low population densities commonly typify rural areas with dispersed concentrations and, consequently, low-load factors (Ehnberg et al., 2020). The advent of cost-efficient off-grid power supply platforms was a transversal transition engine in the last decade (Phillips et al., 2020). A thinly spread population over a large surface area relates to an increase in the costs of setting up energy infrastructure, prices that are non-cost reflective and unattractive returns on investment (ROI) C. Ketlogetswe et al. (2007). Due to this 18 geographical setup and population spread, other scholars believe that the SADC’s objective to achieve equitable and universal electricity access targets will require innovative technologies, strategies, and financing of off-grid rural sectors. A space that is currently being tapped by the emerging energy entrepreneurs Ngoepe et al. (2018). Rural electrification in SADC can be accelerated by leveraging the off-grid area where the new entrants leverage the existing momentum in diffusing new technologies, notably Solar Home Systems (SHS), microgrids, pico-solar systems and leveraging on innovative financing (Ngoepe et al., 2018). The SSA region lags behind the rest of the world, with most of its rural population dependent on traditional forms of bioenergy, which have substantial social and environmental costs (Chaurey et al., 2004). Energy poverty is a constant challenge as most countries still rely on centralised generation and distribution that has not always afforded equitable access (Yadav et al., 2019). According to REA (2011), the inability of grid extension efforts to catch up with the ever- increasing population in the rural areas has left the rural electrification levels in a dire state in SSA. However, the decentralised energy technologies are increasingly achieving financial parity and have certain environmental benefits over grid expansion, especially in remote rural areas (Yadav et al., 2019). 1.2.2 Post-Apartheid History of Electrification in South Africa South Africa possesses a remarkable electricity programme compared to its counterparts in the SADC region. It presents a unique situation; rural electrification has succeeded predominantly through the expansion of the grid and high quality off-grid solar home systems under the Reconstruction Development Programme (RDP) and the Integrated National Electrification Program (INEP) (DOE, 2019a). Despite the strong apartheid policies underpinning the electrification programme where only one-third of the populace had electricity access before 1990, it managed to double that proportion within a decade. According to Bernard Bekker et al. (2008), the voting of a new post-apartheid government post-1994 and the demise of apartheid contributed immensely to an overhaul of innovation and 19 financing, policy, planning, technology and institutional developments leading to access to electricity for over 5 million households between 1990 and 2007. The 1996 census report showed that electricity access in South Africa was at 58%, which was a remarkable improvement from below 35% before 1990; it further revealed disparities in other essential services (StatsSA, 2000). The improvement was attributed to legacies left by the apartheid policies, which included a broadly racially defined contrast between rich and poor; and a history of racial discrimination in infrastructure provision (Bernard Bekker et al., 2008). Electricity distribution infrastructure development was highly unequal, and a substantial majority of the rural population was consequently migrated into autonomous territories. According to Davis (1997), rural communities were among the most marginalised in the country, with almost no infrastructure development due to low load profiles, mismanagement of funds, and a lack of industrial customers. South Africa’s success in its electrification programme depended on three critical phases: institutional/policy/planning, financing, and technological development. Financing is a crucial challenge that needed to be resolved, considering the cost of electrification, and determining the affordable tariff structures. Innovation and introducing new technologies brought down the overall costs until 2003 when the programme started to electrify remote areas; the expenses significantly increased (Bekker et al., 2008). The Department of Energy recorded that more than 7,4 million households were electrified in South Africa between 1994 and 31 March 2018 through the RDP and INEP programmes DOE (2019a). In addition, the Free Basic Electrification Policy was an essential element in the INEP used to provide relief to poor un- electrified rural communities for social and economic benefit (Azimoh et al., 2015). The private financing sector, especially banks, has taken advantage of the rapid growth in distributed energy generation by providing innovative energy finance. The recent evident success has been funding the South African Renewable 20 Energy Independent Power Producers Procurement Programme (REIPPPP) (Nedbank, 2019). The public utility Eskom dominates the power sector of South Africa, and it is the primary electricity provider, generating more than 90 per cent of the electricity in South Africa and about 40 per cent of that in Africa (Eskom, 2019). The electricity supply industry includes the distribution, transmission, generation, and sale of electricity. Eskom operates most baseload and peaking capacity, but the role of Independent Power Producers (IPPs) is expanding. According to Eskom (2019), the coal-fired stations are the main primary energy source generating 200 000GWh. The value chains supply electricity to South Africa and the SADC region with an integrated network that connects the Southern Africa Power Pool (SAPP). The South African RE level is well established compared to other countries in the SADC region; despite having a line network that stretches over 387 000 km, there are still sections in the rural areas that remain with fragile power supply at the outskirts of the grid. While studies have been conducted to examine barriers and drivers of electrification in other SADC or SSA countries (Ahlborg & Hammar, 2014), many experiences of successful RE are derived from Latin America and Asia (Khan, 2019). However, the drivers and barriers of the regions mentioned earlier cannot be directly transferable to the context of South Africa and are not necessarily generalisable due to differing economic, social and political contexts across countries. 1.3 Research problem The South African government plans to electrify or achieve universal electrification by 2025 (97 per cent in the case of traditional households) (Scharfetter & Van Dijk, 2017). Additionally, the Department of Energy seeks to connect 90 per cent of the households to the grid, and seven per cent will use the off-grid options Bongwe (2013). For this purpose, both grid-tied and high-quality and cost-effective off-grid technologies are being used (Jamal, 2015). The two 21 electrification options considered are not without challenges or limitations in South Africa’s rural communities. South Africa is currently heavily dependent on fossil-based fuels. Approximately 90 per cent of its energy comes from low-cost coal, 60 per cent of the country's oil is imported, while the rest is produced from coal-to-liquid technology (DOE, 2019b). As a result, South Africa is Africa’s highest emitter of carbon dioxide in Africa (~45 per cent of the continental total) and the 7th largest in the world in Carbon Dioxide (Joshua et al., 2020). Therefore, this study will explore the possibility of promoting wind and solar as renewable energy sources in electrifying public facilities, households, and enterprises in the study site. According to Eskom’s Integrated Results 2019, Eskom generated energy worth 218 939 GWh for the year; coal contributed 200 210 GWh, which constitutes about 92 per cent of the energy mix (Eskom, 2019). Renewables account for about 7 per cent of generated energy in South Africa. In the Integrated Resource Plan of 2010 (IRP), the Government’s 2030 target is to secure 42 per cent of new electricity supply from renewable energy sources by 2030. The REIPPP, in terms of the national targets for renewable energy capacity goals, as outlined by the Integrated Resource Plan (IRP) and National Development Plan (NDP), had achieved 22 per cent and 57 per cent of the 2030 and 2020 targets by the end of June 2017 respectively (DOE, 2019b). The conventional large-scale centralised power infrastructure has driven South Africa’s electrification programmes, or utility (Eskom) concentrated historically on-grid power extension (Ngoepe et al., 2018). Similarly to other sub-Saharan African countries, public finance has been the dominant financing model for rural electrification (capital and maintenance expenditures) (Kouassi & Pineau, 2011). According to the CSIR (2017), on-grid projects under the Integrated National Electrification Plan (INEP) obtain almost 100% capital and operating cost subsidies. In contrast, off-grid initiatives do not receive equivalent financing, and this impacts rural electrification. The energy transition is vital as part of efforts to increase and decentralise electricity access in rural communities. Adoption of green energy, in particular, is 22 gathering traction as a conduit to, or form of, equitable access for all (Batinge et al., 2017). This will play a pivotal role in combating the change in climate, degradation of the environment and energy security (Chauhan & Saini, 2015). Renewable energy may be used in the national grid as a source of power generation or stability of the network or in non-grid areas as an ideal means of generating electricity for rural electrification (Ngoepe et al., 2018). The main drivers or dependency on fossil fuels, especially coal, are cost factors and the abundant availability of coal. The main barriers facing the rapid deployment of renewables for electricity generation are cost, storage, intermittence, public acceptance and grid reliability (Ahlborg & Hammar, 2014). Leapfrogging to renewable energy as an off-grid alternative is considered a viable route to attaining energy security (Batinge et al., 2017). The recent surge in renewable energy technology innovation has led to a growing interest in innovative financing models, especially electrification of rural sectors using off- grid options (Chuhan-Pole et al., 2018). Despite South Africa's success in rural electrification programmes compared to its sub-Saharan region counterparts, more than three million people in rural areas still do not have access to electricity (SANEDI, 2019). This leaves a substantial populace component without adequate energy access or forming part of the unmet electricity market. As a result, these rural regions that remain particularly underserved in electricity use and access are impacted by poverty, lack of development and economic growth (Stern et al., 2019). According to Oji, Ojah, & Soumonni (2016), the growing shortage of access to reliable energy poses significant challenges for economic development in SSA countries, notwithstanding the proliferation of electricity initiatives in the rural areas over the past two decades (Schillebeeckx et al., 2012). In light of the above, it is evident that energy is a capital-intensive investment dominated by fossil fuels. This persistent shortage of electricity supply is primarily due to the financial constraints and limited resources apportioned to the rural sector. 23 Rural electrification by renewable energy technologies needs innovative financing models that can aid in addressing a fundamental enigmas of energy access and security, which currently affect a significant rural populace globally (Mainali & Silveira, 2011). Alternative financing methods can pave the path for low-cost non-conventional energy technologies and hasten their development. Furthermore, their adoption is expected to eliminate the government's reliance on expensive grid solutions associated with lower electrification rates and other constraints identified in the literature review (Nayyar et al., 2014). Therefore, the study seeks to examine innovative financing models deployed to extend electricity in rural areas and promote renewable energy technology innovation. 1.4 Research Questions This research aims to address the following questions: 1. What are the main drivers and barriers with respect to rural electrification in the Eastern Cape, South Africa? 2. What financing models, whether innovative or traditional, have been deployed for the extension of rural electrification in Eastern Cape, South Africa? 3. How can innovative financing further promote renewable energy technology innovation (that is beyond R&D) to support rural electrification at the study site? 1.5 Significance of the study This study explores the existing financing models and identifies specific drivers and barriers to rural electrification. It will further investigate how innovative financing can promote renewable energy technology innovation to stimulate electrification in the rural Eastern Cape. The research will move beyond the objective of universal electrification in the underserved rural areas or unmet 24 electricity markets by leapfrogging to renewable energy. In South Africa, rural electrification is high compared to its counterparts in the SSA region. However, there is still a substantial portion of the populace that remains without access to electricity. Another objective is to transition from the current coal-based energy resource to renewable, sustainable, and clean energy-based resources. Therefore, the question of financing will remain a critical issue in the foreseeable future beyond striving to accelerate access to electricity by using the opportunity to leapfrog the fossil-based energy regime to embrace a clean or renewable energy regime. Much research on rural electrification has been done from a global perspective and experience derived from other continents like Asia and Latin America. Therefore, these financing models in different sectors of the world cannot be generalisable, and neither can they be transferable to the context of the rural Eastern Cape, South Africa (Chaurey et al., 2004); (Ying et al., 2006); (Bhattacharyya & Ohiare, 2012); (Rathi & Vermaak, 2018); (Cherni & Preston, 2007); (Palit & Chaurey, 2011). Although much of the Eastern Cape has been electrified, global trends and global agreements about climate change show increasingly concerted efforts to pursue new technologies that favour the production of clean energy instead of electricity generated from coal and other fossil energy sources. This is leading to renewed calls for new clean energy technologies. Innovative financing models will play a critical role in delivering electricity to all using renewable energy technologies. This study will assist the Government of South Africa and private players to consider essential issues in choosing suitable financing mechanisms for the electrification of rural areas in the Eastern Cape. This research’s objective is to contribute to the body of knowledge on innovative financing models for rural electrification in the Eastern Cape. It will provide relevant and vital insights that could spur or fast track rural electrification and provide potential solutions to the existing challenges. The study will benefit the government, donors, private sector, financiers, energy experts, civil society, and rural communities. It will further help the SADC community and South Africa on future electrification development in the energy industry and provide insights to 25 other countries experiencing dismal rural electrification. Lastly, this study will contribute to the scholarly community, literature and add to the body of knowledge about strategies used in the Eastern Cape, South Africa. 1.6 Delimitations of the study The objective of this study was to examine innovative financing models and investigate how renewable energy technology innovation can be promoted to stimulate rural electrification in the Eastern Cape, South Africa, through the use of innovative financing models. Therefore, the delimitations were as follows: 1. The scope of this study was limited to the Eastern Cape, South Africa. 2. This study confined itself to interviewing the energy experts and respondents who know and experience rural electrification. 3. The calibre of the sampled population was taken from South Africa, the study area and stakeholder institutions affiliated with the study area from an electrification perspective. 1.7 Definition of terms This part of the research report is intended to assist with understanding how terms are used, when reading, interpreting, and evaluating this research. In the context of the application of this analysis, general terms and phrases are also included. Energy Technology Innovation It is a series of processes whereby energy technology advancements are conceived, studied, built, exhibited, and optimised in environments from the laboratory to the commercial marketplace; and disseminated into widespread use. The technological improvements may be enhancements of existing technologies or their substitution by significantly different ones. Innovation, then, does not consist of research and development (R&D) alone; it is not complete until it incorporates the further phases through which new technologies or 26 improvements achieve widespread dissemination or application (Gallagher et al., 2006). Innovative Financing This is a financing strategy for businesses and projects that have a sustainable social and environmental effect. It seeks to use all the financial and philanthropic tools available to support their growth and promptly develop new ones if existing means are not practical (Ngoepe et al., 2018). Rural Area A rural area is a zone outside a town or city that is heavily populated. Rural areas are typically not metropolitan areas and, in contrast with urban areas with more significant populations, generally are large open areas with few dwellings and few inhabitants (Safeopidia, 2020). The Census Bureau defines rural as "any territory, housing or population not in an urban area” USDA (2019). Urban Area The built or highly populated areas include the town itself, suburbs and continuously inhabited places. It can be less or more extensive than the city itself, including the city and its outlying suburban area or a thickly populated surrounding countryside (Breckenkamp et al., 2015). Electrification It is the connection between a house, town, or area with a supply of electricity. Barriers These factors hinder the deployment of new technology; it may include economic, technical, political, social or environmental (Ahlborg & Hammar, 2014). Drivers These factors promote the deployments of new technology; it includes political, technical, social, economic or environmental (Ahlborg & Hammar, 2014). 27 On-grid Electrification A central power or power system consists of an integrated grid to transmit energy from generators to customers (IEA, 2011). Mini-grid Electrification A 'microgrid,' also known as an independent grid, is a collection of electricity generators and possibly energy storage systems interconnected to a distribution network and provide electricity to a localised consumer population. They include small-scale power generation (10 kW to 10 MW) that serves a small number of customers through a distribution system that can operate independently of national electricity transmission networks (Bhattacharyya & Palit, 2016). Off-grid Electrification A decentralised system that requires less land than a utility-scale renewable project may have fewer distance transmission losses but supplying electricity like a conventional grid link (as only a local customer or area is served). Furthermore, off-grid networks will offer electricity efficiency and flexibility and promote the introduction of localised renewable energy generation into the grid, marked by decreased power outages and their respective massive economic impacts on relevant economic activities (IRENA, 2015). User-Centricity? The appropriateness of an intervention or technology in meeting the needs of users. Its fundamental core concepts are local embeddedness, reliability and affordability (Schillebeeckx et al., 2012). Electricity Technology The generation, transmission, and distribution system of electricity. The three leading technologies are on-grid, mini-grid and off-grid (Granovetter & McGuire, 1998). 28 Viability The revenue structure of rural electrification considers the flow of funds from partners, customers and third parties (Schillebeeckx et al., 2012). 1.8 Assumptions As a point of argument, Leedy and Ormrod (2010) stated that "Assumptions are so fundamental that the research problem would cease to exist if they were not present". This study has identified some assumptions that are generally expected to hold when conducting this scholarly research project. • The respondents will answer truthfully, reflecting rational perspectives and experiences. The anonymity and confidentiality of each respondent will be preserved, and respondents are volunteers who have the right to terminate at any time. Failure to get accurate responses will impact the accuracy of data. • The communication medium will be fully functional when using the research instruments to engage the respondents. The respondents will be notified and given a reasonable time to access and respond to the questions. • There is available material about rural electrification in South Africa. Non- availability can impact the credibility of the conclusions as limited views may not be objective and reflect biases. • Information and material will be accessible, but failure to gain access might significantly impact the purpose of the research. • All respondents understand English. Suppose some respondents do not comprehend the primary languages used by the researcher. In that case, mitigating measures such as interpreting the question or seeking the services of a translator/interpreter will be used. 29 1.9 Chapter Outline This research will consist of six chapters that will cover the following areas: Chapter 1: Introduction and Background This chapter will be a general introduction to the research, and it will provide a background and overview of the study. It will, by so doing, present the context and the electricity background of South Africa. An emphasis will be on the research problem and questions that the research seeks to answer. This section illustrates the significance of the study to explain the importance of this particular research. Chapter 2: The Literature Review This chapter will review the literature and engage in a critical discussion of innovative financing models to extend rural electrification and promote renewable energy technology innovation. Analysis and impact of each model will be discussed in detail. Chapter 3: Methodology It highlights the research approach and discusses the assumptions to qualify its appropriateness for this research. Evaluating and stating the benefits and drawbacks of the design further reinforces the suitability of the methodology and design for this study. The data collection methods are outlined concerning the defined population and sampling method. Furthermore, it describes the features of the research instrument and its ability to collect adequate data justified through the research questions. Chapter 4: Presentation of Results and Discussion The key results will be discussed in this chapter. This discussion will be based on the information in the tables and will describe the key findings that will be attained by administering the questionnaires and conducting semi-structured interviews. A description of the demographic information on the respondents will be available in this chapter. 30 Chapter 5: Discussion of the Results The findings will be presented and clarified in the context of the literature review. Chapter 6: Conclusions and Recommendations The last chapter will provide a deep reflection of the extent to which the goals and objectives of the study will be achieved. It will integrate the findings into the research questions. Furthermore, it will outline the conclusion and recommendations culminating from this research. 31 CHAPTER 2. LITERATURE REVIEW 2.1 Introduction This chapter reviews the literature that is relevant to the context of the study. The chapter shows the current state of knowledge regarding the progress made so far in rural electrification while simultaneously identifying gaps. The literature highlights the critical success factors that spur rural electrification. Further attributes the slow electrification rate to some impediments that cause ineffective provision, especially in rural areas. Amongst other identified factors, financing or financial models are vital in unlocking the widespread dissemination of rural electrification technologies, especially in developing countries. Furthermore, the type of technology used is dependent on such factors as finance, geographical set-up of communities, income levels of people and policies. The literature reviewed in this chapter shows the interrelatedness of financial models, drivers and barriers, energy technology innovation and the rate of electrification. The chapter ends by focusing mainly on the type of financial models for rural electrification, which are traditional and emerging or innovative. According to other scholars, these are broadly categorised as public finance, private finance and public-private partnership. 2.2 The South African Outlook The state of electrification in South Africa and its electrification programme is remarkable and is the best in the SADC region. The South African government intended to electrify the sector to the greatest extent possible (97% in informal households) by 2025 (Jamal, 2015). According to Bongwe (2013), 90 per cent of households will be linked to the national grid, while the remaining seven per cent will use efficient off-grid options. The grid limitations for remote rural areas include: 32 • Affordability – more than 95% of the non-electrified households are from a low-income group (Department of Energy, 2013). • Transmission Network Costs – About 34% of the population lives in rural areas (Worldbank, 2017). More than 60% of the households have no access, and by deductive analysis, system costs will increase as transmission expands to the remainder of the households (Koopman & White, 2011). • Consumption Levels – rural customers' consumption levels are so low that it is impossible to recoup capital and operational costs (Bernard, 2011). • Forecasted Energy Costs – the Integrated Energy Plan perceives increased generational and operational costs, adding to the government’s financial burden if the grid option is used (DOE, 2019a). South Africa has a population of 57.8 million people and is a developing country, and 19.4 million reside in rural areas Worldbank (2017). According to Census (2011), around 24 per cent of the population did not have access to electricity, and the reliability of supply and affordability remain major issues (Rathi & Vermaak, 2018). The table below shows the World Bank (2019) data reflecting the growth in population versus the rate of electrification in South Africa between the period 1996 to 2018. Table 1: Population Growth and Rate of Electrification in South Africa (1996 - 2018) 1996 2018 Urban Population 7,9 million 38,3 million Rural Population 9,1 million 19,4 million Total Population 17 million 57,8 million 33 Urban Electrification 84,3% 92,1% Rural Electrification 25% 89,6% Overall Electrification 57,6% 91,2% Source: World Bank (2019) The key aspects that contributed to the success include supportive policies, institutional environment, sustainable financing, technological developments and innovations (Bernard Bekker et al., 2008). Policy and Institutions South Africa was involved in small scale rural white farmhouse electrification since the 1940s. The electricity supply industry was counted amongst the best globally because of the state utility Eskom, which had above 55% reserve margins due to overbuilding (Bernard Bekker et al., 2008). Despite the usual barriers that affect electrification in general and electrification of rural areas in the developing countries specifically, the main barriers were political and institutional in the 1980s (Eberhard et al., 2014). According to Rathi and Vermaak (2018), these barriers were done away with at the dawn of democracy in 1994, which brought about a change in the political environment and created an institutional environment that enabled policymaking. The three-phased approach adopted by Bernard Bekker et al. (2008) in delineating the critical policy, institutional and planning events are summarised as: I. Phase 1: Initial haphazard efforts and planning (the late 1980s – 1994)- Regarded as the transition phase where the past government policies or frameworks were dismantled, and a new constitution was enacted, as well as new government institutions. 34 II. Phase 2: Institutional Reform (1994 – 2000) – The objective was to increase connectivity in line with the Reconstruction and Development Programme (RDP). A more significant proportion of rural connections were established during this time, and Eskom played a dominant role. III. Phase 3: Business as usual (2000 – present) – Slow connection rates characterise this phase as the focus was shifted to rural areas with increased costs for bulk infrastructure and transmission network extension IV. Furthermore, there was formalisation and integration of the electrical policy and institutions with other policies. Financing Financing in the electrification programme had two objectives. Firstly, it had to address the cost of electrification with particular emphasis in rural areas to achieve the primary goal of rural electrification and secondly, to create affordable tariff structures (Bekker, Gaunt, Eberhard, & Marquad, 2008). Three phases were identified by Bekker et al., (2008) in the evolution of electrification financing as self-funding (the 1980s-1990s), funded by Eskom (1990s- 2000) and funded by the government (2000- present). Technological Developments According to Ahlborg and Hammar (2014), the necessity to reduce cost was a great driver and facilitator to technological development during the national electrification programme; this was achieved in the early 2000s where actual high costs per connection were realised. The technological development in South Africa underwent four phases: supply quality-driven optimisation, cost-drive optimisation, standardisation, and high impact innovation (Gaunt, 2003). The period between the 1980s to 1998 saw a rapid technological development which included the introduction of prepayment metering and single-phase lines; this had a significant impact on reducing costs and increasing the rate of electrification (Tewari & Shah, 2003). Whereas the period post-1998 has had minimal impact innovation in terms of on-grid connection costs, there has been significant off-grid innovation for technologies such as mini-grids, which distributes energy from 35 local generation sources like photovoltaics and wind to several households (B Bekker et al., 2008). Rural Electrification Micro-Grid Strategies Rural electrification necessitates a high initial capital investment per capita due to low energy demand and population density (Xu, Nthontho, & Chowdhury, 2016). It appears to be a loss-making venture due to a lack of consumer density demand. South Africa struggles to attract private investors due to insufficient incentives and government agencies (Xu, Nthontho, & Chowdhury, 2016). The microgrid strategy seems to be well suited for rural electrification over traditional electrification methods as it aims to balance cost-effectiveness and robustness (Ngoepe et al., 2018). According to Xu et al. (2016), A cost-effective rural electrification strategy includes (1) potential site identification, (2) consumer profile understanding, (3) availability of local resources, (4) grid connection transmission costs, and (5) sites connection transmission costs. Strategy simulation scenarios are as follows: I. Dedicated Generation – single consumers (home, hospital, or public infrastructure). There is no resource sharing because each system is self- contained. II. Microgrid-based Support Generation – complete integration of all loads within the scope into a single microgrid network Provides additional load support to all grid-connected users. III. Village-based Support Generation – consolidate consumer load demand as a single entity at the village level. South Africa attributes its remarkable rural electrification programme success to sustainable policies, institutional environment, financing, and technology (Haanyika, 2006). The realisation that access and use of electricity are beneficial to people, including in rural areas where it has been considered a highly desired commodity and prerequisite to economic development, has contributed immensely to moving the needle in rural electrification rates (Cook, 2011). 36 However, it should be borne in mind that power distribution in rural areas is an infrastructure assignment that carries a considerable expense. This high cost is a significant drawback. Therefore, it is vital to examine the drivers and barriers to rural electrification in relation to how they strongly relate to the various actors in the planning and implementation (Amutha & Rajini, 2016). 2.3 Drivers and Barriers to Rural Electrification 2.3.1 Drivers of Rural Electrification In most countries, the electricity supply industry or power sector, especially in the SADC region, has historically been very centralised (Goldemberg, 2000) and controlled by the governments and public officials (Azimoh et al., 2016). However, over the last few years, the structure and dynamics of the power sector have fundamentally changed, which has led to the rise in the participation of other actors (Morris, 2020). The disruption and reshaping of the electricity industry are multifaceted. Some critical narratives and interests that are significantly contributing to the direction of the transition are namely: the increasing competition between renewable energy and fossil fuels, the grid being upended by distributed energy due to its economics and lastly, climate change presenting critical issues such as environmental standards and sustainability (Phillips et al., 2020). These issues have led to compliance obligations to regulatory models and inevitably impacting the current electricity or power sector structures (Scharfetter & Van Dijk, 2017). These changes affect the rural electrification plan, and some actors play a critical role in driving or spurring electrification in rural areas. Rural electrification is a vital component in achieving social and economic development for rural populations in need (Palit & Chaurey, 2011). There are approximately 1 billion people worldwide who do not have access to electricity, with 85 per cent of them living in rural areas IEA (2019) because of the marginalisation of the poor and long distance from the electric grid, amongst other 37 factors (Pauser et al., 2015). However, according to the IEA (2019), the Energy Access Outlook figures show that the number of people who lack electricity access decreased from 1.1 billion to 860 million; this indicates a significant movement towards achieving universal electrification globally. Electricity is a highly sought-after commodity. There is little doubt that having access to and using it benefits people in the already-electric-dependent world and rural areas (Ahlborg & Hammar, 2014). Some of the prevailing drivers that enhance the deployment of new technologies and the increase in electrification rates in rural areas include policies, poverty mitigation, local initiatives, local demand, affordability, and environmental sustainability. Policy Governments worldwide have made it a top priority to ensure that their citizens have access to electricity (Morris, 2020). Political priorities are predominately the main driver for electrification in rural areas in many developing countries based on ambitions for development in the rural areas (Ahlborg & Hammar, 2014). The policy also plays an integral part in considering options for the provision of electricity to rural areas at a technical level as it was in the case of Bangladesh: (1) enlarging and reinforcing the central grid and (ii) deploying off-grid technologies (Rahman et al., 2013). Poverty Mitigation Poverty is a significant obstacle to sustainable development, not only for developing countries but also for the entire world (Nanka-Bruce, 2008). The role of electricity in rural areas has long been explicitly emphasised for poverty alleviation and addressing environmental, social and environmental issues (IEA, 2010). Its importance for better healthcare and education can no longer be overlooked and has become a critical point of consideration in ensuring that rural electrification programmes are prioritised (Rahman et al., 2013). 38 Local Initiatives According to Rahman et al. (2013), community involvement and participation are essential for the success of all rural electrification initiatives. Ownership in the projects can guarantee the protection of assets and significantly contribute to rural industries, farming cooperatives, commercial activities, and local skills development such as technicians. In the past, RE projects have been assessed purely on financial terms and therefore deemed not viable. However, a change in approach has occurred in recent years of evaluating the benefits of rural electrification to include its impact on social welfare, which makes RE projects more acceptable (Nanka-Bruce, 2008). Local Demand Although an average of the grid connects 35% of the rural population in developing countries, there is still a massive gap between supply and demand due to supply shortages (Rahman et al., 2013). According to the Worldbank (2010), the unreliability of power supply caused by vigorous load shedding has contributed immensely to problems such as (i) loss of public interest, (ii) increase in power theft, (iii) low collection rates, and (iv) diminished reputation for rural electrification programs. The drivers for rural electrification embedded in local demand include the increasing demand by rural industry and households, productive uses of electricity and the introduction of off-grid rural electrification technologies (Ahlborg & Hammar, 2014). Affordability Affordability takes into account multidimensional issues such as pricing, energy poverty, and energy vulnerability; therefore, sustainable pricing and price stability are essential for alleviating energy poverty (C. G. Monyei et al., 2018). Subsidies and pro-poor policies are critical drivers for increasing rural electrification connection rates by both cushioning the high costs of grid connection and driving off-grid options (Åkesson & Nhate, 2006). Therefore, it is essential to design RE systems according to public needs, taking into consideration affordability and size. This will further ensure increased reliability and the number of users that can purchase and pay for the systems (Rahman et al., 2013). 39 Environmental Sustainability The established constraints or barriers for RE prove that the rural energy transition process is not unproblematic; therefore, off-grid systems are not just a temporary solution but the most viable option for remote locations (Akella et al., 2009). According to Ahlborg and Hammar (2014), the aim of mitigating global climate change is an essential driver for RE with an environmental factor that enhances the deployment of new technologies. The World Bank has recognised renewable energy technology (RET)-based complement to traditional RE (IEG, 2008). The surge of RETs as viable alternatives to conventional energy solutions effectively decreases carbon emissions Kaufman et al. (2000). Sub-Saharan Africa has excellent potential for RET-based electrification. It has declared to maximise the utilisation of most renewable energy sources like hydropower, solar photovoltaic (PV), wind power, geothermal energy and bio- energy (Akella et al., 2009). Prioritising such critical drivers has resulted in the success of most rural electrification programs worldwide (Nanka-Bruce, 2008). On the other hand, the barriers tend to be interrelated and difficult to isolate the impact of a single barrier. They are factors accounting for the decline in electrification rates and impeding the deployment of new technologies. Therefore, it is critical to understand these significant issues to provide appropriate innovative solutions (Byrne, 2011). 2.3.2 Barriers to Rural Electrification (RE) The national grid extension efforts in rural areas have not achieved universal electrification (Kyriakarakos et al., 2020), especially in the most remote regions where electrification will not be reached in the foreseeable future (Ngoepe et al., 2018). Moreover, according to Vanadzina et al. (2019), the traditional approach to power supply, such as expanding the transmission grid, is not cost-effective due to high investment and connection costs. The decentralised electricity grids are ideal for creating demand and increasing the consumer base as power sectors are undergoing transitions to accelerate rural electrification (Ahlborg & Hammar, 2014). However, despite rapid 40 transformation and innovation in the electricity sector, there are significant barriers to rural electrification (Rahman et al., 2013). Some of the problems in most developing countries have stifled rural electrification: poor policies, weak institutional framework conditions, and limited funding (Haanyika, 2006). This view is also shared by C. Ketlogetswe et al. (2007), who highlight factors responsible for constraining rapid electrification in the rural sectors. The significant barriers often highlighted as leading contributors to poor rural electrification or energy provision include, among others, the following: a) spatiality or geographical arrangements of communities. b) ineffective energy policies or lack of policy certainty. c) impoverished, poor, or low-income levels experienced by rural area-based citizens. Haanyika (2006) cites limited financing, high transmission development costs, low electricity demand and consumption, and over-reliance on donors for RE resources as some barriers to rural electrification in Africa. In addition, financial institutions and executive agencies face challenges that necessitate resource management and technological development to overcome existing obstacles and issues (Javadi et al., 2013). The Asian and Latin American experience of rural electrification has been widely explored and is dominant in literature (Van Ruijven et al., 2012). However, understanding the challenges or barriers requires an empirical investigation to determine the extent of transferability to the African context. Therefore, it is vital to examine factors that relate to the context of the study. Some significant barriers include weak institutions and organisations, economy and finance, social dimensions, technical systems and local management, technology diffusion and adaptation and rural infrastructure (Ahlborg & Hammar, 2014). Weak Institutions and Organisations Several scholars such as Mulder and Tembe (2008) and Jones and Thompson (1996) argue that institutional (high levels of corruption, weak policy and legal 41 frameworks) and organisational (lack of expertise or human capital) have a significant impact on the rate of rural electrification. The strong national influence due to political interference makes it difficult for private sector participation. Economy and Finance A combination of lack of capital and rural poverty, which comprises a weak customer base of households and industry, has led to donor dependency on rural projects (Ahlborg & Hammar, 2014). Furthermore, the rural electrification long- term investment through grid extension is constrained by the low-income levels of the rural populace (Bugaje, 2006). Social Dimensions Poverty and low household affordability harm the roll-out of electrification in the rural sectors from a financial sustainability perspective because subsides have a double effect of being drivers and barriers (Kankam & Boon, 2009). Lack of local engagement, participation and gender discrimination are critical factors that significantly contribute to the social dimension barrier in rural electrification. Technical System and Local Management Off-grid or decentralised electricity grids have been identified as a complement to national grid extension uniquely suited for remote rural areas (Ahlborg & Hammar, 2014). Moreover, over time the projects collapsed due to poor management performance, lack of access to qualified personnel and a poor culture of performance and unproductive or non-profit generating use of electricity (I. M. Bugaje, 2006). Technology Diffusion and Adaptation Funding is critical for the diffusion of energy innovations or technologies. However, most rural entrepreneurs lack access to financing due to a lack of financial institutions and lack of capabilities or know-how to initiate projects; this leads to a mismatch in the criteria for even qualifying for donor funding (Peters et al., 2009a). Addressing the funding constraints can lead to a widespread diffusion of off-grid technologies in rural areas, thereby accelerating rural electrification. 42 Rural Infrastructure Rural areas are distinguished by low population densities and dispersed settlements, a common geographical barrier that leads to high connection costs due to long-distance transmissions (C. Ketlogetswe et al., 2007). Another major constraint to rural electrification is the house infrastructure or building techniques. Most houses consist of mud and grass and are excluded or not considered for connection in most countries. However, according to Åkesson and Nhate (2006), these traditional houses are being connected in countries like Mozambique using protective material, which is more expensive. Lastly, taking the barriers mentioned earlier into consideration coupled with a predominant rudimentary economy in the rural areas, the payback period for grid extension is very long due to the inability of households to pay connection costs. Furthermore, these sectors are also prone to seasonal droughts, and their incomes are seasonal, especially those dependent on farming. Therefore, Ahlborg and Hammar (2014) argue that the cash-flow problem can be solved by introducing suitable payment systems. This section has addressed the main drivers and barriers concerning rural electrification in the Eastern Cape, South Africa. These offer a reflection on the first research question of the study, from the point of view of the peer reviewed literature. 2.4 Financing Models for Rural Electrification Some of the contributing factors in Sub-Saharan Africa and the SADC region to poor rural electrification are poor financial models and limited funding (Malhotra et al., 2017). This view is supported by Kouassi and Pineau (2011), who points out that despite decades of international intervention through various financial models or approaches, the progress made has not been significant. According to Pauser et al. (2015), financial impediments to electrification in rural areas due to: 1) a lack of appropriate financing mechanisms for the end-user, 2) a lack of access to working capital and credit for local businesses, 43 3) a lack of processes and institutions to channel funds to the end-users, 4) uncertainty risk in investments due to the rural citizenry profile characterised as having the low willingness and ability to pay. Additionally, the initial costs for rural electrification are very high due to its remoteness from the grid and on the outskirts of cities in general The financial impediments to rural electrification highlight the key factors affecting the rural populace's affordability, which ultimately determines the adoption rate of innovative energy technologies. In the SSA context, the key factors that affect affordability include risk shifting, periodic payments and capital access (Avila et al., 2017). Affordability Risk shifting, periodic payments, and capital access are essential factors in determining affordability. One of the common characteristics of rural areas is that the inhabitants have low income, few savings, lack technology experiences and cannot access credit due to lack of regular income. As a result, strict requirements for large down payments for renewable energy technologies have emerged, posing a significant barrier to the widespread adoption of RETs. In Bolivia, they doubled the number of customers for small grid connections by spreading the cost of payments over five years. In contrast, countries like Malawi still have abysmal rural electrification rates of under 10 per cent because companies demand full upfront payment of the 30-year cost of line extension (Barnes & Foley, 2004). Secondly, the timing, size, and duration of periodic payments (tariffs, operation and maintenance (O&M), spare parts, and interest are vital drivers for affordability. The payment period must be tailored to local requirements; for example, in Zimbabwe, payments were made yearly, following the annual cotton sale (Mapako & Afrane-Okese, 2002). Lastly, risk shifting is a problem that occurs after the transfer of ownership, and the new customer bears the O&M risk and associated costs. The Grameen Shakti case is unique because it carries the operational risk, while ownership is transferred to the customer immediately (Alamgir, 1999). 44 In analysing the South African situation, Thom (1994) argued that the main impediment to rural electrification is the high cost of grid connections (installation of remote area power supply (RAPS) systems), as well as the ongoing operation and maintenance of connections and systems when compared to costs in urban areas. The situation is exacerbated by the fact that poor rural households are generally not expected to consume enough units of electricity per month in the short term to allow the utility to recover the costs involved within a reasonable time frame. As a result, rural electrification is impractical without substantial funding from sources other than the rural consumer's actual 'rural revenue base'. The literature on electrification financing has classified financial models or mechanisms based on the source of funds. According to Kouassi and Pineau (2011), current energy sector investment in SSA is primarily funded by three sources: (i) public financing resources (national and regional); (ii) international donors; and (iii) the private sector. Other financing schemes are classified under "Public-Private Partnerships", as Kouassi and Pineau (2011) pointed out. 2.4.1 Public Finance In public financing for rural electrification, the government plays a critical role. According to IEA (2011), for most developing countries, their forms of finance include government subsidies, loans and grants from the national development banks, the balance sheet of state-owned energy utilities and other specialised institutions like the rural energy agencies (REA). They are usually used to finance grid expansion projects. The REA funding is provided mainly through national tax, concessional loans, donor funds, and grants and is funded by a 5% rural electrification transmission levy (Twesigye, 2019). The development banks were established primarily to assist in channelling government or donor finance to sectors that do not receive adequate private investment. Some of the public financing models are: • Guarantees: These are arrangements by which the state assumes some or all of the downside risks to a venture. The use of public incentives to persuade private investors to finance new projects is attractive because this can enable the government to build the infrastructure without 45 immediate payments and benefit from private firms’ expertise and enterprises (Irwin, 2007). • Grants: Grants are substantially advanced funds without any repayment requirements (Kamara, 2016). According to the literature, grant competition can result in the lowest capital subsidy per new connection and create incentives to reduce operating costs for rural electrification (Tomkins, 2001). • Concessional Loans: These are loans that are significantly more generous than market loans. The concession can be achieved through, or through a combination of, interest rates below those on the market. Concessional loans typically have long periods of grace. The China EXIM Bank is the Chinese government's primary financial arm in Africa. It primarily operates in the energy sector and offers concessional loans and loans to foreign investment projects. These loans are given to Chinese contractors, typically state-owned enterprises (China EXIM Bank, 2011). • Donor Funding: The Organisation for Economic Co-operation and Development (OECD) and International Development Banks form a group representing bilateral and multilateral agencies providing funding to African governments (Kouassi & Pineau, 2011). Botswana's first rural electrification programme in 1975 was funded by International Organisations, including the Swedish International Development Agency (SIDA) (C. Ketlogetswe et al., 2007). • National Fiscus: In South Africa, the Integrated National Electrification Programme (INEP) aims to provide universal access to essential electricity services. The fiscus makes funding available as a line budget item on a budget of the Department of Minerals and Energy (Wentzel, 2005). Infrastructure projects in SSA continue to rely heavily on public funds for capital and operating and maintenance costs (Estache, 2006). This viewpoint is shared by Kouassi and Pineau (2011), who argue that due to a lack of private sector participation, many SSA states rely on public resources and donors for investment. 46 2.4.2 Private Finance In the context of rural electrification, it is not always easy to justify a competitive rate of return that motivates a business case for private sector participation since investors respond to trade-offs between risk and reward. The primary sources of the private sector for energy access investments, according to IEA (2011), include local banks, microfinance institutions and international banks, and developers, concessionaires and contractors. It also encompasses risk capital providers like venture capital funds, pension funds and private equity. However, equity, debt and mezzanine finance are the primary forms of instruments. Foreign players supported by DFIs (e.g., AfDB, World Bank) or coalitions such as the PIDG are unsurprisingly the leading private players in the SSA energy sector. They finance through loans, guarantees, or equity Kingombe (2011). According to Mainali and Silveira (2011), innovations in financial mechanisms, combined with local private sector involvement, appear to play an essential role in increasing rural electrification penetration in developing countries. Some types of private finance are: • Project Finance: The fund is established to finance an economically separable capital investment project. The funding providers see the project's cash flows as a source of loan servicing and provide a return on equity capital invested in the project. The main feature of project financing is that lenders offer project development funds solely based on risk and future cash flows (Scannella, 2012). In rounds 1, 2, and 3 of the South African Renewable Energy Independent Power Producer Procurement Program (REIPPPP), 56 of the 64 projects received were funded through project finance (Eberhard et al., 2014). • Debt: Debt financing is distinguished by (fixed) interest rates and repayment terms. Senior debt can take the form of a project loan or a credit line, and it will take precedence over all other liabilities. This type of debt lowers the project's overall cost because it is generally less expensive than additional available funding (Kamara, 2016). Like China, India has 47 financed infrastructure in Africa through the line of credit (LOC) of the EXIM Bank of India (Kouassi & Pineau, 2011). • Mezzanine Finance: It is a hybrid of debt financing and direct investment; a method of financing the realisation of a venture project in which the investor does not contribute to the company's capital but rather contributes resources for its development through debt obligations while simultaneously acquiring the option to purchase the borrower's stocks in the future at a pre-determined price. As a result, the financier acts as both a lender and an investor (shareholder) in mezzanine financing. Mezzanine financing instruments include subordinated debt obligations, preferred stocks, warrants, and special zero-coupon bonds (Sazonov et al., 2016). • Equity: Equity investors invest in a project in exchange for a share of the project's equity. This type of investment is frequently riskier, necessitating high returns. Therefore, investors require risk compensation, and the level of risk for capital is commonly reflected in the expected Internal Rate of Return (IRR) (Kamara, 2016). Kouassi and Pineau (2011) indicate that another finding of the researchers is the private sector's lack of involvement in financing electricity infrastructure in Sub- Saharan Africa. However, Roy and Nightingale (2010) argue that specific issues in rural areas (such as the lack of power grids and historical failures), global carbon reduction goals, and technological advancements gradually create new investment incentives and alternatives for developing countries energy projects. They are frequently led or implemented by private companies and non- governmental organisations with government oversight. Concerning the private sector's role in the REIPPPP, Eberhard et al. (2014) contend that the country's banking industry has been critical to the program's success. This is Africa's most prominent, most in-depth and most advanced sector. It has high liquidity, long- term debt (15-17 years in REIPPP) programs, understanding of project finance and PPP and public infrastructure financing. The industry also comprises a small but working secondary bond market and syndicated paper. While the industry is perceived to be conservative and expensive, it has been essential in helping REIPPPP achieve numerous closed transactions in a relatively short period. 48 Public-Private Partnerships Many private sector participants consider the PPP model to be one of the most appealing. Mainly when the business case for private sector investment is marginal, but there are clear public benefits, the government's role is to guarantee investment returns (IEA (2011). In the energy sector, predominantly in power generation, this financing model is gaining popularity in most emerging markets. Similarly, commercial banking financing terms can be less onerous than the government covers risks through guarantees. As a result, the private sector is attracted to industries where the public or government plays a critical role. Kouassi and Pineau (2011) point out that the financial schemes classified under the "Public-Private Partnership" were due to the need to attract private actors and minimise the financing gaps for infrastructures through appropriate governance reforms and strong economic figures. According to Estache (2006), since Chile’s experience in the 1970s, PPIs have generated clear welfare gains following the failure of financing schemes with quasi-exclusive public control on infrastructure projects in developing countries. According to some authors, such as Ajakaiye and Ncube (2010), private players' lack of interest could be explained by the fact that the private sector is readier to invest where a strong commitment and dominance of the public sector are demonstrated. Microfinance has been identified as an appropriate model to tackle end-user financing for electricity access, mainly in rural areas. However, the main obstacle leading to energy deprivation is the inability of users to pay, and this issue can be addressed through some form of public financial support. Uganda depicts a successful case in which the bulk of domestic connections have been executed under the Output-Based Aid (OBA) Global Partnership Programme, mainly funded by the Ugandan government, the World Bank, the European Union, and the KfW Development Bank through the REA. This is the first of its kind; cooperation between a private entity (Umeme Ltd) and a public entity (REA) has revealed the potential for institutional collaboration in the access levels to investors if the right incentives are provided Twesigye (2019). 49 The traditional financing models or mechanisms consist of public finance, private finance and public-private partnerships (Bhattacharyya, 2013). However, the rapid demand for electricity as a highly desired commodity in the new markets, and the already electricity-dependent world with global commitments to address environmental impacts has led to a vast deployment of innovative technologies. These low carbon innovative technologies are unique and require customised or innovative financing solutions to exploit entrepreneurial opportunities. It is, therefore, essential to explore the financing of energy innovation (Wohlgemuth, 2000). 2.5 Financing of Energy Innovation Management of the energy transition is a great challenge for humanity in the 21st century to a more decentralised and renewable system that can address the abysmal electrification rates in the impoverished rural areas (Hall et al., 2017). The energy system transformation will require a vast deployment of innovations, and accordingly, huge investments estimated to be USD 700 million, which amounts to a mere 1% of the global GDP (Iyer et al., 2015). Scholars and experts have identified financing as one of the most salient barriers to low-carbon innovation (Polzin, 2017). In his theory of innovation, Joseph Schumpeter placed finance at the centre, as it is critical for exploiting entrepreneurial opportunity (Mazzucato & Semieniuk, 2018). There is no doubt that the financial sector could play a crucial role in funding transition or innovative renewable energy technologies (Polzin, 2017). According to Polzin et al. (2017), if financial systems are more diverse, the flow of funds to innovative, small-scale, or experimental firms that drive sustainability transitions can increase (more equity, less debt, more non-bank intermediation and more specialised niche banks giving more relationship-based credit). Vanadzina et al. (2019) back this up, stating that investments in equity or equity- like interest-bearing assets are most urgently needed and best suited for innovative energy firms. 50 The concept of learning is fundamental to systems of innovation (SI), where adoption of innovations produced elsewhere, incremental innovation of acquired techniques and diffusion all contribute to technological change (Viotti, 2015). According to the literature, learning occurs primarily through DUI in the context of non-industrialised or late-industrialising economies (Doing, Using and Interacting) (Lundvall, 2016). Soumonni (2013), on the other hand, contends that African countries can and should aspire to the full range of innovation stages, particularly in renewable technology, to increase their rates of access to electricity. Low access to electrification, particularly in rural areas, is an enigma that has led to increased demand for renewable energy in Africa (Chuhan-Pole et al., 2018). The region is endowed with natural resources, and there has been a proliferation of the adoption of renewable energy (Ahlborg & Hammar, 2014). However, hardly any local industries produce either component of renewable energy systems or complete packages (Soumonni, 2013). Therefore, most off-grid renewable