Scaling Up Solar Pumps for Irrigation and Domestic Water Use in Ethiopia: The Role of Blended Finance
By Easwaran Narassimhan and Rishikesh Ram Bhandary
In its announcement of the award of the 2020 Nobel Prize to the World Food Program, the Norwegian Nobel Committee said it wished “to turn the eyes of the world towards millions of people who suffer from or face the threat of hunger.” The issue of food security is increasingly a priority for governments in the developing world, leading to growing attention to sustainable agriculture methods and the potential for blended finance, that is a combination of government and private sector infrastructure funding, to facilitate progress. Our latest policy brief from Climate Policy Lab discusses the role blended finance can bring in promoting sustainable irrigation systems, highlighting the benefits in a case study of Ethiopia’s agricultural sector.
The government of Ethiopia has targeted the agricultural sector for market-led growth and rural transformation to build resilience to climate change and foster economic growth. Agriculture dominates Ethiopia’s economy, representing 40% of GDP and 75% of workforce employment. Only approximately 250,000 hectares of agricultural land out of a potential of 5 million are irrigated in Ethiopia at present. Many small farms grow teff and other rain-fed subsistence crops using manual labor and animals. As part of Ethiopia’s ambition to become a middle-income country by 2030, improvement of efficiency in the agriculture sector is critical.
If Ethiopia is going to make progress on expanding productivity in its agricultural sector, it will need to enhance local systems for water pumping. Many of the existing irrigation pumps were built using grants from international organizations, development banks, and federal and state authorities. The systems suffer from increasingly frequent breakdowns in equipment and high costs to access diesel fuel.
A large grant-funded diesel irrigation pump in Ziwai. It has been under maintenance for more than six months and the community of farmers doesn’t have incoming funds to commission complicated repairs. Farmers are managing the situation by forming groups to share small surface pumps that can draw water from a nearby river.
In its research on climate policy in Ethiopia, Climate Policy Lab in consultation with Winrock International investigated whether blended finance models, that is, a combination of government and private sector infrastructure project funding, could facilitate replacing existing diesel pumps with more sustainable solar pumps in addition to installing new solar pumps in regions lacking access to irrigation infrastructure. By lowering the capital costs, a blended finance model will help to gain the interest of investors and developers, while ensuring the beneficiaries are not charged exorbitant rates. Without public finance, solar pumps will be hard to deploy. For example, it is not commercially viable to install solar pumps for household use where the distribution infrastructure is lacking. Similarly, community irrigation pumps that need bore wells need a grant element to attract private sector interest. Private sector participation in solar water pumping could also bring superior results for preventative maintenance of equipment.
Blended finance has been successful in other locations in Africa and Asia to promote the use of solar pumps for agricultural irrigation. SunFunder is an aggregator platform that offers debt to solar energy companies in East Africa and beyond. SunFunder mostly offers working capital loans to energy companies. By convincing foundations and high net worth individuals to take first loss positions, SunFunder has attracted not just private finance but also other public funders. The success of SunFunder has been, in part, in its ability to tailor products to the needs of energy companies in countries like Kenya.
A grant-funded community solar pump for water supply in Leman, Oromia, Ethiopia
The market for solar pumps in Africa is expected to grow by 20 percent between 2018 and 2024, with Ethiopia potentially serving as the second largest market for solar pumps. Our research determined that small-scale solar-powered surface pumps for irrigation are financially viable for private sector investment in Ethiopia, with a payback period of two to six years (for low to high water supply requirement). Several farmers expressed a willingness to pay up a premium for a reliable water supply. Coupled with government investments in water-efficient drip irrigation systems, large solar irrigation pumping systems could become financially attractive for private sector investment as well.
Similar to solarizing irrigation systems, our research also found that solar-powered community pumps for household water supply are financially viable for private sector investment in Ethiopia, with a payback period of two to three years assuming a 5 year internal rate of return of 20 to 30% for replacing aging diesel pumps. One blended finance option would be for the private sector to invest in the solar pumps while public resources are invested in the water distribution systems.
For a blended finance program to replace Ethiopia’s aging diesel pumping infrastructure with solar pumping to be successful, policy reform is needed. Currently, a legal restriction barring private actors from pumping and selling water for community supply and irrigation would need to be adjusted. We recommend the Ministry of Water, Irrigation and Electricity consider reforms that would allow private companies to install and operate solar pumps. There are multiple entry points for deploying private sector operated and maintained solar power pumps in Ethiopia. Our research suggests
Solar replacement projects can be combined with the government’s rollout of a national mini-grid program to support energy access. Mini-grid operators would receive regular revenue that can then be used to pay for the solar pumps.
Water, sanitation, and hygiene (WASH) projects are a potential source of investment for solar pumps. The One WASH – Consolidated WASH Account project, funded by the World Bank, aims to provide water supply to 3 million people through 8,260 rural water supply systems and 180 municipal utilities.
Ethiopia’s ambition to significantly expand agricultural production and increase farmer incomes through higher value-added farming such as refrigeration and storage and dairy farming provide another entry point for solar pumps.
Innovative blended financing could link impact investors and commercial operators together with concessionary loans from AfBD and other multinational lending sources.
Currently, Ethiopia’s Agriculture Transformation Agency and the Green Climate Fund are supporting projects that give communities pumps on a pure grant-basis but the program is limited at $15 million. There is a possibility that such a financing model may depress demand and prevent the actual scaling up of solar pumps. For example, in Bangladesh, IDCOL, a public-funded infrastructure development company, used blended finance to roll out solar irrigation pumps. As the actors gained experience with the solar pump technology and learned more about potential business models, IDCOL started to phase out its subsidies to allow private actors to play a bigger role in deploying solar pumps.
Blended finance can be the catalyst that helps transform the need for food security, regular water supply, and energy into opportunities that the private sector and investors can tap.
Easwaran Narassimhan is a predoctoral fellow at The Fletcher School, Tufts University. Rishikesh Ram Bhandary is a postdoctoral scholar at The Fletcher School, Tufts University. Read the Scaling Up Solar Pumps for Irrigation and Domestic Water Use in Ethiopia: The Role of Blended Finance policy brief by Easwaran Narassimhan, Rishikesh Ram Bhandary, Kyle Karber, and Bikash Pandey here.
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