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FAO/UNEP/UN-Energy Bioenergy Decision Support Tool -
MODULE 3: Implementation and Operation
size of the farms, since small-scale farmers may be involved in
large-scale bioenergy systems through contract farming. Many
smallholders can have a similar—or in some cases, worse—
impact on the environment than one single company-owned
Forest plantations are illustrative of the nature of the risks in
relation to scale. Thirty-two percent of planted forests are owned
by smallholders. While the impact of each smallholder may be
small, the diffculties that each faces—such as poor germplasm,
low productivity, weak management and limited access to
markets—when taken collectively can have signifcant impacts
across the entire landscape (FAO, 2006). The collection of small
schemes can thus be sub-optimal compared to a large scheme.
Moreover, the risk related to small-scale schemes may be
compounded by the frequent low capacity of small-scale
producers and operators to comply with sustainability standards,
risks are limited so long as the operation itself is small-scale. The
purpose of the scheme and its target are key determinants. If the
market is local and thus small in size, the scale of the investment
risk is reduced although the proft incentives will also be weaker;
with a large-scale market, the risks will be greater regardless of
whether growers are small-scale (Woods, 2006).
The adoption of participatory approaches to identify needs and
to design and implement projects is one of the most effective
ways to ensure that local development initiatives fulfl local needs.
But participation should be understood as “a process through
which stakeholders’ infuence and share control over development
initiatives, decisions and resources which affect them” (World
Bank, 1994), hence emphasising the stakeholders’ negotiation
and engagement dimensions of participation. Moreover it should
involve a broad-based section of the community, including
adequate representation of the poorest social groups.
The provision of biomass feedstock can entail signifcant
transaction costs due to the sometimes complex relation
between suppliers and purchasers when supply and/or markets
are small-scale. Some steps can be taken to minimise such
transaction costs:
• Stakeholder analysis when stakeholders are not
pre-identifed, allowing one to select key stakeholders
according to their importance and infuence;
• Use of stakeholder group representative when it comes to
negotiating agreements;
• Use of smallholder/community organizations to organize their
participation and to sign deals on their behalf.
It is also useful to note that transaction costs can be even more
signifcant when the biomass feedstock supply is based on
wastes or residues; in fact, the reason that wastes and residues
are not being used (i.e. are being wasted) may be due precisely
to the transaction costs associated with identifying ownership,
organising collection and processing
Consequently, the identifcation of appropriate stakeholders that
may have the appropriate economic incentives can also be quite
useful in helping to create a useful energy market for wastes or
The private sector has an important role to play in bioenergy
initiatives, with appropriate public and civil society-sector
oversight and competitive bidding for projects. Innovative
fnancing mechanisms can catalyze the start-up or expansion
of clean energy SMEs. However, as experience from UNEP’s
REED programmes show
<Mod7-Innovative Approaches
, such
supply-side fnancing mechanisms are often not enough to get
entrepreneurs focused on rural markets. A severe challenge for
the private sector is that its role in delivering energy services
to rural areas is limited by the fact that it responds quickly only
when demand is backed by purchasing power. Since the rural
poor have extremely low purchasing power people, credit or
fnancial support is needed at early development stages. End-user
fnancing can be used to reach potential users who could
otherwise not afford to pay upfront for the products and services
offered by clean energy enterprises. When the decentralized
scheme involves a private biofuel processor (as is often the case),
assurance mechanisms
such as contracts or MOUs can be
used to bind the community and the private entity together in a
It is useful to create a local coordination body and associated
mechanisms at the local level. Given that stakeholder collabo-
ration is crucial in the start-up of small-scale initiatives, some
options are:
• Forum for articulating local needs and aspirations, and
building local political consensus.
• Primary forum for community participation, especially from
poorer sections of rural areas;
• Well-defned point of contact with outside organizations.
• Gateway in terms of information dissemination, and
If appropriate, legal authority over common resources needed
for the biofuel project.
It is important to foster local institutions to take responsibility for
the project because projects are more likely to satisfy local needs
over the long term if a local institution is intimately involved. A
local institution should be constituted through transparent public
meetings, and include ample representation of the rural poor.
Their mandate should be to contribute to the design, implemen-
tation, and ongoing management of the project.
Getting the fnancial mechanisms right is especially crucial and
complex when dealing with the rural poor. Financial mechanisms
need to target both supply and demand, i.e. help foster new
businesses and help create a market through innovative credit
facilities that enhance the purchasing power of low-income
consumers. Also, buyer guarantees by larger companies needing
energy services would be a means of helping establish a market
(UNEP/Diligent, 2006). Often, subsidies are put forward as a
tool to help increase the purchasing power of rural communities.
However, a commonly accepted concept in the rural energy
sector is that subsidies should be transparent and linked to
the economic development they are supposed to promote
(UN-Energy, 2007). More specifcally, effective incentives should
have the following features (ESMAP, 2005; UNEP, 2008):
If incentives are intended to increase energy access for poor
households, they should be carefully targeted so that they
are effcient and effective. An example is the so-called lifeline