A Presentation on Renewable Energy Financing

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e-learning course on Bio-energy for achieving
MDGs
Lecture 8 Financing Mechanisms for Renewable
Energy
Prof. Ram M. Shrestha School of Environment,
Resources and Development Asian Institute of
Technology Thailand E-mail ram_at_ait.ac.th 22
June 2007
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Contents

• Introduction
• Conventional Methods of Financing
• Typical Project Financing Models
• Innovative financing Models for Renewable Energy
• Clean Development Mechanism (CDM)
• Dealer-Credit Model
• - Grameen Shakti example
• Consumer Credit Model
• Supplier Credit Model
• Energy Service Company Model
• Revolving Fund
• Global Environmental Facility (GEF)

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Introduction

• Given the huge potential opportunities in
  renewables, entrepreneurs and financial
  institutions are not rushing to cash on the
  opportunity.
• One answer is that RETs have to overcome a series
  of barriers before they can penetrate the market.
• Barriers may be of several kinds Initial cost,
  financial, technical, market, institutional,
  political, legal etc.
• High initial cost of renewable energy
  technologies (RETs) and lack of financing have
  been among the key barriers to the widespread
  use of RETs.
• Appropriate financing mechanism has a major role
  to play in the promotion of RETs.

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Conventional Methods of Financing (1)

• Methods of Financing
• The two broad choices a firm has for financing an
  investment project are
• Equity financing, and
• Debt financing
• Equity Financing
• It can take one of two forms
• - the use of retained earnings otherwise paid
  to stockholders,
• - the issuance of stock.
• Both forms of equity financing use funds invested
  by the current or new owners of the company.

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Conventional Methods of Financing (2)

• Debt Financing
• It includes both short-term borrowing from
  financial institutions and the sale of long-term
  bonds, wherein money is borrowed from investors
  for a fixed period.
• With debt financing, the interest paid on the
  loans or bonds is treated as an expense for
  income-tax purposes.

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Typical Project Financing Models(1)

• The most common structures used to finance
  projects are
• Project Financing (also known as limited recourse
  financing),
• Corporate Financing, and
• Lease Financing.
• Project Financing
• The term project finance refers to financing
  structures wherein the lender has recourse only
  or primarily to the assets of the project and
  looks primarily to the cash flows of the project
  as the source of funds for repayment.
• The terms limited recourse finance and
  non-recourse finance are used interchangeably
  with project finance.

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Typical Project Financing Models(2)

• Corporate Financing
• It involves the use of internal company capital
  to finance a project directly, or the use of
  internal company assets as collateral to obtain a
  loan from a bank or other lender.
• Lease Financing
• Leasing essentially involves the supplier of an
  asset financing the use and possibly also the
  eventual purchase of the asset, on behalf of the
  project sponsor.
• Assets which are typically leased include land,
  buildings, and specialized equipment.
• A lease may be combined with a contract for
  operation and maintenance of the asset.

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Innovative Financing Models

• Clean Development Mechanism (CDM)
• Dealer-Credit Model - Grameen Shakti
  example
• Consumer Credit Model
• Supplier Credit Model
• Energy Service Company Model
• Revolving Fund
• Global Environment Facility (GEF)

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Clean Development Mechanism (CDM)

• Clean Development Mechanism (CDM) is one of the
  Kyoto mechanisms to achieve the objective of
  reducing GHG emissions.
• CDM allows emission reduction projects that
  assist in creating sustainable development in
  developing countries to generate certified
  emission reductions (CER) for use by the
  investor.

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CDM What does it do?

• It enables Annex-1 countries (developed
  countries) to meet their emission reduction
  commitments in a flexible and cost-effective
  manner.
• Assists developing countries (non-Annex I or
  also called the host countries) in meeting
  their sustainable development objectives.
• Investors benefit from the CDM by obtaining
  Certificates of Emissions Reductions.
• Host Countries benefit in the form of investment,
  access to better technology, and local
  sustainable development.
• It is possible to have investments in a CDM
  project solely by host country parties. Such a
  project is called a unilateral CDM project.

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What does CDM aim to achieve?
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CDM Project Requirements

• Estimate of Baseline greenhouse gas emissions.
• Emissions additionality financial
  additionality.
• Does the proposed project result in additional
  GHG emission reductions?
• In other words, does its implementation result
  in less GHG emissions than that without it?
• Is the project already one of the least expensive
  (financially attractive) options and therefore is
  planned to be implemented?
• Is the project unlikely to be implemented
  although it is financially attractive (because of
  barriers like lack of access to financing
  resources or due to other barriers?
• Host country government approval (The host
  country must have ratified the Kyoto Protocol.)
• Meeting the sustainable development criteria

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Special Characteristics of a CDM project in
relation to Financial Analysis

• Two distinct sources of CDM project revenue
• from sale of normal product (e.g., electricity,
  Price and
• qty. of electricity?)
• from sale of CERs (Price and qty. of CER?)
• Distinct costs of CDM projects (besides the
  standard project costs)
• (i) Transaction costs (including costs of PDD
  preparation,
• monitoring, verification, validation,
  trading of CERs).
• (ii) Costs related to project approval and
  registration .
• Some times both (i) and (ii) could be lumped and
  called as transaction costs.

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Dealer-Credit Model (or Dealer Sales Model)

• Here the dealer is provided support through
  access to business financing and sells the RE
  system to the end user, which can be some times
  on credit. The model can be shown as
• In the case of Bangladesh, International Finance
  Corporation, the private sector arm of the World
  Bank, provided loan to the dealer, Grameen
  Shakti, under their Small and Medium Scale
  Enterprise Program. The Grameen Shakti, in turn,
  extended credit to customers to purchase RE
  system.
• Dealer credit was tried but rejected by the
  dealers in Sri Lanka in favour of consumer credit
  through Sarvodaya, a micro finance organization,
  which in turn borrows from commercial financers.

Figure 1 Dealer-credit model
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The Consumer Credit Model

• In this mechanism, local finance institutions
  provide loans to users to buy the RE system. The
  RE enterprise in this case transacts on
  commercial basis with the users.
• Figure 2 Consumer Credit Model
• Example Micro-Credit through Sarvodaya in Sri
  Lanka

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The Supplier Credit Model

• In which a RE enterprise provides a short term
  (3-12 month) credit to the end user to purchase
  the RE equipment/system.

Figure 3 The Supplier Credit Model
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Energy Service Company Model (Fee-for-Service
Model)

• The Energy Service Company Model (or
  Fee-for-Service model), in which the customers
  pay for the energy service that is provided to
  them by an energy service company (ESCO).
• It makes the energy affordable and minimizes the
  long-term risks for the customers as the
  ownership and maintenance of the equipment lies
  with the energy service company.
• The World bank used this model in Argentina,
  Benin, Togo, Dominican Republic and Cape Verde.

Figure 4 Fee-for-Service Model
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Energy Service Company Model (Contd.)

• The energy service company model was also tried
  out in Sri Lanka but given up after initial
  problems in favor of the consumer credit model.
  In the World Bank energy service company delivery
  models, financing for energy service companies
  was provided through either government or
  multilateral sources, but channeled through
  commercial financiers in many cases.
• The lease model is similar to the fee-for-service
  model as the ownership of the equipment lies with
  the leasing company, which typically are
  specialized financial institutions. It has been
  used for big, mostly on-grid power, generation
  equipment.

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Grameen Shakti (Bangladesh) An Example of
Dealer Credit Model (1)

• Grameen Shakti (GS) builds on the experience and
  success of its sister organization, the Grameen
  Bank.
• RE and solar home systems in particular are the
  most practical and cost-effective solution for
  rural electrification in Bangladesh. But such
  technologies are not affordable as such for the
  average rural Bangladeshi.
• Grameen Bank in Bangladesh set up a
  not-for-profit subsidiary, Grameen Shakti, which
  is involved in the marketing, sales, servicing,
  credit provision and other activities related to
  photovoltaic solar home systems business.
• GS developed an innovative micro-credit scheme to
  make technologies affordable to the majority with
  a concept to provide clean energy.

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Grameen Shakti, Bangladesh (2)

• Description of the GS model
• GS developed five financing models for the
  diffusion of solar home systems (SHS). They vary
  in terms of down payment requirements (10 to
  25), number of monthly installments (24 to 42)
  and service charge (8 to 12).
• Five Financing Models of GS
• Model 1 The customer has to pay 15 of the
  total price as a down payment during installation
  and the remaining 85 of the cost is paid by
  monthly installment within 36 months, including a
  12 service charge.
• Model 2 The customer has to pay 25 of the
  total price as a down payment during installation
  and the remaining 75 of the cost is paid by
  monthly installment within 24 months, with 8
  service charge.
• Model 3 The customer has to pay 15 of the
  total price as a down payment during installation
  and the remaining 85 of the cost, including 10
  service charge, is made by 36 post-dated cheques.

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Grameen Shakti, Bangladesh, (3)

• Model 4 4 discount is given for cash purchase.
• Model 5 (Micro utility) The customer has to pay
  10 of the total price as a down payment during
  the installation and the remaining cost is paid
  by monthly installment within 42 months, without
  any service charge. Here the customer sets it up
  on his/her premises, and other shop owners get
  electricity from the solar system against a small
  fee.

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Revolving Fund (1)

• A revolving fund is a reserve money or fund,
  often used in developing countries, used for
  lending to one or more borrowers. The idea for
  the revolving fund can be used both for an
  organization or an individual.
• The borrower on the other hand is expected to
  repay the original sum that restocks the fund
  over the given period of time.
• Usually, an additional sum is charged (interest)
  to the borrower that acts as a fee for providing
  the service (administrative costs) and helps to
  protect the fund from being depleted. These
  include inflation, non-payments and the cost to
  the lender of getting outside finance.

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Revolving Fund (2)

• The basic principles for establishment of the
  revolving funds include
• - Maximizing incentives for high repayment
  rates
• - Selecting projects with high energy saving
  potential and low pay-
• back period (up to five years)
• - Allocating funds on the cost-sharing basis
• -Transparency and control over financial
  disbursements by UNDP
• (during the project implementation
  period), other donors, the
• National Executing Agency and regional
  administrations
• - Creating incentives for participatory
  energy-efficiency projects with
• private sector involvement.

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Revolving Fund (3)Case of Small Hydro Schemes
in Peru

• A revolving fund for financing micro hydro power
  plants was set up in 1994 through an agreement
  between the Inter-American Development Bank and
  ITDG-Peru, a NGO.
• This Fund consists of a financial model based on
  loans subsidized through technical assistance and
  interest payments from individual clients (micro
  rural entrepreneurs). It is a loan fund applied
  for one energy technology, the micro-hydro
  power, covering the installation of new systems,
  rehabilitation and/or repair of existing systems.
  
• The amount of loans ranges from US 10,000 to US
  50,000, with an interest rate of 10. The payback
  period is 1 to 5 years, and the grace period
  varies, depending on the clients financial
  situation.

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Revolving Fund (4) Case of Small Hydro Schemes
in Peru (Contd.)

• Within the framework of this fund, four
  activities are developed in each project
• - Promotion and its benefits,
• - Technical and financial assistance,
• - Organization for sustainable management, and
• - Recovery of loans.
• The project was initiated with the view to
  provide electricity to remote areas not reachable
  through conventional grid.
• The fund has provided loan finance to 15 rural
  electrification projects of municipalities, 5
  projects of the private sector and one project of
  the cooperative.

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GEF and Renewable Energy (1)

• Established in 1991, Global Environmental
  Facility (GEF) is an independent financial
  organization that provides grants to developing
  countries for projects that benefit the global
  environment and promote sustainable livelihoods
  in local communities.
• GEF and Renewable Energy
• The GEF helps countries remove barriers to
  developing markets for renewable energies
  wherever cost-effective.
• GEF support helps create enabling policy
  frameworks, build the capacity for understanding
  and using the technologies, and establish
  financial mechanisms to make renewables more
  affordable.

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GEF and Renewable Energy (2)

• GEF deals with problems hampering the
  transformation of markets for renewable energy
• - lack of supportive policy frameworks,
• - inadequate financing for installations or
  supporting businesses,
• - lack of technical capacity, and
• - lack of awareness and trust in the
  technologies by users and utility
• companies.
• The GEFs renewable energy projects involve
• - private firms as manufacturers and dealers,
• - local project developers,
• - financial intermediaries,
• - recipients of technical assistance,
• - technology suppliers and contractors, and
• - project executors.

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GEF and Renewable Energy(3)

• Some typical examples are
• Solar home systems for rural off-grid markets
• Mini-grids based on micro-hydro, photovoltaic,
  wind, or biomass
• Biomass and biogas for captive applications
  (agro-processing industry)
• Wind farm demonstrations
• Favorable policy environments for wind farms
  (such as power purchase agreements)
• Geothermal power plants
• Biomass-based district heating
• Innovative financing mechanism for renewable
  energies.

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GEF and Renewable Energy (4)

• GEFs three Implementing Agencies,
• United Nations Development Programme (UNDP),
• the United Nations Environment Programme (UNEP),
  and
• the World Bank and seven Executing Agencies
  (under the policy of expanded opportunities).
• These agencies work with the operational focal
  point in each recipient country to develop
  project ideas that are consistent both with the
  countrys national programs and priorities and
  with GEFs operational strategy and programs.

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References

• Painuly, J. P., Wohlgemuth, N., 2006, Renewable
  Energy Financing What can we learn from
  experience in developing countries?, Energy
  Studies Review, Vol. 14, No. 2, pp 154 170.
• Park, Chan S., Contemporary Engineering
  Economics, 4th edition, Prentice-Hall, N.J.,
  2007.
• EcoSecurities,2007,Guidebook to Financing CDM
  Projects, UNEP Risoe Centre, Denmark.

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AppendixSome Case Studies
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The World Bank/GEF India Alternate Energy Project
(1)
Figure 5 Steps Followed by India Renewable RDP
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The World Bank/GEF India Alternate Energy
Project(Contd.) (2)

• Also known as India Renewable Resources
  Development Project, with co-financing from three
  other agencies, provided low-interest loans to
  wind farm developers in the nineties.
• At the same time, favorable investment tax
  policies and a supportive regulatory framework
  resulted in unprecedented market growth for wind
  power.
• More than 1200 MW of wind capacity had been
  installed by the private sector by 2000. Of this,
  direct financing by the GEF project was only 41
  MW.
• Several local financial institutions also started
  financing wind farms which continued thereafter
  also as capabilities had been developed and a
  supportive regulatory framework had been
  established.

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Rural Energy Development Programme (REDP), Nepal
(1)

• Main Concept
• The Rural Energy Development Programme (REDP)
  started in 1996 under an initiative of UNDP in
  Nepal.
• The main idea of the programme is to promote
  clean energy as a way to enhance socio-economic
  development, alleviate poverty and protect the
  environment in rural Nepal.
• REDP engages the community as a whole in energy
  projects in order to lower the cost and to ensure
  that every community member benefits from the
  project.
• REDP main innovation is the mobilization of
  entire communities, both males and females.

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REDP, Nepal (2)

• Success Factor
• The first success factor is the institutional
  support provided by AEPC and the availability of
  soft loans for RE projects with ADBN.
• The second success factor is the innovative
  community mobilization mechanism, whereby the
  community as a whole decides on which technology
  to implement and how to finance the related cost.
  
• Thirdly, the involvement of the local authorities
  District Development Committee and Village
  Development Committee (DDC and VDC) as
  shareholders further reduce the cost of the
  project for the community, while providing a
  source of income on the long term for the local
  authorities.
• Fourthly, to stimulate demand for electricity and
  ensure high load factor on the RE system, REDP
  encourages the development of income generating
  activities through trainings, grants and soft
  loans.
• Finally, the success of REDP owes a lot to the
  availability of good quality locally manufactured
  RE technologies.

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Sunlabob Rental System, Laos (1)

• Main Concept
• Currently, less than fifty percent of the
  population has access to electricity in Laos. The
  government has an ambitious plan to reach 90 of
  the population by 2020.
• Sunlabob, a private energy company was created in
  2000 in Vientiane Laos.
• The main idea of the company is to install good
  quality RE systems and to ensure high quality
  after-sale services.
• For remote villages, it developed a rental scheme
  for solar home systems.

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Sunlabob Rental System, Laos (Contd.) (2)

• Success Factor
• The main success factor is the flexibility
  brought by the rental system.
• Secondly, the fact that energy users do not have
  to pay for the system removes the financial
  barriers.
• Thirdly, the commercial operation insures that
  the installed systems are of good quality and
  that the number of installed systems keep
  expanding.
• Fourthly, the availability of local know-how in
  RE can attract other non-commercial projects (in
  the social sector for example).
• Finally and more importantly, the rental system
  is self-financed, and therefore is not subject to
  donor funding. Sunlabob is a Lao company,
  registered in Vientiane and will not leave the
  country.

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Multifunctional Platform in Mail (Contd.) (1)

• Main Concept
• Multifunctional platforms are small diesel
  engines providing mechanical energy to various
  devices providing useful services for the society
  and the women in particular.
• The devices can be water pump, grinding mill, oil
  expeller, battery charger, etc. according to the
  needs identified by a particular womens group.
• These platforms have proved to bring substantial
  benefits to women in West Africa by saving them
  time while performing household activities
  (fetching water, milling rice, etc.) and
  providing them with opportunities to engage in
  new and more profitable income generating
  activities.

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Multifunctional Platform in Mail (Contd.) (2)

• Success Factors
• The main factor behind the success is the fact
  that a donor could implement these platforms with
  an important subsidy making them affordable for
  womens groups in poor villages. Without this
  subsidy, the platform would not have been
  affordable for the womens groups.
• Another key factor is that the platforms are
  bought by a group of women and not an individual
  woman. The fact the group as a whole raises the
  money allows poor and marginalized women
  (providing they are accepted in the group) to
  participate and benefit from the platform even if
  their financial contribution is limited

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Sri Lanka Energy Services Delivery Project (1)

• Implemented between 1997 and 2002, the Sri Lanka
  Energy Services Delivery Project provided
  commercial financing through banks and micro
  finance institutions for private sector provision
  of on-and off-grid renewable energy services.

• This included mini hydro plants (grid
  connected), community hydro schemes (off-grid)
  and solar home systems.

Figure 6 Sri Lanka Energy Services Delivery
Project
41
E7 Project in Indonesia (1)

• Main Concept
• In Indonesia, many implemented projects suffered
  from rapid technical failures and lack of
  financial sustainability.
• In the late nineties, E7 a group of nine leading
  electricity companies from seven G7 countries,
  started a innovative RE project based on a
  bottom-up approach.
• The financing model used was a partnership
  between the project implementers and the
  electricity users, whereby the project
  implementers borne the investment cost and the
  users paid for operation and maintenance.
• The project was managed at three level, the
  national level, regional level and village level.
  The project promoted the establishment of
  village-based electricity management units
  (Pengelola Listrik Desa or PLD).

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E7 Project in Indonesia (Contd.) (2)

• Success Factors
• The main success factor is that the investment is
  borne by the project implementers and not by
  individual users, thereby making RE affordable
  for a large number of people.
• The fact that the project followed a bottom up
  approach was seen as a major success as compared
  to the previous RE projects in Indonesia which
  followed a more top-down approach.
• Finally, the fact that SHS users become owner of
  their system was seen as a major incentive to
  ensure proper care and use of the systems.

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Photovoltaic Solar Home System Financing in India
(1)

• A credit facility, initiated in 2003 by UNEP in
  Southern India to help rural households finance
  the purchase of solar home systems.
• The programme provides financial support in the
  form of interest rate subsidies for borrowers.
• The programme also provides assistance with
  technical issues, vendor qualification and other
  activities to develop the institutional capacity
  for this type of finance.
• As of January 2005, the programme had financed
  nearly 12,000 loans, through more than 2000
  participating bank branches. Sales volume had
  reached 1000 systems per month.
• The fastest growth in loans is currently in rural
  areas as because of the increasing participation
  of the Grameen banks.
• The 3-year programme with US 1 million in
  support to banks is on target to finance between
  20,000 and 25,000 solar home systems, making it
  one of the largest solar home systems loan
  programmes globally.