Finance Mechanisms

Most the service providers for renewable energy mini-grids are either community cooperatives or local entrepreneurs. Promising programs are emerging that support rural entrepreneurs and community cooperatives with technical and business training in renewable energy technologies, marketing, feasibility studies, business planning, management, and financing. 

To develop mini-grid rural energy service projects, the service provider (whether a utility or a private entrepreneur) needs to access various sources of capital during an investment cycle.  Start-up capital is required during business formation and to support project development activities¹.  Operating capital is required to close the project financial transaction, construct and operate the plant.   At each step the sources of financing can involve public or private, as well as public/private (or NGO) delivery channels. Each step also has its own risk/return profile and generally requires a specialized finance mechanism for effectively deliver. 

Financing the development of mini-grid renewable energy systems has all the difficulties of financing rural electrification in general.    Furthermore, most developing countries have poorly developed financial markets, products, and institutions, as well as high political, credit, currency, and economic risks.    As such, financing has been largely the domain of public agencies and private investment is limited.

To support renewable energy project financing, Bank projects often implement finance mechanisms that can:

• Overcome lending limitations within the local project financing system
• Provide capacity building for participating financial institutions
• Channel grants or financing to support project implementation. 

Mini-grid renewable energy systems are relatively small capital investments, and they require finance mechanisms designed to improve access to capital for local or regional developers (both equity and debt) and reducing the risk of financial institutions that lend to these projects.  

Seed Capital

Mini-grid renewable energy project developers are often community cooperatives or local small entrepreneurs with limited capital resources.   These enterprises require seed capital to identify and develop projects, and business development grants and donor-funded seed finance mechanisms can be used to support new business activity.   

Bank Financing

Bank debt financing for mini-grid renewable energy projects are primarily based on the financial strength of the project owner.   However, for most community cooperative or rural energy service providers, this is rarely possible.  Public and donor funding mechanisms and capacity building efforts are needed to help engage local financial institutions.

Risk mitigation

Risk mitigation is an integral element of financial structuring.  However, in practice not many risk mitigation instruments are available to developing country project sponsors.  Most Bank programs focus on reducing or better managing the risk exposure of lenders.  Better financial risk management is one of the keys elements to enabling the greater deployment of mini-grid renewable energy projects.

Renewable Energy Finance Initiatives

Renewable energy financing support mechanisms include the UNEP Sustainable Energy Finance Initiative, the Renewable Energy Finance and Investment network, prepared by the American Council on Renewable Energy and the Renewable Energy and Energy Efficiency Partnership.  

Carbon Financing

Renewable energy mini-grids also qualify for CDM projects, which can provide an additional revenue stream and improve financial viability of these projects. However, since most renewable energy mini-grids are relatively small projects, the transaction costs for such CDM projects can be prohibitive. Three approaches are useful to address this issue: 1) simplified procedure with standardized methodology for small-scale CDM projects; 2) bundling a number of smalls-scale projects into a portfolio that can be developed as one large CDM project; and 3) programmatic CDM project activities where emission reductions are achieved not by one single investment but rather by multiple actions executed over time by a number of entities as a result of a government policy or a voluntary program.  

¹ Mobilising Finance For Renewable Energies, Virginia Sonntag-O’Brien, Basel Agency for Sustainable Energy Eric Usher, UN Environment Programme, Thematic Background Paper for the International Conference for Renewable Energies, Bonn 2004 (PDF)