 One of the key issues for private entrepreneurs and end users is access to finance covering a diverse set of needs. For an energy service company (ESCO) longer term loans are required to better match the cash flow of the operation; for a dealer it is working capital when the business is rapidly expanding; while for end users financing is needed to reduce the high initial cost of a system. To address these different needs, three main financing approaches can be identified:
 Tailored credit provision which could include easier accessible and/or longer term loans offered through local banks; and, household credit specifically for stand alone systems through Micro Finance Institutions;
Performance-based co-financing grants to buy down initial capital cost for service providers; and, Partial risk guarantees to mitigate risk and enhance credit to local banks and MFIs.
Credit Affordable and accessible financing is a major consideration in the design of any stand alone program due to the high first costs of renewable energy systems. Consumer credit is provided through three primary mechanisms: dealer-extended credit such as in India, credit through a micro-finance organization such as in Bangladesh and Sri Lanka, and credit through a local development finance institution such as in Vietnam. In Sri Lanka, a partnership between consumers, micro-finance institutions, and dealers is adopted, where dealers are responsible for sales, installation and after sales while the micro-finance institution is responsible to client appraisal, loan approval and collection. In the case if a client is dissolvent, the dealer, after request from the micro-finance institution, is responsible for dismantling of the system. In Bangladesh, the micro-finance institution, Grameen Shakti, act as both dealer and consumer credit provider. In Vietnam, sales by a private dealer are assisted by a complex credit delivery scheme involving the Vietnam Women’s Union, an NGO, and the Vietnam Bank for Agriculture and Rural Development, a development finance institution. Lessons learned from early experience demonstrated that provision of consumer credits requires special expertise and a wide network in rural areas, and involves high transaction costs and risks. Micro-finance institutions, the traditional lenders in rural areas, are better positioned to provide consumer credit for solar home systems than commercial banks or dealers. The inability of borrowers to offer adequate security or collateral for the loan is a major constraint to offering term credit. Some approaches to overcome this problem include using the systems as part-security (for example a SHS is allowed as collateral in Sri Lanka, Bangladesh and India), seed capital funds (for example E&Co, Triodos Bank and others provide seed funding to private organizations selling stand alone systems), loan guarantees (for example Papua New Guinea), supplier credits (in several countries suppliers have extended their normal supplier credit to accommodate business development), and equity investments or debt financing assistance from the Government. Pricing and repayment arrangements should capture households’ ability and willingness to pay. Longer credit terms stimulate demand by poorer households but increase risks. In PNG, the program has supported a partial risk guarantee allowing the credit terms to be extended from three to five years. In addition, experience suggests that consumer willingness and capacity to pay is influenced more by the size of the down payment for solar home systems than by the number or the size of the monthly payments. Flexible payment schemes could be introduced for households with irregular income streams. View stand-alone case studies in Bangladesh, India, Sri Lanka, and SELCO.
Subsidies and grants Almost all rural electrification programs worldwide involve some forms of subsidy. The key issue here is how to provide an efficient, effective and equitable subsidy schemes. For many renewable energy programs, it is important to design a subsidy scheme that would provide explicit and transparent subsidies, with an appropriate exit strategy, that increase affordability/commercial viability while retaining cost-minimization incentives, with disbursements linked to targeted outcomes/outputs (not inputs). The scheme should separate grants from debt finance or the opposite of 'soft' loans which bundle them. The notion is that the 'last dollar' should be borrowed on commercial terms. This provides a key incentive to minimize costs since the promoter borrows at relatively high rates, usually prevailing in developing countries, to finance it. The co-financing grants for stand alone systems should only be disbursed after systems have been installed. Normally, at the start of a program the level of co-financing grant is about 15-20% of the initial capital investment or of the net revenue to the industry. With the increasing commercialization of the industry, the co-financing grants should be phased out for the products that become commercially viable, while only retaining for those systems that are not yet commercially viable for the poorest households. In Sri Lanka, it took 7-9 years to complete this cycle from inducement of the solar home system industry supported by co-financing grants to full commercialization. While much of the discussion often revolves around investment subsidies, non-investment subsidies can often have a catalytic effect for grow of the industry. For example, cost-shared business planning is usually critical as well as awareness programs are often critical. View stand-alone case studies in Bangladesh, China, and Sri Lanka.
Partial risk guarantees For most of the financiers stand alone investments are new, and they are unfamiliar with the particular risk accompanying the investment. Partial risk guarantee funds can help to mitigate these specific risks while retaining the normal commercial risks the financier is accustomed to. For example, in Papua New Guinea the finance package offered to the financial intermediary essentially takes away the risk for the financial institution after the third year of the loan. This allows the financiers to extend its tenure from the regular three years to five years making the systems more affordable to the end users. The package also facilitates enhanced liquidity for the financial intermediary and creates a revolving fund, which can be utilized beyond the project period. One of the lessons learned is that the selection of the implementing agencies and their management skills are important to the success of introducing a new finance scheme. Too often, organizations with limited or no finance experience have been selected to introduce these products. This would lead to a delay in implementation with the organizations going through a learning curve, or worse, poor or no introduction of the new finance products. Even though it requires more efforts during preparation to identify the right implementing agency, it is highly recommended to work with well established commercial or development banks and micro finance organizations in a country. |
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