Funding Mechanisms for Solar Energy

Sources of Investment Capital for PV in Developing Countries

So far, most of the investment capital for PV projects in developing countries has been provided by multilateral development banks (MDBs) and bilateral agencies through host governments. Private sector institutional investment in PV projects or enterprises in developing countries has been minimal. Private institutional investors tend to view PV projects as too small and too risky. Even where debt is available, the maturities tend to be too short.

Bilateral and Multilateral Institutions That Provide Capital for PV

Most of the investment capital for PV projects has been provided by bilateral agencies in host countries and by institutions such as MDBs. Bilateral institutions, in particular, have been active in providing training for PV system installers, project staff for designing and administering PV programs, and PV equipment for demonstration projects. Bilateral and multilateral institutions often take steps that they hope will make PV projects financially sustainable. One example is providing seed funding to establish a revolving fund. However, efforts to establish revolving funds often fail, and the revolving funds become “dissolving” funds they do not charge high enough interest to cover normal level of defaults, they have insufficient community participation and thus high defaults, and they have inadequately trained staffs.

One new program sponsored by the International Finance Corporation (IFC) and the Global Environment Facility (GEF) — the Photovoltaic Market Transformation Initiative (PVMTI) — will offer technical assistance and risk capital to the manufacturers, dealers and other private players who provide, install and maintain PV systems. The PVMTI will provide working capital loans on a competitive basis to PV businesses in the target countries of India, Morocco, and Kenya.

The U.S. Export-Import Bank has provided both export credit insurance and working capital loans for U.S. PV businesses with overseas operations or distributors. In order to qualify for the loans, the firms must show, among other things, an order for a large number of units. For most PV companies, if a single large order were to materialize at all, it would come only after a substantial period of business development and historical sales. The Export-Import Bank’s loans are thus mainly applicable to already-established distribution companies. The Export-Import Bank also will provide intermediary loans (up to maximum principal amount of $5 million and maximum repayment term of 5 years) to fund intermediaries who loan to foreign buyers of U.S. capital and quasi-capital goods and related services. The application of intermediary loans to PV credit entities has not been explored.

The Overseas Private Investment Corporation (OPIC) provides U.S. companies seeking to invest overseas with investment services and political risk insurance, as well as direct loans and loan guarantees. Project financing is also provided. Participation by small and medium-sized businesses and corporations has recently been encouraged. In 1996, two OPIC-backed country funds invested in a PV dealership in India.

Among grant-making agencies, both the U.S. Agency for International Development (AID) and the U.S. Trade and Development Agency provide funding for U.S. firms to carry out feasibility studies, consultancies, and other planning services related to major PV projects in developing countries. AID supports a number of training activities as well.

Prospective sources of investment capital include the funds that would flow from implementation of the Clean Development Mechanism of the Climate Change Convention that promotes investment in clean-air technology in poorer countries, as well as from implementation of the Solar Development Corporation (SDS) being established by the World Bank and nonprofit foundations:

• The Clean Development Mechanism (CDM) of the Climate Change Convention. Investments made pursuant to the CDM will not be limited to PV and could even bypass PV altogether. The many kinds of energy, transportation, agriculture, and forestry projects that will presumably be approved for carbon credits under the CDM will likely compete with each other to attract CDM investment. Many alternative carbon emission reduction activities are cheaper and/or easier to pursue than PV projects. Adding to the difficulty is the fact that carbon emissions reductions must be monitored and verified. This may be extremely difficult and expensive for remote, off-grid SHS projects.
• The Solar Development Corporation (SDC) is intended to provide working capital and financing to PV dealers operating in developing countries. It is envisioned as a combination technical assistance and investment fund. Of its anticipated $50 million capitalization, $18 million will be in grant form from the GEF for business advisory services. The remaining $32 million will be investment capital used to capitalize the investment fund. Of the total, the World Bank, IFC, GEF, and nonprofit foundations have committed $30 million, so the SDC will have to raise another $20 million from private institutional investors, mainly for capitalizing the investment fund. That fund will invest on a quasi-commercial basis in local PV ventures and financial intermediaries. The business advisory services, funded by grant monies, will provide technical assistance to PV companies and charge them a small fee where appropriate.

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