Funding Mechanisms for Solar Energy

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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.


Private Institutions That Provide Capital for PV

A few environmentally oriented private investors have provided small amounts of equity and some debt for PV developers. At least three private institutional investors — Gaia Capital (Germany), Swiss Reinsurance Company (Switzerland), and Triodos Bank (Netherlands) — have invested several million dollars in PV development companies.

  • Gaia Capital and Swiss Reinsurance Company have provided equity capital to PV project developers operating in developing countries.
  • Triodos Bank has established a $3 million Solar Investment Fund, capitalized by the Dutch government and the Dutch power utility ENW. In Sri Lanka, the Solar Investment Fund is providing a loan to the private Renewable Energy Services Company of Asia (RESCO), which provides SHS loans to rural households. It is also providing a partial guarantee on the first 600 PV systems, thereby helping to attract local lenders to participate in the project. In Bolivia, the Solar Investment Fund is funding Co-Operativa Rural de Electrificación LTDA (CRE), an electric cooperative utility that hitherto has provided electricity through the national grid, but which is now aiming to provide solar energy for rural customers on a fee-for-service basis.

Private institutional investments in PV such as those made by Gaia Capital, Swiss Reinsurance Company, and Triodos Bank are rare. From the PV industry’s perspective, the capital markets have largely bypassed PV.

Domestic capital markets in developing countries can help or hurt the establishment of a viable SHS industry. Obviously, local capital is less essential if an PV entrepreneur can attract offshore capital, as has been the case in the Dominican Republic. Unfortunately, offshore capital is hard to access mainly because of the unacceptably high foreign exchange risk faced by capital providers.

In many of the developing countries that are the most likely hosts for SHS investments, there is virtually no venture capital or other long-term institutional risk capital financing available. And even if local capital markets are relatively developed, SHS investments often involve technologies and structures that are new to the country and are therefore considered exotic. Furthermore, SHS projects tend to be more capital intensive than their conventional counterparts, even if operating costs for SHS are lower. When compared with the diesel generation alternative, the capital costs seem out of proportion.

As noted above, the development of any SHS project, especially in a developing country, can take 2 to 5 years. At its inception, it requires equity capital investment for the working capital needed to penetrate the cash market. Then, debt can be used to finance perhaps a modest portion of working capital, and then a portfolio of consumer finance or lease paper. But to attract debt, the relatively small size of SHS projects is a problem. Unfortunately, classical international project financing approaches dictate the need for relatively large projects — with minimum financing requirements of, say, $15 million. Financiers may consider SHS entrepreneurs too small to obtain debt financing without strong outside (i.e., nonproject-related) collateral. When prudently financed, SHS projects are capitalized in rollout stages: first to exploit cash market; then to do a pilot program to research and test optimal financing vehicles, for say 200 units; then to get enough financing to carry one region of a country to reach cashflow breakeven level; then to replicate those programs in other regions, etc. There is no real reason for any particula r stage of financing to require more than $1 million.

One private company seeking to finance PV projects by packaging them with other energy projects is the Energy Capital Holding Company (ECHCO) based in Washington, D.C. ECHCO has announced a plan to close on $1 billion worth of energy projects which will include some PV. In addition to packaging the projects to meet the application requirements of funders, ECHCO provides project sponsors with an integrated set of legal, engineering, insurance, fiduciary, and financial advisory services, as well as sourcing equity capital. At the time of this writing, ECHCO had not yet closed on its first package deal, so the viability of its approach, while promising, is still theoretical.10


10 Michael Philips, “ECHCO to Close on $1 Billion Package, Including Renewables,” Clean Energy Finance, Volume 3, Number 1, Spring 1998 (Winrock International and Energy Ventures International), p. 3.


Source: Philips, Michael/Browne, Brooks H.: Accelerating PV Markets in Developing Countries.



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