Funding Mechanisms for Solar Energy

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Sources of Investment Capital for PV in Developing Countries[1]

Recently, multilateral development banks (MDBs) and bilateral agencies provided the majority of the investment capital for Photovoltaic (PV) projects in developing countries. This was accomplished by host governments. There is only small contribution of the private sector in PV projects. The same goes for enterprises in developing countries. That might be caused by private institutional investors' perception of PV projects as being too small and highly risky.

Bilateral and Multilateral Institutions That Provide Capital for PV

Institutions, such as MDBs as well as bilateral agencies in host countries, contributed the majorian part of financial support of PV projects. Especially bilateral institutions have shown themselves responsible for training for PV system installers, designing project staff and for administration of PV programs, and PV equipment for demonstration projects. Bilateral and multilateral institutions aim for financial sustainability of PV projects, for example providing seed funding to establish a revolving fund. However, the approach to to establish revolving funds is often not successful. As a consequence the revolving funds become “dissolving” funds: they fail to charge interests that cover normal level of defaults, community do not participate. Therefore high defaults, and inadequately trained staffs are common.

A new program called Photovoltaic Market Transformation Initiative (PVMTI) is financed by the International Finance Corporation (IFC) and the Global Environment Facility (GEF). It provides technical assistance and risk capital to the manufacturers, dealers and other private participants who are involved in providing, installing and maintaining of PV systems. The PVMTI will offer working capital loans on a competitive basis to PV businesses. The PVMTI will take place in India, Morocco, and Kenya.

Both export credit insurance and working capital loans for international U.S. PV businesses has been offered by the U.S. Export-Import Bank. As one of the various criteria to apply for the loans, the company has to prove 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. Thus, the Export-Import Bank’s loans are mainly provided to already-established distribution companies. The Export-Import Bank also will offer intermediary loans (up to maximum principal amount of $5 million and maximum repayment term of 5 years). Intermediary loans are offered to fund intermediaries who loan to foreign buyers of U.S. capital and quasi-capital goods and related services. But so far, there has not taken place an exploration of the application of intermediary loans to PV credit institutions.

The Overseas Private Investment Corporation (OPIC) provides U.S. companies which want to invest internationally with investment services and political risk insurance. Project financing, direct loans and loan guarantees are also provided. Recently, participation by small and medium-sized businesses and corporations has been strongly encouraged.

Grant-making agencies, such as the U.S. Agency for International Development (AID) and the U.S. Trade and Development Agency support american companies in conducting feasibility studies, consultancies, and other planning services related to major PV projects in developing countries. Additionally, AID supports also training activities.

Prospective sources of investment capital include the funds that would flow from implementation of the Clean Development Mechanism of the Climate Change Convention. It promotes investments in environmentally friendly technology in developing countries. Further sources include funds from implementations of the Solar Development Corporation (SDC) which is set up by the World Bank and nonprofit foundations:

  • The Clean Development Mechanism (CDM) of the Climate Change Convention. CDM funds not only PV, contrary PV might be not the largest investment in future anymore. Carbon credits will probably be appliable for various forms of energy, transportation, agriculture, and forestry projects. Such projects will be in competition under the CDM to attract its funding. Many alternative carbon emission reduction activities are less costy and/or easier to conduct than PV projects. Described obstacles of PV projects increase even more, if taken into consideration that it is an obligation to monitor and verify carbon emissions reductions. This may be extremely difficult and expensive for far rural, off-grid SHS projects.
  • The Solar Development Corporation (SDC) aims to provide working capital and financing to PV dealers in developing countries. Its objective is to combine technical assistance and investment fund. Its predicted capitalization is about $50 million capitalization. This includes the provision of $18 million for business advisory services by the Global Environment Facility (GEF). The difference of $32 million will be investment capital used to capitalize the investment fund. In sum the World Bank, IFC, GEF, and nonprofit foundations have provided $30 million. Thus, the task of the SDC is to raise another $20 million from private institutional investors. This sum is 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 will provide technical assistance to PV companies for a small fee.

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 have financed PV development companies: Gaia Capital (Germany), Swiss Reinsurance Company (Switzerland), and Triodos Bank (Netherlands)  

  • Gaia Capital and Swiss Reinsurance Company have provided equity capital to PV project developers 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 offers loans to the private Renewable Energy Services Company of Asia (RESCO), which supports rural households by providing loans for SHS. It offers also a partial guarantee on the first 600 PV systems in order to increase participation. In Bolivia, the Solar Investment Fund is funding Co-Operativa Rural de Electrificación LTDA (CRE). CRE is an electric cooperative utility that has provided electricity through the national grid in the past. Now it changes its objective to provide solar energy for rural households on a fee-for-service basis.

But presented private institutional investments in PV projects such as those made by Gaia Capital, Swiss Reinsurance Company, and Triodos Bank are not common. PV industry claims that PV was overcome by the capital markets.

Development of a viable SHS market can be supported or slowed down by the Domestic capital markets in developing countries. If an PV entrepreneur can manage to gather offshore capital, local capital is less essential (as in the Dominican Republic). But offshore capital is hard to attract because capital providers are faced with high foreign exchange risk.

Developing countries wich are considered as hosts for SHS investments, do not have venture capital or other long-term institutional risk capital financing at their disposal. Even in developed 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.


  1. Philips, Michael; Browne, Brooks, H. Accelerating PV Markets in Developing Countries: http://www.repp.org/repp_pubs/articles/pv/7/7.html