Funding Mechanisms for Solar Energy

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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. That might be due to private institutional investors' perception of PV projects as being too small and highly risky[1].

Bilateral and Multilateral Institutions that Provide Capital for Photovoltaic (PV)

Institutions, such as MDBs as well as bilateral agencies in host countries, have contributed the major part of financial support for photovoltaic (PV) projects. Especially bilateral institutions have shown themselves responsible for training of 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 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 and communities do not participate. Therefore high defaults, and inadequately trained staffs are common.

Photovoltaic Market Transformation Initiative (PVMTI)

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.

► More Information on the Photovoltaic Market Transformation Initiative (PVMTI)

Overseas Private Investment Corporation (OPIC)

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 and the U.S. Trade and Development Agency (USTDA) 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 (CDM) of the Climate Change Convention. It promotes investments in environmentally friendly technology in developing countries.

Further sources include funds from implementations of the Change/Global - Solar Development Group (SDG)/Project Document for WP.pdf 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.

► More Information about the Overseas Private Investment Corporation (OPIC)

Private Institutions Providing Capital for Photovoltaic (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 adapted 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 which 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 local capital markets SHS are perceived as new, exotic technology. Additionally, on the average SHS projects are more expensive compared to common products, altough operating costs for SHS are lower. Capital costs for the diesel generation alternative are unofficially.

The development of any SHS project, especially in developing countries, are long and can take 2 to 5 years:

At its inception, equity capital investment is needed for the working capital to penetrate the cash market. In the next step, debt is required to finance for example a modest amount of working capital, and as next step a portfolio of consumer finance or lease paper. Attracting debt the relatively small size of SHS projects is an obstacle, because international project financing organizations usually support only large projects with an amount of at least $15 million. Therefore, new SHS companies might be evaluated as being not large enough to attract debt financing without outside collateral. SHS projects are often capitalized in rollout stages: first to exploit cash market; next conducting pilot studies to find out optimal financing models; afterwards attracting finance in order to get one region to reach cashflow breakeven level; finally the replication of those programs in other regions, and so on. If financed prudently in this way no reasons exist for any of the described stages of financing to need more than $1 million.

The Energy Capital Holding Company (ECHCO) is interested in financing PV projects in combination with other energy projects in order to fulfill the demands of financing entities. ECHCO aims to accomplish energy projects, including some PV, of an amount of $1 billion. Furthermore, ECHCO supports project sponsors with a combination of legal, engineering, insurance, fiduciary and financial advisory services, as well as sourcing equity capital. When this report was published, the first deal was not yet finished. Thus, "the viability of its approach, while promising, is still theoretical."[2]

Further Information


  1. Philips, Michael; Browne, Brooks, H. Accelerating PV Markets in Developing Countries:
  2. 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.