Renewable energy financing; PV solar home systems from South India
Published on 26 November 2007
Jyoti Prasad Painuly, Senior Energy Planner, UNEP Risoe Centre, Risoe National Laboratory, DTU, Denmark, and H V Kumar, Director, Crestar Capital India Private Limited, Mumbai, India
The UNEP programme described here aimed to facilitate access to clean energy to households in South India using PV solar home systems. Accessing finance was found to be a critical barrier and to increase finance access, risk perception from partner banks had to be addressed. This was achieved through technical and market development support, including equipment specification development, vendor qualification, and development of a competitive market through a multivendor approach. More than 18,000 households have now received clean energy directly through the programme with a current vibrant market for SHS in Karnataka, India.
ENERGY OPTIONS IN INDIA
More than 60 per cent of households in South India are estimated to have no access to electricity and, even when connected to the electricity grid, rural and semi rural communities suffer power outages and fluctuating power quality. These households tend to rely on less efficient energy sources, such as kerosene for light and dung and wood for heat. This not only adversely impacts health but limits both economic and social development. Poor quality of electricity has led many rural households to consider generators, inverters and solar PV systems.Solar energy using photovoltaics (PV) is a clean energy alternative to displace conventional polluting fuels, such as kerosene, for lighting and other applications. With significant PV sales and service infrastructure already in place, PV solar home systems (SHS) offers a viable alternative for lighting. But the lack of a credit market has constrained its growth. The households, who need it most, do not have access to credit needing subtle public interventions, just enough to drive the market forward in a sustainable way. The general aim of the UNEP programme described here was to facilitate access to clean energy to households in South India, particularly poorer households in rural and semi urban areas with the most power shortages with no access to better, more expensive alternatives.
Is solar home system (SHS) a viable option?
Electricity produced using a PV system is not cheap and can only help households tide over the problem of access to reliable electricity, mainly for lighting purposes. Grid electricity is often subsidised making any comparison difficult. However, if subsidy was assumed to be eliminated and electricity prices assumed to increase consistently, an SHS, despite the high initial cost, can be an attractive long term option when compared to costly or unreliable power supplies, see Table overleaf.Without financing, however, the high initial cost of PV will continue to constrain the growth of the Indian SHS market. But an increased access to credit from the banking sector could enable rural households to buy cleaner energy and pay for it with money that is currently being spent on less efficient, and often more polluting, forms of energy.
INDIA’S BANKING SECTOR
India has a well developed rural banking infrastructure, but the links to the renewable energy sector are weak at best. For this UNEP project, the need was clear for some short term market intervention to assist banks in gaining confidence in renewable energy technologies and increasing their exposure to SHS. This would increase consumer access to credit and lower the cost of this credit. A market based intervention could remove key barriers and allow market forces to expand the SHS market without further external support. Having identified access to finance as the main barrier, UNEP helped Indian banks develop lending portfolios of solar home systems. Potential customers for the loan facilities were households and small enterprises looking to use solar PV for either domestic or income generating activities. The programme was expected to help 18,000 customers directly and many more households indirectly, as a result of opening up the SHS credit market.
STAKEHOLDER CONSULTATION
During the first phase of the programme, a wide range of stakeholders in India were consulted, including SHS vendors, banks and other small scale financing institutions, governmental agencies, experts and NGOs. These consultations provided significant input on the state of the solar industry in South India, on the need for SHS financing and the best mechanisms for influencing growth of this financing.
FINDING THE RIGHT FINANCE PARTNERS
Based on consultations, the State of Karnataka was chosen as the target area for the initial phase of implementation mainly because of its strong rural banking system, established means of credit delivery and its vibrant solar industry with an extensive service infrastructure already in place. After consulting with a number of banks, partnership agreements were signed with Canara Bank and Syndicate Bank, two of India’s largest with branch networks in the target region.
Type of financing offered
The intervention model used was intended to encourage the market to grow and vendors to innovate in their product and service offerings while not substantially distorting the market. Importantly, a predetermined exit strategy was considered essential. Feedback was solicited on a variety of possible finance support mechanisms, including capital subsidies, front-end and back-end interest rate subsidies, credit default guarantees, loan term extensions, beneficiary margin support and subsidised transaction costs.
After weighing the pro and cons of various alternatives, an interest rate subsidy was chosen for accelerating
the market without overly distorting it in the long term. By providing loans with an interest rate buy-down (using the bank’s capital but UNEP interest subsidies), both the high up front cost and high credit cost barriers could be addressed. The interest subsidy could be decreased progressively to make the exit easy. This interest subsidy approach has in fact already been applied successfully in India, in the solar thermal sector by the Ministry of Renewable Energy (MNRE) and in the solar PV sector on a small scale by Selco, as a direct vendor initiative.
PROJECT’S APPROACH AND RESULTS
Based on discussions with partners, market development support was given by increasing awareness and providing information. Technical support was provided through vendor qualification and SHS specifications and training of bank staff (based on needs). Financial support was given through interest subsidy to end users (which also helped develop the market), and transaction cost support to the banks. A multivendor approach was taken to ensure quality products, competitive pricing and reliable after sales support. The programme was open to all vendors who fulfilled product quality and after sales service criteria. These were set through competitive forces, not programmatic regulations.Since its launch, 18,000 customers have been served directly through the project over a period of four years by the partner banks via 2,000 branches. Many more were served outside the project as a result of the opening of the credit market for SHS in the region.Interest subsidy was decreased in October 2004, and again in June 2005, bringing down the interest to nine per cent, which was close to the market rates. The interest subsidy reduction had no adverse impact on the programme, indicating its sustainability. The project won the prestigious Energy Globe Award in 2006 in recognition of its success.
ROLE OF THE BANKING SECTOR
Encouraged by the success of UNEP partner banks, several banks launched their own loan programmes independent of UNEP support and some broadly follow the practice established by the UNEP. Syndicate Bank continues to lend for SHS in Karnataka after the end of UNEP financial support and has extended it to all parts of India, although they have limited success elsewhere, mainly due to an under developed market. The Bank, however, registered good success with its ‘Solar Grama’ (Solar Village) initiative, where loans were provided mainly to lower income families for electrification of household clusters (through SHS). Canara Bank successfully extended the loan programme to the neighbouring Kerala State. Although Canara continues to lend, the pace slowed down during 2005 and 2006 under competitive pressures from other banks. With the end of the formal partnership with Canara Bank in December 2006, the programme ended in South India. New initiatives were taken up in the second half of 2006 and the programme was launched in early 2007 in Maharashtra in partnership with the Bank of Maharashtra, and in Gujarat in partnership with Sewa (a well known women’s social organisation), and their financial arm, Sewa Bank. Technical support and support for awareness measures was provided to the partners under the programme. SHS sales at Sewa have picked up considerably, mainly on account of extensive product innovations by the vendor Selco to enhance livelihood opportunities using PV technologies. The Bank of Maharashtra is trying to put the programme on a sound footing. In addition, the project has supported international NGO, S3IDF, in providing solar lighting to the urban poor, eg hawkers and small shop owners.
Expanding into rural markets
Indian Banks have large rural banking networks and a wide range of products that cater to various customers. Adding to their range of asset products gives banks a competitive edge over the rest of the market, and solar home light loans address a critical need for their customers. Since most loans were sold in the rural markets, it helped banks fulfil specific business segment and geographical targets. The banks see the SHS business from a variety of perspectives, which includes extending their reach to rural markets, other business from the SHS customers, and satisfaction from meeting the needs of those who have no access to electricity for lighting, which they see as a part of their corporate social responsibility.
“Indian banks pursue stiff business targets for financial inclusion and solar light loans help them expand their reach in rural markets, especially among their lower income customers”, said MBN Rao, Chairman and Managing Director of Canara Bank. “For small borrowers, the solar loan adds value to their livelihoods and increases cash flows in the form of higher productivity. Besides, our bank takes great pride in contributing to social change in association with UNEP. Putting solar home lighting systems and reliable energy supplies within the reach of the common citizen kindles hopes and aspirations of many for a better life and well being.” At grass roots level, bank managers see this as an opportunity to increase their business and derive a sense of satisfaction by meeting this crucial need for lighting. “This (SHS loan) helps the people to come to the bank and when they come ... they can get other financing facilities from the bank. We can do good business with them through dairy loans, education loans etc”, says Vasudev Rao, Bank Manager of the Syndicate Bank, who was involved in the programme and advanced several SHS loans from his branch. “It is a very good programme, people are happy and as a bank, we are happy. We are also happy because we have done something good for the poor. It gives us satisfaction.”
LESSONS LEARNT
Access to financing is a major barrier for rolling out renewable energy in India. The risk perception of financing institutions, and small or non-existent markets are two important issues that must be addressed for renewable energy to achieve its potential. Technical support and a code of best practice for vendors were used to address the issue of risk, and market development was supported through reduction of financial costs to consumers, and awareness programmes by the partners.Stakeholders’ involvement at every stage of the programme and in every decision was very important along with enough flexibility to incorporate changes as a result of consultations and changes in environment. Renewable energy, especially PV electricity, is still expensive for the very poor. Therefore, it is important to integrate it with income generating activities, if the very poor are to be reached. Some were reached in the programme, through support for S3IDF’s street hawkers lighting project, and the Sewa Bank’s work in Gujarat. Feedback mechanisms are other valuable tools that can make a programme successful. Annual audits of some branches of partner banks and customer satisfaction surveys were used in the programme as feedback mechanisms. Findings from these were used to prepare a good practices manual, and feedback was also used by the partners to improve the programme.Although the programme is easily replicable, initial support may still be needed in other regions due to a need for market development through awareness programmes, and capacity development of financial institutions that may be new to this kind of programme.
Solar energy using photovoltaics (PV) is a clean energy alternative to displace conventional polluting fuels, such as kerosene, for lighting and other applications.
Table: Monthly costs in Rupees for a household with four lights.
Period
Existing grid customer
New grid customer
Kerosene
Inverter
SHS
First five years
115
297
212
465
325
10 years
148
298
272
465
200
Source: Economic and Financial Assessment of SHS for the State of Karnataka, Crestar Capital, March 2002.
THE INTEREST RATE BUY-DOWN
The interest rate buy-down structure allows partner banks to offer consumer loans at a concessional interest rate of five per cent initially, seven per cent below the prime lending rate of 12 per cent. While UNEP funded the interest rate buy-down, the banks provided the capital and carried 100 per cent of the credit risk. Banks are therefore motivated to maintain quality loan portfolios. Price distortion was minimal since the financing cost, not the capital cost was subsidised.
Authors
Jyoti Prasad Painuly works as a Senior Energy Planner at UNEP Risoe Centre, Denmark. He has wide-spread experience of working on a variety of issues in energy and environment area. This includes in energy and environment economics and policy, energy efficiency, renewables, technology assessment, climate change issues and bio-energy.H V Kumar is Director of Crestar Capital India Private Limited and based at Mumbai, India. He advises on renewable energy finance and worked with the UNEP to manage the PV Solar Home Systems Project in South India.
Organisations
The UNEP Risoe Centre on Energy, Climate and Sustainable Development (URC) supports the United Nations Environment Programme (UNEP) in its aim to incorporate environmental aspects into energy planning and policy worldwide, with a special emphasis to assist developing countries.URC is sponsored by UNEP, the Danish International Development Assistance (Danida) and Risoe National Laboratory.
Enquiries
Jyoti Prasad Painuly, Senior Energy Planner, UNEP Risoe Centre on Energy, Climate and Sustainable Development (URC), Risoe National Laboratory, DTU, Frederiksborgvej 399, PO Box 49, DK 4000 Roskilde, DenmarkTel: +45 46 775167Fax: +45 46 32 19 99E-mail:
j.p.painuly@risoe.dk H V Kumar, Director, Crestar Capital India Private Limited, 4 Vishnu Mahal, D Road, ChurchgateMumbai 400 020, IndiaTel: +91-22-22819944E-mail:
crestar@vsnl.netVisit UNEP RisoeVIsit UNEP Division of Technology, Industry and Economics
No comments:
Post a Comment