Sources Of Financing For Pvbased Rural Electrification

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PV technologies, including solar home systems, are usually expensive relative to the average individual income in developing countries. Securing financing is therefore an important element of a PV project. Funds could be by way of loans, grants, equity investment, or other instruments. However, securing PV financing can be a long and winding road. Successful projects had persistent project developers who were able to demonstrate the profitability as well as the nonfinancial merits of the project.

Barriers exist at the program level (national level) as well as the project level. National governments can access and secure financing from large multilateral and bilateral development banks only by submitting to a lengthy and complicated process. Commercial lending and investment organizations may also still perceive PV lending as a high-risk area owing to a lack of familiarity with the technology or a lack of access to well-informed advice about PV system financing. The relatively small size of PV projects, especially by the standards of investment organizations, can also be a barrier. PV project developers may have to compete with a host of other important rural development projects, while the available funds could be limited. Development financiers also may have political agendas and technological preferences around which PV program developers will have to work.

To navigate these barriers, PV project developers should familiarize themselves with potential funding sources and initiate early conversations with them. Before arriving at a mix of financing options, a number of variables, such as return on investment (ROI) and the length, uncertainties, and risks of a given program, should be considered. The application process will usually require considerable dialogue and substantial paperwork; hence, a thoroughly worked out business plan that includes market analysis would be essential. The application time frame can vary widely from source to source, taking as long as a couple of years with the large multilateral development banks and as little as several months with commercial sources.5

16.4.1 Overview of Sources

While international financing sources play an important role in financing PV projects, most funding is from the national development funds in the developing countries (80% or more) themselves. Commercial banks and investment firms at both the national and international level are also important sources for financing PV projects. Figure 16.5 presents an overview of important international sources for PV finance.

16.4.2 International Concessionary Financing

International concessionary finance is mainly provided by way of loans (some grant money may also be available) by multilateral development banks (MDB) such as those under the World Bank Group. However, most official development assistance (ODA) is accessible only to the national governments of the developing countries and may not be directly accessible to individual project planners. Prior to receiving any funding, the MDB application process — which can include compilation of information, application writing, and exchanges with the MDB — can take up to anywhere between 2 to 5 years!

Alternative international financing includes funds from private foundations (e.g., Shell Foundation, E & Co., etc.) as well as green investment mechanisms such as tradable certificates for CO2 emissions. These are market-based efforts to externalize the environmental benefits of renewable energy and solar electrification.

A large pool of financing resources is available to developing countries through bilateral donor funds. Bilateral agencies, like MDBs, are more open to innovative or unproven technology than the commercial financiers. However, geographical restrictions for project location might apply, and sometimes the equipment suppliers or project managers must be sourced from the donor country. While MDB financing favors longer-term projects (5 to 10 years), bilateral financing favors projects with time-spans of just 2 to 3 years. However, in many cases, bilateral funding cannot ensure sustainability of the market development. If follow-up funding is not available, the situation can prove disruptive to market development.

16.4.3 National and Commercial Financing

Many developing countries provide their own development funds created through taxes or tariffs. Governments can also provide fiscal and financial incentives to offset the cost of development projects, such as tax and customs exemptions on equipment, accelerated depreciation benefits, etc. Subsidies are also provided by the local governments in the form of a refund of a portion of the cost of a PV system to end-users or to project developers. Sometimes, subsidies are provided direct by way of grant to PV system companies to assist them in marketing, selling, and maintaining PV systems. Although subsidies and incentives can assist market

International concessionary financing

Multilateral Development Banks (MDBs)

Regional Development Banks r-( World Bank Group

Asian Development Bank (ADB)

International Bank for Reconstruction& Development (IBRD)

African Development Bank (AfDB)

International Development Association (IDA)

Inter-American Development Bank (IADB)

International Finance Corporation (IFC)

Islamic Development Bank (IDB)

Transport and Energy (DGTren)

European Bank for

Reconstruction & Development (EBRD)


Development &



European Commission (EC)

Bilateral Agencies

US Agency for International Development v (USAID) j

Japan N International Cooperation Agency __(JICA)_

UK Dept for International Development v_(DFID)_y

BMZ & GTZ (German Agencies)

Australian Agency for International Development (AUSAID)

Funds, Foundations

United Nations Foundation (UNF)

Shell Foundation

GEF Small

Grants Programme (UNDP) J

FIGURE 16.5 Sources of international concessionary financing.

development, if government fiscal policy changes (for instance, when a new government comes to power), the project developer may be faced with an unmanageable increase in the cost of equipment, or the end users may no longer be able to afford the planned PV systems. Thus subsidies have often been criticized for creating a false market. Moreover, while subsidies can assist in establishing a market where one could not exist before, their introduction into existing markets can create unsustainable market demands.


As a case study, the pertinent issues of energy supply for a water-pumping operation in the agriculture sector are examined in this section. The case for solar-powered water pumping and experience with an implementation model involving an ESCO are presented.

16.5.1 Energy and Water Use in Agriculture

The problems affecting the electricity sector in the countries in the Asia Pacific region have been described by Padmanabhan and Sarkar.6 A vicious cycle in energy and water use in agriculture begins with inefficient operation of the utilities in the public sector, resulting in poor voltage profiles, high distribution losses, and low load-diversity factor, culminating in remarkably low end-use efficiency of electricity and water (Figure 16.6). For instance, the agricultural sector in India consumes 27% of the electricity and 85% of available freshwater (irrigation efficiency 20 to 50%) while contributing only 5 to 10% of revenue. Although the operating costs are higher, diesel pumps are widely used to compensate for the unreliable power supply.

Problems in groundwater management can have a potentially huge implication for world carbon dioxide emissions. In the case of India, studies have projected an increase of 4.8 to 12% in emissions for each 1-m drop in groundwater levels. Solar-powered pumping, if implemented with sufficient attention to demand-side management (for instance including a drip-irrigation system with water-usage efficiency 90% or above), can potentially provide a viable alternative.

FIGURE 16.6 Vicious cycle of energy and water usage in the Indian agriculture sector.

16.5.2 Punjab PV Pumping Project

In 2000, the government of the northern Indian state of Punjab initiated an innovative program to install 1000 PV pumps in just 2 years (each pump with a PV array of 1800 Wp*). The state of Punjab, India's food basket bordering Pakistan, is known for its "green revolution" to accomplish massive increases in production of wheat, rice, etc., crops in the 1950s by implementing extensive canal irrigation systems as well as using groundwater sources. Farmers use a combination of diesel, electric (open as well as submersible, with high discharge capacity), and tractor pumps, usually in the capacity range of 5 to 10 hp (3.7 to 7.4 kW), with low irrigation efficiencies (<50%). Despite the fact that the state-run electricity board has been operating for several years with a negative rate of return of over 10%, the government has continued to supply electricity for pumping free of cost or with only a marginal cost recovery, mainly owing to political reasons (large vote bank, strong farming lobby). Thus the solar pumps chosen for the program, which were 1.8 kW (ca. 2 Hp) in capacity and cost over US $10,000 (2002 market price in India), had to compete with the larger pumps costing under US $500 that were receiving free electricity. In the absence of concessionary financing and subsidy from the government, there was no market. However, an implementation model integrating financial engineering that involved a leasing company drastically reduced the up-front price for the pumps for the farmers, thus creating a market.

16.5.3 Financial Engineering

The Ministry of Nonconventional Energy Sources (MNES) in India has been implementing a unique solar pumping program (launched in 1992-1993), and by 2002 some 4200 pumps had been installed under the program. The Indian Renewable Energy Development Agency (IREDA), the financial arm of the ministry, was offering soft loans for the purchase of pumps at an annual rate of interest of 2.5%, with a repayment period of 10 years as well as a moratorium of 2 years. Over and above this, the ministry also was providing a direct capital subsidy for the purchase of the pumps. Furthermore, if a profit-making company were to invest in a PV project, it would be eligible to claim an accelerated depreciation benefit on the cost of the project (i.e., a tax break taken in the first year that, in the normal course of events, would have been amortized over 10 years). For the Punjab pumping project, all of these elements of financial engineering were included.

A reputable company secured a soft loan from IREDA for a large number of pumps (at times, several hundred pumps), absorbed the accelerated depreciation benefit, obtained the available capital subsidy, and finally leased the pumping units to individual farmers upon payment of a one-time fee that is only a fraction of the true cost (costs to the farmers have ranged from US $900 to 1500 over the years). The Punjab Energy Development Agency (PEDA), which was the nodal agency for implementing the project, also pumped in additional grants to reduce the cost of the system. The farmer would only make an up-front payment, but theoretically would

* The rated power of PV panel expressed in watt peak, or Wp, is a measure of how much power a solar panel can produce under optimal conditions.

receive the ownership of the pump at the end of 10 years. As there is no further payment requirement from the farmer, there is little cause for default, and the only binding condition to the farmer was that the PV array and pump should be used for agriculture purposes during the lease period.

16.5.4 Implementation of the Program and Lessons Learned

Marketing efforts begin with newspaper advertisements. A preinstallation survey follows when the farmer expresses his interest by paying an initial deposit, and then a suitable site is mutually agreed upon between the energy service company (ESCO) and the farmer. Helped by an unreliable grid supply and a long waiting period for a new connection from grid, a total of 1000 pumps were successfully installed between October 2000 and March 2002.7 Following this success, the project is now being repeated on a yearly basis, and neighboring states have picked up on the initiative and started their own programs. The success of this program highlights several novelties and winning factors:

The Punjab Energy Development Agency (PEDA) chose to award the contract to to a few leading domestic solar PV companies such as Tata BP Solar, Bharat Heavy Electricals, etc ., instead of contracting a single company. These companies, in turn, chose their own ESCOs to fulfill the contractual obligation with PEDA. These contracted ESCOs were contracted to provide both installation and maintenance service for 5 years after installation. Auroville Renewable Energy (AuroRE) was one of the chosen ESCOs, a company that also specialized in the manufacture and supply of balance-of-system (BOS) components (including accessories such as array-support structures, trackers, etc.) as well as installation. AuroRE, located in South India (over 1500 km from Punjab), was successfully able to identify key issues, train personnel, and implement the project through local representatives, which goes to prove that geographic proximity to the project location is not one of the biggest challenges to overcome if the chosen implementation model is right. AuroRE was awarded the Ashden Award (considered a green Oscar by many) for the year 2004. In presenting the award, the Ashden judges commended AuroRE for its integrated approach to supplying energy services, combining technical and business competence with a strong commitment to the greater use of sustainable energy, which sums up the requirements for a successful ESCO.

Rotomag, an indigenously and exclusively manufactured DC centrifugal pump of 2-hp capacity, was used under this program to replace more expensive (to buy and maintain) Grundfos pumps, which were earlier imported for the packaged systems. Two Axis tracking structures have been independently developed by various installation companies.

User training — including demonstration of the operation of the system at the field level, pasting of waterproof instruction sheets in the regional language on the array, etc. — were important elements of this program.

Maintenance problems often arise from equipment or devices that may not be part of the PV systems itself. For instance, a faulty foot valve may render the system inoperational. The motor brushes of the DC pump need replacement after 2 to 3 years. Surveys have indicated that these details have been attended to, and over 98% of the systems were still functioning satisfactorily after 1 year.

Surveys also indicated a high level of user satisfaction, and farmers were increasingly adopting efficient irrigation systems such as drip irrigation (>90% irrigation efficiency) to grow high-value plantation crops rather than field crops, which would generate higher income for the farmer.

Thus the Punjab solar-powered pumping program, relying heavily on subsidies, has been able to establish a market for solar pumping system where there was none before. However, in the opinion of the authors, the sustainability of this market is dependent upon how well the lessons of past mistakes with subsidies are integrated into this program. This requires that subsidies be tapered off gradually, that ESCO services be maintained, and that improved irrigation practices continue to be encouraged.


1. Inversin, A.R., Reducing the Cost of Grid Extension for Rural Electrification, Joint UNDP/World Bank Energy Sector Management Assistance Programme (ESMAP), ESM227, World Bank, Washington, DC, February 2000, p. 48.

2. IEA, Trends in Photovoltaic Applications Survey, report of selected IEA countries between 1992 and 2003, Report IEA-PVPS T1-13:2004, International Energy Agency, Paris, 2004, p. 6.

3. Nordmann, T., in Subsidies versus Rate-Based Incentives for Technology: Economical and Market Development of PV, the European Experience, 3rd World Conference on Photovoltaic Energy Conversion, Osaka, 2003.

4. IEA, Summary of Models for the Implementation of Solar Home Systems in Developing Countries, Report IEA-PVPS T9-02:2003, International Energy Agency, Paris, 2003, pp. 33-38.

5. IEA, Sources of Financing for PV-Based Rural Electrification in Developing Countries, Report IEA-PVPS T9-08:2004, International Energy Agency, Paris, 2004.

6. Padmanabhan, S. and Sarkar, A., in Electricity Demand Side Management in India: a Strategic and Policy Perspective, International Conference on Distribution Reforms, New Delhi, 2001.

7. Akker, J.v.d. and Lamba, H., Thinking big: solar water pumping in the Punjab, Refocus, 3, 40-43, 2002.

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