Access to Clean Energy: An Innovative Financing Modality

Energy poverty is one of the most important but least discussed issues. It is condemning billions of people to darkness and to missed opportunities for education and prosperity. One in five people lacks access to electricity and 3 billion rely on wood[1], coal or charcoal for cooking. Energy poverty is not just about the lack of energy, it cuts across – and undermines – all aspects of development. 

To turn on the lights in households around the world, successful examples of clean energy and energy efficient technology must be scaled up. This will require innovation that can spread through the developing world, where energy demand is burgeoning. With innovation come opportunities for development – and for business.

Energy poverty is a problem of technology, of infrastructure, of economics, of culture, and of politics – and it impacts over a billion people in the Asia-Pacific region alone.

Solving this problem requires solutions from the top-down and the bottom-up – everything from global finance to village-level technologies.

In the last few years, technological innovation has significantly reduced the cost of renewable energy technologies like solar panels, cooking energy solutions and other technologies, but renewable energy still needs serious financial supports to compete with conventional energy.

As of now, there are only limited options of financial mechanisms, which have been practicing widely by different actors. These mechanisms are primarily focused on grant, ODA funding, micro-credits, loans, which are merely considered as conventional funding windows. Indeed, based on the contemporary situation of providing access to energy at the bottom of the pyramid, it is realized that the conventional financial mechanisms alone may not be sufficient to fulfill the demands of energy. Perhaps, we need to think ‘out of the box’ and explore innovative financing streams or mechanism which could add impetus to the cause of providing access to energy for ALL.

An innovation on this front could be the carbon bundling mechanism. The key concept of the Carbon Bundling is that revenues from renewable energy carbon offsets can serve a risk-mitigating function for new renewable energy (RE) lending by microfinance institutions (MFIs). In this scheme, a financial institution would provide capital for a revolving fund set-up with a commercial bank or wholesale lending institution. This funding would be used to stimulate MFI lending for renewable energy technologies that are eligible for carbon trading.

Image

Income from these carbon trades triggers three things: (1) provides much needed upfront capital (2) motivates MFIs to provide loans for RE by covering their default risk and (3) brings revolving liquidity into the system. Furthermore, income from carbon trades can support extended after-sales service and funding of more RE projects.

The value to MFIs and the attraction of their participation is available capital and increased client volume from low-risk loans. The benefit to participating financial institutions would be a share of carbon income plus the added client base of participating MFIs. Finally, the possibility for carbon trading firms to access the renewable energy market would bring additional private sector weight to the initiative.

Since this is a revolving fund, once the loan is paid back to the financial institution, its initial investment can go directly to start-up the same type of carbon bundling programme in other countries.

How It Works [Figure/1].

The carbon bundling business model can work on a system of lending spreads that are backstopped by carbon revenue.

  1. The financial institution provides a soft loan of €1.5 million a year for a period of 3 years (total €4.5 million) —through a commercial bank — which funds MFIs to finance 5,000 RETs a year (each entity’s lending rate is shown below). The loans are paid back over a 3-year period. This means that €300 is available as loan per RET which in most case would require government subsidy as well (also refer to footnote 2).  
  2. Carbon revenue would begin to be available at end of Year 2, through a carbon project developer which makes their money in the trade. It is assumed that the market price of carbon is 10 Euro per ton of which 5 Euro goes back in the project and 5 Euro is for the carbon project developer (to be negotiated).
  3. Conservatively assuming every RET generates 1 tonnes carbon credits per year, this would generate €25,000 at the end of Year 2, increasing to €75,000 (post-project at end of Year 4) when all the units are operational
  4. With MFIs facing a potential default rate among RET purchasers (borrowers) of 2%, a portion of carbon revenue is set aside as MFI insurance = €30,000 per year or, potentially, as incentive
  5. A portion of the carbon revenue will go to RET purchasers as an incentive to participate or be developed as after-sales servicing (e.g.,  €3 per purchaser per year)
  6. Any remaining carbon revenue will be channelled back into the programme
  7. Regulation is provided by the Government of Nepal’s Alternative Energy Promotion Centre (which maintains a renewable energy credit facility)
  8. Rural Microfinance Development Centre, a wholesale lending institution in microfinance, or a commercial bank, which focuses on energy financing, could be responsible for fund channeling.

Role of SNV

SNV would identify and align commercial partners (MFIs, commercial bank, carbon trading firm), develop and run trainings and workshops for MFIs and directly manage activities related to Microfinance, Renewable Energy and Carbon—especially with respect to valuations, assets and technical trends.

Note: Grateful to my esteemed colleague Tom Krader, who supported to give shape to this concept.

Keshav C Das
Senior Advisor, Climate Finance, SNV Netherlands Development Organisation


[1] World Economy Forum 2011. 

Money for methane: Success Stories of Carbon finance

The 2010 and 2011 are two remarkable years for the SNV Netherlands Development Organisation as well as its national partners in Nepal and Cambodia, as because, the countries receive long pending carbon credits issuance and successfully registered its pro-poor domestic biogas based emission reduction projects. These successes have ensured a steady flow of carbon revenue to the biogas projects, which is crucial for financial sustainability of these programmes. The official communiqués on this success is depicted below.

Cambodia

The National Biodigester Programme (NBP) from Cambodia received a certificate representing its first issue of 34,112 Gold Standard VERs at the international workshop held in November 2011 in Indonesia. This was the result of the first NBP monitoring report covering the period of May 2009 till August 2010. The average annual emission reduction per biodigester was determined at 4.2 ton CO2 equivalent.

The NBP, which is a joint venture between the Cambodian Ministry of Agriculture, Forestry and Fisheries (MAFF) and SNV, initiated carbon finance activities in 2005. At that time, obtaining CERs was unattractive, as only VERs allowed a combination of fuel switch and methane capture in the emission reduction calculation, as well as no thermal ceiling on the power output of the bundled biodigesters. Since 2007, NBP has an important agreement with the Hivos Climate Fund on the sale of VERs generated by the programme.

The process of acquiring the first carbon credits was time-consuming, however the 2nd monitoring report, planned for March 2012, with a total of about 60,000 VERs, is expected to go smoother and faster. It is very important for NBP to continue carbon finance activities to cover long-term financing of the programme costs. With the present VER market condition, NBP expects to have all programme costs, including subsidy, covered out of carbon revenues when 45,000 biodigesters are in operation. This can be achieved by 2018 if the present plant construction figures are maintained. The 15,000th installed plant mark was achieved on 20th of February this year.

The success story of Nepal:

The United Nations Framework Convention on Climate Change (UNFCCC) has issued a total of 92,278 carbon credits for the Nepalese Biogas Support Programme (BSP) in the 2nd half of 2011. The credits (Certified Emission Reductions; CERs) cover 19,396 biogas plants installed between November 2003 and April 2005 and for emission reduction period of August 2004 to July 2006.

BSP-Nepal, the programme implementing agency and other partners faced several hurdles in the process of obtaining the UNFCCC certified carbon credits. With the assistance of SNV and others (e.g. KfW and World Bank), for example in developing new CDM methodologies, they overcame these obstacles and can now reap the benefits by mainstreaming carbon projects into their biogas programme.

Two more bundled biogas projects were registered in December 2011, covering 40,602 biogas plants, as CDM projects. The CER issuance of these projects is expected for 2013. The carbon credits certified by UNFCCC could provide annual carbon revenue of up to US$ 5 million by the year 2014/15. This amount meets the current level annual expenditure of the programme, including the subsidy component. The financial gap in programme implementation would therefore be bridged and make the programme financially self-reliant, ensuring a successful continuation even without donor and government funding.

The Alternative Energy Promotion Centre (AEPC) run Nepal’s bio-gas programme has enabled the Nepali rural households to use clean cooking fuel, and eventually reduce greenhouse gas (GHG) emissions by displacing the conventional use of fuel wood for cooking. Over 230,000 bio-gas plants installed through the BSP-N programme across the country have replaced firewood, providing cleaner energy, improved health among women, reduced deforestation and contributed to job creation. An Emission Reduction Purchase Agreement (ERPA) was signed by AEPC and the World Bank for trading of the Emission Reductions (ERs) from the two CDM Projects for 7 years. An amount of around USD 1.98 million, generated from the carbon credit for up to July 2009, has already been paid by the World Bank. Currently, a Programme of Activities – PoA for registration of biogas plants to be constructed with BSP support in the next 28 years.

Keshav C Das
Advisor, Climate Finance, SNV Netherlands Development Organisation