Financing Innovatively: What can we do in Renewable Energy Sector?

There is widespread recognition that renewable finance needs to be scaled up from its current levels. However, there is no clear view on how developing countries like Nepal can efficiently and effectively mobilise further finance to meet the needs of its increasing energy economics from new and innovative sources of financing. Jan.

While the demand for renewable energy technologies keeps growing, the cost of such devices remains an important barrier for a majority of households and small businesses, slowing down their potential dissemination in developing countries.

The International Energy Agency (IEA) has reported in its recent Global Energy Demand Report that the world requires $48 trillion investment till 2035 in order to meet the growing need for energy. To meet this increasing energy demand, countries need to diversify sources of energy production and means of energy distribution and countries must invest $40 trillion in energy supplies over the next 21 years, according to the same report of IEA. Economic growth and rising living standards have been fuelling the global energy demand, forcing governments to find ways and money to increase supplies. The world has invested $1.6 trillion in 2013 for energy supply, more than double the amount in 2000. Until 2035, the annual investment figure is expected to reach $2 trillion, report says.

In the recently published Global Status Report on Renewable 2014 it is stated that that total investment in renewable power and fuels (excluding large hydro-electric projects) fell for the second year running in 2013, reaching $214 billion worldwide, some 14% lower than in 2012 and 23% below the 2011 record. That means, there is a significant gap between financing need and the existing financing, which is more than $50 billion investment gap (23% of the $214 billion).

In this context, the key question is- where from such a big investment can be generated to meet the growing needs of financing, while the global economy is affected with financial crisis? Indeed, this difficult situation has stimulated increased interest in innovative financing to help deliver more and better aid.

Seeking to overcome this barrier, we need further works and demonstrations on innovative finance for designing a range of innovative financing mechanisms for the renewable energy sector with a particular focus on the domestic cooking and lighting markets.  Key activities under this work could be conducting field based assessments to understand renewable energy users’ perceptions and preparedness for new financing methods, and evaluating the applicability and readiness of various result based finance instruments in the domestic cooking and lighting markets.  On this front, I will welcome inputs and partnership for this important works!

Keshav C Das

New Delhi, January 03, 2015

India’s Renewable Energy: Vision and Reality

indexIndia’s substantial and sustained economic growth over the years is placing enormous demand on its energy resources. Inspite of the substantial increase in installed electricity capacity in India, demand has outstripped supply. Thus, there is an emerging energy supply demand imbalance. This is a major reason for which promoting clean (renewable) energy in India has assumed great importance in recent years in view of high growth rate of energy consumption, high share of coal in domestic energy demand, heavy dependence on imports for meeting demands for petroleum fuels and volatility of world oil market. A number of renewable energy technologies (RETs) are now well established in the country. The technology that has achieved the most dramatic growth rate and success is wind energy; India ranks fourth in the world in terms of total installed capacity. India hosts the world’s largest small gasifier programme and second largest biogas programme. After many years of slow growth, demand for solar water heaters appears to be gaining momentum. Small hydro has been growing in India at a slow but steady pace. Installation of some of the technologies appears to have slowed down in recent years; these include improved cooking stoves (ICSs). However, in the solar photovoltaic (PV) and solar based power generation sector, India has been making remarkable progress in the last two years due to the creation of conducive environment for investment as well as relatively pro-development government policies and regulations.

In spite of these successes, the overall growth of renewable energy in India has remained rather slow. Significant barriers to renewable energy development remain in India. Given the high upfront capital costs of renewable energy technologies, financial barriers are substantial. But nonfinancial barriers are equally important in limiting the growth of renewable energy. Barriers can be grouped into three categories: financial viability, support infrastructure, and regulatory approval. A number of factors are likely to boost the future prospects of renewable energy in the country; these include global pressure and voluntary targets for greenhouse gas emission reduction, a possible future oil crisis, intensification of rural electrification program, import of hydropower from neighboring countries, focusing on energy efficiency as a distinctive market segment and lastly introducing a more robust and sustainable financing in the cleantech sector, which can be made available to promoters and developers of RETs against a performance based market mechanism. And, this is the bottom-line for renewable energy development in India.

Therefore, it is felt that the country needs a new set of strategies and approaches for cleantech development and promotion in India. Currently, there are good numbers of visions in place, including the vision of 100% Renewable Energy Scenario (REN) for India by the middle of the century against a reference scenario in which the economy is likely to be dependent primarily on fossil fuels – coal, oil and gas. But this type of vision also needs short term pragmatic workplan, which could help the country to meet the current needs and demand. Energy is central to achieving the interrelated economic, social, and environmental aims of sustainable human development. if India is to realize this important goal, the kinds of energy India produces and the ways it uses them will have to change. Otherwise, environmental damage will accelerate, inequity will increase, and economic growth will be jeopardized.

It will be timely to the current government to address these issues.

 

Keshav C Das

Senior Advisor, Renewable Energy

Netherlands Development Organisation

ENERGY SMART FOOD – LINKING FOOD AND CLEAN ENERGY

If energy prices continue to rise, the global food sector will face increased risks and lower profits. The efforts from low-GDP countries to emulate high-GDP countries in achieving increases in productivity and efficiencies in both small and large-scale food systems may be constrained by high energy costs. Lowering the energy inputs in essential areas, such as farm mechanization, transport, heat, electricity and fertilizer production, can help the food sector mitigate the risks from its reliance on fossil fuels. Hence, a major focus of food processing industries should be to reduce energy demand and/or promoting efficient energy management as well as introducing renewable energy technologies (RETs) to reduce the food sector’s dependence on fossil fuels. Indeed, introduction of RETs should happen from field to factory (processing) and up to the retail-outlet.  Energy.Smart

The encouraging development is that there is increasing consensus on the necessity on energy smart food and very recently in a study on energy-smart food, the Food and Agriculture Organization of the UN (FAO) stresses that agriculture’s dependence on fossil fuels is undermining efforts to build a more sustainable world economy. The paper, which is titled “Energy-Smart Food at FAO: An Overview[1],” notes that world food production consumes 30% of all available energy, most of which occurs after the food leaves the farm. The paper calls for: increasing the efficiency of direct and indirect energy use in agri-food systems; using more renewable energy as a substitute for fossil fuels; and improving access to energy services for poor households. It outlines numerous approaches to adapt practices to become less energy intensive.

However, to promote the campaign on energy smart food, we need affordable technologies at farm-level and food processing level. Unfortunately, most of the ‘energy efficient’ technologies in the agriculture sector of developing countries are expensive and not within the reach of poor farmers. Similarly, financing is also pivotal. Most farmers do not have upfront investment for introducing energy efficient devices in to their farm operations. Can we think of introducing a concessional loan systems into the farm system to meet this requirement as well as provide a really doable and practical contract farming model to the farmers, where, farmers will receive advance market commitments from global retailers and big MNCs in food market chain, and therefore, farmers will be in a comfortable situation to produce more and trade more? Indeed, agriculture insurance is also a key and obligatory intervention in the current context; particularly to reduce the risk of damage and loss due to climate change related adverse effects.

We also need enabling policies: strong and long-term supporting policies and innovative multi-stakeholder institutional arrangements are required if the food sector is to become energy-smart for both households and large corporations. Financial policies to support the deployment of energy efficiency and renewable energy will also be necessary to facilitate the development of energy-smart food systems. Examples exist of cost-effective policy instruments and inclusive business schemes that have successfully supported the development of the food sector. These exemplary policy instruments will need to be significantly scaled up if a cross-sectoral landscape approach is to be achieved at the international level.

Indeed, development organisations like SNV Netherlands Development Organisation has a major role to play in this domain so that the agriculture sector of developing countries are ready for the deployment of appropriate technologies; introduction, sharing and adaptation of energy-smart technologies; and carrying out capacity building, support services, and education and training on energy smart food production supply chain. Nevertheless, addressing the energy-water-food-climate nexus is a crucial and complex challenge. It demands significant and sustained efforts at all levels of governance: local, national and international.

 

Keshav C Das

Senior Advisor, Renewable Energy and Climate Finance

SNV Netherlands Development Organisation

 

[1] http://www.fao.org/docrep/014/i2454e/i2454e00.pdf

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.

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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. 

Is high quality technological solution a myth?

How do you define high quality? Is it merely the quality of being superior? Or, is it a superior offering, which is easily accessible and acceptable to consumers?

In the context of dissemination of renewable energy technologies and enabling the poor consumers (at the bottom of pyramid) to have access to ‘high quality’ renewable energy technologies, the task of defining ‘high quality’ for consumers’ acceptability is further difficult.

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Figure: High Quality Framework

 It is particularly true as most of the hi-fi renewable energy technologies are expensive (beyond the purchasing power of rural poor), it demands high level of maintenance, knowledge to operate such devices and importantly it is not readily available in the local market, because of which, it needs to be imported from outside. Eventually, this import process creates negative market forces, which does not allow local enterprises for developing a regional and national market in the renewable energy with local innovation and market –led solution to the poverty alleviation.

A picture of this kind is noticed in case of the micro-scale renewable energy technologies, including the improved cookstove technology. Although, we have the Lima Consensus, followed by the ISO standardization initiative for the cookstove sector, however, it is found that the parameters used for this high quality standardization is purely based on indoor air-pollution, safety, GHG reduction, thermal efficiency etc. This initiative does not include parameters such as a pricing index based on broad principle of affordability of stoves as per the income level of people or country’s economic situation like poverty level, GDP, Purchasing power parity etc.

A technological solution is outmoded and not relevant for poor countries if it cannot be accessible to people at an affordable price without compromising with the superior technological dimensions. The question is-how to make it happen then, at a low price with best technical solutions?

It is assumed that private sector involvement in the micro-scale renewable energy sector could be the game changer, which could ensure high quality RET solution at affordable price. Global private sector players with an interest in micro-scale RETs should partner with the local and regional small and medium enterprise for take up this challenge. A mass production at the regional level is also the key to reduce the cost as well as maintain uniformity in the standard of RETs.

One major bottleneck for this initiative could be the limited capacities of local and regional level SMEs to carry out this profit making (profit for purpose) intervention with a market-led approach. International development organizations should come forward to bridge up this gap by providing capacity building services in the business management and institutional development to the SMEs. Indeed, to have a spark effect on private sector involvement and promoting high quality RETs, local government should also have conducive policies for private sector involvement.  In absence of such policies, high quality RETs would be transformed into a myth and an unfulfilled dream.

Keshav C Das