Private Financing and Governance Issues in Renewable Energy Financing

1. Private Financing and GovernanceIssues in Renewable Energy Financing 21st April 2004 Head EMSD/DINT IDFC

2. IDFC Background • Set up in 1997 as a nodal FI to lead private capital to commercially viable infrastructure • 40% GoI, 40% international agencies • Capital base of over US$300 mn (equity+ sub-debt) and balance sheet size of US$ 650 mn • Works on project finance, policy & advisory work • Sectors • Energy • Generation, Transmission and Distribution • Integrated Transport & Logistics • Roads and Bridges • Ports and harbors • Telecommunication & IT • Water, Sanitation and Solid waste • Food & Agriculture • New social sectors : Health, Education & Tourism • Strong focus on development and sustainability

3. Financing Sustainable Energy • Sustainability • Social Sustainability (Provision to the last mile and poor) • Local Environment sustainability (avoidance of thermal power) • Global sustainability (GHG mitigation) • Covers • RET • Energy efficiency • CDM & GHG focus • Presentation to cover only • RET development in India and its success • Rural and remote rural electrification and PSP

4. A Critique of India’s RET Policies • India has an impressive record on renewables • Government has played a critical role in developing the same with incentives and subsidies • Government has failed to create a market • Device/Technology based push • Focus on asset creation rather than energy service • The impressive record is only in terms of “installed capacity” • Conflicting roles of the government • Subsidy provider • Implementer • Evaluator • Regulator • No accountability

5. New Electricity Act • Local Bodies can distribute and generate power • Provision of license free generation in rural areas • Subsidy provision in the budget to facilitate rural electrification • Utility has to buy power from the small generators • Some ambiguities but this is a huge potential boost for the sector

6. Present Opportunity • There is an opportunity for Remote Rural electrification using renewables • National targets • Electrification of all villages by 2007 • Electrification of all households by 2012 • Estimated that 80000 (1991 census) villages in India yet to be electrified • Estimated that 18000 of these are remote rural villages • Off-grid /mini grid options to be explored here • by MNES/state nodal agency • Exploration of a new business model that possibly moves the governance framework

7. Remote rural electrification (RRE) & PSP • Challenges • Limited paying capacity • Small village size/Dispersed population • Low energy loads • Mostly in hilly difficult terrain areas(16 states) • Based on the above projects will not be stand-alone viable • MNES to provide subsidy based on economic condition target customers • Present indicative amounts of 90% capital subsidy • Can PSP be used to leverage this amount • Pay for service delivery rather than asset subsidy • Private sector includes local entreprises, NGOs and local bodies

8. Issues and considerations • Look at energy service provision instead of asset/device creation • Definition of the Universal Service standard for power • Present MNES definition of 60% households/village needs to be further specified • The off-grid vs. grid extension approaches • Move from push to pull (Demand based) • Technology neutrality : Primary objective to be clear • Renewables vs off-grid last mile electricity access

9. Avenues for PSP involvement • Private sector can be involved in various degrees of involvement • Outright Equipment/device sale • Maintenance and local training • Annuity based energy service contract Risk/stake in project increases for private sector

10. Private sector requirements • Requirements • Clear policy and assurance of tenor • Reasonable returns (for risks taken) (profits have to be provided for) • Benefits • Self regulating if framework and project is properly designed • Caveats • Monitoring has to be clearly defined as part of framework to ensure Private sector delivers

11. An Annuity model for RRE Technical & Commercial Support Project Financing Cash Flows Service Provision Subsidy Energy Customers LOCAL ECONOMY Local support • Subsidy • To ensure viability • To reduce risk PPP Equipment Supplier Commercial/ local Finance MNES

12. A suggested strategy for PSP in RRE • Government to better characterize the requirements • Obtain detailed field data for target areas including potential demand and ability to pay • Finalize Universal service requirements (..for target areas) • Clarify interface with other agencies and frameworks for off-grid power • Invite private sector equipment suppliers to consultations to jointly develop possible models for their involvement • Risk-return expectations • Monitoring and accountability • Extent of involvement (coverage & financing) • Develop and freeze frameworks for PSP involvement • Initiate PSP for places where private sector is interested • Balance can be done through conventional MNES approach

13. The Conventional Financier issues • High risk aversion • Technology • Cost • Quality of project promoters • Lack of creative business models and willingness to explore • Donor commercial finance divide • Inadequate knowledge of the market • Transaction costs • Need for intermediation and lack of intermediaries • Poor frameworks for risk sharing

14. Solar lantern financing Credit enhancement SDC Grant support for soft costs Loan for assets To IRNET IRNET IRNET buys the devices And provides to NGOs and SHGs NGOs NGOs provide to SHGs t SHGs SHGs NGOs provide sell or sell on a financing basis Households Households

15. Project Risk Allocation • Capital Financing • End user (10-20%) (indicator of demand) • Equipment supplier (10-20%) lock in for service provision • IDFC (60-80%) • Operating expenses • IRNET opex borne by SDC • Rest of the opex borne from operating margins • PPP • SDC provides first loss cover on portfolio’ • The surplus made from revolving IDFC’s loan makes IRNET independent • A proxy for the national RRE program • To try out and simultaneously work with the policy

16. Key Perspectives • There is a synergy between last mile power and renewables • Private sector involvement can improve delivery • Focus on service provision and not assets • Critical to have accountability and a sound risk return framework • Government to focus on frameworks and regulation

17. Thank You