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ROLE OF MICRO-FINANCING IN PROMOTING RENEWABLE ENERGY

By Patricia Andrews,2014-03-30 21:32
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Renewable energy technologies (RETs) represent a promising and economical method for providing sustainable rural energy. In order to achieve this,

     Best Practices for Agriculture Pump Sets and Rural Demand Side Management (DSM) Distribution Reform, Upgrades and Management (DRUM) Training Program

ROLE OF MICRO-FINANCING IN PROMOTING RENEWABLE ENERGY

    TECHNOLOGIES (RETS) IN RURAL AREAS FOR SUSTAINABLE

    DEVELOPMENT AND POVERTY ALLEVIATION

    Vinod K. Shrivastava, CORE International, Inc.

    Abstract Poverty alleviation programs for the rural poor are strongly dependent on sustainable energy access. Renewable energy technologies (RETs) represent a promising and economical method for providing sustainable rural energy. In order to achieve this, market rules and elements need to be introduced as well as adequate financial mechanisms and structures should be used. Recent experience shows that a well designed, and planned micro-financing scheme could be the most appropriate tool for developing a sustainable market for RETs in rural areas. This promises to provide sustainable rural development and progressive poverty alleviation. Roles of donors, government, and private sector participation within the context of a free market environment are also addressed in this paper.

    Key Words: micro-financing renewable energy technologies (RETs), sustainable development of rural areas, rural energy markets, poverty alleviation of rural poor, and private participation

1. INTRODUCTION

    The improvement in quality of life of rural poor is one of the most cherished goals of all developing nations. Most poverty alleviation programs for rural poor are strongly dependent on sustainable energy access in remote rural areas. Utility investment in rural electrification has proven unable, over the past three decades, to reach an estimated target group of 2 billion people. This is the case at present and will most likely be the same in the future, because the power industry is undergoing deep market oriented reform throughout the World. This reform is about financial sustainability in a free market environment, which prohibits the power industry from investing in poor and underdeveloped areas. Eventually rural energy service delivery will be following this direction more intensively. Actually, there are many signs and examples of the market approach being implemented in rural areas and activities in many developing countries, also. RET-based rural energy service activities are becoming part of this market-driven approach. A self-sustaining RETs market for household and small business development PV systems is proving to be an important option for basic remote rural electrification within the context of sustainable rural development and poverty alleviation. In a fair and open market for RET systems, demand and supply (end-user and vendor) interact directly to define products and prices. Several countries have seen the development of fully commercial markets for household and small business RETs systems in rural areas. Most often, these markets are for PV systems, traded by commercial traders on a “cash-over-the-counter” basis. Distribution channels generally

    depend on the traditional trading infrastructure in the market, and mostly build on existing distribution channels, micro-enterprises and the informal sector.

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    RETs are characterized by high initial costs and benefits that accrue over time. Financing converts the future stream of revenues or savings into the required initial investment. Generally technologies with the lowest initial costs have higher operating costs. Whether the higher cost of photovoltaics (PV), for e.g., is justified by fuel cost savings depends largely on the terms of the financing arrangement. Strategies to extend the term of financing and reduce the interest rate will speed the implementation of these cleaner, more efficient technologies. RETs represent a promising method of providing sustainable rural energy access. The financing of a large number of thinly dispersed small capacity RETs, such as micro-hydro, solar photovoltaic, wind, biomass etc. for the rural application in far-flung areas is a challenging job. The wide-scale financing of RETs for rural areas had not been forthcoming. However, recent experience shows that micro-financing can be an appropriate tool for financing RETs for such rural applications, provided it is done in a fair market environment. The availability of post-sale maintenance services for RETs is essential. The importance of training the rural consumers of operation and minor maintenance aspects of RETs have been recognized and implemented in the examples provided herein.

    Views and facts presented in this paper aim at providing insight on the characteristics and role of microfinance in supporting RETs introduction to rural areas, and their use for sustainable development and poverty alleviation purposes. Ways in which self-sustaining microfinance supported rural markets for RETs can be created in developing countries is another objective of this paper. Furthermore, it presents various types of micro-financing, and provides details on how the World Bank is now using micro-financing of RETs for rural applications.

2. RET FOR RURAL APPLICATIONS

    Improving the quality of life and poverty alleviation of rural poor requires the availability of sustainable rural energy service at reasonable cost. The majority of rural population cannot afford the use of energy to improve their quality of life. There exists a strong nexus between energy and sustainable rural development, as energy is a basic input in almost all economic development and social activities. Therefore, there is a need for developing, planning, and implementing an integrated rural development strategy to cater to the needs of rural population. The program must simultaneously address the energy requirements for income generating activities and other needs such as energy for water supply, health facility, and domestic purposes.

    Renewable energy technologies (RETs) as individual power generating systems utilizing renewable energy sources have better prospects for reaching remote poor rural areas as compared to grid-based electricity supply. This is because of thinly dispersed requirements of small quantity of energy. The rural energy supply based on RETs requires taking care of the following: (i) educating the rural population on RETs based energy systems, (ii) creation of centers (manned by engineers/technicians to provide installation and maintenance services as well as training for the rural customers) in remote difficult-to-access areas, (iii) adding to this centers all banking and finance functions related to making loans, and collecting installments and bills.

2.1 Information, Awareness, and Technology Selection

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    Dissemination of information on the available RET technologies is critical. Rural customers should be able to choose from a number of energy options, and they may find a hybrid solution most appropriate. Solar water heating, PV panels for electricity, biomass, mini- and micro hydro power generators, and wind turbines are some of the typical options. Without reliable accessible information in their own language, these consumers will not be able to make informed choices about the technologies that they want to use. Furthermore, available micro-financing mechanisms need to be explained, along with the advantages and disadvantages they inherit. If service providers are to be profitable, they will have to stimulate the market by encouraging consumers to think about innovative ways of getting the services they want.

    The developing world has two advantages on its side when it comes to RETs. Most countries have abundant energy resources, particularly renewable energy resources. And in many countries, the lack of developed infrastructure outside of the main cities means that they can start with a “clean slate”, and have an opportunity to avoid the less efficient energy systems that most industrialized countries are committed to. It is true that although some energy technologies can be based on local knowledge, many energy technologies, which can contribute to rural sustainable development, are advanced and sophisticated, or at least contains some high-tech components, which are not available universally. Technology choice will be successful when it takes into account the: (i) general energy policy of the country, (ii) priorities and forms of economic development, (iii) social, natural, environmental, and cultural characteristics of the country or region for which it is meant, and (iv) geographic and climatic conditions of the site. These factors are now being included in the selection criteria of many grant-giving and lending cooperation agencies.

3. MICRO-FINANCING OF RETs

    The UN General Assembly, in its resolution 52/194 of 18 December 1997, noted that, in many countries micro-credit programs have proved to be an effective tool in freeing people from poverty and have helped to increase their participation in the economic and political processes of society. Apart from formal microcredit schemes, informal and small-scale lending arrangements have long existed in many parts of the world, especially in the rural areas, and they still survive. Good examples are schemes in Ghana, Kenya, Malawi and Nigeria ("merry-go-rounds", etc.). They provide the rural population with access to savings within the local area and with a certain cushion against economic fluctuations, and they encourage a cooperative and community feeling. The groups formed provide joint collateral and serve as instruments for spreading valuable information that is useful for economic and social progress.

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    3.1 Sustainable Microfinance Features and Principles

    Microfinance is considered to be an adequate instrument for financing small-scale RET applications in rural areas because of the following features: (i) provides credit for investment in small-scale activities (for energy access systems and self-employment) chosen by the poor themselves, (ii) empower the poor through a personal transformation from a feeling of "I cannot" to one of "I can. I can do something about my poverty.”, (iii) can pay for itself with the interest earned, (iv) allows for massive expansion reaching tens if not hundreds of millions of underserved people, and (v) has the broadest utility and the least cost per beneficiary.

    The principles of sustainable micro-financing are as follows: (i) offers flexible customer friendly services preferred by low-income group, (ii) has opportunities for streamlining operations and reducing costs (standardized simple lending process, decentralized loan approval, inexpensive offices, and use staff from local communities), (iii) operate in market basis charging market interest rates and fees, and (iv) strive to recover the costs of the loan.

    3.2 Microcredit for Enterprise Development vs. Microfinance as an Industry

    Many view rural microcredit as an input, along with business development services, into rural micro-enterprise development. Traditional microfinance products and methodologies generally reflect this model, with products aimed primarily at micro entrepreneurs, especially market vendors, with short loan terms, regular repayment schedules, and ever-increasing loan amounts. Increasingly, a new consensus is emerging among microfinance practitioners, donors and experts. This new view considers microfinance as an industry worth promoting in and of itself.

    Microfinance institutions (MFIs) can be small and medium enterprises at the heart of rural sustainable development. Their development positively correlates with rural business development. A new approach considers a wide range of flexible financial services for a variety of poor clients, not just rural micro-entrepreneurs. This means that microcredit becomes transformed from input into rural enterprise development into a financial service that available to poor people. What this mean to MFIs and donors is the following:

     1. MFIs: Under the current micro-enterprise development model, an MFI offers a very limited number and range of supply-driven credit products, which tend to focus fairly narrowly on micro enterprises needs and activities. Loaning for RET systems is not a usual practice for MFIs. Under the new approach MFIs need to evolve to provide more demand-driven flexible and efficient financial services for the rural poor. These flexible demand-driven services would recognize the varying requirements of poor. Microfinancing of RETs represents one example of a demand-driven service to the poor.

     2. Donors: Currently, donors design projects to reach the rural micro-enterprise sector or other specific target groups. Many of these projects combine credit with business development services, reflecting the traditional micro-enterprise development model. Donors often insist that the MFIs charge "market" or

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    "sustainable" interest rates in order to become sustainable, which is appropriate. Under the new approach, donors need to push for the transformation of these MFIs into demand-driven financial service providers with a wider variety of financial products.

3.3 Models of RET Microfinance Institution

    It is worth to mention few of microfinance institutions that may successfully expand their business to providing small loans to RET-based rural electrification projects that have a focus on rural sustainable development and poverty alleviation.

     Grameen model: The Grameen model emerged from the poor-focused grassroots

    institution, Grameen Bank, started by Prof. Mohammed Yunus in Bangladesh. It essentially adopts the following methodology: A bank unit is set up with a Field Manager and a number of bank workers, covering an area of about 15 to 22 villages. The manager and workers start by visiting villages to familiarize themselves with the local milieu in which they will be operating and identify prospective clientele, as well as explain the purpose, functions, and mode of operation of the bank to the local population. Groups of five prospective borrowers are formed; in the first stage, only two of them are eligible for, and receive, a loan. The group is observed for a month to see if the members are conforming to rules of the bank. Only if the first two borrowers repay the principal plus interest over a period of fifty weeks do other members of the group become eligible themselves for a loan. Because of these restrictions, there is substantial group pressure to keep individual records clear. In this sense, collective responsibility of the group serves as collateral on the loan. The Grameen model extensively uses peer pressure to ensure repayment among its borrower groups.

     Non-Governmental Organizations: NGOs have emerged as a key player in the

    field of micro-credit. They have played the role of intermediary in various dimensions. NGOs have been active in starting and participating in micro-credit programs. This includes creating awareness of the importance of micro-credit within the community, as well as various national and international donor agencies. They have developed resources and tools for communities and micro-credit organizations to monitor progress and identify good practices. They have also created opportunities to learn about the principles and practice of micro-credit. This includes publications, workshops and seminars, and training programs.

     ROSCAs: Rotating Savings and Credit Associations (ROSCAs) are essentially a group of individuals who come together and make regular cyclical contributions to a common fund, which is then given as a lump sum to one member in each cycle. For example, a group of 12 persons may contribute Rs. 100 per month for 12 months. The Rs. 1,200 collected each month is given to one member. Thus, a member will 'lend' money to other members through his regular monthly contributions. After having received the lump sum amount when it is his turn (i.e. 'borrow' from the group), he then pays back the amount in regular/further monthly contributions. Deciding who receives the lump sum is done by consensus, by lottery, by bidding or other agreed methods.

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     Vendor Financing: In numerous cases manufacturers offer financing as marketing, enabling people and businesses to buy their equipment and machinery. A third party such as a bank often is the actual source of financing. Vendor financing is common among energy technologies, and offering easy, low-cost financing is a very effective way for suppliers to stimulate markets. Vendor financing may be most suitable for small projects, but large companies also finance large projects. Vendors advertise low interest rates if the vendor profits from the sale. The disadvantage of this type of financing is in that it reduces the opportunity of selecting among competing technologies they are technology conditioned type of financing.

     Bank Guarantees: A bank guarantee is used to obtain a loan from a commercial bank. The government may arrange for the establishment of special guarantee funds to cover primarily the risk associated to crediting rural consumer by commercial lenders. Governments may raise easily donor funds to capitalize these types of guarantee funds. As a form of capital guarantee scheme, guaranteed funds may be used for various purposes, including loan recovery and insurance claims. Several international and UN organizations have been creating international guarantee funds that banks and NGOs can subscribe to, to on-lend or start micro-credit programs.

     The role of micro-financing in rural energy access is well recognized by international donors and lenders. For example, the World Bank/GEF funded energy services delivery (ESD) program during March 1997 December 2002 in Sri Lanka was

    administered through DFCC bank and fund was disbursed by several banks to various individual and societies for solar home systems and mini-hydro projects with local grids. The program was very successful and a new program “Renewable Energy for Rural Economic Development Project (REREDP)”, which aims at improving the quality of

    rural life, by utilizing off-grid renewable energy technologies, to provide electricity in remote areas, and, in addition, promote private sector power generation from renewable energy resources for the main grid. The project worth US$ 133.7 million would be for the period September 2002 June 2008.

4. CREATING MARKET ENVIRONMENT FOR SELF-SUSTAINED RET

    MICROFINANCING

    Removing the barriers that impede the diffusion of RETs is one of the main roles of governments, both at the central and local level. It is the responsibility of the government to: (i) remove certain market distorting subsidies on other energy resources such as kerosene, paraffin, etc.; (ii) help set up microfinance schemes to finance RETs projects; (iii) adapt norms and regulations which take account of emerging sustainable RETs; (iv) adopt a more balanced and productive fiscal system in the energy field; (v) stimulate competition in rural markets; and (vi) contribute to capacity building. The barriers to sustainable RETs development and financing have been identified and continue to exist.

4.1 Role of the Market

    Introduction of elements of deregulation and competition are required to enhance the environment for RET microfinancing. Financing institutions feel that the development of sustainable energy would greatly benefit from market and competitive forces. The World Bank states that “one of the most powerful ways to improve energy supply is to

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    ensure that the energy market is determined by consumers’ choices... that means both

    that the price of energy should reflect its cost and that regulation of energy industries should encourage competition and choice.” (The World Bank, 1996). To reach the rural consumers on a market-based way, a new distribution & financing, installation and after-sales structure have to be developed. Market development depends on the success in building this new infrastructure.

    Most developing countries are seeking to find ways to move away from highly subsidized rural electrification programs to more economically sustainable alternatives. In general, this shift results in a more consumer-oriented, market-based approach to rural energy services for which RET systems are ideally suited in many cases and countries, South East Asia ones included. To promote sustainable household and small business RET electrification, governments should promote the following:

; Rationalized import duties and taxes. Import taxes and duties on RETs

    components and systems should be avoided since they increase their costs in

    many cases dramatically, limiting the potential market.

    ; Equal fiscal treatment of RET rural electrification options. Although market

    based pricing is the appropriate mechanism, the poorest households may still

    require subsidies in order to buy and maintain a RET based system. To reach the

    poor, RET systems should receive similar financial support as that provided under

    conventional grid extension or isolated grids in rural areas.

    ; Public investment in RET penetration. Public financial assistance should be

    provided to RETs penetration in rural remote areas, just as public sector equity

    financing and long-term loans have flowed to grid-based rural electrification

    projects, when economically justified. Even if a government is not involved in

    procuring RET-based systems directly, it can play a key advocacy and

    demonstration role by using RET-based energy systems in education, health, and

    other social areas.

    ; Access to affordable financing. Financing mechanisms such as microcredit

    lines, loan guarantees schemes, and hire-purchase and leasing schemes expand

    the RET- based small energy systems market. Governments should support

    innovative micro-financing mechanisms that allow lenders to offer long-term credit

    on reasonable terms.

    ; Local participation in rural electrification markets. Government policies and

    programs should help enable local representative groups to participate in RETs

    dissemination by offering them training in business practices, installation and

    servicing, among other things as well as improved access to microcredit.

4.2 Donor support for market interventions

    Despite the proven potential for serving the rural end-user, the open market model has not received adequate support from the international donors and development aid organizations. There are cases when projects, in their drive for strict technical standards, exclude the small RET systems from “market development projects”. In Kenya, Morocco, and China projects have even been financed with the explicit objective to transform the existing free market from its current state to a “better practice” high quality market. In these interventions, the better practice markets are defined by the project developers and managers, including implicit or explicit technical

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    standards. Therefore, one can characterize these interventions as replacing the free market by a project market. Two main reasons appear to play a role behind this bias of the major international donors towards project markets: (i) lack of awareness - international project developers and donors may be largely unfamiliar with the functioning of self-sustaining free markets in developing countries; and (ii) lack of capacity - international donors and project actors may not have adequate instruments for supporting dispersed free markets in which small enterprises operate. Their existing instruments may only fit a focus on large-scale operations such as nation-wide credit schemes and “fee-for-service” programs, inherently oriented towards project markets.

4.3 Encouraging Private Sector Participation

    The greatest way to increase private participation in RETs marketing is to reduce private sector risks while providing a fair framework for market operations. Governments can do both through the provision of incentive based programs and government guarantee schemes for RETs financing through private micro-finance institutions. Some essential ways, which governments can encourage the private sector to participate in RET-based rural electrification, include the following: ; Avoid the use of mechanisms and instruments that distort emerging rural

    energy markets. Government policies must consider the importance the market

    plays in RET-based rural electrification. Building appropriate markets promises

    sustainability of the service. This does not imply that all subsidies should be

    banned. This implies that subsidizing operation and maintenance cost should be

    avoided.

    ; Let the consumers and energy service providers decide on market basis

    which technology they are going to use in case by case mode. The

    government should provide a level playing field, undistorted competition for all

    technologies available.

    ; Create the right environment for the creation of appropriate RET micro-

    financing institutions. It is important to provide the mobilization of local rural

    saving and leverage them with public resources in supporting RET-based RE

    projects. Guarantee schemes are an important instrument for attracting private

    investors.

    ; Provide for level playing field in bidding for concessions, subsidies,

    projects, etc. Public awareness and transparency are critical to the process.

     The private sector can be attracted to participate in RET electrification schemes, even in a poor country, if an appropriate legal framework and risk management options are in place, including the assurance of a level playing field in terms of competition and the ability to charge full cost-recovery tariffs.

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    5. CONCLUSIONS AND RECOMENDATIONS

    The importance of micro-financing in rural development and promotion of RETs is now recognized by stakeholders. However, the success of micro-financing is dependent on the presence of several factors. These factors include infrastructure, availability of information, education of rural population, availability of maintenance services, and creation of opportunities for incoming generating activities. In other words, integrated rural development and RET-based rural energy programs leading to incoming generating opportunities for rural population can really be put on fast track by the use of micro-financing. Only such an approach can bring about poverty alleviation and improve the quality of life of the rural poor.

    The main challenge for donors and governments is to develop instruments to support the development of self-sustaining RETs market models for rural areas, tailored to the situation of a particular country. Currently, donors and governments focus mainly on the project model. There is still not enough active support for the market demand driven model, even though this may hold a large potential for market development. It is advisable that elements of the free market, in which the RET suppliers operate, be supported in the following ways: (i) assist the development of an effective and efficient RET trading infrastructure through supporting development of retailers and outlets, (ii) remove market barriers such as standards that may prevent tradable products from entering markets, (iii) facilitate development of the inherent knowledge base in markets regarding realistic RET options, on the level of the vendor and the end-user, (iv) facilitate the learning process of markets to distinguish between good and bad quality products, by arranging for consumer information feedback and independent product information services, and (v) prevent all distortion of free market development by projects. Finally, what we experience more and more is that best practices for RETs market development can only be defined by local markets, in which end-users and vendors are the main actors, rather than foreign consultants, project developers or international donors.

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    SAPP Member Countries and Rural Electrification in Lesotho”

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