A Presentation on Renewable Energy Financing by malj

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Lecture 8: Financing Mechanisms for Renewable Energy
Prof. Ram M. Shrestha
School of Environment, Resources and Development Asian Institute of Technology Thailand E-mail: ram@ait.ac.th
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22 June 2007 ASIAN INSTITUTE OF TECHNOLOGY

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Contents
 Introduction  Conventional Methods of Financing  Typical Project Financing Models  Innovative financing Models for Renewable Energy  Clean Development Mechanism (CDM)  Dealer-Credit Model
- Grameen Shakti example

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 Consumer Credit Model  Supplier Credit Model  Energy Service Company Model  Revolving Fund  Global Environmental Facility (GEF)
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Introduction
 Given the huge potential opportunities in renewables, entrepreneurs and financial institutions are not rushing to cash on the opportunity.  One answer is that RETs have to overcome a series of barriers before they can penetrate the market.  Barriers may be of several kinds: Initial cost, financial, technical, market, institutional, political, legal etc.  High initial cost of renewable energy technologies (RETs) and lack of financing have been among the key barriers to the widespread use of RETs.  Appropriate financing mechanism has a major role to play in the promotion of RETs.

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Conventional Methods of Financing (1)
 Methods of Financing
• The two broad choices a firm has for financing an investment project are: 1. Equity financing, and 2. Debt financing It can take one of two forms: - the use of retained earnings otherwise paid to stockholders, - the issuance of stock. Both forms of equity financing use funds invested by the current or new owners of the company.
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 Equity Financing:
•

•

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Conventional Methods of Financing (2)
 Debt Financing:
• It includes both short-term borrowing from financial institutions and the sale of long-term bonds, wherein money is borrowed from investors for a fixed period.
• With debt financing, the interest paid on the loans or bonds is treated as an expense for income-tax purposes.

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Typical Project Financing Models(1)
 The most common structures used to finance projects are:

• Project Financing (also known as limited recourse financing), • Corporate Financing, and • Lease Financing. e-learning course

 Project Financing
• The term „project finance‟ refers to financing structures wherein the lender has recourse only or primarily to the assets of the project and looks primarily to the cash flows of the project as the source of funds for repayment. • The terms „limited recourse finance‟ and „non-recourse finance‟ are used interchangeably with „project finance‟.
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Typical Project Financing Models(2)
 Corporate Financing
• It involves the use of internal company capital to finance a project directly, or the use of internal company assets as collateral to obtain a loan from a bank or other lender. e-learning course

 Lease Financing
• Leasing essentially involves the supplier of an asset financing the use and possibly also the eventual purchase of the asset, on behalf of the project sponsor. • Assets which are typically leased include land, buildings, and specialized equipment. • A lease may be combined with a contract for operation and maintenance of the asset.
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Innovative Financing Models
• • • • • • • Clean Development Mechanism (CDM) Dealer-Credit Model - Grameen Shakti example Consumer Credit Model Supplier Credit Model Energy Service Company Model Revolving Fund Global Environment Facility (GEF)

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Clean Development Mechanism (CDM)
 Clean Development Mechanism (CDM) is one of the Kyoto mechanisms to achieve the objective of reducing GHG emissions.  CDM allows emission reduction projects that assist in creating sustainable development in developing countries to generate “certified emission reductions (CER)” for use by the investor.

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CDM : What does it do?
 It enables Annex-1 countries (developed countries) to meet their emission reduction commitments in a flexible and cost-effective manner.
 Assists developing countries (non-Annex I or also called the “host countries”) in meeting their sustainable development objectives.

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 Investors benefit from the CDM by obtaining Certificates of Emissions Reductions.

 Host Countries benefit in the form of investment, access to better technology, and local sustainable development.  It is possible to have investments in a CDM project solely by host country parties. Such a project is called a “unilateral CDM project”.
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What does CDM aim to achieve?

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CDM Project Requirements
 Estimate of Baseline greenhouse gas emissions.  Emissions additionality & financial additionality.
• Does the proposed project result in additional GHG emission reductions? In other words, does its implementation result in less GHG emissions than that without it? • Is the project already one of the least expensive (financially attractive) options and therefore is planned to be implemented? • Is the project unlikely to be implemented although it is financially attractive (because of barriers like lack of access to financing resources or due to other barriers?

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 Host country government approval (The host country must have ratified the Kyoto Protocol.)  Meeting the sustainable development criteria
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Special Characteristics of a CDM project in relation to Financial Analysis
 Two distinct sources of CDM project revenue:
• from sale of normal product (e.g., electricity, Price and qty. of electricity?) • from sale of CERs (Price and qty. of CER?)

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 Distinct costs of CDM projects (besides the standard project costs):
(i) Transaction costs (including costs of PDD preparation,
monitoring, verification, validation, trading of CERs). (ii) Costs related to project approval and registration . Some times both (i) and (ii) could be lumped and called as transaction costs.
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Dealer-Credit Model (or Dealer Sales Model)
 Here the dealer is provided support through access to business
financing and sells the RE system to the end user, which can be some times on credit. The model can be shown as
Commercial Financers Business Financing

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Dealers

Credit

End User

Figure 1: Dealercredit model

 In the case of Bangladesh, International Finance Corporation, the private sector arm of the World Bank, provided loan to the dealer, Grameen Shakti, under their Small and Medium Scale Enterprise Program. The Grameen Shakti, in turn, extended credit to customers to purchase RE system.  Dealer credit was tried but rejected by the dealers in Sri Lanka in favour of consumer credit through Sarvodaya, a micro finance 14 organization, which in turn borrows from commercial financers.
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The Consumer Credit Model
 In this mechanism, local finance institutions provide loans to users to buy the RE system. The RE enterprise in this case transacts on commercial basis with the users.
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Commercial Financers

Business financing

Local Finance Institution

End users
Micro-Credit RE system

RE Enterprise

Figure 2: Consumer Credit Model

Example: Micro-Credit through Sarvodaya in Sri Lanka
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The Supplier Credit Model
 In which a RE enterprise provides a short term (3-12 month) credit to the end user to purchase the RE equipment/system.
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Short Term Credit

RE Enterprise
RE System

End User

Figure 3: The Supplier Credit Model
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Energy Service Company Model (Fee-for-Service Model)
 The Energy Service Company Model (or Fee-for-Service model), in which the customers
pay for the energy service that is provided to them by an energy service company (ESCO).
 It makes the energy affordable and minimizes the long-term risks for the customers as the ownership and maintenance of the equipment lies with the energy service company.  The World bank used this model in Argentina, Benin, Togo, Dominican Republic and Cape Verde.
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Government or Multilateral Sources

Commercial Financers Provides Energy

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Energy Service Company

Customers

Pay Fee to the energy service company

Figure 4: Fee-for-Service Model
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Energy Service Company Model (Contd.)
 The energy service company model was also tried out in Sri
Lanka but given up after initial problems in favor of the consumer credit model. In the World Bank energy service company delivery models, financing for energy service companies was provided through either government or multilateral sources, but channeled through commercial financiers in many cases.

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 The lease model is similar to the fee-for-service model as the
ownership of the equipment lies with the leasing company, which typically are specialized financial institutions. It has been used for big, mostly on-grid power, generation equipment.

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Grameen Shakti (Bangladesh): An Example of Dealer Credit Model (1)
 Grameen Shakti (GS) builds on the experience and success of its sister organization, the Grameen Bank.  RE and solar home systems in particular are the most practical and cost-effective solution for rural electrification in Bangladesh. But such technologies are not affordable as such for the average rural Bangladeshi.

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 Grameen Bank in Bangladesh set up a not-for-profit subsidiary, Grameen Shakti, which is involved in the marketing, sales, servicing, credit provision and other activities related to photovoltaic solar home systems business.  GS developed an innovative micro-credit scheme to make technologies affordable to the majority with a concept to provide clean energy. 19
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Grameen Shakti, Bangladesh (2)
 Description of the GS model

GS developed five financing models for the diffusion of solar home systems (SHS). They vary in terms of down payment requirements (10 to 25%), number of monthly installments (24 to 42) and service charge (8 to 12%). e-learning course
 Five

Financing Models of GS

• Model 1: The customer has to pay 15% of the total price as a down payment during installation and the remaining 85% of the cost is paid by monthly installment within 36 months, including a 12% service charge. • Model 2: The customer has to pay 25% of the total price as a down payment during installation and the remaining 75% of the cost is paid by monthly installment within 24 months, with 8% service charge.

• Model 3: The customer has to pay 15% of the total price as a down payment during installation and the remaining 85% of the cost, including 10% service 20 charge, is made by 36 post-dated cheques.
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Grameen Shakti, Bangladesh, (3) • Model 4: 4% discount is given for cash purchase. • Model 5 (Micro utility) : The customer has to pay
10% of the total price as a down payment during the installation and the remaining cost is paid by monthly installment within 42 months, without any service charge. Here the customer sets it up on his/her premises, and other shop owners get electricity from the solar system against a small fee.
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Revolving Fund (1)
 A revolving fund is a reserve money or fund, often used in developing countries, used for lending to one or more borrowers. The idea for the revolving fund can be used both for an organization or an individual.
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 The borrower on the other hand is expected to repay the original sum that restocks the fund over the given period of time.
 Usually, an additional sum is charged (interest) to the borrower that acts as a fee for providing the service (administrative costs) and helps to protect the fund from being depleted. These include inflation, non-payments and the cost to the lender of getting outside finance. 22
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Revolving Fund (2)
 The basic principles for establishment of the revolving funds include:
- Maximizing incentives for high repayment rates;

- Selecting projects with high energy saving potential and low payback period (up to five years); - Allocating funds on the cost-sharing basis; -Transparency and control over financial disbursements by UNDP (during the project implementation period), other donors, the National Executing Agency and regional administrations;
- Creating incentives for participatory energy-efficiency projects with private sector involvement.
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Revolving Fund (3): Case of Small Hydro Schemes in Peru
 A revolving fund for financing micro hydro power plants was set up in 1994 through an agreement between the Inter-American Development Bank and ITDG-Peru, a NGO.
 This Fund consists of a financial model based on loans subsidized through technical assistance and interest payments from individual clients (micro rural entrepreneurs). It is a loan fund applied for one energy technology, “the micro-hydro power”, covering the installation of new systems, rehabilitation and/or repair of existing systems.

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 The amount of loans ranges from US$ 10,000 to US$ 50,000, with an interest rate of 10%. The payback period is 1 to 5 years, and the grace period varies, depending on the client‟s financial situation.
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Revolving Fund (4): Case of Small Hydro Schemes in Peru (Contd.)
 Within the framework of this fund, four activities are developed in each project: - Promotion and its benefits, - Technical and financial assistance, - Organization for sustainable management, and - Recovery of loans.  The project was initiated with the view to provide electricity to remote areas not reachable through conventional grid.

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 The fund has provided loan finance to 15 rural electrification projects of municipalities, 5 projects of the private sector and one project of the cooperative.
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GEF and Renewable Energy (1)
 Established in 1991, Global Environmental Facility (GEF) is an independent financial organization that provides grants to developing countries for projects that benefit the global environment and promote sustainable livelihoods in local communities.

 GEF and Renewable Energy
• The GEF helps countries remove barriers to developing markets for renewable energies wherever cost-effective. GEF support helps create enabling policy frameworks, build the capacity for understanding and using the technologies, and establish financial mechanisms to make renewables more affordable.
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GEF and Renewable Energy (2)
 GEF deals with problems hampering the transformation of markets for renewable energy:
- lack of supportive policy frameworks, - inadequate financing for installations or supporting businesses, - lack of technical capacity, and - lack of awareness and trust in the technologies by users and utility companies.

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 The GEF‟s renewable energy projects involve
- private firms as manufacturers and dealers, - local project developers, - financial intermediaries, - recipients of technical assistance, - technology suppliers and contractors, and - project executors.
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GEF and Renewable Energy(3)
 Some typical examples are:
• Solar home systems for rural off-grid markets • Mini-grids based on micro-hydro, photovoltaic, wind, or biomass • Biomass and biogas for captive applications (agro-processing industry) • Wind farm demonstrations • Favorable policy environments for wind farms (such as power purchase agreements) • Geothermal power plants • Biomass-based district heating • Innovative financing mechanism for renewable energies.

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GEF and Renewable Energy (4)
 GEF’s three Implementing Agencies,
- United Nations Development Programme (UNDP), - the United Nations Environment Programme (UNEP), and - the World Bank and seven Executing Agencies (under the policy of expanded opportunities).

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 These agencies work with the operational focal point in each recipient country to develop project ideas that are consistent both with the country’s national programs and priorities and with GEF’s operational strategy and programs.

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References
 Painuly, J. P., Wohlgemuth, N., 2006, Renewable Energy Financing – What can we learn from experience in developing countries?, Energy Studies Review, Vol. 14, No. 2, pp 154 – 170.
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 Park, Chan S., Contemporary Engineering Economics, 4th edition, Prentice-Hall, N.J., 2007.  EcoSecurities,2007,Guidebook to Financing Projects, UNEP Risoe Centre, Denmark. CDM

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Appendix
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Some Case Studies

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The World Bank/GEF India Alternate Energy Project (1)
World Bank / GEF Agency 1 Agency 2 Agency 3

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Government
Investment Tax Policy

Government Low Interest Loans Supportive regulatory Framework

Wind Farm 1

Wind Farm 2

Wind Farm 3

Wind Farm N

Figure 5: Steps Followed by India Renewable RDP
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The World Bank/GEF India Alternate Energy Project (Contd.) (2)
 Also known as India Renewable Resources Development Project, with co-financing from three other agencies, provided low-interest loans to wind farm developers in the nineties.

 At the same time, favorable investment tax policies and a supportive regulatory framework resulted in unprecedented market growth for wind power.  More than 1200 MW of wind capacity had been installed by the private sector by 2000. Of this, direct financing by the GEF project was only 41 MW.
 Several local financial institutions also started financing wind farms which continued thereafter also as capabilities had been developed and a supportive regulatory framework had been established.
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Rural Energy Development Programme (REDP), Nepal (1)
 Main Concept
• The Rural Energy Development Programme (REDP) started in 1996 under an initiative of UNDP in Nepal. • The main idea of the programme is to promote clean energy as a way to enhance socio-economic development, alleviate poverty and protect the environment in rural Nepal.
• REDP engages the community as a whole in energy projects in order to lower the cost and to ensure that every community member benefits from the project.

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• REDP main innovation is the mobilization of entire communities, both males and females.
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REDP, Nepal (2)
 Success Factor
• The first success factor is the institutional support provided by AEPC and the availability of soft loans for RE projects with ADBN. The second success factor is the innovative community mobilization mechanism, whereby the community as a whole decides on which technology to implement and how to finance the related cost.

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Thirdly, the involvement of the local authorities District Development Committee and Village Development Committee (DDC and VDC) as shareholders further reduce the cost of the project for the community, while providing a source of income on the long term for the local authorities.
Fourthly, to stimulate demand for electricity and ensure high load factor on the RE system, REDP encourages the development of income generating activities through trainings, grants and soft loans.
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• Finally, the success of REDP owes a lot to the availability of good quality locally manufactured RE technologies.
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Sunlabob Rental System, Laos (1)
 Main Concept • Currently, less than fifty percent of the population has access to electricity in Laos. The government has an ambitious plan to reach 90% of the population by 2020.
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• Sunlabob, a private energy company was created in 2000 in Vientiane Laos. • The main idea of the company is to install good quality RE systems and to ensure high quality after-sale services. • For remote villages, it developed a rental scheme for solar home systems.
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Sunlabob Rental System, Laos (Contd.) (2)
 Success Factor:
• The main success factor is the flexibility brought by the rental system. • Secondly, the fact that energy users do not have to pay for the system removes the financial barriers. e-learning course
• Thirdly, the commercial operation insures that the installed systems are of good quality and that the number of installed systems keep expanding. • Fourthly, the availability of local know-how in RE can attract other non-commercial projects (in the social sector for example). • Finally and more importantly, the rental system is self-financed, and therefore is not subject to donor funding. Sunlabob is a Lao company, registered in Vientiane and will not leave the country.
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Multifunctional Platform in Mail (Contd.) (1)
Main Concept
• Multifunctional platforms are small diesel engines providing mechanical energy to various devices providing useful services for the society and the women in particular. e-learning course • The devices can be water pump, grinding mill, oil expeller, battery charger, etc. according to the needs identified by a particular women‟s group. • These platforms have proved to bring substantial benefits to women in West Africa by saving them time while performing household activities (fetching water, milling rice, etc.) and providing them with opportunities to engage in new and more profitable income generating activities.
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Multifunctional Platform in Mail (Contd.) (2)
Success Factors
• The main factor behind the success is the fact that a donor could implement these platforms with an important subsidy making them affordable for women„s groups in poor villages. Without this subsidy, the platform would not have been affordable for the women‟s groups. • Another key factor is that the platforms are bought by a group of women and not an individual woman. The fact the group as a whole raises the money allows poor and marginalized women (providing they are accepted in the group) to participate and benefit from the platform even if their financial contribution is limited
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Sri Lanka Energy Services Delivery Project (1)
 Implemented between 1997 and 2002, the Sri Lanka Energy Services Delivery Project provided commercial financing through banks and micro finance institutions for private sector provision of on-and off-grid renewable energy services.

Sri Lanka Energy Services Delivery Project
Commercial Financing Banks / Micro Finance Institutions

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 This included mini hydro plants (grid connected), community hydro schemes (offgrid) and solar home systems.

Community Mini Hydro Plants Hydro Schemes (Grid Connected) (Off-grid)

Solar Home Systems

Figure 6: Sri Lanka Energy Services Delivery Project
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E7 Project in Indonesia (1)
Main Concept
• In Indonesia, many implemented projects suffered from rapid technical failures and lack of financial sustainability. • In the late nineties, E7 a group of nine leading electricity companies from seven G7 countries, started a innovative RE project based on a bottom-up approach. • The financing model used was a partnership between the project implementers and the electricity users, whereby the project implementers borne the investment cost and the users paid for operation and maintenance.
• The project was managed at three level, the national level, regional level and village level. The project promoted the establishment of village-based electricity management units (Pengelola Listrik Desa or PLD).
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E7 Project in Indonesia (Contd.) (2)
Success Factors
• The main success factor is that the investment is borne by the project implementers and not by individual users, thereby making RE affordable for a large number of people. e-learning course • The fact that the project followed a bottom up approach was seen as a major success as compared to the previous RE projects in Indonesia which followed a more top-down approach. • Finally, the fact that SHS users become owner of their system was seen as a major incentive to ensure proper care and use of the systems.

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Photovoltaic Solar Home System Financing in India (1)
 
  

A credit facility, initiated in 2003 by UNEP in Southern India to help rural households finance the purchase of solar home systems. The programme provides financial support in the form of interest rate subsidies for borrowers.
The programme also provides assistance with technical issues, vendor qualification and other activities to develop the institutional capacity for this type of finance. As of January 2005, the programme had financed nearly 12,000 loans, through more than 2000 participating bank branches. Sales volume had reached 1000 systems per month. The fastest growth in loans is currently in rural areas as because of the increasing participation of the Grameen banks.

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

The 3-year programme with US$ 1 million in support to banks is on target to finance between 20,000 and 25,000 solar home systems, making it one of the largest solar home systems loan programmes globally.
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