Page 24 - Oasys South Asia Research Project - Towards Scaling Up of Electricity Access
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18 Towards Scaling up of Electricity Access
Finally, the country-level risks and investment environment also influence
investment decisions. Political instability, weak or ineffective law-enforcement and
currency-related risks are perceived as major threats to viable investments. There is
thus an urgent need to remove major barriers that hinder large-scale mobilization and
use of funds in the off-grid electrification business.
Any investor intending to enter the off-grid business would need the start-up
capital and the ability to take risks in the new business. The seed capital is an early
stage finance mechanism for this purpose that is used to convert an idea to a new
business, particularly in the case of small and medium-sized businesses. Although
venture capitalists play an important role in industrialized countries in taking risks of
innovative businesses, the prospect of persistently low returns in the off-grid businesses
restricts the potential of venture capital. The donor agencies could fill this gap instead.
Once a business starts operating, its operating capital needs to increase to meet
the short- and long-term capital needs. Very few commercial lenders provide funds to
off-grid electricity businesses and consequently, support mechanisms are required in
the form of lines of credit, loans for credit enhancements, and capital funds for SME
growth. If governments want to reach the poorest section of the population, subsidies
perhaps cannot be avoided but these have to be well targeted and appropriately designed
to avoid market distortions. There is still a huge affordability gap amongst rural poor
and therefore subsidy plays an important role. But, the subsidies may be attracting new
suppliers in the market and may not be creating a sustainable business model.
To become sustainable, an off-grid project has to be beneficial to all main
stakeholders—consumers, service providers, financers, and government. This needs
to consider the government’s intentions, subsidy commitment, and regulatory rules;
promote productive and institutional energy use that generates income opportunities;
and take the possibility of international co-financing into account. Designing an off-
grid system is not an exact science—it is made more complex by a combination of
factors including, among others, remote locations, high cost, poorer consumers,
and new technologies. The question that requires investigation is how and when an
off-grid investment complements grid expansion. Although a few off-grid operations
are commercially viable (examples include PV in China and Kenya, some PV operations
in India, pico-hydro in Laos and Vietnam, and micro-wind in China and Mongolia),
most off-grid electrification may require subsidies. Therefore, enhancing affordability
through subsidies, consumer financing, low-cost technology options, and policies and
business practices are important. Further, financing arrangements can complement
subsidies. International co-financing, through Global Environment Facility (GEF),
Climate Investments Fund (CIF), and the Clean Development Mechanism (CDM)
can help. By increasing the size of the consumer base through micro-finance, the
affordability and viability of projects can be enhanced. Rationalization of duty or import
Finally, the country-level risks and investment environment also influence
investment decisions. Political instability, weak or ineffective law-enforcement and
currency-related risks are perceived as major threats to viable investments. There is
thus an urgent need to remove major barriers that hinder large-scale mobilization and
use of funds in the off-grid electrification business.
Any investor intending to enter the off-grid business would need the start-up
capital and the ability to take risks in the new business. The seed capital is an early
stage finance mechanism for this purpose that is used to convert an idea to a new
business, particularly in the case of small and medium-sized businesses. Although
venture capitalists play an important role in industrialized countries in taking risks of
innovative businesses, the prospect of persistently low returns in the off-grid businesses
restricts the potential of venture capital. The donor agencies could fill this gap instead.
Once a business starts operating, its operating capital needs to increase to meet
the short- and long-term capital needs. Very few commercial lenders provide funds to
off-grid electricity businesses and consequently, support mechanisms are required in
the form of lines of credit, loans for credit enhancements, and capital funds for SME
growth. If governments want to reach the poorest section of the population, subsidies
perhaps cannot be avoided but these have to be well targeted and appropriately designed
to avoid market distortions. There is still a huge affordability gap amongst rural poor
and therefore subsidy plays an important role. But, the subsidies may be attracting new
suppliers in the market and may not be creating a sustainable business model.
To become sustainable, an off-grid project has to be beneficial to all main
stakeholders—consumers, service providers, financers, and government. This needs
to consider the government’s intentions, subsidy commitment, and regulatory rules;
promote productive and institutional energy use that generates income opportunities;
and take the possibility of international co-financing into account. Designing an off-
grid system is not an exact science—it is made more complex by a combination of
factors including, among others, remote locations, high cost, poorer consumers,
and new technologies. The question that requires investigation is how and when an
off-grid investment complements grid expansion. Although a few off-grid operations
are commercially viable (examples include PV in China and Kenya, some PV operations
in India, pico-hydro in Laos and Vietnam, and micro-wind in China and Mongolia),
most off-grid electrification may require subsidies. Therefore, enhancing affordability
through subsidies, consumer financing, low-cost technology options, and policies and
business practices are important. Further, financing arrangements can complement
subsidies. International co-financing, through Global Environment Facility (GEF),
Climate Investments Fund (CIF), and the Clean Development Mechanism (CDM)
can help. By increasing the size of the consumer base through micro-finance, the
affordability and viability of projects can be enhanced. Rationalization of duty or import
