Page 59 - Oasys South Asia Research Project - Towards Scaling Up of Electricity Access
P. 59
Scaling Up and Replication Studies 53
They also list a number of financial challenges that surround any rural electricity
supply project in a remote area.
55 First, the size of the investment is too small to be attractive to any financial
institution, as their threshold transaction level tends to be $20–25 million.
Bundling of projects can avoid this problem if the promoter has a sound financial
condition. It remains demanding to ascertain whether a promoter can support a
few hundred of such small projects or not.
55 Second, when the projects are managed locally, the village cooperatives or
associations have limited borrowing capacity and do not have the required deposit
or bank guarantees for availing any debt finance. Generally, commercial banks or
local financial organizations who lend for such projects often require 100 per cent
(or even more) guarantee for the credit provided, which proves to be difficult to
comply with.
55 Third, most of the projects sell their output to poor households and small
commercial entities. Unlike power generators selling their power to the grid or
to a large consumer through a bankable contract, the sale in these cases is highly
distributed. Similarly, a community-based project is viewed as a non-commercial
activity and so project finance is not extended by most financial institutions. In the
absence of a bankable agreement, the project company cannot finance its projects
through project financing.
55 Fourth, given that the cost of off-grid supply is generally higher than the tariff
charged for the grid-based supply, and because the paying capacity of the consumers
tends to be low, cost recovering tariffs may discourage consumers to avail
off-grid electricity. In such cases, subsidies to reduce the cost may be unavoidable.
However, the sustainability of such subsidies in the long run is an issue, given the
budget constraints of the governments in most countries.
55 Fifth, many projects need component replacements during the project life and the
revenue collected from the consumers may not be sufficient to take care of these
capital needs.
55 Sixth, the risks involved in doing business in remote areas can be perceived to
be high, which in turn can lead to higher borrowing costs, thereby affecting the
project viability and investor interest in the project. A related challenge comes in
terms of financing logistics to set up plants in far flung remote villages. Private
investors largely focus on ‘not-so-remote areas’ as a result. The question that thus
arises: “Is there a need to split the entire off-grid energy market into different
categories based on distance from grid?”
55 Seventh, alternative streams of income have been considered by some projects
from carbon credits or monetization of byproducts. However, their contribution
They also list a number of financial challenges that surround any rural electricity
supply project in a remote area.
55 First, the size of the investment is too small to be attractive to any financial
institution, as their threshold transaction level tends to be $20–25 million.
Bundling of projects can avoid this problem if the promoter has a sound financial
condition. It remains demanding to ascertain whether a promoter can support a
few hundred of such small projects or not.
55 Second, when the projects are managed locally, the village cooperatives or
associations have limited borrowing capacity and do not have the required deposit
or bank guarantees for availing any debt finance. Generally, commercial banks or
local financial organizations who lend for such projects often require 100 per cent
(or even more) guarantee for the credit provided, which proves to be difficult to
comply with.
55 Third, most of the projects sell their output to poor households and small
commercial entities. Unlike power generators selling their power to the grid or
to a large consumer through a bankable contract, the sale in these cases is highly
distributed. Similarly, a community-based project is viewed as a non-commercial
activity and so project finance is not extended by most financial institutions. In the
absence of a bankable agreement, the project company cannot finance its projects
through project financing.
55 Fourth, given that the cost of off-grid supply is generally higher than the tariff
charged for the grid-based supply, and because the paying capacity of the consumers
tends to be low, cost recovering tariffs may discourage consumers to avail
off-grid electricity. In such cases, subsidies to reduce the cost may be unavoidable.
However, the sustainability of such subsidies in the long run is an issue, given the
budget constraints of the governments in most countries.
55 Fifth, many projects need component replacements during the project life and the
revenue collected from the consumers may not be sufficient to take care of these
capital needs.
55 Sixth, the risks involved in doing business in remote areas can be perceived to
be high, which in turn can lead to higher borrowing costs, thereby affecting the
project viability and investor interest in the project. A related challenge comes in
terms of financing logistics to set up plants in far flung remote villages. Private
investors largely focus on ‘not-so-remote areas’ as a result. The question that thus
arises: “Is there a need to split the entire off-grid energy market into different
categories based on distance from grid?”
55 Seventh, alternative streams of income have been considered by some projects
from carbon credits or monetization of byproducts. However, their contribution
