Innovative Financing for Renewable Energy

7/27/2019 Innovative Financing for Renewable Energy

1/59


2/59

26

Research team meetingsA mid-term research team meeting was held in New Delhi, India in July 2003, hosted by the

Energy and Resources Institute, and a further meeting was held in Bangkok in November 2003, inconjunction with the first RISPO plenary workshop. Finally, a research team meeting was held inFebruary 2004 in Japan, in conjunction with the second RISPO Plenary Workshop.

Publication of research findings and presentation at international conferencesOn the basis of the research outputs of the first year, a number of activities were initiated in

order to disseminate the research findings so far. This included writing and publishing a researchnote entitled Financing Renewable Energy in India: A Review of Mechanisms in Wind and SolarApplications in the International Review of Environmental Strategies by research team membersfrom IGES and TERI. Another paper titled Developments with Photovoltaic Research andApplications in India was presented by research team members from India at the 14th InternationalPhotovoltaic Science and Engineering Conference in Bangkok, in January 2004.

Contribution to the policy-making processResearch team members from the Energy Research Institute, China prepared and made

arrangements for the European Union - China High Level Conference on Renewable Energy Policyand Project Financing, held on April 6, 2004 in Beijing, China. Members also participated indevelopment activities of the China wind power and small hydro program under the CleanDevelopment Mechanism (CDM), as well as preparing the draft of the Renewable EnergyPromotion Law of the Peoples Republic of China.

Good practices

Seventeen good practices have been collected from China and India, in collaboration with theEnergy Research Institute of China and The Energy and Resources Institute of India. The practicescover various innovative financing mechanisms including: mechanisms that combine government

and community financing (India); development of a market-oriented institutional and financial model for decentralisedsolar systems (India); wind-power development throughcombination of the Clean Development Mechanism CDMand public sector financing (India); scaling-up of renewablevillage power through governmental finance and biddingbased on market regulation (China); experience of the firstCDM project in renewable energy financing in China(China); financing the utilisation of landfill gas through

economic incentives (China); commercialisation of solar hotwater systems through a financial intermediary (FI) scheme(India); market development for solar lanterns in a post-

subsidy regime (India); developing a sustainable financialmodel for solar pumping systems (India). Economic instruments, awareness raising, partnerships,technologies, design, planning and management were among critical instruments in these successfulpractices.

Solar water pumping in Chandigarh, IndiaPhoto by Gueye Kamal, IGES


3/59

27

Strategic Policy Options

Based on the provisional framework developed in the first year, work continued towardsfinalising the SPO framework following the life-cycle approach. The results of the policy andliterature review, and the collection and analysis of good practices indicate that there is a relation ofinterdependence between the deployment of RE products and technologies and their market demandwith regard to financing. The availability of financing for research and development as well as formanufacturing is crucial for reducing the high costs of the systems. Similarly, adequate consumerfinance enhances affordability and stimulates further demand, which in turn leads to furtherdevelopment of the RE industry. Given this inter-linkage between industry and market growth on theone hand and price reduction on the other, the challenge of financing is addressed under a life-cycleapproach (LCA), which examines financing mechanisms during the stages of: 1) research anddevelopment; 2) demonstration; 3) early commercialisation; and 4) demand-drivencommercialisation.

- Government finance- International funding

mechanisms- Private-sector finance- Micro-credit and community-

based finance

Earlycommercialisation

Demand-driven

Research anddevelopment

Demonstration

Figure 3-1. Life Cycle Approach


4/59

28

Framework

The framework and proposal of strategic policy options were developed to provide research-

based answers to the following questions:

1. Which particular types of barriers are best addressed by governments, internationalfinancing mechanisms, private finance and micro-credit/community-based financingrespectively?

2. Who can best address the financial requirements at each specific stage of the LCA?3. To what extent is the role of the different financing instruments technology-specific (i.e.

does this vary between solar, wind, biomass etc.)?4. What would be the optimal combination of financing sources for the respective

technologies?5. How can policy options be replicated in other countries?

The following key principles were identified as driving forces behind sustainable financingstrategy:

Financing should be an instrument that drives market development. Financing mechanisms should not be a one-time delivery initiative but should involve a

package of services for acquisition and maintenance of RE products. Financing should increasingly move away from subsidy-driven schemes and rely on private

finance and market-driven demand.


5/59

29

Table 3-1. Framework of Strategies and Strategic Policy Options Strategy Strategic Policy Options

(Source of finance)

Financing Instruments

(Modality of delivery)

R&D funds/development fundsOptimal use of government funds

Technology Commercialisation/incubation

funds

Incubation funds/venture capital

Joint venture and technology transferAttracting International development

funding mechanisms

Collaborative R&D

Increasing financing by public/private

financing institutions

Risk capital and technology finance

SSuuppppoorrtt ffoorr

tteecchhnnoollooggyy aanndd

pprroodduucctt

ddeevveellooppmmeenntt..

((RReesseeaarrcchh,,

DDeevveellooppmmeenntt aanndd

DDeemmoonnssttrraattiioonn

ssttaaggee))

Enhancing private sector financing Corporate-funded R&D

Combining subsidy with loans in the

ownership model

Competitive biding for minimum subsidy

Redirecting subsidies away from fossil fuel

based energy

Environmental cost of fossil fuel projects

Greening of GDP

Optimum use of government funds

Increasing share of RE

Refinancing: Two-step loans

Buying down interest rate of commerciallending

Attracting international funding

mechanisms

Creating Special Purpose Vehicles for Clean

climate mechanisms (CDM, FCP, carbon

trading)

Renewable portfolio lendingIncreasing financing by private/public

financial institutions Market-based institutional finance

Micro-credit and self help group-based

financing

Carbon Cess, Preferential tariff, Concession

tariff / Tariff rebate

Leveraging consumer financing

Community-based green funds

Development of energy service companies

Fee for service model

Vendor credits

Leasing

IImmpprroovviinngg tthhee

ccoommppeettiittiivveenneessss ooff

rreenneewwaabbllee eenneerrggyy

mmaarrkkeettss..

((CCoommmmeerrcciiaalliissaattiioonnssttaaggee))

Enhancing private sector financing

Renewable energy processing zones

(concessions, tax holidays etc.)


6/59

30

Preliminary proposal

Research on the basis of the life cycle approach led to the identification of two key strategies

that aim to 1) support technology and product deployment (at the research, development anddemonstration stages) and 2) improve the competitiveness of RE markets (at the commercialisationstage). Based on these strategies, five strategic policy options have been developed. The indicationfrom the policy options identified is that innovation was related more closely to innovative modes ofdelivery than to new sources and mechanisms of financing. Accordingly, the strategic policy options(SPO) place emphasis on modes of delivery (financing instruments) that involve new combinationsof different sources of finance, optimising the aggregate effect in reducing the financing barrier. Inother words, each SPO incorporates a combination of financing instruments. There are five SPOspresented in detail under the country sections:

Optimum use of government funds International funding mechanisms Increasing financing by private/public financial institutions Leveraging consumer financing Enhancing private sector financing

Research planin FY 2004SPO development- Completion of country-specific SPO (August 2004)- Developing SPO applicable to Asian countries (September December 2004)- Completion of SPO and draft final report (December 2004)- Review of draft final report (January 2005)- Finalisation of SPO and final report (February 2005)

SPO review meetings- Review meeting, China (August 2004)- Review meeting, India (September 2004)

Dissemination of research results- Renewable energy workshop, India (April 2004)- Renewable energy workshop, China (April 2004)- Policy paper on SPO (February 2005)


7/59

31

Research collaborators

Energy Research Institute (ERI), China

Ms. Hu XiulianMs. Jingli Shi

Dr. Kejung Jiang

The Energy and Resources Institute (TERI), India

Ms. Akanksha Chaurey

Mr.Yuvaraj Dinesh Babu

Mr. Shirish Garud

Institute for Global Environmental Strategies (IGES), Japan

Dr. Gueye Kamal


8/59

32

3.2.1.2. Summary of research progress in selected countries

A. China

Summary of research progress in FY 2003

Literature, information and policy survey

A review was conducted of the various publications released by the government, research andfinancial institutions, public and private companies including renewable energy users andmanufacturers; internet sites, international collaborative projects etc.

Site visit, group discussion, expert meetings and telephone interviews

Wind energy site-visits were conducted in order to meet with the major wind manufacturers anduser groups; expert meetings were organised with various representatives of financial institutions;and solar energy site-visits were conducted in order to interact with the suppliers network of dealers

and technicians, individual households, and rural banks.

Research team meeting and electronic discussion

The first meeting of the research team on March 27-28, 2003 in Bangkok, Thailand, the secondon July 22-23, 2003 in New Delhi, India, the third on November 22-23, 2003 in Bangkok, Thailand,and the fourth on February 10-12, 2004 in Japan, were held to review the research framework,identify financing mechanisms potentially innovative in the collection of good practices, and adoptthe basic framework for Strategic Policy Options. Follow up activities were conducted throughelectronic discussions.

Activities related to the project

Members of the team prepared and made arrangements for the EU-China High LevelConference on Renewable Energy Policy and Project Financing, held on April 6, 2004 in Beijing.

Members also participated in development activities of the China wind power and small hydro CDMprogram, as well as drafting the Renewable Energy Promotion Law of the Peoples Republic ofChina (Draft version)

Background information in China

Renewable energy resources potentials in China

According to the initial assessment, China has great potential for renewable energy resourcesdevelopment, including wind power, hydro energy, solar and biomass. According to the estimatesmade by the China Academy of Meteorology, exploitable on-shore wind power is about 253 GW,and offshore wind power is 750 GW, totalling 1 TW. According to the results of re-investigationreleased from the latest hydro resources, exploitable small hydro resource is 125 GW, and 65% of

this is located in the western region. According to this estimation, the amount of solar radiationreceived at the ground surface is about 170 billion tce each year in China. Solar energy is potentiallyhighly valuable in most of areas of China.

Driving force behind the development of renewable energy in China

20 thousand villages and more than 800 rural households, over 30 million rural people, as yethave no access to electric power in China, and 50% of domestic energy use still relies on non-commercial energy in Chinas rural areas. This not only influences the quality of living in rural areas,but also has a great impact on the environment. Therefore, China urgently needs to improve itsenergy structure that is dominated by coal use, and increase energy efficiency and benefits.Environmental protection and GHGs emission mitigation will influence sustainable development inChina. Commercialisation, industrialisation and market-oriented development of renewable energy

will definitely provide an opportunity for China to create a new economic growth area.


9/59

33

Current status of renewable energy industry

With advances in science and technology, China's renewable energy industry has witnessedsteady growth. In some technologies, most notably solar water heating, China has a well-establishedindustry with decent sized export markets, and a number of other technologies are rapidly movingtowards commercialisation. Chinese advances in renewable energy technologies include:

development of practical and commercialised units

basic design/manufacturing capacity for modern and large-scale units

establishment of national testing centres

training of technical personnel

new innovative technologies for development and application

continuous improvement of equipment performance, which is approaching internationalstandards for many technologies


10/59

34

Table 3-2 . Current status of China's renewable energy technologies

Maturity and Development PhaseTypes of Technologies

R&D Demonstration Early-

commercialisation

Demand-driven

commercialisation

Solar water heater

Passive solar house

Solar stove

Solar drier

Solar cell

Grid connected wind turbines

Small and mini wind turbines

Geothermal power generation

Geothermal heating

Traditional bioenergy technology

Small methane tank

Large-medium methane technology

Municipal organic waste power generation

Biomass gasification

Other modern bioenergy technologies

Wave power generation

Tidal power generation

Ocean thermal energy conservation

New hydrogen manufacturing technology

Hydrogen storage techniques

Small hydropower


11/59

35

Chinas Current Policies on Renewable Energy

National legislation, policies and programmes

The Government of China has made a substantial effort to develop renewable energy. Theprimary energy policies published by the central government are as follows (Policies, laws andregulations associated with renewable energy in China are detailed in Appendix A):

(1) People's Republic of China (PRC) Law on ElectricityThis was China's first energy-related law. The legislation states that the state encourages and

supports renewable energy and clean energy based power generation; promotes the development ofhydropower resources in rural areas, including construction of medium and small-sized hydropowerstations; and encourages and supports rural power supply including solar, wind, geothermal andbiomass energies.

(2) Energy Conservation LawThe 1998 Law on Energy Conservation described the important strategic role and position ofenergy efficiency and renewable energy in bringing about emission reductions and environmentalimprovement. The legislation requires government at each level to enhance the rural energy supply,including the development and utilisation of biogas, solar energy, wind, hydro and geothermalenergies.

(3) Regulation on Grid-connected Wind Power Generation ManagementPromulgated in 1994, the Regulation on Grid-connected Wind Power Generation Management

is one of the most concrete regulations focusing on renewable energy. This document stipulates thatwind power shall be allowed access to the nearby grid and that the network shall purchase all output.The wind power tariff shall be determined based on the cost (both principal and interest repayment)plus a reasonable profit. The incremental cost of wind power above the average electricity tariffshould be shared by the whole grid.

(4) Ninth Five-Year-Plan and 2010 Objectives for National Social and Economic DevelopmentIn the 9th five-year-plan for China's national economic and social development, the energy

development strategy was defined as centred around coal based electric power with enhancedsurvey and development of petroleum and natural gas resources The policy also stressed thenecessity of developing small hydro power, wind energy, solar energy, geothermal energy andbiomass energy compatible with local conditions.

(5) Notification on Further Support for Renewable Energy DevelopmentIn 1999, the former SDPC and Ministry of Science and Technology issued the Notification on

Further Support for Renewable Energy Development. This document presents a series of concrete

economic incentive policies for promoting renewable energy.

(6) National programmesThe "Riding the Wind Program" was initiated by the former SDPC in 1996. The programme

selected domestic WTG manufacturers through a bidding process, and formed joint ventureenterprises with foreign companies for production. A joint venture company Xi'an NORDEX WindTurbine Co. Ltd. was established with Xi'an Aero-Engine (XAE) and NORDEX of Germany, wheremanufacturing technology of 600kW WTG was imported. Another joint venture company Y1TUO-MADE (Luoyang) Wind Turbine Ct). Ltd. was established by China YITUO Group Co. Ltd. andMADE Technologies Renewable, S.A. Spain, where manufacturing technology of 660kW WTG wasimported. Both companies have the capability of batch production and their products have beeninstalled in wind farms, totalling more than 20.

The "National Debt Wind Power Program" of the former State Economy & Trade Commission


12/59

36

(SETC) has been in place since 1998. The program uses national debt with favourable condition ofinterest subsidy to build wind farms, and the planned total installed capacity will be 73MW. It isexpected to accelerate the development of domestic wind power equipment manufacture. The ChinaClassification Society (CCS) is preparing to establish a type certification scheme for locallymanufactured WTGs, to implement tests and measurements according to international standards.

The "Brightness Program", sponsored by the former SDPC from 1996 onwards, aims to provideelectricity to off-grid villages and households in the western part of China, 23 million people in total.The first phase of this program (projects in Inner-Mongolia, Gansu and Tibet) was completed in2000. The Central Government intends to invest RMB 2 billion in the next few years to supply PVpower to the off-grid villages in western China. The program will drive the PV market forward.

(7) Strategic planning for renewable energy development in 2020Part way through 2003, the National Development and Reform Commission (NDRC) initiated

the formulation of Strategic planning for renewable energy development in 2020, to promoterenewable energy technology development in China and keep up with world trends. The strategy isbased on renewable energy resources and technology characteristics in China to meet the social and

economic development requirement, and it draws on foreign experience and lessons learned. Thestrategy presents the objectives, layout and policy measures for renewable energy development inChina in the next 20 years, guiding the path of development and construction of key projects in therenewable energy field.

Economic incentives

(1) Tax exception and reductionCustoms Tariff Relief. With the gradual opening of Chinese markets, customs duties for many

imports have been reduced, and duties on renewable energy equipment are lower than the average.For example, customs duty is not applied to imported wind turbines. Ironically, this damages theoverall objective of promoting local manufacturing considering wind turbine components are subject

to a three-percent customs tax. This policy provides an incentive to import complete turbine unitsfrom abroad and not to use as much local equipment as possible. Since local equipment is cheaper,the overall effect is to raise the cost of wind generation equipment unnecessarily.

(2) VAT reductionValue Added Tax Relief. At present, most renewable energy products are taxed at the full value

added tax (VAT) level. The two exceptions are the VAT on biogas at 13 percent (current standardVAT is 17%) and that on small hydropower generation at 6 percent.

(3) Income tax reductionIncome Tax Relief. Chinas income tax system has greatly improved in recent years. At present,

the standard income tax paid by enterprises is 33 percent. Local authorities collect income tax from

local enterprises, and some regions, such as Inner Mongolia and Xinjiang, have developedpreferential policies to support the development of renewable energy.

(4) PricingDiscount price. Local authorities have various measures for pricing certain renewable energy

applications. For example, Shanghai authorities have defined a higher price for biogas based cookinggas at Rmb 1.20 Yuan/m3 while other provinces such as Sichuan and Guandong have offereddiscount prices for the cement used in biogas tank construction.


13/59

37

(5) Discounted loan interest rateDiscount loans. In 1987, the Chinese Government created discount loans specifically for rural

energy development. These loans support biogas projects, solar thermal applications and wind powergeneration technology. In 1996 the fund totalled Rmb 130 million. The government offered a 50percent discount on regular commercial bank loan interest. In addition, the government has made alimited number of low interest loans available for small hydro projects.

In 1999, the State Council, SDPC, and the Ministry of Science and Technology issued theNotification on Further Supporting the Development of Renewable Energy. The statement stressedthat renewable power projects would enjoy priority in state bank loans. The National DevelopmentBank is the lead institution providing such loans and encourages the involvement of othercommercial banks. The SDPC assists the developer in acquiring bank loans for projects above 3MW.These types of loans are subject to an interest rate reduction of two percent below the commercialrate, a discount subsidised by the national or local government.

(6) Subsidy

Subsidies. The central authorities subsidies for renewable energy are usually offered forresearch or development and there are also some local subsidies for solar energy and wind power.Subsidies paid to investors are used in China for investing in the construction of local smallhydropower stations. Consumer subsidy is also a widely used incentive. In addition to its extensiveapplication in extending solar energy equipment and mini wind generators, these subsidies are usedwidely for efficient firewood stoves and other biomass energy technologies. The objective is to spuron the expansion of production capacity and thus reach the goal of cost reduction.

As an example of local policy, the Shanghai municipal government allocated a financialappropriation of Rmb 10 million yuan for a fund dedicated to the promotion of biogas projects usinga market mechanism based on demand growth. Some local authorities such as those in Liaoning andDalian provided an Rmb 700 yuan subsidy for farmers using methane to heat greenhouses ornurseries. This is in addition to low interest loans of up to Rmb 2, 000 yuan for each system.

Research and development policy

(1) Proving funds for renewable energy R&DFunding from the central authorities for research, development and demonstration are made for

the following purposes:

Providing administrative expenses and research budgets for scientific research institutions.

Supporting major scientific studies and related training: as shown by the incomplete statistics,the total budget used in the 9th five-year-plan period for this purpose exceeded Rmb 100 millionyuan.

Offering project subsidies: in the early 1990s, for example, the central authorities invested Rmb7 million in the construction 4 PV stations in Tibet as a demonstration project.

Providing assistance in the planning process: for example, in 1996, the State PlanningCommission, State Science and Technology Commission and State Economic Commissionjointly published Development Outlines for China's Energy and Renewable EnergyDevelopment in 1996-2010."


14/59

38

(2) Supporting renewable energy technology demonstrationIn line with the energy, environment and sustainable development strategy, the government of

China pays much attention to the development and demonstration of renewable energy technologies.For example, two demonstrations on solar cooling were completed in the state R&D Program for 9thFive-year-plan.

The Shangdong projectThis integrated solar system was built in Rushan, Shangdong in 1999. It functions as a cooling,

heating and hot water system for a gymnasium with a space of 1000m2. This system has 2160 piecesof heat-pipe evacuated tubular collector with a net absorber area of 364m2 and is equipped with aLiBr absorption chiller. Typically in summer the system provides 1777.4M J/day of refrigerationcapacity with a COP of around 0.5, while in winter it supplies 2175.3MJ/day of heat. Beside thecooling and heating system, it supplies 32000 litres of hot water.

The Guangdong project

This integrated system was constructed in Jiangmen, Guangdong in 1996. It serves as a coolingsystem for one floor of a plaza (600m2) and heats 30 tons of hot water for the whole building. Thesystem is equipped with 500 m2 of flat plate collectors and a 100kW LiBr absorption chiller withCOP around 0.44.

Priority areas for developing the renewable energy and development goal in China

Materials from the relevant government agencies and reports from research institutes haveshown that the priority areas of renewable energy development in the coming 20 years will berenewable energy power generation, renewable energy gas supply, renewable energy heat supply,liquefied fuel from renewable energy and new energy technology (fuel cells and hydrogen energy).

The key areas for development of renewable energy power generation include small hydropower, wind power, solar power and biomass power. The total installation capacity of renewableenergy power generation will reach about 600 TW in 2010, accounting for about 10% of the nationaltotal. Amongst these, small hydro will hold a share of 80%, wind power 7% and solar and biomasspower 31% . In 2020, the total installation capacity of renewable energy power generation will reachabout 1150 TW, about 12% of national total. Small hydro will hold a share of 65%, wind power 17%and solar and biomass power 18% .

Heating supplied by renewable energy (heating supplied by solar heaters and geothermalenergy) will replace 22 Mtce (million tonnes of coal equivalent) energy by 2010, which will increaseto 45 Mtce of renewable energy by 2020. Liquefied fuels made from renewable energy (bio-ethyl

alcohol, bio-oil) will replace 11.43 Mtce or 8 Mtoe (million tonnes of oil equivalent) by 2020.

Barriers and issues of renewable energy development in China

In general, renewable energy in China suffers from a lack of a well-articulated policyframework and an independent industry that can attract investment capital. Though there certainly isprogress, most renewable technologies would benefit from a comprehensive set of policies, tailoredto address the phase of development of the individual technology. There are numerous renewableenergy technologies in different stages of development in China, and therefore there are variousbarriers and problems. The following is a summary of the barriers common to all technology fields,and Annex 2 gives a detailed analysis of wind power.

The role of renewable energy in the national energy development general strategy is weak,showing a lack of long-term objectives, development planning and concrete implementationmeasures. The omission of renewable energy utilisation in national energy statistics effectsenergy policymaking.


15/59

39

There are no supporting policies or incentive mechanisms formulated by the legislativerequirements. The existing policies are not integrated, lacking power, stability and consistency.

There are no effective supporting investment and financing mechanisms available. Manyrenewable projects are funded by the government, and international assistance or large scalecommercial development is not possible.

There is lack of input in R&D and industrialisation. An integrated renewable technologyindustry base and quality control system including standards and certifications have not yet beenestablished. Technology and equipment still rely on imports.

There is lack of resource surveys, assessments and management systems. Resource surveys failto provide detailed information for project planning and development, therefore increasing theinvestment risks.

There is lack of a scientific, accurate and complete assessment system. As a result, theenvironmental and social benefits of renewable energy are undocumented and renewabletechnologies are disadvantaged in market competition.

Common barriers to the financing for renewable energy are: high up-front capital costs and lowaffordability of renewable energy (RE) products and technologies by consumers; inadequateaccessibility to credit by RE industry and consumers; and subsidies for fossil fuels that hinderthe RE market development and reduce competitiveness

Paths to be taken to solve the problem of financial capital needed to develop renewable energy

in China

Establish a fund guarantee system for renewable energy construction, involving the government,social benefits organisations, renewable energy special capital and renewable energydevelopment funds.

The main solutions to solving the problem of gaining the financial capital needed for renewableenergy development are to combine: state guidance investment with social multi-channelinvestment; poverty shake-off with ecologic protection project, in which state investment playsthe leading role; state investment with subsidiaries, such as those based on total investment,giving 5% financial support for small hydro power, and 1% financial support for wind power.The state should be responsible for investment in wind power resource exploration andassessment, project planning, and standards and regulations formulation. As for waste biomassutilisation project, the government should subsidise 3% of the total investment.

Cultivate the space needed for renewable energy development. Before 2010, policies of

government bidding, MMS and law binding power purchase price should be adopted, and after2010, a competitive renewable energy market should be developed gradually.


16/59

40

Good practices identified

In this research, the current focus in renewable energy technologies are solar and wind energy .According to the analysis of existing policies in China, the research group prepared a draft list ofgood practices, which was submitted for discussion at the working meeting held on July 22- 23,2003 in New Delhi, India. Based on the results of this discussion, the research group determined alist of the first four good practices that have been conducted. These were:

z Demonstration of a wind power concession policy to reduce the large-scale wind power price.Location; Dongfeng Wind Farm, Jiangsu Province, China, and Huilai Wind Farm, GuangdongProvince, China.

z Establishment of a Renewable Energy Service Company (RESCOs) for the Renewable VillagePower System. Location; Bulunkou Xiang, Xinjiang Province, China.

z Utilising Landfill Gas for Power Generation. Location; ShuiGe Landfill Site, Nanjing City,Jiangsu Province, China.

z Solar Water Heater Integrated Building. Location; Qingdao, Shandong Province, China.

a. Demonstration of wind power concession policy to reduce the large-scale wind power price

Location: Dongfeng Wind Farm, Jiangsu Province, China, and Huilai Wind Farm, GuangdongProvince, China

Background: Research into Wind Power Concession Policies has been conducted in China forseveral years. Chinese wind power has also developed rapidly in recent years, reaching 468MW by

the end of 2002, which was three times that of 1997. At present, the major problems facing windpower in China are the Power Purchase Agreement and Wind Power Price. In order to stimulate thedevelopment of wind power, the National Development and Reform Commission initiated the WindPower Concession Policy in 2003.

Objective: The objectives of the demonstration of wind power concession are: (i) to provideguarantees to the wind farm developer when signing a long-term Power Purchase Agreement withthe power-grid company; (ii) to reduce the wind power price through international bidding.

Activity: The Energy Bureau of National Development and Reform Commission is in charge of thedemonstration of the wind power concession policy. Two sites were selected in Jiangsu andGuangdong and international bidding was adopted. The first bidding was conducted by the Jiangsu

Planning Commission and Guangdong Planning Commission. A total of 11 international and nationalwind farm developers were involved in the bidding. Ultimately, the Huarui Corp. won the JiangsuDongfeng project, and Guangdong Yuedian Electric Power Corp. won the Guangdong Huilai project.

The results of the bidding were that,z The wind farm concession period is 25 yearsz During these 25 years, the power-grid company must purchase all wind power from the wind

farmsz The power price of the first 30000 hours is determined by the bidding; for the Jiangsu project,

0.436yuan/kWh, for the Guangdong project, 0.51yuan/kWh


17/59

41

Impact: The price of wind power is greatly reduced through the wind concession policy and bidding.The wind power price of the former projects in Jiangsu and Guangdong was over 0.6yuan/kWh(some projects even reached 1yuan/kWh).

Potential for application: These two projects comprised the first wind power concession policydemonstration. The National Development and reform Commission is planning for later groups ofwind power projects.

b. Establishing Renewable Energy Service Companies (RESCOs) for the Renewable Village

Power System

Location: Bulunkou Xiang, Xinjiang Province of China

Background: The Renewable Village Power system is important in solving the residential powersupply problem in remote areas. The UNDP/GEF Capacity Building project of rapid Development ofRenewable Energy Commercialisation in China supported the establishment of several renewablevillage power systems for demonstration, including the Bulunkou project, located in Xinjiangprovince. Apart from providing financial support for investment in the renewable village powersystem, the UNDP project also supports the set up of RESCOs for the maintenance and operation ofthe village power system.

Objective: To help establish RESCOs.

Activity: The UNDP project provided US$600,000 for the initial investment in the Bulukou system.The systems comprised 5 sub-systems. The total installed capacity is 60kW of wind turbines, and8kW PV and 120kVA diesel generators. The local government provided 1.6 million RMB yuan ofinvestment.

A RESCO was registered in the beginning of year 2003, and the company took charge of the systemoperations in March 2003. The price of power charged to farmers, government buildings andbusiness buildings are 1yuan/kWh, 1.2yuan/kWh and 1.5yuan/kWh respectively. The moneycollected covers the operation costs at present, including salaries and small maintenance costs. Butfor maintenance work such as battery changing that necessitates a great deal of money, the incomefrom power cost collection is not sufficient.

Impact: This RESCO is the first true RESCO in China, and the company provides the service to keepthe village power system in normal operation.

Potential for application: In 2002-2003, the National Development and reform Commissionimplemented the Song-Dian-Dao-Xiang project, to equip 800 villages in remote areas with PV and

PV hybrid village power system. But the difficulty of keeping these systems in normal operation inthe next 10-15 years is a problem faced by the National Development and Reform Commission.RESCO will be the ideal choice.

c. Utilising Landfill Gas for Power Generation

Location: ShuiGe Landfill Site, Nanjing City, Jiangsu Province, China

Background & Activity: The UNDP/GEF project, Promoting the Methane Recovery and Utilisationfrom Mixed Municipal Refuse of Chinese Landfill Sites was initiated in 1997, One major activityof the project is to construct landfill gas utilisation systems in three Chinese cities. Shuige LandfillSite of Nanjing city is one of the demonstration sites.

The landfill sites were owned by local government, but through bidding, the local government and


18/59

42

project management office selected an Australian company to take charge of the construction andoperation of the landfill gas utilisation system. The local government also helped with negotiationsbetween the Australian company and the local power-grid company. The Power Purchase Agreementwas signed in 2001 and the system began operation in 2002.This project was successful in selecting a private company (international) to operate the system,rather than intending the owner of the landfill site to manage the system.

d. Solar Water Heater Integrated Building

Location: Tianjin or Qingdao (to be determined)

Background & Activity: The solar water heater is the single technology in the renewable energy fieldat the full commercialisation stage in China. In some cities such as Kunming, development isprogressing quite well, but in others, especially in tourist-attractive cities such as Dalian, installationwas forbidden by the local regulations, which considered solar water heaters to badly influence theappearance of buildings.

In recent years, the concept of the solar water heater integrated building was proposed, and a numberof solar water heater manufacturers have cooperated with construction companies to install the newsolar water heater in solar buildings.A UNF project titled Improvement and Expansion of Solar Water Heating Technology in Chinawas implemented in year 2002, and both Tianjin and Qingdao are sites for demonstration.The case study will examine one of the demonstration sites, however as members of the researchgroup have not yet visited the sites, the site for our case study is yet to be decided.

Strategic Policy Options developed

Increasing financing by private/public financial institutions

The perception of high risk and high transaction costs of renewable energy transactions,combined with limited affordability by low income consumers are common barriers to commercialbanking playing a significant role in financing access to RE products and services. The policyoptions envisaged aim to: increase the renewable portfolio in total bank lending; increasegovernment intervention that establishes new financial institutions operating on preferential marketterms; and introduce mechanisms to reduce the interest rate for commercial lending.

In China, the establishment of a renewable energy development fund has been studied anddiscussed amongst the relevant governmental departments for some time. The fund will be set up bythe government, with the objective of providing funds specifically for the development andutilisation of renewable energy. The renewable energy development fund will use funding from thefollowing sources:

Sale surcharge of electric power and fuel: in accordance with the target of renewable energydevelopment, the government will calculate the level of surcharge to be imposed on the sale

price.

Financial allocation from Chinas central government

Benefits from fund

Grants and othersOnce established, the fund will be used for the following purposes:

Subsidies for power tariff gap of renewable generation connecting with the grid

Subsidies for investment and operation costs of off-grid power systems in remote areas

Subsidies for price gap of bio-liquid fuel

Subsidies for renewable energy technology application in rural areas

Subsidies for technology research & development, introduction, demonstration projects

Outreach, education, training, international cooperation and exchange.


19/59

43

A special account for the renewable energy development fund will be established to be locatedin Chinas central financial agency. The government agencies responsible for energy managementwill develop an annual budget so as to realise the target of a special fund for a special purpose. Onexamination and approval of the subsidies for renewable generation and bio-liquid fuel by thegovernment departments concerned, the enterprises can deduct this directly from the sale surchargeon behalf of the relevant agencies.

Suggestions on research plan in Year 3

April:

EU-China High Level Conference on Renewable Energy policy and Project Financing inBeijing.

Study of SPO analysis evaluation model methodology

May June

Develop SPOs

Participate in the renewable energy international conference to be held in Born, Germany

Compile SPO background report

Study of model analysis scenarios

August October

Apply the model to the development of scenarios analysis

Prepare initial SPOs national report

September December

Review and discussion of SPOs national initial report

Meeting of capacity building

January February

Complete and revise SPOs national report

Finalise SPO report


20/59

44

B. India

Summary of research activities in FY2003Year 2 of the IFRED sub-theme focussed on four activities:

1. Finalising the framework for SPOs2. Writing the research note/background paper3. Presenting the research outcome at an International Conference4. Collecting four more GPIs

Based on the provisional framework developed in year 1 of the sub-theme, work continuedtowards finalising the SPO framework following the life-cycle approach. The results of the policyand literature review, and the first four GPIs indicated that there is a relation of interdependencebetween the deployment of RE products and technologies and their market demand with regard tofinancing. The availability of financing for research and development as well as for manufacturing iscrucial for reducing the high costs of the systems. Similarly, adequate consumer finance enhancesaffordability and stimulates further demand, which in turn leads to further development of the REindustry.

Given this inter-linkage between industry and market growth on the one hand and pricereduction on the other, the challenge of financing is addressed under a life-cycle approach, whichexamines financing mechanisms during the stages of: 1) research and development; 2)demonstration; 3) early commercialisation; and 4) demand-driven commercialisation. The aboveframework was finalised through the following steps:

- Team meeting in Delhi, India in August 2003, attended by IGES, ERI and TERI- Electronic discussion and e-mails- Group meeting during RISPO research meeting in Bangkok in November 2003, attended by

IGES, ERI, Department of Energy, Fiji and TERI- Group meeting during 2nd RISPO plenary workshop in Hayama, Japan in February 2004,

attended by IGES, ERI, Department of Energy, Fiji and TERI- Writing the research note/background paper

Based on the research completed in Year 1, a research note Financing Renewable Energy inIndia: A Review of Mechanisms in Wind and Solar Applications was written by the team membersfrom IGES and TERI. This note, after undergoing the peer review process, is now being published inthe International Review of Environmental Strategies.

Collecting four more GPIs

The following four GPIs were collected in Year 2. They are summarised in section 4 of this

report:- Developing a sustainable financing model for SPV pumping- 7.8 MW biomass grid connected power - CDM project- Market development for Solar lantern in a post-subsidy regime- Commercialisation of Solar hot water systems

Presenting the research outcome at an International Conference

Based on the research of Year 1, a paper entitled Developments with Photovoltaic Researchand Applications in India was presented at the 14th International PV Science and EngineeringConference in Bangkok, in January 2004.


21/59

45

Background information in India

As of March 2003, the achievements in grid connected wind energy systems and Solar PV standat 1807 MW and 121 MWp respectively. Further, the government is keen to increase the share of REin the countrys installed power generation capacity by an additional 10,000 MW by the year 2012. Adraft of the RE policy statement has been submitted by MNES for approval. Within the long-termvision, this Policy Statement seeks to set out the major application areas and near term targets for theperiod up to the end of the Eleventh Five Year Plan, the year 2012. One of the major applicationareas is the village electrification of 18,000 remote villages. In another initiative, the Ministry ofPower (MoP) has set up a mission called REST Rural Electrification Supply TechnologyMission whose basic objective is to accelerate the completion of all villages progressively by theyear 2012 using local RE sources and decentralised technologies (as of March 31st 2003, 72715villages were yet to be electrified). Such target oriented programmes and the introduction of theElectricity Act 2003 (EA 2003), which came into effect on June 2nd 2003 are expected to facilitatethe development of the RE market in India.

The Electricity Act 2003 contains several provisions favourable to RE power, including ruralelectrification. It provides for local generation and distribution of electricity by Panchayats (legallyelected village level governing bodies), rural franchisees, NGOs and user associations by involvinglocal communities in managing electricity distribution. Under the open access scheme expected to bein place by mid 2004, the Independent Power Producers (IPP) can establish RE power plants forcaptive use, third party sale, power trading companies and for own transmission and distributionboth in rural and urban areas. The act also directs the Central Government to prepare nationalelectricity and tariff policies including RE based power. The most important feature of the act is thatit empowers state electricity regulators to promote RE specifically by purchasing electricity from REsources from distribution licensees. This is considered to be a major boost in the promotion of theRE sector in India. In other words, once it is implemented, the utilities in the state will be given atarget for RE based power, a certain percentage as specified by the regulator. In this liberalised

electricity market, the financing mix for RE is likely to change as new financing institutions andmechanisms are developed.

Good practices identified

This section gives a summary of the four good practices reviewed in this report

a. Developing a sustainable financing model for solar pumping systems

The scheme was designed to promote the use of solar photovoltaic pumping systems as analternative to diesel powered pump sets. This was to reduce diesel consumption, which in turn canreduce environmental pollution and hardship faced by farmers in fetching diesel from far of places.

The scheme has been one of the most successful schemes in the renewable energy sector in thecountry. Under the scheme so far 1700 pumps have been installed in the state of Punjab in the lastthree years. The total number of pumps installed in the country stands at 5113. It is estimated that anindividual farmer is able to save INR 40000 to 60,000.00 in diesel expenses per year. Additionally,employment is generated in the state since each manufacturer provides service facilities at thedistrict level. An appropriate financial scheme is the critical tool for the success of this project. Theinnovative approach of combining soft loans, user contribution, government assistance in terms ofcapital subsidy and users contribution and enhancing the advantage of depreciation tax benefit to thebeneficiary is key to success of the scheme. A judicious mix of these financial instruments resultedin a net contribution of beneficiary to Rs. 55,000.00, which is close to the investment required for aconventional diesel pump set. Thus the main barrier, high capital investment, was removed.


22/59

46

b. Market development for Solar Photovoltaic lantern in post-subsidy regime

Solar Lanterns were first developed in India almost a decade ago to provide a cost effective,affordable solution to meet the challenge of providing adequate light to the rural population of India.Solar lanterns were first developed to replace the candles, kerosene lights and hurricane lanternscommonly used by villagers. Besides this, portable light is used in agricultural fields duringirrigation, harvesting, during fishing at night, and for many other activities. The portable solarlantern is an ideal solution for these applications. The Ministry of Non Conventional Energy Sources,Government of India, initially developed the specifications for lantern that can give adequateillumination for 4 hours per day. In the initial stages of development, the lantern cost wasapproximately, Rs 5500, a subsidy of Rs 3500 was available from the central government and somestates provided additional subsidy. The lantern programme became quite successful and 441481lanterns were distributed by 31

stMarch 2003. The main barrier identified was the limited funding

available for subsidy. Market feedback from users gave new ideas for product development andmarketing to manufacturers. However, MNES approved just one lantern design under the subsidyscheme. The limited funds available for subsidy and the high price of non-subsidised lanterns when

compared with the subsidised lanterns, was identified as a major barrier to the large-scale penetrationof lanterns into the Indian market. A number of manufacturers identified the market potential anddeveloped various new designs. The cost of these smaller design models was reduced to Rs.1500. Inthe year 2003, the subsidy for solar lanterns was removed on the understanding that the product wasnow mature and capable of being sold in the open market on its own merits. In the post-subsidyregime, manufacturers developed various innovative schemes such as the salary deduction scheme toenhance the market for the new product.

c. Commercialisation of Solar hot water systems through financial intermediary scheme

The objective of this case study was to assess the effectiveness and impact of an innovativefinancing instrument, namely financial intermediary scheme, on the solar thermal market. The use

of solar water heating systems has increased rapidly in the domestic market in India, particularly inthe state of Maharashtra, in the last few years. The typical solar water heating system consists of asolar collector, insulated storage tank, cold water supply tank and insulated piping. The collectors aremanufactured and certified as per Indian standards (IS12933) and there are 58 approvedmanufacturers in the country. The total installed capacity in the state of Maharashtra is above 3.5Millions lit per day (70,000 Sq m. area). The Ministry of Non Conventional Energy Sources(MNES) removed the direct capital subsidy on solar water heating systems in 1993 and the demandfor solar water heating systems subsequently decreased. MNES then introduced two schemes: i)direct soft loan through nationalised banks and, ii) soft loan scheme through financial intermediaries.The financial intermediaries (FI) can be any company meeting the criteria of eligibility forchannelling the credit from IREDA to the customer. This approach opened new markets formanufacturers who themselves became financial intermediaries or created links between themselvesand the financial institutions participating in the scheme. This study was carried out to assess theimpact of the scheme on the market and manufacturers.


23/59

47

d. Biomass power development by the private sector - a combination of international funding

mechanism and public sector financing

The 7.8 MW biomass power plant in Rajasthan is one of the six projects short listed by theGovernment of The Netherlands under their Carbon Emission Reduction Units Procurement Tender(CERUPT). This is the first biomass power project to be commissioned under the CDM in India. Theproject utilises mustard stalk as a major biomass fuel for generating steam for power generation,which is abundantly available in the vicinity of the site. A portion of the electricity generated is soldto the State grid, namely Rajasthan State Electricity Board (RSEB). Kalpataru Energy VenturePrivate Ltd., has implemented this project near the village of Kawai in the Bharatpur District, in thestate of Rajasthan in India, based on CDM. The CDM project Design Document (PDD) is presentlyunder validation by the Accredited Operational Entity (AOE). The total investment in the project isUSD 7 Million and the expected revenue from CERs is USD 1.3 million over 10 years, with a totalCERs generation of 0.3 million over 10 years. The project achieved financial closure from anationalised bank, namely the Oriental Bank of Commerce. The project also envisages an advancepayment from CERs revenue totalling 50 % of the total revenue from CERs on a discounted basis.

The combustion technology used is totally indigenous, whereas the turbine is imported fromJapan. The power generated is sold to the state utility, namely the Rajasthan Vidyut Prasaran Nigam(RVPN). The Power Wheeling and Banking Agreement (WBA) has also been signed with RVPN andthe Vidyut Vitran Nigams (VVNs) for the sale of power to third parties. The electricity generatedwill replace the mixture of lignite and coal-based power generation. The project generates substantialdirect employment and contributes to the economic development of the region.

Strategic Policy Optionsdevelopeda. Optimum use of government funds

There is a clear indication that public finance, either through subsidy, fiscal incentives or otherforms of governmental financial support, is crucial in the initial stages of technology and marketdevelopment. In both developing (Indias RE programme) and developed countries (JapansSunshine project), government support in terms of technology development funds, performancelinked incentives etc. have helped the growth of the RE sector. However, at the commercialisationstage, sustainable market development is illusionary so long as it depends solely on subsidy.Nevertheless, the removal of subsidy can only be envisaged in terms of gradual policy change. Thisinvolves a competitive approach to the provision of subsidy with the objective of optimal use, aswell as a stable and long-term commitment to selective subsidy to ensure long-term privateinvestment commitments, and a combination of subsidy with loan ownership models. The approachtaken under this SPO includes: a) the choice of government funding at the demonstration stage,subsidy support at the market initiation stage and soft loans at the commercialisation stage, b) the

use of a fee-for-service model that matches the user s financial capacity with the level of servicesprovided and the effective use of various developmental funding in setting up the utility.

Related good practices

Market development of Solar lanterns in post-subsidy regime Developing a sustainable financial model for solar pumping systems Commercialisation of Solar hot water systems through the financial intermediary (FI)

scheme implemented by MNES/IREDA

Solar PV minigrids in Sunderbans- a combination of government and community financing Public sector financing for wind power development


24/59

48

b. International funding mechanisms

Bilateral and multilateral financing sources have played a major role as incubation funds for REdevelopment. However, the traditional method of one-time delivery of aid either through directfinancing or provision of equipment has serious limitations. This strategy option identifies newforms of delivery of external aid within the national policy framework, taking into considerationbarriers that can best be addressed by external aid and international funding mechanisms, such as theGlobal Environment Facility and the clean climate initiatives. The analytical work under the SPOhas focused on the Clean Development Mechanism (CDM) taking into consideration internationaldevelopments in the CDM process as well as those at the national level in India. At the internationallevel, the modalities and procedures (M&P) for operationalising CDM have progressed satisfactorily.This has been accompanied by similar progress at the national level, in terms of establishing theDNA (Designated National Authority), a number of project design documents in response to CDMtenders, scores of capacity building events, country CDM studies etc., In India, the DNA, establishedin December 2003, had cleared around 17 projects as of February 2004 out of a total submission of47 projects. The CDM project development has peaked in India and there are more than 100 PINs

(Project Information Notes) currently seeking sources for development PDDs (Project DesignDocuments). Under various donors of the CDM capacity-building programme in India (8 so far) andin response to various CDM tenders, a total of around 50 PDDs are in various stages of completion,while many other PDDs have already been completed. These donors and tendering countries includeGTZ, CIDA, The World Bank, Sweden, The Netherlands, the Prototype Carbon Fund, Austria,Foreign Commonwealth Office, U.K. Additionally, at least 75 PDDs are at various stage ofcompletion under private sector initiatives,. Most of the PDDs are being developed in the energysector, with renewable energy the most frequent.

Related good practices

Wind power development by the private sector - a combination of international fundingmechanism and public sector financing

Biomass power development by the private sector - a combination of international fundingmechanism and public sector financing


25/59

49

Suggestions on research plan in Year 3

April:

Renewable energy conference in New Delhi

Revising good practices

May June

Developing SPOs

Drafting background papers

August October

Prepare initial SPOs national report

September December

Organising two workshops to disseminate the research findings

January February

Revising SPOs national report

Finalise SPO report


26/59

50

3.2.1.3. Good Practices collected in FY 2003

1.

Commercialisation of Solar hot water systems through financial intermediary scheme,India.

2. Developing a sustainable financing model for solar pumping systems, India.3. Market development for Solar Photovoltaic lantern in post-subsidy regime, India.4. Biomass power development by the private sector - a combination of international funding

mechanism and public sector financing, India.

5. Demonstration of wind power concession policy to reduce the large-scale wind powerprice, China.

6. Encouraging Various Finance Sources for the Utilisation of Landfill Gas ThroughEconomic Incentive Policies, China


27/59

51

Asia-Pacific Environmental Innovation Strategies (APEIS)

Research on Innovative and Strategic Policy Options (RISPO)

Good Practices Inventory

Commercialisation of Solar hot water systems through financialintermediary (FI) scheme implemented by MNES/IREDA

Keywords: Solar water heating systems, Financial Intermediary (FI) scheme, IREDA, MNES

Strategy: Innovative financing for renewable energy development

Environmental areas: Urban environment

Critical instruments:Economic instruments, Organisational arrangements

Country: India

Location: State of Maharashtra, India

Participants: Solar thermal manufacturers, Indian Renewable Energy Development Agency (IREDA),

Individual customers, Ministry of Non-Conventional Energy Sources (MNES)Duration: 1995-onwards

Funding: Community, IREDA and private financial institutes

Background:

The use of solar water heating systems is increasing rapidly in domestic market in India and particularly

in the state of Maharashtra in last few years. The typical solar water heating system consists of a solar

collector, insulated storage tank, cold water supply tank and insulated piping. The collectors are

manufactured and certified as per Indian standards (IS12933). There are 58 approved manufacturers in

the country. Total installed capacity in the state of Maharashtra is above 3.5 Millions lit per day (70,000

Sq m. area). The Ministry of Non Conventional Energy Sources (MNES) removed the direct capital

subsidy on solar water heating systems in 1993. Subsequently the demand for solar water heating

systems reduced. MNES then introduced two schemes- i) direct soft loan through nationalised banks

and, ii) soft loan scheme through financial intermediaries. The financial intermediaries (FI) can be any

company meeting the criteria of eligibility for channelling the credit from IREDA to the customer. This

approach opened new markets for manufacturers who themselves became financial intermediaries or

who tied up with financial institutions for participating in the scheme. This study was carried out to

assess the impact of the scheme on market and on manufacturers.

Objectives:

The objective of this case study was to assess the effectiveness and impact of the innovative financing

instrument namely financial intermediary scheme on the solar thermal market

Description of the activity:The scheme of soft loan through financial intermediaries was formulated to open the market for solar

water heating systems. It was observed that there is a huge market potential for solar water heating

systems as the technology is proven and accepted by the market. However, the main barriers were i)

limited funds available under subsidy schemes and, ii) lengthy and time consuming procedures to get

the subsidy sanctioned. The soft loan through intermediaries removed these two barriers effectively.

Under the scheme, financial intermediary can get a line of credit approved from IREDA for providing

loans to customers based on the projected sales. The loan is available for onward financing the

customer for purchase of solar water heating systems. The FI can avail loan at an interest rate of 2.5 %

per annum and can extend loan to consumer at an interest rate of up to 5% (spread of 2.5%). the loan is

available upto 80% of the system cost. The FI is responsible for the recovery of the loan amount from

the customer and is also responsible to return the loan to IREDA, which provided the finance. The

funds are revolving type and FI based on its business plan can avail further loans. Any legal companythat can satisfy eligibility criteria and terms and conditions of the loan scheme can become the FI. The

Summary of the Practice


28/59

52

scheme was specifically designed to help individual customers and customers of domestic hot water

systems.

Overview

Economic instruments, in particular the combination of various financing instruments, and an

organisational arrangement whereby a one-stop service takes care of product delivery, financing and

after sales services were critical to the success of the scheme.

Economic instruments

Choice of government funding at demonstration stage, subsidy support at market initiation stage and

soft loan at commercialisation stage

The product has seen the support of various financing instruments at different stages of its life-cycle.

The sector has witnessed a tremendous growth even after the removal of subsidy, indicating that

appropriate financing instruments at appropriate developmental stage help the sector grow.

Organisational arrangements

One-stop service regarding product, finance and after-sales service.

The financing intermediary scheme provided means for financing proven renewable energy technology

on wider scale. It helped consumers to get guaranteed service from one point. It also increased the

consumer confidence in manufacturer, product and after sales service. The scheme also helped

increasing the credibility of the products since the supplier/ manufacturing company offered loan too.

The scheme helped manufacturer to provide financial assistance to prospective customer directly. This

improved the market as customers from small towns, rural and semi urban areas could also take loaneasily. Same supplier providing loan, also gave the customer a confidence about his credibility, as well

as quality and durability of the product. This improved the market response and trust in technology. The

sales for solar water heating system are rising steadily and total installed capacity is now well over 0.7

million Sq. m as on March 2003. Following graph shows the year wise installations.

Source - MNES annual reports from 1988 to 2000

1. Appropriate financial schemes are a must to cater to the needs of the consumers for proven

RE technologies that are on the verge of commercialisation.

Impacts

Lessons Learned

100

150

200

250

300

350

400

450

500

550

1988 1990 1992 1994 1996 1998 2000

Year

X1000

sq.m

Critical Instruments


29/59

53

2. Adequate availability of working capital and funds for providing loan helps during early

commercialisation. Shortage of funds for loan scheme, subsidy etc. act as barrier for people

to run away from RE technology.

3. Timely change in policies responding to changing market needs both in term of finance and

product up-gradation is important.

4. The capital investment in the case of solar water heating system is 4 times more than that for

the conventional electric geyser however; the savings in electricity consumption are equal toor in some cases, more than the monthly repayment of the loan. However, as market

increased, the manufacturers, particularly small and medium ones with their limited resources

faced difficulty in providing guarantees required for loan security. Also, their locked up

capital in loan for five years became barriers. However, by that time the bank loan schemes

came in to place in a big way and thus the transaction was smoother. The customer now has

choice of loan schemes or for cheaper price for 100% down payment purchase.

The success of the intermediary finance scheme implemented through manufacturers and other eligible

agencies can be effectively used for other products and technologies in other countries. In the case ofsolar hot water system alone, apart from domestic sector, the process heat requirements in the small and

medium enterprises can economically be met by this technology.

Mr. Shirish Garud,

Fellow,

The Energy and Resources Institute (TERI)

Darbari Seth Block, Habitat Place,

Lodhi Road,

New Delhi 110003,

India.

[email protected]

Ph 0091-11-24682111

Fax 0091-11-24682144

Case reviewer: Shirish Garud, Fellow, The Energy and Resources Institute (TERI), E-mail:

[email protected]

Information date: 20 March 2004

Potential for Application

Contact


30/59

54




DEVELOPING A SUSTAINABLE FINACIAL MODEL FOR SOLARPUMPING SYSTEMS

Keywords: Solar photovoltaic, Solar water pumping, Soft loan, Subsidy, IREDA


Environmental areas: Water resource management, Rural Environment

Critical instruments:Economic instruments, Awareness capacity building

Country: India

Location: State of Punjab, IndiaParticipants: Punjab Energy Development Agency, PV industry, Individual farmers (Village

community), local enterprise, Indian Renewable Energy Development Agency (IREDA), Ministry of

Non-Conventional Energy Sources (MNES)

Duration: 1999-onwards

Funding: Central subsidy, sate subsidy, community, IREDA, private financial institutions

Background:

Punjab is the largest surplus state in food grains in India. The state is also called as the food bowl of

India. Located in North West of the country, Punjab has an area of 50362 Sq. km comprising of plain

and fertile land. At present, over 84% of the total geographical area of the state is under cultivation. The

state has four major rivers and a vast network of canals and tube wells for irrigation purpose. As per

State government Statistics, in 1997-98 the state had a total of 9,75,000 tube wells out of which7,50,000 are having electrical pumps and 1,25,000 are powered by diesel generators. Due to the

shortage of electricity, many tube wells, which are powered by electricity, have alternative diesel

powered pumps installed with it. The water table available in most parts of the state is @ 5 m. Solar

Photovoltaic based water pumping systems, though found suitable, are beyond the reach of the farmers.

The solar PV pumping project of MNES/IREDA as implemented in the state of Punjab, has introduced

innovations in original scheme to not only match the technology services to the needs of the farmers,

but also to make these services affordable to them.

Objectives:

The scheme was designed to promote the use of solar photovoltaic pumping systems as an alternative to

diesel powered pump sets. This was to reduce the diesel consumption, which in turn can reduce the

environmental pollution and hardship of farmers who have difficulties in fetching diesel from far offplaces.

Description of the activity:

Under the Solar Photovoltaic Water Pumping Programme of the MNES, the Punjab Energy

Development Agency (PEDA) has completed installation of 500 solar pumps in Punjab for agricultural

uses. When the subsidy scheme for solar photovoltaic pumping was launched in India, only 900 Wp (1

Hp) system at roughly Rs. 200,000 with 50% capital subsidy on the complete system was approved.

There were few takers of this scheme in Punjab as the 1 Hp system was not sufficient to meet irrigation

requirement of the farmers, and the expected contribution from the farmer (Rs. 100,000) was very high.

Realising that the farmers needed a minimum 2 Hp (1800 W) capacity pump and a suitable finance

scheme (as this pump costs Rs. 350,000), the Punjab State Government through its agency- Punjab

Energy Development Agency (PEDA) took following initiatives:



31/59

55

1. Got the 1800 W (2 Hp) capacity solar photovoltaic pumping system approved by the MNES fordistribution under the scheme

2. Helped manufacturers to tie up with financial institutions to take soft loan from IREDA andoffer pumps under lease-finance scheme. (In this scheme, the financial institution takes

advantage of the financial incentive in terms of 100% accelerated depreciation in the first year

available under Income tax rules and passes on this incentive to the user by offering him a one-time lump-sum payment instead of the regular rentals)

3. Offered states contribution to pay half of the one-time lump-sum charges to the financialinstitution on behalf of the farmer, thereby reducing his payment burden further.

The above steps brought down the farmers share from Rs. 175,000 to Rs. 35,000. The 1800 Wp - 2 Hp

system is capable of delivering about 140,000 litres water every day from a depth of about 6 7 meters.

This quantity of water is considered adequate for irrigating about 5 8 acres land holding for most of

the crops. PEDA made initial identification of villages suitable for installation of solar pumps. To

identify the beneficiaries, newspaper advertisements were given. The applicants were asked to apply

along with proof about ownership of at least 5-acre land holding in their name, information about water

table and deposit Rs. 10,000 with PEDA. After scrutiny of the applications, the IREDA approved and

empanelled suppliers were asked to visit the short listed sites for a detailed survey for final siteselection. There after the solar pumps were installed. Five suppliers participated under the programme.

Each supplier was allocated sites in clusters. They were required to open at least one service center in

Punjab. Solar pumps have been supplied with a five-year maintenance contract. The solar pumps have

been installed under the lease-finance arrangement, where the leasing company has secured a soft loan

(at low interest rates and long repayment periods) from IREDA. This company, who is the owner of the

system, has leased the system to the farmer. The company has availed of the income tax benefits under

the accelerated depreciation allowed by the Government of India on renewable energy systems. These

benefits have been passed on to the farmer in the form of an option to pay reduced lease rentals as one

time upfront lump-sum amount. PEDA provides further subsidy on this lump-sum amount. As a result

of this arrangement, farmer pays only Rs. 35,000 towards the pumping system; the remaining amount

of lease charges is paid by PEDA. Field reports indicate that farmers are happy with the solar pumps.

The successful implementation of this project in Punjab has encouraged other states like Haryana, Uttar

Pradesh, Gujarat, Bihar, Andhra Pradesh etc. to propose implementation of similar projects in

respective states. This scheme was launched in financial year 2000-2001.

Overview

The combination of various economic instruments with publicity and awareness campaigns were the

main factors that contributed to the success of the programme.

Economic instruments

Appropriate financing scheme is the critical tool for the success of this project. The innovative

approach of combining soft loan, user contribution, government assistance in terms of capital subsidy

and users contribution and enhancing the advantage of depreciation tax benefit is key to success of the

scheme. Judicious mix of these financial instruments resulted in the net contribution of beneficiary to

Rs. 35,000 which is close to the investment required in conventional diesel pump set. Thus main barrier

of high capital investment was removed.

Awareness capacity building

A publicity and awareness campaign through electronic, print media and exhibitions is a regular feature

of the programme. Through radio programmes in Hindi and other regional languages, awareness was

created about the SPV water pumping systems. To encourage publicity by the manufacturers, a scheme

Critical Instruments


32/59

56

for reimbursement of 50% of the cost of publicity on specific items, subject to a limit of Rs.1,00,000

per supplier was continued. IREDA published brochures in Hindi, English and several regional

languages. The SPV water pumping systems were displayed in exhibitions and farmer fairs.

Training programmes on the operation & maintenance and water management aspects of PV water

pumping systems were also continuing for actual users, local technicians and mechanics. State Nodal

agencies have also started conducting training and awareness programme for existing / prospective

users of pumping systems.

The scheme has been one of the most successful schemes in the renewable energy sector in the country.

Under the scheme so far 1700 pumps have been installed in the state in last three years. Total pumps

installed in the country are 5113. It is estimated that each farmer is able to save Rs. 40,000 to 60,000 in

diesel expenses per year. Apart from this there is employment generation in the state since each

manufacturer has service facilities at district level.

Selection of products that satisfy need of the users is important factor in promoting Renewable Energy

based schemes. Mere availability of subsidy for 900W pump capacity pump was not sufficient to

develop market as the pump capacity was not sufficient. Pump of 1800W capacity suited well for many

applications and hence the project became popular.

Similar schemes are now approved for other states like Haryana, Andhra Pradesh, Uttar Pradesh,

Gujarat etc. Location-specific factors such as the availability of ground water are essential elements for

the successful implementation of these schemes.

Mr. Shirish Garud,

Fellow,

The Energy and Resources Institute (TERI)

Darbari Seth Block, Habitat Place,

Lodhi Road,

New Delhi 110003,India.

[email protected]

Ph 0091-11-24682111 Fax 0091-11-24682144

Dr. Gueye Kamal,

Policy Researcher,

Long-term Perspectives and Policy Integration Project

Institute for Global Environmental Strategies (IGES)

2108-11 Kamiyamaguchi, Hayama, Kanagawa 240-0115, Japan

[email protected]

TEL: +81-46-855-3863/3861 FAX: +81-46-855-3809

Impacts

Lessons Learned

Potential for Application

Contact


33/59

57

Case reviewer:Mr. Shirish Garud, Fellow, The Energy and Resources Institute (TERI), E-mail: [email protected]

Dr. Gueye Kamal, Policy Researcher, Institute for Global Environmental Strategies (IGES), E-mail:

[email protected]

Information date: 20 March 2004


34/59

58




Market development for solar lantern in post-subsidy regime

Keywords: Solar photovoltaic lantern, Soft loan, Subsidy, Salary deduction scheme


Environmental areas: Climate change, Rural EnvironmentCritical instruments: Organisational arrangements, Technologies

Country: India

Location: State of Andhra Pradesh

Participants: Management and employees of Andhra Pradesh State Road Transport Corporation

(APSRTC), PV industryDuration: 2003-onwards

Funding: Employee salary scheme, user contribution, soft loan

Background:

Solar Lanterns were first developed in India almost a decade back to provide cost effective and

affordable solution to meet the challenge of providing adequate light to the rural population of India.

According to the latest data released by the Ministry of Power, Government of India, there are

161982648 un- electrified households in India. Providing gird-connected electricity to these remote and

thinly spread households all across the country is a mammoth task. The solar lantern was first

developed as replacement of candles, kerosene lights and hurricane lanterns, which are commonly used

by villagers. In addition this, portable light is also required in agricultural fields during irrigation,

harvesting, during fishing at night, and many other activities. The solar portable lantern is an idealsolution for these applications. Ministry of Non Conventional Energy Sources, Government of India

initially developed the specifications for lantern that can give adequate illumination for 4 hr per day.

When developed first, the lantern cost was approximately, Rs 5500 and subsidy of Rs 3500 was

available from Central Government and some states provided additional subsidy in initial phase. The

lantern programme became quite successful and 441481 lanterns were distributed till 31St

March 2003.

The main barrier identified was the limited funds available for the subsidy. The market feed back from

users of solar lantern gave new ideas for product development and marketing to manufacturers.

However, MNES had only one approved design for lantern under subsidy scheme. The barrier of

limited funds available for subsidy and high price for non-subsidised lantern as compared to subsidised

lantern was identified as barrier for large-scale penetration of lanterns in Indian market. Various

manufacturers identified the market potential and they developed various new designs. The cost ofthese smaller design models came down to Rs.1500. However, these were not available on subsidy and

to reduce the down payment from consumers, the manufacturers developed various innovative schemes

that are discussed in this case study. In the year 2003, the subsidy from solar lanterns was removed with

an understanding that the product is now matured and is capable of being sold in the open market upon

its own merits.

Objectives:

To develop the market for solar lantern in the post-subsidy regime. The product is being promoted as an

alternative to kerosene lanterns and lights in rural environment and as emergency lights during power

cuts in urban environment.

Description of the activity:Few manufacturers devised following innovative schemes for promotion of sale of solar lanterns

without the aid of capital subsidy



35/59

59

1. Salary deduction scheme This scheme is being implemented in the state of Andhra Pradesh ofIndia, through its state owned road transport company (A P State Road Transport Corporation.).

The corporation has more than 1.28 million employees. Most of these are from rural part of the

state and have ancestral houses or joint families in villages. The solar lanterns are provided to

them through salary deduction scheme. The lanterns are typically costing Rs. 2000- 3500 but

available on one/ two year equated monthly payments. The employees of organisation for

example APSRTC can buy lanterns for their family, relatives or even as gift for friends. Theemployer by way of memorumndum of understanding ensures the repayment to the

manufacturer. The manufacturer is also compelled to give proper service during and after the

loan period as a part of the contract.

2. Second scheme used was to offer gifts with lantern. Utility items like camera, watches wereoffered as gift along with lantern. Normally, the gift item is available form manufacturer at

lower price after deducting taxes, and dealer margin etc. However, for the consumer, the cost of

the gift item is high thereby giving him feeling of value for money and additional benefit.

Overview

Institutional arrangements for direct marketing and technological innovations in design of the product

helped in opening up of commercial market for solar lanterns.

Organisational arrangements

The salary deduction scheme of the APSRTC is an innovative institutional arrangement where the

employer provides one-stop service to its employees for sales, credit and after sales service of a

consumer. It is a win-win situation for all because the supplier of the products deals with one corporate

consumer instead of many small consumers thereby reducing his transaction costs. The consumer

reduces his risk perception of investing in a relatively new product by being one among many buyers.

Similarly, the gift scheme has also stimulated the purchase of lanterns

Technologies

While the lantern was being sold under the subsidy scheme, there was only one government approved

design that was available for purchase. Technological innovations, not only in product design but also

in its performance have now been introduced that are helping in stimulating non-subsidised market.

Each solar lantern that is designed to operate for 4 hrs every day for 300 days in a year is capable of

avoiding the use of 1200 hrs of kerosene lamp. The most commonly used kerosene device in rural India

has a specific consumption of 0.025 litres per hr. Accordingly, each solar lantern will save 30 litres of

kerosene in one year, thereby mitigating 73.5 kg CO2 annually (emission intensity of 2.45 kg CO2 per

litre of kerosene burning).

Different attributes of the product has been found to be useful both for rural and urban population. As

Innovative Financing for Renewable Energy

Documents

Transcript of Innovative Financing for Renewable Energy