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close this bookPhotovoltaic Household Electrification Programs - Best Practices (WB)
close this folderInstitutional models
View the document(introduction...)
View the documentEnergy service company (ESCO)
View the documentLeasing arrangements
View the documentConsumer financing
View the documentCash sales
View the documentThe role of governments and donor agencies
View the documentRole of the world bank and other donors

(introduction...)

5.1 This Chapter examines institutional structures for implementing household PV programs and discusses the roles governments and donor agencies can play in supporting such programs. PV systems programs have been implemented with various institutional arrangements. These range from electric utilities or rural electric cooperatives to private sector leasing and direct sale programs. No single institutional design is applicable in all countries; rather, successful programs are based on local conditions, capabilities, and consumer needs. The experiences of Indonesia, Sri Lanka, and the Philippines demonstrate that effective and sustainable programs have made use of existing institutions, rather than new organizational structures. While this approach avoids the problems of creating and staffing new institutions, the capabilities of existing institutions may have to be strengthened through staff training and, occasionally, through expansion. Also, existing institutions may require specific incentives to accept additional responsibilities. When it is not possible to utilize existing organization, new dedicated solar electrification organizations can be established. In the Pacific Islands, the Tuvalu Solar Electric Cooperative Society was set up after several attempts to use the local utility failed.

5.2 This following section discusses four models for household PV programs: energy service companies (ESCOs), leasing or installment arrangements, consumer financing through dealers and commercial banks, and cash sales. It also discusses ownership arrangements, financing mechanisms, and the flows of products, services, and money. The institutional models described apply to newly created solar electrification organizations as well as existing institutions.

Table 5-1. PV Program Structures

Structure

Ownership

Financing

Product flows

Service flows

Money flows

Examples

ESCO

Module and

Provided by

Bulk purchase of

Provided by ESCO as

Monthly consumer

Utility: Idaho Power Company (USA)


controller

ESCO through

systems or components;

part of ESCO

payments to ESCO; ESCO



owned by

service

installation by ESCO or

agreement

pays equipment suppliers,

Coop: Rural Electricity Coops (Philippines),


company;

agreement

by supplier under


service and admin. staff,

Tuvalu Solar Electric Cooperative


other


contract to ESCO


and bank loans

Society (Pacific Islands)


components







may be owned





Private: SOLUZ, Inc. (Dominican Republic)


by customer or







company






Leasing

Module and

Provided from

Bulk purchase of

Provided by

Monthly consumer

NGO: Gansu Solar Electric Light Fund


controller

intermediary

systems or components;

intermediary or

payments to intermediary.

(China)


owned by

through lease

installation by

private vendor under

Intermediary pays



intermediary;

agreement

intermediary or supplier

contract to

equipment suppliers,

NGO-led. Coop-run: Solanka Sun Society,


other


under contract to

intermediary; may be

admin. staff, and bank

Sarvodaya (Sri Lanka), Enersol


components


intermediary

included as part of

loans. Service technicians

(Dominican Republic)


usually owned



leasing agreement

may be paid by consumer



by customer




or intermediary.

Govt-led. Coop-run: BANPRES (Indonesia)

Consumer

All

Provided from

Individual purchase of

Provided by private

Proceeds of loan used for

Dealers: ADESOL, ADEPE, ADESJO,

Financing

components

commercial

system; installation by

vendor, generally on

lump-sum consumer

SSID (Dominican Republic); Pt.


owned by

bank, coop, or

private sector or NGO

a fee-for-service

payment for equipment.

Sudimara, Pt. Kyocindo; (Indonesia);


customer;

vendor


basis, through service

Monthly consumer loan

Solar Power & Light Company (Sri


module can be



contracts

repayment. Servicing paid

Lanka), Electricidad del Sol, Industrias


used as loan




by consumer at time of

Electricas (Dominican Republic)


collateral,




service.



although other





Banks: Bank of Ceylon, Hatton Bank (Sri


loan security





Lanka)


may be







needed.






Cash

All

Not applicable

Individual purchase of

Provided by private

Lump-sum payment to

Dealers: Pt. Sudimara, Pt. Kyocindo

Sales

components


system, installation by

vendor, generally on

vendor. Servicing paid by

(Indonesia); Solar Power&c Light


owned by


private sector or

a fee-for-service

consumer at time of

Company (Sri Lanka), Electricidad del


customer


consumer

basis, through service

service.

Sol, Industrias Electricas (Dominican





contracts


Republic); all companies in Kenya

Energy service company (ESCO)

5.3 An ESCO sells energy services but retains ownership of the system that provides them—that is, the hardware is neither sold nor leased. An electric utility is, by definition, an ESCO. Cooperatives, NGOs, and private companies can also function as ESCOs. Working examples of such ESCOs include the Tuvalu Solar Electric Cooperative Society in the Pacific Islands and SOLUZ in the Dominican Republic (see Box 5-1). Typically, an ESCO procures solar home systems in bulk from regional distributors or on the international market, installs the system and services the power-generating components (which, at a minimum, include the PV module and support structure). The ESCO is also responsible for financial management and administration. ESCOs may also retain ownership of controllers, inverters, and batteries, so that customers pay only for energy service.

5.4 The ESCO model has several advantages. First, the monthly cost to the consumer can be reduced by spreading the cost of the solar home system over a period comparable to its physical life (ten years or more). The smaller monthly payment makes the system more affordable, allows the ESCO to serve a larger population within its service territory, and creates a "critical mass" of demand. A large consumer base can help the ESCO provide cost-effective maintenance and administrative service and reduced equipment costs, through standardization and high-volume purchasing.

5.5 By aggregating demand, the ESCO can obtain favorable financing terms that are not generally available to individual consumers. ESCOs are often eligible for low-interest loans or grants from private or public sources and are generally considered to be better risks and more creditworthy than individual rural customers. In addition, the transaction costs associated with one large loan are lower than they are for a large number of small consumer loans. The favorable terms can then be passed on to customers in the form of lower service fees.

5.6 The ESCO is a useful model for delivering least-cost rural energy services in areas where offgrid household PV initiatives can be coordinated with conventional electrification efforts by electric utilities.

5.7 Despite its attractive features, the ESCO model does present some disadvantages. First, an ESCO generally requires an existing organization, since setting up a new ESCO is difficult and expensive. Second, a sustainable ESCO model will need a broad base of local support. A handful of temporary personnel, no matter how qualified, will not be able to guarantee strong institutional capability. Third, a full cost-recovery mechanism must be in place in order to ensure the program's sustainability. Programs that rely on grant funds for initial capital investment, must, at a minimum, secure payment to cover recurrent costs. Fourth, since customers do not own their PV systems, the product may be misused.

5.8 Operation of an ESCO also requires a broad range of technical and business capabilities within a single organization, as well as a long-term view of debt servicing that may involve repayment schedules of ten years or more. The decades of experience with grid-based rural electrification programs provide some key lessons for ESCOs.

· The ESCO must be operated as a business with gross income greater than gross expenses.

· ESCO users should participate in capital formation, either through cooperatives or through significant contributions to the initial costs of the system. This will instill a sense of ownership in participants and reduce dependence on outside financing.

· While it is preferable for user or participant fees to include all costs, including capital recovery, at a minimum they must cover the operating costs of the service and be collected regularly.

· The staff must be proficient in business management, photovoltaic systems installation, trouble-shooting and repair, and routine maintenance.

· The ESCO must adopt technical and operating standards to ensure that good quality components are procured, maintenance and repair procedures are simple, and the cost of stocking spare parts is minimized.

· The ESCO staff must have access to information, technical assistance, and continued training in order to maintain their technical and managerial effectiveness.

· Fiscal and technical oversight is required to maintain financial "due diligence" and to detect and correct problems with service resulting from poor management or technical error (Waddle 1994).


Incorporating these features in the design of ESCO programs increases the likelihood that customers will receive efficient, effective services.

5.9 Since ESCO administration can impose significant overhead costs on a household PV program, a critical mass of customers is required for a sustainable program. If there are not enough participants, the administrative cost burden will overwhelm the program and make the systems unaffordable. In a small 600-household program proposed by Sarvodaya in the Southern Province of Sri Lanka, levelized administrative costs are estimated at Rs. 1,750/year per system ($35), which is equivalent to 12 percent of the initial installed cost. This sum covers the costs of collecting fees, administration, service technicians (one per 60 systems), fuel for transporting components, motorcycles and bicycles, office supplies, tool kits, and training. It approximates the 10 percent administrative charge levied by the Rural Electric Cooperatives in the Philippines for their relatively small household PV programs. Instead, in parts of Indonesia, where many more solar home systems are deployed, consumers are only charged a shipping and handling fee of Rp. 25,000 ($12.50) at the time of installation and a bill collection fee of Rp. 6,000/year per system (less than $3, or about 0.5 percent of the installed cost). Maintenance costs are borne directly by the customer.

Box 5-1
Examples of Solar Home System Projects Implemented by ESCO

SOLUZ Inc., a private US company working with Industrias Electricas belle Vista in the Dominican Republic, operates as a commercial, for-profit venture (Hansen 1994). Within months of its creation in early 1994, SOLUZ was providing PV systems services to 100 customers in the Dominican Republic. The company expects a ten-fold increase in customers by the end of 1995.

Five rural electric cooperatives in the Philippines serve as ESCOs for solar home systems. The cooperatives own the PV modules, the supports, and the controllers; consumers own the remaining components and pay a fixed monthly fee to cover loan repayments plus administrative and maintenance costs.

The ESCO approach is also used by the Tuvalu Solar Electric Cooperative Society and in other PV systems projects in the Pacific Islands. Consumers pay a $40 connection fee, plus a monthly fee of $5 for a one-panel system ($6.10 for a two-panel system) to cover administrative and service expenses; the ESCOs absorb the cost of the PV module. These programs depend on government or donor startup funds and therefore are not financially self-supporting.

Two US utilities, Southern California Edison and Idaho Power, have pilot programs that offer their customers grid-quality electricity, using relatively large PV systems (the minimum system size is 1 kWp). The utility owns the PV system and provides installation and maintenance. The consumers pay a 5 percent connection fee and 1.6 percent of the net installed cost per month.

Leasing arrangements

5.10 Under a leasing or hire-purchase arrangement, the intermediary retains ownership of the solar home system or some of its components until the cost is recovered. The solar home system is used to secure the lease agreement. Most leasing programs to date have been set up with grants or low- or zero-interest loans from donors and governments and have used NGOs as intermediaries. In Indonesia, Sri Lanka, and the Philippines these grants have been used to establish revolving funds to buy PV systems. The intermediary serves as the manager and guarantor of the funds if loans need to be repaid, registers qualified participants, makes bulk purchases, provides installation and maintenance services, stocks spares, trains consumers, collects fees, and performs other administrative tasks. The BANPRES Project in Indonesia and the Solanka/Sun Societies and Sarvodaya in Sri Lanka use lease arrangements under which customers make monthly payments to the NGO/intermediary responsible for servicing the debt to the donor agency or government. Once a loan is paid off, ownership transfers to the customer. The principal differences between ESCOs and leasing arrangements are that ESCOs retain ownership of the major solar home system components, while in lease or hire-purchase arrangements, fees are essentially loan repayments. Services such as maintenance must be paid for separately. As an institutional model, lease or hire-purchase arrangements share many of the potential advantages of the ESCO scheme but are often constrained by the scarcity of grant financing to set up revolving funds.

Consumer financing

5.11 Consumer financing is a very common mode for increasing the sale of consumer durable goods in all parts of the world (see Table 5-1). However, direct sales are limited either to those who can obtain financing from dealers or local banks or to high-income consumers who can pay cash. Some consumer financing models involve NGOs; for instance, in the Dominican Republic, ADESOL and ADESJO have addressed the lack of commercial bank financing by providing loans for solar home systems through a national network of qualified independent solar entrepreneurs.

5.12 Credit arrangements in which dealers finance solar home systems resemble those available for other consumer durable goods such as sewing machines, motorcycles, televisions, and refrigerators. Consumers obtain maintenance services through an annual service contract or on an as-needed basis. The dealers, who are part of the community, are familiar with their customers' creditworthiness. Unlike banks, they do not require stringent security guarantees. Dealers have knowledge of and confidence in their products. Their incentive to sell results in faster, more efficient transactions than with commercial bank financing. However, dealers typically offer shorter repayment periods and relatively high interest rates. With access to cheaper funds, dealers could offer their customers more favorable rates.

5.13 Commercial banks rarely finance the purchase of consumer durables in rural areas of developing countries. When bank financing is available, interest rates are high. For example, the KUPADES program of the Bank Rakyat Indonesia has begun lending money to rural customers for consumer goods. Interest rates are around 30 percent per annum, and repayment periods are typically one year, although the bank is allowed to lend for up to three years. The limited ability of rural people to offer acceptable collateral also restricts commercial bank financing to high income-consumers, those with fixed assets or co-guarantors or to salaried borrowers.

5.14 Commercial bank financing can help implement household PV programs if:

· The solar home system is considered eligible for bank financing. Some banks, which offer loans for "income-producing" investments, use the income stream as partial loan security. However, a solar home system may not qualify as "income-producing". Banks must be encouraged to examine the potential effects of PV systems on household income—for instance, a woman can earn money during the day if she has light by which to perform household tasks at night.

· Bank staff are familiar with household PV systems. The Sri Lankan experience shows that even if banks are willing to lend money for solar home systems, an awareness program targeted at loan officers is necessary.

· Borrowers have convenient access to banks. Ideally, the bank (or a branch) should be located close to borrowers. Proximity is particularly important if more than one visit is needed to secure the loan and if payments must be made in person. Since banks are open only on weekdays, dealers may have to assist customers in arranging financing or, as happens in some rural credit schemes, may need to offer outreach services for rural customers.

· Loan application procedures are streamlined. Loan forms should be simple to complete and the number of visits required to approve the loans kept to a minimum. Again, it is helpful to have suppliers assist buyers in preparing loan applications and negotiating with banks.

· Collateral and security barriers are addressed. Rural households without salaried workers may lack the necessary collateral to secure a loan. In some cases, land and dwellings cannot be used as security because there is no clear title. A possible solution is to treat the PV module as collateral and to enlist the help of suppliers in collecting payments or repossessing the module in cases of default.

· Repayment schedules are flexible and complement borrowers' income flow. Many rural residents have irregular income streams that depend on harvests, sales of animals or seasonal employment. Flexible schemes would, for example, allow farmers to pay after crops are sold rather than on a monthly basis, and take into account informal and intermittent employment. Salaried workers could authorize regular payment deductions from their monthly salary.

5.15 The primary advantage of commercial financing is that it is firmly rooted in the private sector, which has the potential to offer more competitive, efficient services than government sponsored programs. In addition, commercial financing relies entirely on existing institutions (banks, NGOs, and private vendors) and can be self-sustaining if there is sufficient market demand. However, this model is subject to the "chicken and egg" problem common to the development of all new markets: costs will not decline until there is sufficient demand to create economies of scale, but demand will not increase until costs decline.

Cash sales

5.16 A significant number of solar home systems are sold directly to high-income customers who pay the full amount in cash. Direct cash sales are common in many countries, including Kenya, where roughly 20,000 units that have been sold, mainly through cash sales. Private vendors receive their products from wholesalers and regional distribution networks. Cash sales represent the simplest financial vehicle and share the advantages (and drawbacks) of commercial financing. Given the limited disposable income of most rural households, direct cash sales of capital-intensive solar home systems cannot sustain a household PV electrification program directed at a sizeable proportion of the rural population.

The role of governments and donor agencies

5.17 Providing electricity to rural populations is a complex task. Though the private sector's role in rural electrification is growing, governments must provide the framework for rural electrification activities and donors can accelerate the process.

5.18 Governments. The case studies on which this report is based show a range of government involvement in household PV programs. In the Indonesian BANPRES Project, the government acts as the primary implementor, although village cooperative and private sector equipment vendors also play important roles. This contrasts with the passive role of government in the Dominican Republic in PV electrification. While the level of government involvement in household PV projects may vary, these case studies and other experiences indicate that governments can best support programs by focusing on: decentralizing the delivery of rural energy services; developing local and national markets; and supporting transparent institutional and regulatory frameworks.

5.19 A Multimodal Approach to Delivering Rural Energy. Many rural electrification programs are run by a single institution, usually the state-owned electric utility which supplies power to both urban and rural areas. The utility, which seeks to provide all customers with similar levels of service, is responsible for planning all rural electrification programs. In urban areas, this model has worked well. In rural areas, however, it is often unworkable (see Chapter 2) because most rural electrification programs center on grid extension, which is only one option among many that can meet the energy needs of rural populations. The rural energy planning process needs to incorporate technologies such as household PV which can complement grid extension when PV is the least-cost economic option and reflects local needs (for lighting, the operation of household appliances, commercial and industrial loads, or other uses) and the ability and willingness of customers to pay (not all customers need or can pay for 24-hour grid power). The rural electrification process should allow delivery of energy services through a range of institutions, both public and private, as well as local cooperatives and NGOs. In regions or markets where the private sector or local organizations can take the lead in project planning and implementation, the government should adopt a facilitating and oversight role. Elsewhere, governments can take a more direct role by including household PV options in rural electrification programs.

5.20 Indonesia is currently incorporating renewable energy options, including household PV systems, into its Rural Electrification Master Plan, partially funded under the World Bank-supported Second Rural Electrification Project (World Bank 1995a). Indonesia is also preparing a World Bank/GEF-assisted project to support private sector installation of 150,000-200,000 solar home systems. In Mexico, the PRONASOL Program has incorporated a solar home system component into its rural electrification efforts. This provides privately installed solar home systems in areas where grid service is unavailable or too costly (Huacuz and Martinez 1994). Approximately 30,000 solar home systems have been installed under the PRONASOL Program (see Box 5-2). In Argentina, some unelectrified areas will be offered household PV systems under a new program for dispersed rural populations (SEN 1995). Private sector companies will compete for concessions to supply electricity using solar home systems and minigrids; the concessions will go to companies requiring the lowest subsidy and meeting other performance criteria. The $314-million program will supply electricity services to 1.4 million inhabitants and 6,000 public services in areas with very low population densities, and where grid extension is unlikely. Beneficiaries will contribute $142 million, subsidies from existing provincial government funds will add $75 million, and the national government will provide $97 million.

5.21 Market Development. Most governments are seeking to move away from highly subsidized rural electrification programs to more economically sustainable alternatives. In general, this shift results in a more consumer-oriented, market-based approach to rural energy services for which solar home systems are ideally suited. To promote sustainable household PV electrification, governments should assure the following:

· Rationalized import duties and taxes. Import taxes and duties on PV components and solar home systems should be avoided since they can increase the costs of solar home systems dramatically, limiting the potential market.

· Equal fiscal treatment of rural electrification options. Although market-based pricing is the appropriate goal, the poorest households may still require subsidies in order to buy and maintain solar home systems. To reach the poor, PV systems should receive similar financial support as that provided under conventional grid extension or isolated grids in rural areas.

· Public investment in PV. Public financial assistance should be provided for PV electrification efforts, just as public sector equity financing and long-term loans have flowed to grid-based rural electrification projects, when economically justified. Even if a government is not involved in procuring solar home systems directly, it can play a key advocacy and demonstration role in support of PV systems by using PV equipment in education, health, and other social programs.

· Access to affordable financing. Financing mechanisms such as credit lines, loan guarantees, and hire-purchase and leasing schemes expand the PV home systems market. Governments should support innovative financing mechanisms that allow lenders to offer long-term credit on reasonable terms. Investment funds currently provided for such programs include the World Bank-supported India Renewable Resources Development Project (under which IREDA offers eight-year solar home system financing), the GEF-assisted Zimbabwe Solar Home Systems project, the projects in Mexico that will provide credit for private sector sales of solar home systems, as well as the Indonesia and Sri Lanka projects discussed above.

· Local participation in rural electrifcation programs. Local cooperatives, NGOs, and grass-roots organizations are better suited than centralized power utilities to provide PV home systems to dispersed rural populations. Government policies and programs should help enable these groups to participate in PV dissemination by offering them training in business practices, installation and servicing, among other things as well as improved access to credit.

Box 5-2
Mexico's PV Rural Electrification Program

In 1989, the Mexican Government launched the National Solidarity Program (PRONASOL), an infrastructure development program, in poor regions and communities. This program included a rural electrification component and provided a special budget for the electric utility, Comision Federal de Electricidad (CFE), and another to provide PV electricity services to remote communities. To date, 40,000 solar home systems (rated at 48 to 100 Wp per system) have been installed; some 29,000 have been supported by PRONASOL.

Implementation: The CFE is responsible for technical aspects of PV electrification. Private contractors and local NGOs disseminate information. Villagers wishing to acquire solar home systems submit applications to the local government and organize themselves into a local electrification committee. The requests are then submitted to PRONASOL for approval. Sites are selected on the basis of remoteness, distance from the grid, and lack of near-term grid connection plans. The CFE then contracts with private companies to install systems. Users must participate in the construction, operation, and maintenance of the system; the CFE is responsible for quality assurance and acceptance testing.

Financing: PRONASOL supports both productive and "quality-of-life improvement" uses. Productive uses of PV (for agro-industrial and related applications) are financed as "soft" loans by Mexican development banks. "Quality-of-life" uses (household lighting and entertainment, public lighting, telephones, and vaccine refrigerators) are supported by the federal government, which has budgeted $10 million annually in grant funds. The federal government pays about 50 percent of the total cost. The remainder is borne by the state government (30 percent) and local governments and the participating communities (20 percent). This includes the users, who can pay with in-kind contributions such as labor, materials, and transportation of equipment. Communities are responsible for setting up fee-collection mechanisms to cover the costs of maintenance, repair, and future expansion of the systems.

Sustainability: The PRONASOL program has identified four key elements of sustainable infrastructure programs: (i) strong, locally based industries that assure a ready supply of quality products; (ii) a clear, comprehensive framework under which industry can operate; (iii) adequate financing; and (iv) local availability of hardware and consulting, engineering, installation, commissioning, and maintenance services. To encourage service quality over sales, the CFE collaborates closely with the solar PV industry to support information dissemination, international technology transfer, trade shows, industry-to-industry interactions, and system design guidance. Technical specifications have been developed collaboratively with the PV industry, which has adopted them voluntarily. The Mexican Government's firm commitment to PV technology as a viable option for rural electrification, its continued collaboration with NGOs and the private sector, and a careful assessment of potential users' attitudes toward electricity have made PRONASOL an effective and sustainable program.

5.22 Institutional and Regulatory Frameworks. If the private sector and NGOs are to assume greater responsibility for planning and implementing rural electrification projects, they will need a transparent, "enabling" institutional and regulatory framework. Governments should ensure fair and not overly restrictive credit laws and regulations. Governments can also help develop appropriate technical standards, encourage a diversity of rural electricity service providers, assume responsibility for monitoring and oversight, and disseminate information.

· Setting technical standards. Baseline quality and safety standards can be used by the implementing organizations that procure systems, by the financial institutions that appraise loans, by local equipment suppliers, and by solar home system users in making their purchases. Government institutions can develop these standards themselves, as was done by BPPT in Indonesia and IREDA in India, or they may collaborate with industry, consumers, and other stakeholders to form an independent standards-setting body.

· Encouraging a diversity of service providers. In some countries, regulations governing rural electrification programs effectively rule out service providers other than the public electrical utility. If a PV market is to develop, such restrictions must be lifted. In Argentina, the government specifically encourages and supports alternative service providers.

· Providing monitoring and oversight and information disseminating. Monitoring and oversight of PV programs are important to gauge progress and to identify successful practices to replicate elsewhere. Governments should collect and disseminate such information and promote PV technology (but not specific products). These functions are especially important in new markets in which the private sector is weak.

Role of the world bank and other donors

5.23 Potential support for household PV programs from multilateral development organizations such as the World Bank, the United Nations, regional development banks, the GEF, bilateral aid and development agencies, and philanthropic organizations, should be integrated into broad rural energy or rural development plans. Donor efforts are most effective when coordinated with governments, local organizations, other donors, and private sector stakeholders. The donor community can facilitate PV electrification programs, provide technical assistance, and help fund both pilot and large-scale projects. Donor roles include:

· Promoting policy dialogue. Donors can encourage governments to adopt policies and practices that will be most beneficial to rural electrification programs, implementing regulatory reforms, least-cost planning and effective financial mechanisms, and improved fiscal policies.

· Providing investment financing. Donor funds are often essential for implementation of household PV programs due to the high up-front investment costs of these programs and the limited availability of long-term capital in many developing countries. However, local financial institutions need to participate in projects in order to ensure the commitment of stakeholders.

· Technology transfer. Donor agencies can help disseminate information on technological innovation, best practices, training, and demonstration projects. Effective donor support can improve project and program design, evaluation procedures, technical designs, standards and specifications, quality assurance, manufacturing methods, installation practices, and operation and maintenance of new technologies.

5.24 The World Bank and other multilateral lending institutions can encourage client countries to recognize PV and other renewable energy options as sustainable rural energy alternatives, complementary to grid extension. While assisting rural development and rural electrification project preparation, World Bank staff should explicitly consider renewable energy technologies and suggest their application where they best match the demand. World Bank/GEF support is particularly critical for up-front infrastructure investments to support the start-up of large-scale household PV programs in rural areas. Two innovative World Bank/GEF-supported operations are presently under preparation in Indonesia and Sri Lanka (see Boxes 5-3 and 5-4). Both rely heavily on implementation of PV household electrification programs through the private sector.

Box 5-3
World Bank/GEF-Assisted Indonesia Solar Home Systems Project

In a project that is presently under preparation, the World Bank and the Global Environment Facility (GEF) are planning to assist the Government of Indonesia in providing electricity services using solar home systems to about 200,000 households in West Java, South Sulawesi and Lampung provinces. The households targeted are in areas where the electric utility (PLN) grid service is not expected for at least three years or where it is uneconomic for PLN to provide such service. The estimated cost of the project is $72.0 million with $26.0 million from the users and suppliers, a $24.0 million grant from the GEF, $20.0 million from the International Bank for Reconstruction and Development (IBRD), and the balance from the Government of Indonesia. GEF cofinancing is based on the potential for the PV systems to displace kerosene and other fossil fuels that produce global warming gases. The project is designed to overcome the principal constraints to solar home system market development: (a) the high initial cost and the limited availability for term financing; (b) lack of information at the household level; and (c) undeveloped supply and service networks.

The project will finance only certified products that meet specified standards. Each 50Wp or larger system must power at least three fluorescent lights (each providing more than 200 lumens of light), and a black and white 14-inch TV for four hours or more per day, on a day with average solar radiation.

The project will use a commercial approach where dealers sell solar home systems directly to rural customers. It is expected that at least eight dealers will participate in this project. The project will offer loans through commercial banks to dealers for up to five years at market interest rates. Dealers will provide installment payment programs to solar home systems customers. The commercial banks will apply for their standard loan appraisal procedures to decide whether to make loans to the dealers. The Government of Indonesia refinances the commercial bank loans using on-lending arrangements for an IBRD credit. While each dealer will set the payment terms, typically, a customer will make a down payment of about Rp. 200,000 and an installment payment of about Rp. 20,000/month for 42 to 48 months. Each dealer will receive a GEF grant of approximately $90-$125 for each unit sold. This grant helps increase the penetration of sales within the market areas allowing dealers to make the initial investments required to create a sustainable commercial SHS market. In addition, the GEF grant will fund market development activities including promotion, business development, quality assurance, and technical support.

Box 5-4
World Bank/GEF-Assisted Sri Lanka Energy Services Delivery Project

The Sri Lanka Energy Services Delivery (ESD) Project is expected to support the installation of approximately 30,000 solar home systems over a five-year implementation period. Financing for these installations would be available to private sector and NGO developers through an ESD Credit Line established under the Project. In addition to the PV systems, the ESD Credit Line is expected to support development of approximately 20 village micro-hydro systems and related distribution network and 20 mini-hydro plants (connected to the central electricity grid). An estimated $12 million will be requested for the PV subprojects. Half of this funding would come as commercial credit, supported by World Bank (IDA) funds. Project developers would provide $3 million in equity, and the GEF would provide $3 million in grant cofinancing. The Project is designed to remove the principal obstacles to widespread dissemination of renewable energy technologies. With respect to solar home systems, these obstacles are: (i) a lack of access to term financing; (ii) unfamiliarity of consumers, private sector developers, and the financial community with the technology; and (iii) an underdeveloped sales and distribution infrastructure. GEF grant support under the Climate Change Operational Program will help overcome these obstacles to commercialization of this climate-friendly technology. Once the necessary infrastructure is in place, and a competitive market prevails, solar home system costs will drop, allowing continued sales after the ESD Project is completed.

The ESD Credit Line will provide commercial financing through participating credit institutions for subprojects which meet standard appraisal criteria. All systems sold must conform with equipment standards developed for the Project. It is expected that NGO and private sector developers will utilize the ESD Credit Line to provide term financing to their solar home system customers. During the Project period, developers will receive a GEF grant of $90 to $100 for each 30- to 50-W solar home system sold. To be approved, business plans submitted by project developers in support of their ESD credit application must show financial viability and continued solar home system sales well beyond the Project period. GEF grant funds will also support business development and technical support.