Cover Image
close this bookSustainable Energy News - No. 20 - Newsletter for International Network for Sustainable Energy -Theme: International Development Financing - New INFORSE Action Plan (INFORSE, 1998, 32 pages)
close this folderFinancing theme
View the document(introduction...)
View the documentDevelopment banks & energy
View the documentWorld bank support for sustainable energy in Sri Lanka
View the documentESCO concept finds its way in eastern Europe
View the documentWB solar Initiatives
View the documentIDB's first loan for energy efficiency
View the documentPrivate funds' initiatives
View the documentUNDP-GEF-New trend supports micro hydro
View the documentUnsustainable WB

World bank support for sustainable energy in Sri Lanka


PV (and micro hydro) are the off-grid technology chosen.

Photo: INFORSE.

An overview of how a World Bank loan supports solar, wind, and small hydro projects in rural Sri Lanka, and what difference it makes for the rural population.

By Gunnar Boye Olesen, INFORSE

One of the outcomes of the World Bank initiatives for renewable energy is a $24 mill. loan for the 'Sri Lanka Energy Services Delivery (ESD) Credit Program'. This loan, combined with a $5.9 mill. grant from the Global Environmental Facility (GEF), shows what the World Bank and similar large financial institutions can do if they decide to lend money for renewable electrification in rural areas of developing countries. The loan is for investments in grid-connected renewables (wind and mini-hydro), off-grid renewables (village hydro and solar home systems (SHSs)), and energy-efficiency measures in buildings. The expected outcome is 26 MW of installed renewable-energy capacity, with the off-grid component supplying electricity to as many as 32,000 rural customers (households and small businesses) that do not have access to electricity today.

Cheap Loan to the Government

The Government of Sri Lanka is a major player in the program. It is the Government that receives the low-interest loan and grant, guarantees the repayment of the loan, and lends it to banks which, in turn, disburse it to the borrowers. The loan to the Government of Sri Lanka is from the World Bank IDA (International Development Agency) facility and is, in principle, an interest-free loan given in a mix of "hard" currencies. The loan runs for 40 years and requires no repayment for the first 10 years. The loan is not entirely interest-free, as the Government of Sri Lanka pays a "service charge" of 0.75% per year on the loan that it has received and a "commitment charge" of up to 0,5% per year on the unused part of the loan.

Foreign Exchange Question

The loans from the government to the commercial banks are distributed in Sri Lanka rupees. Thus, the Government risks some devaluation of its currency. Interest paid on the loans by the banks is considerably higher than that paid by the government, however, so the program is not necessarily a loss for the government. It could even yield a gain if the Sri Lankan rupee is stable compared with the "hard" currencies of the initial loan. The loan also brings hard currency into the country, but as it is linked to investments in imported technology, it probably will not improve the general foreign trade balance of the country. In the future, the payback of the loan will require hard currency, while the projects themselves should decrease the need for energy imports.

Government Funds Added

The Government of Sri Lanka contributes $1.9 mill. of its own funds to the program. The Government is also involved in administration of the program, e.g., in approving the participation of each of the banks involved.

Commercial Banks as Intermediaries

The Banks in the program pay interest to the Government at a rate equal to the average interest rate that banks in Sri Lanka pay to their customers on interest-bearing accounts. This rate is typically 12.5% per year, but it is revised every 6 months. The banks borrow the money for a maximum of 15 years with up to 5 years before repayment starts. The banks lend the funds to project organisers at a rate of interest 5-10% higher than that which they pay to borrow them, for a maximum of 10 years. The banks will also use part of their own lending capacity for the program, estimated at $13.7 mill., or 25% of the program budget.


A demonstration windfarm and small hydro are grid-connected technologies in the program.

Photo: OVE.

Companies and NGOs

The organisers of actual projects can be private enterprises, NGOs, and/or community cooperatives. To participate, they must show that they can carry out the project and are credit-worthy in the eyes of the relevant bank. The project organiser may apply the funds directly to the project, e.g., a village hydro scheme; or, it may lend them in turn to end-users for, e.g., solar home systems.

Since the interest rate on the loan is 5-6% higher than that which the banks pay, a project organiser has to pay interest at a rate of about 18% per year. Given a payback time of 10 years, the annual payment is about 22% of the original loan*. Loans under this program can make investments cost-effective if they have simple payback periods of about 4 years. These are quite hard conditions compared with expected loan payback times for renewable energy in, e.g., Western Europe. Even so, they are better than those of loans normally available for rural activities in Sri Lanka.

The project organisers or entrepreneurs must also provide their share of the investments, e.g., as advance payments from the users. This share is estimated at $9.6 mill., or 17% of the program budget.

GEF Grant Supplement

A share of the GEF grant is used to cover part of the investments in off-grid installations, primarily village hydro (small hydro with a local grid in a village) and solar home systems. A typical financing arrangement for a solar home system would be:

Investment $500, consisting of:

· user cash payment

$100

· GEF payment

$100

· Loan

$300

Annual payment on the loan $75 (25% of original loan)**
Monthly payment on loan: $6.25**

Project Development Support

The program also includes grants for technical assistance to develop projects and raise awareness. These are part of the GEF grant and cover, in full or in part,

· preparation of feasibility studies, business plans, and loan documentation for off-grid projects;

· a national promotion and information campaign on off-grid projects;

· a system to verify that solar home systems and village hydro systems meet agreed specifications;

· a Consumer Protection Facility.

Not Just Money

Besides receiving and disbursing the funds, the Government of Sri Lanka has made an agreement with the national utility, the Ceylon Electricity Board (CEB), to support sustainable energy in a number of ways:

· The CEB has initiated a standard tariff and standard contracts for the purchase of power from small producers for the grid, based on long-term avoided costs, to be updated annually.

· The CEB will include renewable-energy supplies in its generation planning, replacing some of the power that it would otherwise obtain from fossil fuels.

· Sri Lanka has adopted a Code of Practice (standards) for energy-efficient commercial buildings.

Technologies Included and Excluded

The renewable-energy technologies included in the program are windturbines (a 3-MW windfarm organised by the CEB); small hydro-power (below 5 MW, grid-connected and for local village grids); and PV systems, mainly as solar home systems. These technologies are all well proven and are used commercially in developing as well as in industrialized countries. With the possible exception of some of the hydropower plants, they represent a large addition to imports. Inasmuch as they replace fossil fuels imports, however, they will benefit the trade balance of Sri Lanka in the long run.

In principle, other kinds of renewable energy technologies may be included, but since the technical assistance in the program focuses on the above mentioned technologies, it will most probably be difficult. One of the most obvious other candidates would be family-size biogas plants that often is a more cost-effective solution than a solar home system for rural families that own cattle or pigs. For roughly the cost of a solar home system, a biogas plant can provide the same amount of light plus gas for cooking. It also improves the fertiliser value of the manure. Biogas plants add relatively little to imports, and thus they would have little impact on the Sri Lanka trade balance. This also makes them less interesting to the companies from industrialised countries that provide the other technologies.

Conclusion

This program looks like one of the best examples on how to overcome the constraints of World Bank lending (large-scale, intergovernmental operations) to reach dispersed, off-grid rural power projects, which often is the most cost-effective way to provide electric services to a dispersed rural population.

* Assumes an annuity loan, i.e.. interest plus payback is constant

** Assumes that the project organiser does not charge interest on lop of bank rates. 10 year loan, annuity.

Source: ASTAE Unit, The World Bank, 1818 H Street, N.W. Washington DC 20433, USA. E-mail: rcastro3@worldbank.org, att. Loretta Schaeffer, Ricardo Castro.


Family biogas plant in India. Biogas is not included in the program.

Photo: R. Myles/AFPRO, India.