I M P O RTA N CE OF REN EWA BL E EN ERGY FOR S US TA I N -

A BL E DEV EL OP M EN T
Subscribing to the ethic of sustainable development
provides two main motivations for promoting renew-
able energy. Firstly, because a vast majority of current
e n e rgy demand is provided by depletable re s o u rces, society
should restrain its use until a transition to an energy system
based on renewable sources can be made. Secondly, since
energy use is an important contributor to greenhouse
gas emi ssi ons, sustai nable development re q u i res an
i n c reasing use of more environmentally benign technolo-
gies. I n the energy sector, these technologies comprise
m o re efficient technologies on the energy supply side as
well as on the demand side, less carbon intensive (i.e.
natural gas) and carbon free (i.e. renewable) re s o u rc e s .
The potential of renewabl e energy re s o u rces is
significant. Theoretically they could provide a multiple
of current world energy demand. However this theore t-
ical potential cannot be tapped with given technologies,
only the technological potential. Economics prevents the
technological potential from being realised. In reality the
actual market penetration of technologies is even below
their economic potential. Figure 1 shows symbolically
these potentials. Policies to improve the market penetra-
tion of a technology have to address the series of
b a rriers renewable energy faces. Adequate financing of
renewable energy applications has been identified as one
of the key barriers.
The World Bank has esti mated that developing
countries alone over the next four decades will re q u i re
five mi ll ion megawatts of new el ectrical generating
capacity to meet anticipated needs. Thus, even if the Wo r l d
Bank's estimate i s too high, we will have to double the
world's i nstall ed capacity during the next few decades.
In financial terms, this amount of new capacity will re q u i re
a p p roximately five trillion dollars of new investment. While
it i s true that renewables can anticipate capturing only
a fraction of thi s market, every one percent of that
market in developing countries re p resents appro x i -
mately US$50 billion of investments. I f re n e w a b l e s
can capture several percent of that market, we're
looking at a potential for several hundred billion dollars
of renewable technology sales worl dwide and cre a t i o n
of many new jobs over the next decades. Fi gure 2
shows investment requirements for renewable energy
systems for two scenarios, Current Policies (CP) and
Environmentally Driven (ED), to the year 2020.
An overvi ew of innovative mechanisms to pro m o t e
investment in renewable energy technologies is given.
T HE W ORL D B A N K
The Asia Alternative Energy Program (ASTAE)
was established in 1992 to promote renewable
e n e rgy and energy efficiency in Asia through the Wo r l d
Bank's power sector lending operations. To support
this goal, ASTAE works with both Bank staff and
SU S TA I N A B L E DE V E L O P M E N T I N T E R N AT I O N A L 37
AB S T R A C T
S
i nc e t he use of r enew abl e ener gy cont r i but es t o
al l di mensi ons of s ust ai nabl e development , par t i c-
ul ar l y i n developing count r i es, one of t he chal l enges
f or ener gy pol i c y i s t o ens u r e t hat r enew abl e ener g y
ha s a f a i r op p or t u n i t y t o c om pe t e f o r r e s o u r c e s
r e q u i r ed for t he pr ovision of ener gy ser vices. The ar t i c l e
r ev i ew s s ome of t he i nnovat i v e f i nanc i ng mechani s ms
t hat hel p r enew ab l e ener gy s y st ems dev el o p. Thes e
mec hani sms ar e bei ng appl i e d by i nt er nat i onal or g a n-
i s at i ons and numer ous NGOs t hr oughout t he dev el -
opi ng w or l d.
NORBERT WOHLGEMUTH, UNEP Collaborating Centreon Energy and Environment, Denmark
Innovative Financing Mechanisms
for Renewable Energy Systems in
Developing Countries
Figure 1
Potentials of renew able energy
technologies
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client country decision-makers to incorporate alter-
native energy options into the design of energy
sector strategies and lending operations for all the
B a n k s cl ient countries i n Asia. Si nce its i nception,
ASTAE has generated substantial momentum,
increasing the lending portfolio for alternative
e n e rgy projects in Asia from about US$2.0 mil lion
in financial year (FY) 92 to over US$1.2 billion
(FY93-FY00).
The Solar Development Corporation (SDC),
conceived as a free-standing, commercial enter-
prise, is being established by the IFC, the private sector
a rm of the World Bank. I ts pri mary objecti ve is the
development of viable, private sector business
activity in the distribution, retail and financing of
off-grid PV applications in developing countries.
The Prototype Carbon Fund (PCF) has also been
launched by the World Bank after Kyoto. The fund
will buy carbon offsets at a competitive price and
ensure that buyers and sellers of off-sets receive a
fair share of the value added. The price of the
carbon offsets would cover the cost of additional
emissions reductions and also include a margin to
share the benefits from the offset between the
investor and host.
The I FCs Renewable Energy and Energy Eff i c i e n c y
Fund (REEF) is expected to be the first global fund
dedicated to investing in private sector renewable
e n e rgy and energy efficiency in developing countries.
The fund is expected to provide $150-210 million
of private and I FC capital for financing on/off - g r i d
projects of less than 50MW.
The Photovoltaic Market Tr a n s f o rmation I nitiative
(PVMTI ) is a $30 million fund operated by the
I FC. This will be used to accelerate the growth of
PV markets in I ndia, Kenya and Morocco by
providing leverage to private companies on a
competitive basis.
The Small and Medium Scale Enterprise Program
(SME) is a $21 million activity of I FC supported by
G E F. I t finances biodiversity and/or climate change
projects carried out by small and medium scale
enterprises in GEF-eligible countries. Contingent,
concessional loans are provided to financial inter-
mediaries (FI s). These FI s then finance the SMEs.
UN I T ED N ATI ON S DEV ELOPM EN T P ROGRA M M E
( U N D P )
UNDP has an Energy and Atmosphere Pro g r a m m e
(EAP), a component of which is focused on energy issues
including promotion of renewable energy and energy
e fficiency through such activities as the joint UNDP/Wo r l d
Bank Energy Sector Management Programme (ESMAP);
the FINESSE (Financing Energy Services for Small-scale
Energy-users) programme; and building linkages with
the UNDP-GEF unit on energy eff i c i e n c y, renewable energ y,
and greenhouse gas i ssues. The EAP completed the
UNDP Initiative for SustainableEnergy (UNISE) in 1996.
UNI SE is based on the fact that traditional appro a c h e s
to energy make energy a barri er to socio-economic
development and are not sustainable. Renewable energ y
was one of the focus areas i n the UNI SE. Other global
p rogrammes and initiatives related to renewable energ y
within the EAP included operationalisation of UNSI E
i n various countri es through diff e rent projects, and
renewable energy and rural electrification pro g r a m m e s
to disseminate and commercialise renewabl e energy to
p rovide rural energy servi ces. Renewable energy issues
a re also addressed in other programmes as a part of pro m o-
tion of sustainable energy policy by the UNDP.
J OI N T I N I T I AT I VES B Y I N T ERN AT I ON A L A GEN CI ES
Global Environment Facility (GEF) funds pro j e c t s
that provide global environmental benefits and
local development gains in developing countries. The
GEF provides grant financing to mitigate gre e n h o u s e
gas emissions and projects covered in this compo-
nent are targeted at lowering barriers to the success
of renewable energy and energy efficiency technolo-
gies. The World Bank, UNDP and UNEP are the
executing agencies for GEF projects.
The Energy Sector Management Assistance Pro g r a m
(ESMAP) is a global technical assistance pro g r a m m e
s p o n s o red by UNDP, the World Bank and bilateral
donors. Renewable energy projects are an import a n t
component of the ESMAP. The programme also
features innovative financing mechanisms such as
the solar PV concession systems for Argentina.
ESMAP has reached to the poorest in Africa also
t h rough its micro PV lantern demonstration pro j e c t s .
The Renewable Energy Partnership (REP) Pro g r a m m e
is being proposed by the World Bank and the
Global Environment Facility (GEF) to provide
i n c reased and more flexible Bank and GEF funding
to emerging market countries that make serious
commitments to renewable energy development. The
key to the eligibility will lie in making a re n e w a b l e s -
friendly policy, regulatory changes and other steps
to foster renewable energy development.
K YOT O M ECHAN I SM S
The new climate change regime also offers an opport u n i t y
for renewable energy as it meets the two basic conditions
to be eligible for assistance under the United Nations
Framework Convention on Cli mate Change impl e-
menting mechanisms: they contribute to global sustain-
ability through greenhouse gas (GHG) mitigation; and
they conform to national pri orities by leading to devel-
40 SU S TA I N A B L E DE V E L O P M E N T IN T E R N AT I O N A L
Figure 2
Investm ent requirem ents for
renew able energy
(Source: W orld Energy C ouncil)
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opment of local capacities and infrastru c t u re. While the
Kyoto Protocol has not yet proposed any bi nding
emi ssi ons l imitati on commitments for devel oping
nati ons, fl exi bl e i nstruments such as the Cl ean
Devel opment Mechani sm and the possi bi l ities of
emissions trading are likely to provide economic incen-
tives for significant emissions abatement in developing
countries. The altered competiti ve dynami cs should
also prove favourable for renewable energy.
N O N - G O V E R N M E N TA L ORGA N I S AT I O N S
Several international and national NGOs are involved
in promoting renewable energy in various countries. They
have developed innovative financing mechanisms to support
the renewable energy on a sustained basis.
E & CO's mission is to promote developing country
energy enterprises that create economically self-
sustaining energy projects; use environmentally
superior technologies; and produce a more equal distri
bution of energ y, especially to the poor . To this end
E & CO participates in enterprise development to
share risk and leveraging funding from conven-
tional sources. E & CO was conceived by the
Rockefeller Foundation to address the barriers in
p romotion of renewable energy and energy eff i c i e n t
technologies in developing countries. E & CO
provides small loans, technical assistance, inter-
m e d i a ry services and direct investment for (i) innov-
ative implementation of a proven technology; (ii)
technology innovation that is high risk by nature
but shows potential for innovation in energy pro d u c -
tion; (iii) promoting new energy delivery techniques
i n rural areas where end-users of energy have poor
ability to pay; and (iv) innovative financing (including
c redit, loan and equity) of energy enterprises to pro v i d e
cost effective energy services to potenti al end users
currently without access to such services.
Enersol Associates, Inc. is a non-profit org a n i s a t i o n
p romoting use of solar energy for rural development
in developing countries. Enersol has created a solar
fund (Fondo Solar) which helped NGOs in Dominica
and Honduras to raise finance for solar energy
development. NGOs can secure commercial bank
loans in local currency guaranteed with Fondo
Solar funds. This familiarised NGO implementers
and rural beneficiari es with credit pro c e d u res, and
also helped the formal banking sectors forays into
this area. Enersol has helped develop a local network
of i ndependent local enterprises which sell, install,
and maintain solar-electric systems in rural commu-
nities of the Dominican Republic and Honduras. The
entrepreneurs are provided with training and
technical assistance. The micro-enterprises in the
Dominican Republic have installed over 6000 PV
systems which provide electricity to rural homes, farm s ,
schools, businesses, community centres and health
clinics. The financing of these systems was arr a n g e d
through the NGOs.
Grameen Bank (i.e. Village Bank) in Bangladesh is
well known for its small-scale rural credit schemes.
The Bank has now initiated a programme to finance
renewable energy in rural areas, that constitute
85% of the country s population, most of it without
access to electricity. The Bank has established
Grameen Shakti, a not-for-profit rural power
c o m p a n y. Grameen Shakti is prepari ng a fi nancing
scheme for development of solar PV systems, wind
turbines and biogas.
Decentralised Energy Systems India Private Limited
(DESI Power) is experimenting with the concept of
I ndependent Rural Power Producers (I RPPs) in
India. The company plans to enter into joint venture
a g reements with village communities or local entre -
p reneurs to set up small power plants of 100 to 500
kW capacity utilising local renewable energy sourc e s .
It will also be open to financing inputs from socially
responsible funding sources and ethical/commerc i a l
investors elsewhere.
The International Fund for Renewable Energy and
E n e rgy Effici ency (I FREE)s goal is to promote the
sustainable use of renewable energy and energy
e fficient technologies in less developed and transi-
tion economies. I FREE provides a part of the pre-
investment funding to share the risk of project
development with private sector companies for
commercially financeable projects.
OT HER I N I T I AT I V E S
Polyene Film Industries (PFI), a manufacturer of solar
PV water pumps in South India, linked up with a local
c o m m e rcial finance company (Nagarjuna Group) to
use low cost funds provided by the Indian Renewable
Energy Development Agency (I REDA) and tax
incentives off e red by the Government of India to make
the pumping systems aff o rdable to rural farmers. I n
this scheme, farmers have to make a one-time
upfront payment, which is now affordable. The
finance company is able to lower the cost to the farm e r s
as it can make use of tax incentives and low cost
funds available from IREDA. Left alone, farmers would
not have been able to make use of low cost funds
and tax incentives due to the high upfront cost of
the system. Low cost funds to IREDA were pro v i d e d
by the World Bank through the Government of
I ndia.
Triodos Bank. The Dutch bank has decided to
invest several million guilders in PV technology in
developing countries. The investment will be thro u g h
a new Solar I nvestment Fund. The objective is to
provide solar energy at an affordable cost to rural
households and small businesses in developing
countries.
Sol ar Electric Light Company (SELCO) has raised
equity funding from Swiss, German and U.S.
investors. The company has lined up an additional
$28 million in debt from various lending institutions
and investment funds for consumer finance of solar
home systems. SELCO will sell and service solar PV
household lighting and power systems on a global
scale, focusing on emerging market countries.
Solar Bank TM is an initiative by the finance
community that will seek to tap the global capital
markets for a continuum of funds for the PV
markets. The Solar Bank will be a private institution
that will act as a secondary lender to existing local
p r i m a ry financial institutions such as banks, cooper-
atives, credit unions, electric utilities, energy serv i c e
companies, micro-enterprise lenders and others
who are in a position to finance local PV markets.
That is, the Solar Bank will purchase PV loans
f rom primary lenders, and will manage the credit risk
and interest rate risk on a portfolio basis.
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C O N C L U S I O N S
The key financing issue in developing countries is the
availability of capital to renewable energy developers and
rural end-users, while issues in developed countries involve
the cost of money, the ease of obtaining low-cost funds,
and i nstituti onal complexi ti es that hinder financing
and market growth. Several innovative financing mecha-
nisms for renewable energy developers and end users
have been devised and tested by international organi -
sations, governments and NGOs to promote re n e w a b l e
energy. As a general policy, there is a move away from
the traditional government-and subsidy-centred appro a c h
to promoting renewable energy to the new, market-oriented
a p p roach i n which consumer-side financi ng or fee
based service is the key issue.
F U RT HER REA DI N G
S c h m i d h e i n y, S., Zorraquin, F. (1996). Financi ng
Change. The Financial Community, Eco-eff i c i e n c y, and
Sustainable Development. The MI T Press, Cambridge,
Massachusetts.
World Bank (1998). Financing Decentralized Renewable
E n e rgy: New Approaches. World Bank Energy Issues No
15, available at
w w w. w o r l d b a n k . o rg / h t m l / f p d / e n e rg y / e n e rg y i s s u e s 1 5 . h t m
A B O U T T H E A U T H O R
N o r b e rt Wohl gemuth i s seni or economi st at the UNEP
Collaborating Centre on Energy and Environment, Ris National
Laboratory, Denmark. His work focuses primarily on renewable
energy supply options and institutional changes in the energy
industry. He is on leave from the university of Klagenfurt,
Austria, where he is assistant professor in the department of eco-
nomics.
I F Y O U H AV E A N Y E N Q U I R I E S R E G A R D I N G T H E
C O N T E N T O F T H I S A RT I C L E, P L E A S E C O N TA C T:
Norbert Wohlgemuth
Department of Economics
University of Klagenfurt
Universitaetsstrasse 65-67
9020 Klagenfurt
Austria
Tel: +43 463 2700 491
Fax: +43 89 2443 40238
E-mail: norbert.wohlgemuth@uni-klu.ac.at
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