A New Paradigm in the Financing of Solar Energy Projects

During the end of November of 2015, when the historic Paris Climate Agreement discussions were in motion, there was a declaration signed on the sidelines of the Paris Agreement amongst the sunshine countries. This gave rise to the International Solar Alliance (ISA). The countries which fall between the two tropics formed this alliance which is the largest grouping of nations after the United Nations. The sheer number of countries which became part of this alliance is a testimony to the acceptance of the fact that climate change is real and the world as we know it cannot function on the energy sourced from the fossil fuels.

ISA laid the foundation for making solar energy mainstream. However, the challenge pertaining to solar energy remained in terms of access to technology and the financing of the technology for a wider use. This lack of financing restricts the use of solar energy in the tropical countries given their constraints either in limited budgetary capability or accessing the funds through Multilateral Developmental Banks (MDBs) or Developmental Finance Institutions (DFIs).This is visible in limited installed solar capacity in the member countries across different regions.

For instance, even though the electricity access at country level is to the tune of 85% to 100% in LAC and Asia Pacific region, the solar capacity as a proportion of total installed capacity is quite low ranging from 0.2% to 12%. Whereas in most of the African member countries, the electricity access at country level is varying from the range of 20% to 65%.

Figure 1: Total installed capacity and solar capacity in ISA’s African member countries

Source: International Energy Agency (IEA)

Figure 2: Per capita annual electricity consumption and country level electricity access (%) in ISA’s African member countries

Source: International Energy Agency (IEA)

Figure 3: Total installed capacity and solar capacity in ISA’s Asia Pacific member countries

Source: International Energy Agency (IEA)

Figure 4: Per capita annual electricity consumption and country level electricity access (%) in ISA’s Asia Pacific member countries

Source: International Energy Agency (IEA)

Figure 5: Total installed capacity and solar capacity in ISA’s Latin American member countries

Source: International Energy Agency (IEA)

Figure 6: Per capita annual electricity consumption and country level electricity access (%) in ISA's Latin American member countries

Source: International Energy Agency (IEA)

This shows that there is huge potential for increasing penetration of solar energy in these countries. However, accelerating deployment is a challenge because of various issues pertaining to access to affordable finance. Even though MDBs have also marked significant percentage of their funding for energy projects such as 14% by the World Bank, 27% by the New Development Bank, 19% by the Asian Development Bank, 21.8% by the African Development bank, the ISA member countries are unable to access these funding. The key challenge in accessing the finance for solar projects is that the major rating agencies have not rated these countries very highly on their credit worthiness.

This restricts the option of countries to access funds from the MDBs such as World Bank, New Development Bank, Asian Development Bank, Asian Infrastructure Investment Bank, European Bank for Reconstruction and Development (EBRD) etc.

The rating of ISA member countries varies from Ba3 to Caa2, which fall under categories of Currently Vulnerable/Vulnerable in near term making countries difficult to access the bond or commercial loan. Further, many of ISA member countries are already indebted and hence need ultra-long loan tenors, long moratorium and flexible repayment structures.

This has given rise to need and conception of new financing agency. India has proposed to set up a World Solar Bank. This dedicated bank shall accelerate financing and deployment of solar projects in member countries and will also help in improving the ecosystem of financing. This initiative is the realization of ISA preamble in letter and spirit.

An Excerpt from ISA preamble

One of the programmes which ISA is currently working on, is the affordable finance at scale. ISA has the aggregated demand of solar pumps, solar rooftops, solar mini-grids, solar parks, and solar home systems in its member countries and translated that demand into financing requirement. This turned out to be $5.5 billion. Countries acting alone are less likely to successfully establish procurement frameworks, raise finance and implement solar projects. Further, it is difficult to finance smaller distributed projects such as solar pumping systems, solar mini grids, solar roof top etc. in member countries. A dedicated financial institution shall also have economies of scale in raising long term funding through green bonds or development impact bond markets for these requirements.

In a recent interaction UN Secretary General António Guterres commended India’s plan for a World Solar Bank that will mobilize $1 trillion of investments in solar projects over the coming decade. This would be a natural fructification of the vision of One Sun, One World, One Grid. He also stressed upon the fact that India could possibly fill the leadership void in this fight for a sustainable future.

The fact is that future of energy is solar and a dedicated global financial institution such as World Solar Bank shall indeed reduce both the cost of technology and cost of finance for solar deployment. This would further accelerate solar deployment in ISA member countries.

Note: Opinions expressed are purely academic in nature and are written in the author's personal capacity. They do not express the views or opinions of the author's employer.