Decentralized energy projects in developing countries present their own unique financing challenges, some flowing from unfavourable national energy policies and the lack of suitable business models. Here, Sandeep Tandon describes project financing experience of USAID to support bagasse-fuelled cogeneration, and discusses opportunities for rural energy projects in developing countries.

Two developments in recent years have started exerting a pincer-like grip on the global economy: first, the broad recognition of climate change as a growing threat to all countries, and second, the surge in demand for fossil fuels among strong as well as growing economies. The former has compelled countries to develop action plans to mitigate the effects of climate change by reducing the emission of greenhouse gases. The latter has given rise to increases in the prices of fossil fuels (both oil and gas) due to a widening gap between supply and demand, especially in growing economies.

Support from banks is critical to getting projects started. This remains a principal challenge for developing countries
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The situation is further complicated by the need to secure long-term supplies of energy resources to sustain national economies and their growth rates. These two factors could well be the change agents that determine how future generations will utilize energy. Energy planners are now forced to ‘think out of the box’ and reconcile with fast-changing realities to develop meaningful long-term energy roadmaps. These trends seem to augur well for decentralized energy (DE) technologies such as:

  • decentralized generation of power from waste heat or waste gases produced from industrial processes
  • high-efficiency cogeneration or combined heat and power (CHP)
  • distributed generation using renewable resources for local consumption of electricity.

Since DE technologies can make use of either the energy that is presently wasted in the form of heat or renewable energy for electricity production, they are therefore less susceptible to external factors such as oil price fluctuations or the anticipated stringent regulations in response to climate change concerns. DE technology projects, based on resource availability and located near the points of energy consumption, are emerging as the favourites to meet the captive energy demand in many countries across the world. The advances in technology options for electricity production made during the last few decades are now benefiting the power industry and households in rural areas.

Crossing the technology barrier

Advances in technology as well as unforeseen factors in the past few decades are now exerting pressure for yet another shift in the pattern of energy supply and consumption which hopefully can provide an optimal solution for the coming decades. Industries that are the biggest consumers of energy have started looking at options of generating electricity locally to meet their needs, due to economic or environmental compulsions. In such cases, the availability of appropriate CHP technologies and their integration to the industrial process both play a crucial role.

Traditionally, industries have been the main users of DE technologies primarily to help improve their bottom line. Industry has invested in DE projects of various sizes, irrespective of the process. Captive power units running on fossil fuel are preferred as they provide complete flexibility in terms of matching energy needs, meeting future growth requirements, and offering the quality and reliability of electricity which are much sought after in many developing countries where industries are starting to compete globally.

There are several examples worldwide that support the above point. One set of examples are the cogeneration projects in Indian sugar mills which added a whole new chapter in technology and promoted unique business models in the renewable energy sector, as well as the sugar industry. In these projects, sugar cane waste or bagasse is used to generate electricity to meet the energy needs of the sugar mills, with excess power supplied to the grid. These are the conventional technologies of power generation where, instead of a fossil fuel, crushed sugar cane waste is burned in a boiler to produce steam at high pressure (66 kg/cm2), and is then passed through a condensing-extraction steam turbine to generate electricity. Depending on whether the sugar mill is operational or not, the steam turbine is run in extracting mode or condensing mode. The box above elaborates the process and the spectrum of benefits.

The success of bagasse cogeneration came not only from the proven technology, but also from a sound business model in which the sugar mills had access to a steady revenue stream from the sale of electricity to the utility. This income helped sugar mills to overcome inherent fluctuations in the sugar market (which had an effect on the price of sugar and the mill’s bottom line) so much so that some sugar mills considered themselves to be in the business of producing electricity in which sugar was a by-product.

Another Indian example of industrial cogeneration application is a large copper smelter business located in southern India. The business owner(s) made investments in a waste heat recovery system that captures heat from various process streams to generate electricity to meet its own requirements and reduce the burden of using fossil fuel. In this case, the management reviewed the overall plant process and identified various streams where energy was being lost in the form of heat. Electricity generation using waste heat helped the company achieve energy independence by going off-grid. This smart decision by the management has helped to meet the plant’s own energy demand and reduce energy costs, thus allowing them to market their product at very competitive rates.

A copper smelter plant in Tamil Nadu, India, achieved energy independence by investing in a waste heat recovery system, enabling it to go off-grid
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Notwithstanding the commercial benefits of CHP derived by industries, as the technical and economic feasibility of CHP projects become more attractive, non-traditional areas have started gaining ground, such as municipal waste-to-energy and biomass gasification-based village power. Today, municipalities, government-owned industries and non-governmental organizations (NGOs) are seriously pursuing such projects. This is particularly so as the sale of carbon is becoming a reality and considerably improving the economic feasibility of such projects.

These are some of the examples of the growing list of diverse organizations and projects that have started taking advantage of distributed generation technologies, either to improve the conditions of their businesses or simply to improve the quality of life by providing energy in the form of electricity and heat to end-users.

Challenges to financing DE projects

One would think that after such glaring successes and compelling rationale, there would be a snowball effect leading to proliferation of DE systems across the world. However, challenges remain, such as unfavourable government policies towards DE or the administered prices of fossil fuel or electricity, both of which favour conventional energy models of centralized power generation. An even more challenging puzzle is that of developing a viable business model around some of the DE technologies especially in the rural areas; this is due to the lack of a single ownership and collaterals which, in addition to the lack of a steady revenue stream, makes it difficult to finance a project. As noted before, there are two principal users of DE sources – the industry and business establishments, and retail users who do not have access to grid electricity.

In the case of industries, implementing a CHP project is dealt with in a rather straightforward manner once the compatibility with process (i.e., whether the process leads to waste energy generation that can be captured for useful purposes, such as meeting the electricity requirement) is determined. The next logical step then is to determine the economics for additional investment for capturing and utilizing the energy. Often, the economics and paybacks are developed using business-as-usual scenarios, which show the additional investment being recovered from the savings generated. In such cases, the attractiveness of the project depends upon the quantity of energy saved which, in turn, depends upon whether the industry uses electricity or fossil fuel to meet its energy requirements.

Justifying the need to capture waste energy using conventional methods of cost-benefit analysis and simple payback is only a starting point. If industry uses primary energy sources such as coal and oil to meet its needs, it can then get a more realistic picture of the attractiveness of CHP technologies by factoring in the fluctuations and volatilities of fossil fuel prices, plausible future price increases, and other corresponding benefits that would accrue over the life of the project. This therefore requires having some historical information on fuel prices from which to extrapolate different trends and scenarios. The situation is somewhat different if the technology changeover involves switching to fuels such as locally available biomass. The future price fluctuation of biomass depends solely on the demand/supply equation based on its availability every season. Predicting variation in biomass availability in the future could require applying standard statistical analysis similar to the one used in the agriculture sector.

Such sound analysis has a far better chance of gaining the approval of management and financial institutions, even if the additional revenue stream from carbon offset is not taken into account. A company’s financial situation, along with the sector performance and market outlook, attracts financial institutions and helps banks to make lending decisions. Small- and medium-size industries such as textile, paper, chemicals and even pharmaceuticals (which uses process steam and power) are quickly switching over to biomass-based cogeneration as the increase in fossil fuel prices is making CHP more attractive. A sound CHP project idea should be able to stand on its feet to be acceptable to banks, but the price benefit offered by carbon offset in the recent years are found to greatly improve the internal rate of return of the overall project and improves the prospects of receiving funding by local banks.

Financing decentralized rural electrification projects

There is a far greater challenge in justifying DE projects in developing countries, particularly in rural settings to provide electricity to meet the basic needs of village dwellers that do not have access to grid electricity. Here, the challenge is to work out the economic viability of the projects, which is often more important than the limited choice of site-specific technologies. Limited rural income generally can only cover operating costs and some equity, leaving the majority of the initial capital expenditures to be supported in the form of grants from local government or development agencies.

The starting point still remains the assessment of a suitable technology option which can be managed by the local community. This means that both business and technical capacities of the local community must be built to operate and maintain the energy system. Unfortunately, for such applications in remote locations, the most suitable of all technologies (solar photovoltaic or SPV) turns out to be the most expensive and is therefore a less desirable option. Small diesel-generator sets, which are much cheaper, offer electricity albeit at high cost to end-users. Currently, a biomass gasification system coupled with a gas engine is emerging as another attractive option and stands in between the other two technologies. This technology uses methane-rich gas produced from biomass gasification (not combustion) which, after clean-up, is fired in a conventional compression ignition dual-fuel engine. An alternator linked to the engine produces electricity.

In rural village settings, there are three major problems for DE technology application:

  • The issue of capital versus the running cost. As noted above, SPV has a very high capital cost but a low operating cost, while diesel generator sets have a low capital cost but high running costs. If the technology selection is made based on capital cost, SPV will lose out, despite the fact that the higher cost of per unit of electricity is due to high combined capital, running, and maintenance costs of diesel generator systems.
  • The issue of sizing of DE systems. DE systems are often sized to meet the lighting needs of the local people with very little spare capacity to meet any other additional demand of electricity. For a project to run successfully, the capacity calculations should take into account load growth over a five-year period, as the factors that can trigger sudden increase in demand of electricity are unpredictable. During the initial years when demand remains low, an alternative is to increase the generating capacity in a phased manner.
  • The issue of financing DE systems. Clearly this issue is closely related to the previous two issues, and therefore it is imperative that the first two issues are carefully resolved. If the finances are made available in a phased manner to meet growing demand, the chances of rural DE project becoming successful and self-sustaining will greatly increase.

Governments are slowly coming forward with creative ways to support DE. However, the gap between government subsidies and the true cost of a project can at times be too wide to be bridged by local users. Special-purpose models are being created to clearly delineate the responsibility of the local community in terms of ownership of assets through shareholding, operation and maintenance, and payment mechanisms. These models still need to be standardized, improved upon and tested across several different locations before they can be widely applied.

A number of technologies are nearing maturity and stability, but the business models are still being refined. A few critical elements that should spur the development of such projects include governments taking a share in the project, the involvement of private sector equipment providers, NGOs interfacing with the village communities, and lending by local banks.

Some of these elements have been time-tested in DE projects in remote regions in India. The majority of these projects have used SPV technology, while a handful in recent years have used biomass gasification. Led by the local government agency, several DE projects of 50, 100 and 150 kW sizes were trialled and tested over a period of seven years, and two technologies are functioning successfully. With the help of local entrepreneurship, the lives of more than several thousand villagers have now been greatly improved by obtaining access to electricity.

Banks have a major role to play in DE projects, both in terms of increasing the geographic coverage and in getting projects off the ground. So far, DE in villages has failed to enthuse banks for the reasons cited above. Banks and other financial institutions are guided predominantly by their business interests and prefer to lend to those industries where they see a secure and steady revenue stream needed to service a loan. In successful DE projects, a steady revenue stream may not be generated until after a period of about three years. Few lenders have the patience to wait this length of time. Banks and financial institutions have their annual disbursement targets to projects, which are achieved by financing large-size projects where the transaction value or the loan amount involved is high. Thus small-size projects never come onto their radar screens. Consequently very few banks think about supporting DE projects. The handful of those that do continue to remain extra-cautious in their approach.

A 24 MW sugar cogen plant in Karnataka, India, supported by the USAID’s Bagasse Cogeneration initiative
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The financing of village DE projects is in its early stages and is still evolving as the situation of energy needs, suitability of technology, and willingness to take ownership of energy systems all vary from one place to another. It is at a stage where it needs government attention and perhaps – in the case of developing countries – support from bilateral and/or multilateral agencies, through equity participation rather than providing capital subsidy which causes distortions in the market. In the bagasse cogeneration projects, USAID’s contribution was below 10% of the overall project cost, but with equal emphasis on training for the sugar industry and banks, the concept has today spread throughout the country and is working without any additional financial support from the development agency or the government.

As DE projects in rural areas rarely offer returns attractive enough for banks to seek engagement, banks are still cautious in their approach and their commitment remains to be seen. The involvement of banks can be facilitated by bundling several such projects, which helps to reduce transaction costs especially for those banks already working in the rural sectors and can relatively easily include a portfolio to finance DE projects. The presence of DE in rural areas can strengthen agricultural activities and improve the incomes of the end-user – a viable win-win scenario. Therefore the bottom line remains that local banks and financial institutions must be in the forefront and where ever required, and their capacity should be developed so that they can in turn build the capacity of local people, creating opportunities for local franchises to increase the up-take of DE projects.


The Indian examples illustrate the fact that the opportunities for DE projects are present across the industrial and commercial sectors in varying degrees in all developing countries. External compulsions are now forcing government and end-users alike to exploit the latent energy in their backyards. Having recognized the limitations of centralized energy supply systems, governments should come up with policies favouring DE. Governments should further encourage end-users to identify and develop resources and feedstock for their respective DE projects. They should also encourage local financial institutions to support such projects, especially for the retail end-users by helping to minimize the risk involved in such projects through equity partnership.

Given the significant advantages which DE offers, particularly in minimizing the waste of energy in the form of heat and avoiding transmission and distribution losses, it is in the best interest of governments and industries – the two major stakeholders – to make use of DE systems to meet their respective goals now, or face the peril of losing out to their competitors.

A shift toward DE today is a leap forward, yet it is also a return to the old way that generations before us met their energy needs on-site. The difference though lies in the fact that the present change is based on an informed decision and utilizes diverse energy sources. Today, the technology choices of energy production and utilization are far superior and more efficient than they were a century or even a few decades ago. Not surprisingly, the sustenance and growth of an economy will strongly hinge upon the extent of use of DE in the future, with centralized energy systems serving as the backbone. Ultimately, the overall shift to DE will greatly depend upon the end-use efficiency of energy. In spite of these uncertainties and limitations, the future growth trend of DE is optimistic since it offers the right mix of technical and economic solutions to meet growing energy needs at the grass-root levels while addressing global climate change.

Sandeep Tandon is an Energy Specialist with the US Agency for International Development’s India Mission, New Delhi, India. E-mail:

The author’s views expressed in this article do not necessarily reflect the views of the US Agency for International Development or the US Government.

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The Alternative Bagasse Cogeneration programme

To encourage increased and efficient use of biomass and sugar cane waste (bagasse) at sugar mills, USAID/India launched the Alternative Bagasse Cogeneration programme in 1995. Support was provided in the form of grants and technical assistance to nine private sugar mills that came forward to invest in cogeneration.

USAID engaged the US Department of Energy’s National Energy Technology Laboratory to provide technical assistance, supervision, training and performance evaluation, and the Industrial Development Bank of India to manage the project’s investment-related activities.

USAID offered a conditional grant of US$40,000 per MW to the private sugar mills for installing and operating high-efficiency biomass cogeneration. The size of cogeneration plants ranged from 12 MW to 24 MW. USAID’s commitment helped nine private sugar mills to achieve financial closure with the banks at commercial terms.

The partners worked together not only to overcome difficulties in project implementation and signing power purchase agreements with local utilities, but also in setting a precedent by demonstrating high-efficiency 270-day-per-year cogeneration using sugar cane waste and other biomass fuels. Aggregate capacity of 195 MW was added as a result of this effort and the units are feeding power into the grid to this day. More capacity addition is taking place on purely commercial terms throughout India. Since the ending of USAID assistance, a total of 400 MW of capacity has been added in the sugar sector.

Benefits for sustainable development

Because both steam and power are utilized locally in the sugar mill, the thermal efficiency of cogeneration is significantly higher than that of centralized fossil fuel-based power plants. Such cogeneration qualifies as a DE application project as it has a small capacity, which provides uninterrupted power to nearby rural areas, thereby minimizing transmission and distribution losses.

Due to the improved reliability and quality of supply, farmers and other end-use customers in villages also benefit greatly as cogeneration supports employment and provide regular income to local farmers and labourers.

USAID’s equity contribution leveraged 20 times more from local banks and project developers to meet the project cost. Active participation of a number of local banks by lending to these projects helped in building their capacity to understand the bagasse cogeneration business. The presence of engineering firms, equipment suppliers and banks also helped in ensuring continuity of the concept after USAID support ended.

Biomass cogeneration projects using renewable fuels are environmentally friendly and carbon-neutral, in contrast to coal-fired power generation which is a source of high levels of particulates such as sulphur, nitrous oxides and other greenhouse gases.

It is estimated that these nine projects have helped to avoid more than four million tonnes of carbon dioxide (CO2) emissions in India.