Poverty puts power beyond the reach of most people living in remote rural villages in the developing world. However, innovative financing solutions have been introduced that make sustainable renewable energy solutions affordable.

David Flin

Being able to provide technological solutions that deliver power to rural areas that are not connected to a power grid is only half a solution. As most of the people living in these regions that are deprived of access to grid electricity are poor, much standalone power is simply beyond their capacity to afford. Therefore, financial solutions are also necessary if people living in these areas are ever to feel the benefits of advancements in rural electricity technology.

However, most development and economic activity is directly related to the consumption of energy, and without access to energy, it is very difficult for these people to escape the poverty of their situation. What is required is a means by which suitable financing can be arranged to enable these people to install suitable power supplies in such a way that the financing can be repaid.

Complicating the issue is the environmental question. Excessive use of fossil fuel is considered to be bad for the environment, and the lack of infrastructure for delivery of conventional energy supplies is another problem for remote regions of developing countries. In countries like Bangladesh, remote rural populations do not generally have access to the grid, and the best way for them to gain access to electricity supplies is through standalone renewable energy technology.

Recovery risk

The initial cost of renewable energy technology is generally higher than conventional energy, placing an increased need for a suitable financing mechanism. One method of achieving this financial mechanism through the use of micro-credit has been developed and introduced by the Grameen Shakti Bank of Bangladesh, first introducing the scheme in 1996.

Figure 1. Bangladeshi craft workers benefit from electric lights
Click here to enlarge image

The micro-loan scheme was initially introduced with a six-month credit period. However, the promotional progress of this scheme was disappointing. When the credit period was extended, interest and take-up increased. Extending the credit period though, also increases both the recovery risk and the amount tied up in investment. Currently, Grameen Shakti is promoting solar home energy systems (SHS) with four different financing schemes. These are as follows:

  • Scheme 1. The customer has to pay 15 per cent of the total price as down payment during installation, and the remaining 85 per cent of the cost is paid by monthly installment over 36 months. A service charge of 12 per cent is included in this scheme.
  • Scheme 2. The customer has to pay 25 per cent of the total price as down payment during installation, and the remaining 75 per cent of the cost is paid by monthly installments over 24 months. A service charge of 8 per cent is included in this scheme.
  • Scheme 3. The customer has to pay 15 per cent of the total price as down payment during installation, with the remaining 85 per cent of the cost being made by 36 post-dated cheques. A service charge of 10 per cent is included in this scheme.

Rural endeavours

Most commercial banks are reluctant to give small loans for consumer goods to rural borrowers. As multilateral financial institutions (MFIs) strive to serve more clients, they continually tune their products to customer needs, giving loans not only for income generation, but also for housing, higher education and mobile phones. Some MFIs are already engaged in the solar market. MFIs in Sri Lanka, Morocco and Kenya are offering credit to buyers of SHS. The Indian Solar Loan Programme has encouraged and introduced collaboration between SHS manufacturers, rural energy service companies, banks and MFIs. MFIs here serve as the link in the SHS distribution chain. In one specific example, Grameen Shakti was formed specifically to increase supply of renewable energy to un-electrified villages in rural Bangladesh.

These are just a few of the examples demonstrating that rural MFIs can do much more than simply give credit.

There are rural areas where there is no access to conventional grid electricity, nor is this access ever likely to be available. This failure to develop the infrastructure for grid electricity could be due to the remoteness of the region, or to some geographical barrier. In such areas, customers are seeking alternative ways of obtaining electricity to light their houses or business premises after dusk. Grameen Shakti designs the packages of SHS according to market demand, such as to enable customers to extend their business hours in the rural market and for other specific requirements.

Two processes are key for success of these rural endeavours: maintenance and training. It is necessary to train local staff to be able to maintain SHSs and educate customers on SHS maintenance, and on the benefits of solar energy.

Marketing strategy

Grameen Shakti sold only 228 SHS during its first year of operations (1996/97), and it took time and effort to develop an effective marketing strategy. Current monthly installations run at over 1200 SHS, with a total of over 33 500 SHS installed at the end of 2004. Engineers held village demonstration meetings, distributed flyers and brochures, and went from door to door to explain to potential customers the benefits of SHS. In order to keep close contact with local markets, unit offices have been established in many local villages. This allows staff to stay in close contact with customers to both help maintain the SHS and to make it easier to collect the monthly installments.

The cost of renewable energy technology is very high in comparison with conventional technologies. In addition, the purchasing capability of a rural community is typically very low. Therefore, in order to achieve as extensive and effective an uptake as possible, the technology has to be adapted to bring its cost down to a minimum. This can be done by producing the electronic module locally, with local production of items such as charge controller or mobile phone chargers. In addition, purchasing in bulk volume will also reduce the cost price by increasing the bargaining power for cost negotiations.

Without continual improvements in SHS technology, and without continuing education of rural societies about renewable energy technologies, it would not be a sustainable development programme. As a result, Grameen Shakti undertakes parallel activities in the development of SHS technology through adaptive research and educational activities such as the distribution of posters, leaflets, banners, brochures and training programmes. This approach ensures the active participation of the local community in the schemes. If the local people are trained in renewable energy technology, then they can convey the benefits of renewable energy technology to their society and ensure better maintenance for the products. In addition, the introduction of innovative soft financing schemes tends to accelerate the adoption of SHS and renewable energy technology.

Diversification of application

While it is easy to understand that SHS can enhance life style, especially in impoverished areas, it is less easy to understand that it can be a part of income generating tools. Various opportunities have, however, been developed. One such opportunity is the development of micro-utility systems. In this, the user installs the SHS without any service charge, in order to encourage the customer to use the system productively. The user then shares power with neighbouring shops or dwellings. The user pays a monthly fee to Grameen Shakti for the SHS, and in turn, the user collects a fee, which is usually paid on a daily or weekly basis, from other users according to the load capacity that they use. It is generally the case that the user can receive about 50 per cent of the fee to Grameen Shatki from sales to his neighbours. After 42 months, the user becomes the full owner of the system, and can continue to earn money through selling the power to others.

Figure 2. A Bangladeshi family combines work and play
Click here to enlarge image

Another concept of the productive use of SHS is in a Solar Mobile Phone Van Shop. This new concept consists of a SHS, an ISD mobile phone (Palli Phone) and a rickshaw van. The SHS is used to charge the mobile phone and for lighting the van shop after dusk. The user moves through the village, offering the phone service to villagers, at the same time as using his rickshaw as a mobile shop. The complete payback period for this type of scheme is typically six years. Another project that has been implemented is called Polli Phone, or Village Pay Phone. This has tremendous potential as an income-generating tool for the poor women of a village. At present, many areas covered by mobile phone signals do not have access to grid electricity. SHS serves as an alternative source of power for charging the mobile phone.

In addition to these, there are many more examples of the potential productive use of SHS, such as extending the working hours of businesses, thus generating extra income for the users. Examples of such use include:

  • Lighting rice mills and saw mills
  • Lighting tailor shops and grocery shops
  • Poultry farms
  • Fisheries
  • Lighting clinics
  • Lighting restaurants
  • Bazaars
  • Radio/TV repair shops.

Seed funding

Renewable energy technology tends to have high start-up costs. As a result, seed funding is essential to enable this sector to grow. However, direct subsidy has an adverse effect, hampering the normal growth of the market. On the other hand, seed funding can help develop the capacity of a user, encouraging economic growth.

A soft loan in 1998 from the Global Environment Facility (GEF) was used to reduce customer down payments from 50 per cent to 25 per cent of the cost of the SHS and extend the repayment period. As a result of this, sales of SHS rose dramatically. Funding from the Swedish donor Sida helped to produce an increase of capacity by establishing a production unit in Bangladesh. Solar modules are still imported, but all SHS components except the battery and the PV module can be manufactured locally. This has the twin benefit of reducing the price of the SHS, and of increasing the money available to local people by adding to people’s income.

These loans helped SHS uptake reach economies of scale when commercial funding was not available. The system is now profitable, and Grameen Shakti plans to have 100 000 SHS installed by 2007. The World Bank has become involved in financing this sector through the Infrastructure Development Company Limited (IDCOL), which is a government-owned company of Bangladesh. Other organizations have begun to follow this financing model.

Direct subsidies or grants cannot provide a long-term solution for promoting renewable energy technology. Indeed, over the long run, these have an adverse effect on the market. It is essential to have a realistic and effective programme with an affordable financing scheme for the user and a reliable backup and maintenance service to develop this market.