FINANCING SMALL SCALE RENEWABLE ENERGY DEVELOPMENT IN SRI LANKA

FINANCING SMALL SCALE RENEWABLE ENERGY DEVELOPMENT IN SRI LANKA Jayantha Nagendran Senior Vice President (Project Management) DFCC Bank EXECUTIVE SUMMARY The Sri Lanka Renewable Energy Program is assisted by a World Bank credit line and Global Environment Facility (GEF) grant for two investment projects, the recently completed Energy Services Delivery (ESD) Project (1997 2002) and the ongoing Renewable Energy for Rural Economic Development (RERED) Project (2002-2007). An Administrative Unit set up within DFCC Bank implemented the ESD Credit Program, and now manages the RERED Project. The program is an example of successful private sector and community led renewable energy initiative that was developed on market principles. By March 2005, 87 MW of mini hydro and 1 MW of dendro power capacity had been added to the grid through 32 projects, while off-grid community owned village hydro schemes and stand-alone solar home systems provided electricity to 3,961 and 65,864 homes respectively. Several more projects are under construction, while the solar PV industry is presently installing around 2,000 solar home systems in rural Sri Lanka every month. The program supports the provision of on- and off-grid electricity services and socio-economic development in rural areas through: (i) hydro, solar PV, wind and biomass renewable energy technologies; (ii) credit financing through private participating credit institutions; (iii) output based grant mechanisms for off-grid systems; (iv) technical assistance for promoting productive applications of off-grid electricity; and (v) technical assistance for promoting energy efficiency, developing carbon trading mechanisms and integrating renewables into government policy. A multi-stakeholder approach was adopted in overcoming financial, institutional and market barriers and in developing a vibrant industry of renewable energy suppliers, developers, consultants, NGOs, community based organisations and industry associations, while promoting commercial financing to this sector through banks, leasing companies and micro finance institutions. By March 2005 loans totalling Rs8,338m had been approved with Rs5,448m 1 disbursed since inception by 10 private sector participating credit institutions. The growing renewable energy industry in Sri Lanka presently comprises more than 200 organisations with over 2,000 people commercially involved in gridconnected, off-grid community and household based renewable energy systems. The success of this program could be attributed to the creation of public-private partnerships, commercial financing through banks and micro finance institutions, adoption of a multi-stakeholder approach, awareness creation and consumer protection, capacity building of stakeholders and introduction of technical standards and standardised arrangements. These aspects are discussed more fully in this paper. 1 Equivalent to US$61m approx. at exchange rates prevailing at the time of disbursements

1.0 INTRODUCTION 1.1 Country Environment Public sector investments in power generation since the 1990s have lagged behind Sri Lanka s rapidly growing demand, which is around 8% per annum, while grid-based electricity access is presently around 67% of the population, and is expected to level off at around 80% in the medium to long-term. The Government s strategy to address such gaps includes (i) creating a regulatory and policy environment that encourages private investments in the power sector, (ii) expanding grid access in the most economically efficient manner, and where this is not feasible, providing off-grid services at village or household level and (iii) improving the efficiency of energy services delivery. 1.2 Interventions The Sri Lanka Renewable Energy Program promotes the provision of electricity services using environmentally sustainable renewable energy technologies through projects set up by the private sector, cooperatives and individuals. It is assisted by a credit line from the International Development Association (IDA) of the World Bank and grant funding from the Global Environment Facility (GEF) for implementing two investment projects, namely, the recently completed Energy Services Delivery (ESD) Project (1997-2002) and the follow-on Renewable Energy for Rural Economic Development (RERED) Project (2002-2007). The RERED Project is assisted by a US$75m IDA credit line and a US$8m grant from GEF. The program applies a multi-stakeholder approach in overcoming the financial, institutional and market barriers usually associated with the implementation of small scale renewable energy solutions. It supports the provision of on-grid and off-grid electricity services and socio-economic development in rural areas through: (i) hydro, solar PV, wind and biomass renewable energy technologies; (ii) credit financing through private participating credit institutions; (iii) grant mechanisms for off-grid systems; (iv) technical assistance for productive applications of off-grid electricity; and (v) technical assistance to promote energy efficiency, development of carbon trading mechanisms and integration of renewables into government policy. 1.3 Institutional Arrangements An Administrative Unit (AU) set up within DFCC Bank, a private blue chip development bank, functions as the implementing agency on behalf of the Government of Sri Lanka. The AU administers the IDA credit line to refinance subloans made by participating credit institutions (PCIs) to investment projects (referred to as subprojects) that are owned and operated by private sector corporates, village community based organisations and individuals. The AU also administers the GEF grant funds available for cofinancing off-grid subprojects, preparing off-grid community based subprojects, developing new applications and technical assistance to address numerous market development activities. The PCIs are private sector institutions comprising development banks, commercial banks, leasing companies and micro-finance institutions that participate in the program by fulfilling defined eligibility criteria. Registered finance companies are expected to become eligible to participate shortly. PCIs use their standard procedures to appraise subprojects, establish creditworthiness and negotiate lending terms with their customers. PCIs assume the full credit risk on subloans disbursed to subprojects, and avail of refinance from the IDA credit line on market-determined terms as per criteria set out in the Project Operating Guidelines. 2

1.4 Business Model This private sector led program builds an enabling environment for businesses, entrepreneurs, community based organisations and financial institutions to support the development of renewable energy services as part of their mainstream business. The Administrative Unit at DFCC Bank in turn provides an array of services including awareness creation; technical assistance for off-grid business development; regular stakeholder consultations; administration of performance based cofinancing grants and consumer protection schemes and maintenance of technical standards for off-grid schemes. The IDA credit line enabled lending institutions to access long-term funds that were not available in the domestic debt market, although the refinance provided was on near-commercial terms. The program supports the formation of specialised industry associations, but does not prescribe the market, technologies or products to be offered to the end user. Rather, a demand driven approach is fostered. As a result several financing models operate in parallel. For instance, solar PV companies sell solar home systems (SHS) on credit terms in collaboration with micro finance providers, lease SHS through established leasing companies, and make occasional over the counter cash sales. The program supports project preparation services for rural communities to establish electricity consumer societies that set up, generate, distribute and consume electricity produced through off-grid micro hydro schemes on a fee for service basis. It has also supported independent small power producers using renewable resources to sell electricity to the national utility through a standardised power purchase agreement and tariff formula. 2. FINANCING ARRANGEMENTS 2.1 Credit facility As shown in Figure 1, the IDA credit line is channelled through the Central Bank of Sri Lanka (CBSL) to PCIs to refinance subloans disbursed to investment projects set up by subborrowers. Refinance is limited to 80% of the subloan disbursed, and is provided at a floating rate of interest equal to the 6-month Average Weighted Deposit Rate, a market based benchmark. PCIs provide the balance 20% from their own resources, and negotiate with the subborrower the interest rate on the subloans as well as the other terms and conditions such as the extent of loan financing (gearing ratio), tenure, grace period, collateral etc. The lending program is on commercial terms, with the PCI making its own creditworthiness assessment and negotiating the terms of the subloan. By March 2005, subloans totalling Rs5,448m (approx. US$61m) had been disbursed by PCIs. The AU processes refinance applications of PCIs and replenishes the Special Account at CBSL periodically. Fig 1. Credit Line Administration IDA (World Bank) CBSL Refinance PCIs Subloan Investment Enterprises AU, DFCC Bank Non-PCI Retailers Subloan Investment Enterprises 3

2.2 Grants for Off-grid Co-financing GEF cofinancing grants are a form of capital subsidy and are available to off-grid subprojects provided they fulfil defined criteria, such as conformity with technical specifications, transparent procurement procedures and environmental safeguards. The cofinancing grants are released on an output basis, that is, only after installation of the off-grid system. Typically, the GEF cofinancing grant provides transparent subsidies for off-grid community based schemes such as village hydros (US$400/kW) and stand-alone solar home systems (based on system size measured in Watt peak), primarily to overcome initial cost disadvantages inherent in these technologies. 2.3 Grants for Technical Assistance GEF grants for technical assistance are provided through cost-shared and full-cost windows, both operated by the Administrative Unit at DFCC Bank. The cost-shared scheme typically supports gridconnected company-specific projects that require assistance to overcome market barriers. It does not include support for hardware. Full-cost technical assistance is primarily for off-grid technologies (project promotion, subproject preparation, verification of compliance with technical specifications, consumer protection etc) and to address barriers in the relatively new grid-connected wind and biomass technologies, provided they benefit the industry as a whole. The GEF grant is also available to PCIs to cover their incremental costs in supervising off-grid community based subprojects. 3. GRID-CONNECTED RENEWABLE ENERGY PROJECTS 3.1 Standardised Small Power Purchase Agreement and Tariff The ESD Project introduced a standardised Small Power Purchase Agreement (SPPA) and a Small Power Purchase Tariff (SPPT) mechanism for renewable resource based independent power producers selling energy to the state owned utility, the Ceylon Electricity Board. This important innovation addressed a formidable barrier to entry by allowing small developers with projects up to 10MW in capacity to overcome high transaction costs and their weak bargaining power. At present the tariff is based on avoided energy costs, and does not take into account any capacity benefit. Table 1. Small Power Purchase Tariffs Announced by CEB, Rs/kWh Period 2002 2002 revised 2003 2004 2005 Dry season: Feb-Apr 5.13 5.90 6.06 5.70 6.05 Wet season: Jan, May-Dec 4.91 5.65 5.85 4.95 5.30 Weighted average 4.97 5.71 5.90 5.14 5.49 US$1.00 = Rs100.00 approx in July 2005 3.2 Mini Hydro The above initiatives, together with the availability of long-term credit, contributed to a rapid increase in grid-connected mini hydro installed capacity from 1 MW in 1997 to 71 MW through 31 subprojects by March 2005, while another 21 projects with a total capacity of 56 MW were under construction. Several more were under evaluation by PCIs. The completed project capital cost for mini hydros under the ESD Project was around US$964 per kw. Site quality (particularly the head and flow) and the learning curve effect were material factors 4

in making the costs competitive. These run of the river mini hydro projects are operating profitably with plant factors of over 40%, while contributing positively to the utility s goal of least cost power generation. DFCC Bank and National Development Bank (now NDB Bank) by virtue of their in-house capabilities spearheaded the lending to this sector. Commercial banks followed suit, initially participating in the larger loans that were syndicated by the development banks. Today, commercial banks compete independently to finance this sector. Typical lending terms applicable to this sector are as follows: Interest rates are negotiated and pegged to the 6-month Average Weighted Deposit Rate (AWDR), which is a floating rate that reprices every six months. PCIs receive refinance for 80% of the subloan disbursed at this rate. The AWDR as at July 2005 was around 5.5% p.a. Typical interest rates charged by banks for mini hydro projects has been around AWDR + 3.5 to 5.0 % p.a. In real terms, this amounts to negative interest rates as inflation was well in to double digits by July 2005. Debt to equity ratios in the financing plan are also negotiated, and these have typically been around 60:40 to 70:30. Collateral is usually the project assets, together with a mechanism to secure project cash flows and the ability to takeover the business as a going concern in the event of a foreclosure. Such risk mitigating measures include the operation of an escrow account for receiving payments from the utility, mortgage of shares of the business entity and the lodgement of relevant documents such as the SPPA. Another risk mitigating measure adopted is the syndication of large loans, thereby avoiding excessive credit exposure to a single borrower. The tenure of loans is based on the estimated cash flows to service the loan interest and principal while maintaining an adequate safety margin. Typical mini hydro loans have been around 6-8 years in duration, including a grace period of 1-2 years to cover the period between loan disbursement and commencement of commercial operations. In some cases, the loan amortisation is structured according to the rainfall patterns, allowing for smaller repayments during the dry season. 3.3 Biomass The first biomass project, with a capacity of 1MW, was commissioned in late 2004 and was financed by a PCI operating under the RERED Project. The project uses an out-grower model for sourcing its fuel wood, namely, glyricidia sepium, harvested through the short rotation coppicing technique. The fuel wood is combusted in a boiler to raise superheated steam that drives a steam turbine coupled to a generator. The lessons learnt from this project is expected to pilot more dendro power projects, subject to the introduction of a more equitable power purchase tariff. The present tariff paid by the Ceylon Electricity Board has no capacity component, and is inadequate for sustainable operations of biomass projects. 3.4 Wind A 3 MW demonstration wind farm comprising five 600 kw turbines designed to supply a total annual capacity of about 4.5 GWh was commissioned by CEB in 1999 at a cost of about US$1,175/kW. The wind farm is interconnected to the CEB grid and operates at an average plant utilisation factor of 5

14%, which is lower than the projected value of 17%. The operation of the pilot wind farm created interest among private developers looking to develop wind power projects, and a Request for Proposals for a larger wind farm was solicited by the Government/CEB in 2003. However, the procurement was cancelled for unclear reasons, thus undermining the interest of private investors in this sector. 4. COMMUNITY BASED RENEWABLE ENERGY SCHEMES 4.1 Off-grid Village Hydro These are community owned micro hydro schemes that are set up by Electricity Consumer Societies (ECS) to generate, distribute and consume the electricity produced by members of the Society. A typical village hydro of 10kW capacity provides a 230V, 50Hz supply to about 40 rural homes within a 2km radius (no transformers are used). Each home would thus have a limit of about 250W, which is sufficient for energy efficient lighting (standard fluorescent lamps or CFLs) and the operation of basic appliances such as TV, radio/cassette player and in some cases refrigerators and irons. These schemes are set up by project preparation consultants who mobilise the community, prepare a feasibility report including detailed engineering calculations in accordance with technical standards specified by the ESD/RERED Project, assist the ECS in obtaining all required environmental and statutory clearances, negotiate a bank loan from a PCI for the ECS and provide technical assistance in implementing the project up to successful operations. The program requires the verification of technical compliance at the design stage and again upon project completion, as these safeguards provide comfort to lenders in respect of safety, reliability and longevity of the scheme. The project preparation consultants are registered with the AU and are paid a staggered fee for their services at standard rates based on pre-determined milestones. The AU also maintains a database of registered village hydro suppliers for turbines, generators and load controllers (induction generator controllers) and monitors their performance. The program has supported the installation of 871kW through 86 technically certified village hydro schemes serving 4,025 rural households by March 2005. A further 49 schemes approved by banks were under construction, with several more in the pipeline. The average cost of a village hydro is about US$2,000/kW excluding the project preparation fee paid to the consultant. The program provides a capital subsidy in the form of a cofinancing grant amounting to US$400/kW (with an upper limit of US$20,000), while Provincial Councils also provide subsidies independently. Banks providing loans to these village hydro schemes rely on the design verification carried out at inception and the installation verification carried out at completion by Chartered Engineers retained by the program. Banks also verify the socio economic analysis and willingness to pay by the beneficiaries and the probability of the national grid not reaching the particular community in the medium term (as given in the project preparation consultant s report). Loans are usually secured on project assets and personal guarantees of ECS office bearers/members. Although the underlying collateral has no tangible value in the event of a foreclosure, experience shows that repayment is excellent as long as the scheme is well designed and operates as planned giving the rated power output. Interest rates levied by banks are usually around AWDR + 5 to 8 % p.a. while debt capital is usually around 30 to 50% of the project cost, and is based on the financial capacity of the beneficiaries. Financing also includes equity, provided by way of labour by the beneficiaries during the construction phase, plus a small cash contribution paid up-front to establish their commitment. A typical financing arrangement for loan and grants for off-grid village hydro schemes is shown in Figure 2. 6

Fig 2. Financing Model for Off-grid Village Hydro Schemes Grant Credit AU Project preparation fee Repayment Refinance loan CONSULTANT PCI Project Cofinancing preparation grant Subloan Subloan services repayment ELECTRICITY CONSUMER SOCIETY As to be expected, the peak power demand for village hydros occurs during the first few hours of the night. Being run-of-the river projects, most of the generating capacity is therefore unutilised and wasted by day. The program, through technical assistance, supports the setting up of income generating activities by encouraging the productive use of electricity generated during daylight hours. Typical productive applications set up so far include communication centres, refrigerators/freezers in shops, carpentry, food processing and packaging, sewing machines/tailoring, computer education centres, hair dressing salons and battery charging. 4.2 Off-grid Biomass The first community owned off-grid biomass project of 35kW capacity to serve 100 households became operational in late 2004, and is presently providing electricity to over 50 houses. The project uses the gasification technology with glyricidia sepium fuel wood as feedstock, which is harvested from existing plantations by the community using the short rotation coppicing technique. The prime mover is an internal combustion engine operating in a single fuel mode. The lessons learnt from this pilot project are expected to stimulate further development in this sector. 4.3 Off-grid Wind The first community owned off-grid wind project, a 1kW plant to serve 10 homes is under construction. 5. SOLAR HOME SYSTEMS The solar PV industry is making an increasingly important contribution towards rural electrification. Under the program 65,864 homes (or over 1% of homes in Sri Lanka) were using solar home systems by March 2005. The systems are required to meet global quality standards specified by the program, and are sold and serviced by AU-registered solar companies who provide warranties (minimum 10 years for the solar panel and 1 year for balance of system components) and after sales service. At 7

ESD project launch, the fledgling industry had 2-3 small solar companies selling about 20-30 systems/month in 1998 through one micro finance institution. Some solar companies also attempted direct consumer financing, but it was found to be impractical. The program presently has countrywide coverage with average sales of over 1,500 systems/month through 11 registered solar companies and about six micro credit providers, each competing for business. The average system price including installation is around US$10/Wp today. The solar companies are primarily responsible for marketing and service. As shown in Figure 3, they work closely with providers of consumer finance that include specialised micro finance institutions, leasing companies, finance companies and a few banks. A cofinancing grant, based on the capacity of solar home systems installed, is provided to solar companies to help them set up rural infrastructure. The grant is limited to small systems, and is presently US$40 for systems in the 10 to < 20Wp range and US$70 for those in the 20 to 40Wp range. Poor service by the solar company can lead to a dissatisfied customer and a breakdown in loan repayment. Hence, PCIs who provide micro credit establish a memorandum of understanding with the solar companies, typically covering aspects such as minimum service levels, repossession of the solar panel on foreclosure and buyback in the event of a grid expansion. This leads to a tripartite arrangement involving the PCI, solar company and the end user. In addition to the cofinancing grant and technical assistance that are funded by GEF, the Government presently provides a solar subsidy to householders resident in three provinces (Uva, Sabaragamuwa and North East) that have the lowest grid penetration in the country. The subsidy amounts to Rs7,500 (approx. US$75) per householder who purchases a system up to 60Wp capacity. The Government solar subsidy is also managed by the Administrative Unit at DFCC Bank, and is used to reimburse solar companies who provide an up-front discount equal to the subsidy amount. Several checks and balances are in place in the disbursement of GEF cofinancing grant and the Government subsidy schemes. Fig 3. Typical Solar Home System Financing Model Grant Credit AU Cofinancing Grant Repayment Refinance loan SOLAR COMPANY Payment for SHS PCI SHS installation Subloan repayment SHS CUSTOMER Loans and leases are secured on the solar home systems themselves, as solar panels have an economic life of 20 years or more and are therefore marketable assets even after repossession. In addition, counter guarantees by family members or neighbours are also obtained, mainly to effect peer pressure. Repayment has been found to be excellent as long as debt collection is regular, after sales 8

service is responsive and the consumer is properly educated on system capabilities and limitations. Interest rates levied on such micro loans and leases are relatively high on account of the high transaction costs involved, and are usually around 20-24 % p.a. The loans and finance leases typically carry tenures of 3 to 4 years. There is no grace period, and the consumer makes an initial down payment of around 10% of the purchase price, followed by monthly instalments. Payments are sometimes structured to suit the cash flow pattern of the consumer, as in the case of rice farmers with seasonal incomes. 6. KEY INNOVATIONS 6.1 Access to Long Term Capital The absence of a long-term debt market to mobilise matching finance for grid-connected mini hydro and off-grid village hydro projects impeded banks willing to lend to these sectors. This barrier was overcome under the renewable energy program when long-term financing through a World Bank credit line became available. The Government, as borrower, receives concessionary terms and relends to participating credit institutions (PCIs) in local currency at market rates (six-month Average Weighted Deposit Rate), while absorbing the exchange risk. PCIs thus have access to long-term funds at market rates, and more importantly, are hedged against currency depreciation, which is consistent with the rupee cash flows of their subborrowers. 6.2 Subsidies Subsidies (cofinancing grants) and technical assistance provided under the program are transparent, output or results based (not input based) and carefully targeted based on needs. Interest rates are not subsidised, no credit guarantees are provided and financial institutions are encouraged to lend to this sector based on their own assessment of creditworthiness. They are free to negotiate lending terms with their borrowers. These measures have brought about a demand driven, market based approach that encouraged cost minimisation and efficiency, while ensuring affordability through separate subsidy mechanisms and a clear exit strategy for the GEF grant support. 6.3 Awareness Creation and Public-Private Partnerships To address the lack of awareness, and more importantly to overcome the negative image of solar PV created through previous ad hoc initiatives, the ESD Project executed a generic promotion campaign on solar home systems and off-grid village hydro schemes. The promotion targeted end users, government officials, community based organisations, financial institutions and the general public. Promotional messages explained the advantages and limitations of these off-grid technologies, the operation of a consumer protection scheme through quality certification, after sales service and warranty arrangements and the availability of loan schemes. A variety of communication channels were used, including workshops and demonstrations at villages with the active participation of suppliers and credit providers. Progress of the promotion campaign was reviewed monthly with inputs from industry associations. The absence of an articulated national policy on renewable energy raised awareness and acceptance issues among policy makers, financiers and potential beneficiaries. The problem becomes worse for off-grid village hydro and solar home system projects when politicians made false promises of grid extensions just before elections and thus disrupted ongoing development work. Increased awareness of these technologies as viable options, reinforced by success stories in the media, gradually overcame this problem. 9

A Provincial Council, recognising that full grid electrification was not financially viable, leveraged its limited subsidy funds by linking its solar electrification initiative with the ESD credit program. It adopted a market-based approach and made use of the technical, financial and marketing infrastructure put in place by the program and, with its own transparently applied subsidy, was able to multiply several fold the number of rural homes accessing solar home systems. This scheme has now been taken over by the central Government and expanded to cover two more provinces. Likewise, Provincial Councils now provide supplementary subsidies of their own for village hydros that make use of the infrastructure set up by the program. 6.4 Standardised Arrangements As discussed in section 3.1, the development and introduction of a Standardised Power Purchase Agreement (SPPA) and a non-negotiable Standardised Power Purchase Tariff (SPPT) with the Ceylon Electricity Board (CEB) were crucial for the market entry of private sector small power producers. It led to reduced lead-time and transaction costs to the developer and utility, and also overcame the weak bargaining power of small power producers. However, the SPPT ran into trouble at times. Being administered by a monopolistic purchaser in an environment that does not have an independent regulator, the tariff computation methodology underwent changes and data inputs lost transparency. Issues were resolved through an independent consultant acceptable to both the CEB and the developers (Grid Connected Small Power Developers Association). The tariff computation methodology is presently under review through a RERED-funded consultancy assignment that will determine a policy framework for renewable resource based electricity generation for Sri Lanka. 6.5 Technical Standards and Consumer Protection At the beginning the off-grid industry did not have technical standards to ensure quality, safety and longevity of schemes and thus reduce commercial risks. The program introduced technical specifications for off-grid village hydro schemes and solar home systems. These standards are reviewed periodically based on experience and market development. GEF grant funds are utilised to verify compliance with specifications, and also for investigating unresolved consumer complaints. The AU maintains a panel of consultants for such services and no major issues have surfaced to date. The program provided technical assistance to the National Engineering Research and Development (NERD) Centre to obtain international accreditation for its solar PV testing facility, thus enabling solar companies to source a wider range of cost effective components for their solar home systems. 6.6 Multi Stakeholder Approach The AU introduced an effective consultation process, using both formal and informal channels. Quarterly stakeholder meetings are convened by the AU, which are attended by about 60 participants representing financial institutions, NGOs, suppliers, consultants, developers, industry associations, community based organisations, advocacy groups, Provincial Councils, Government agencies and the World Bank. While the quarterly stakeholders meetings serve as a forum for important announcements, discussions, networking and reporting of project progress, the AU continues to maintain direct and indirect contact with groups that are under-represented at these meetings (such as rural consumers of off-grid electricity). Following a feedback from the industry on emerging issues, a Village Hydro Working Group was set up, with the AU as the convenor. The Group, which is well represented by a cross section of stakeholders, meets quarterly and has successfully addressed several problems. These measures have fostered a high degree of willingness to discuss problems openly, suggest solutions and share information among stakeholders. 10

6.7 Innovation Solicitation To address market barriers and tap new ideas and applications to scale up off-grid electrification, the AU invites proposals from time to time through an open solicitation process. Proposals are evaluated by a panel of experts, refined where necessary, and multiple contracts are awarded for implementation. The contracts cover the costs of the consultant, but not the capital assets necessary to implement the project. Where applicable, the consultant assists the beneficiaries in sourcing the required funding to finance project assets, thus proving replicability and sustainability of the concept. To ensure that the proposals lead to concrete achievements, the AU ties down these contracts to clear deliverables. Such an output based approach has resulted in increased participation through new entrants, capacity building and scaling up of the market. 6.8 Capacity Building and Studies The AU continues to identify areas that require strengthening and carries out capacity building assignments through consultants. Activities carried out so far include the training of solar PV technicians (implemented by the Solar Industries Association), capacity building of village hydro electricity consumer societies (implemented by the Federation of Electricity Consumer Societies) and training on the design and construction of village hydros for project preparation consultants. To scale up consumer financing of solar home systems, the program is presently assisting a micro finance institution to set up a comprehensive MIS solution for its renewable energy financing division. To address the concerns of project developers regarding grid connectivity issues of embedded generators raised by CEB, the program financed an international consultancy to carry out a technical assessment of renewable resource based electricity generation in Sri Lanka and make recommendations. Likewise, to address energy policy, regulation, legal and commercial issues including tariffs and subsidies, another international consultancy assignment is presently underway. 7. CONCLUSION 7.1 The Renewable Energy Industry The implementation of the private sector led renewable energy program has created a vibrant industry of suppliers, developers, consultants and trainers, community based organisations, NGOs and specialised industry associations. By mid-2005 there were over 40 mini hydro companies backed by about 20 active developers, 11 registered solar companies, 22 registered village hydro developers and 12 village hydro equipment suppliers as compared to 1 mini hydro developer, 4 fledgling solar PV companies and 2 village hydro developers at the start of the program in mid-1997. At village level, there are now more than 90 functioning electricity consumer societies that own and operate off-grid micro hydro schemes that meet ESD and RERED technical standards. Commercial financing to this sector has been largely mainstreamed, with banks competing for business in some sectors such as mini hydros. At present two development banks, five commercial banks, two leasing companies and a micro finance institution provide subloans under the program, while independent credit providers include a few finance companies and rural development banks. Active industry associations include the Grid Connected Small Power Developers Association (commercial mini hydro developers), Bio Energy Association of Sri Lanka (dendro power developers), Federation of Electricity Consumer Societies (representing owner-operators of off-grid 11

village hydro schemes) and the Solar Industries Association (solar home system suppliers and consumer loan providers). 7.2 Key Lessons Learned and Success Factors The program s unique design and successful implementation now serves as a model for other renewable resource based rural electrification initiatives. Perhaps the most outstanding feature is the demand driven and commercially focussed approach of enabling multiple stakeholders to overcome financial, institutional and market barriers. Throughout implementation, this required a strong and consistent emphasis on establishing strategic and working partnerships between a multitude of stakeholders including the Government, Provincial Councils, statutory bodies such as the Central Environmental Authority, Ceylon Electricity Board, financial institutions, private developers, contractors and consultants, industry associations, suppliers of plant and equipment, rural electricity co-operatives and consumers as well as advocacy groups. It also required a competent and proactive Administrative Unit with multi-disciplinary capabilities to manage project co-ordination and implementation. Finally, the World Bank s advice and technical support based on global experience proved to be an invaluable element for the success of the program. REFERENCES DFCC Bank Administrative Unit, Sri Lanka Renewable Energy for Rural Economic Development Project, Financial Monitoring Report, Quarter Ending 31 March 2005 Exel J., Sri Lanka Solar Industry Review, December 2003 Nagendran J., Sri Lanka Energy Services Delivery Project Credit Program: A Case Study, for Infrastructure Forum 2001, 2001 World Bank, Sustainable Energy: Less Poverty, More Profits, December 2004 World Bank, Project Performance Assessment Report, Sri Lanka Energy Services Delivery Project, Report No: 29532, 25 June 2004 World Bank, Implementation Completion Report, Energy Services Delivery Project, Report No: 25907, 5 June 2003 World Bank, Sri Lanka Renewable Energy for Rural Economic Development, Project Appraisal Document, 24 May 2002 12