Microfinance to Promote Renewable Energy




Policymakers struggling to plug energy access gaps have an opportunity in disguise to promote the use of renewable energies. Sri Lanka has created a vibrant renewable energy industry with two projects that aimed to increase rural electrification. The program, backed by a strategic government policy, encourages the use of renewable resources by helping entrepreneurs to provide and finance solar, hydro and other small-scale power projects.


The idea: 

Challenge. The government is aiming to make electricity accessible to 75 percent of Sri Lankans by 2007. Conventional grid extension has made good progress, with nearly 60 percent of Sri Lankans connected, but accessibility differs widely among regions. For example, the more developed Westem Province has over 80 percent coverage, while other provinces like Uva are less than 30 percent covered.

Solution. Through two projects supported by the World Bank and the Global Environment Facility, rural households get financing for solar and hydropower systems from a competitive network of entrepreneurs that includes microfinance institutions, leasing companies, and commercial banks.

Policies and actions. The government's policy document on rural electrification outlines its strategic approach. Since technical and financial realities limit grid extension, even widespread and rapid expansion of the system would leave nearly 20 percent of the island's population reliant on off-grid systems. Many areas will require off-grid provision until the grid is able to reach such locations. Expanding the main grid is the principal vehicle for electrification, but the two off-grid projects have shown that power systems like solar home and community-level independent grids are often better for remote, rural communities.

With World Bank assistance, the government designed a program to provide private firms, NGOs, and cooperatives with medium- and long-term financing for solar home systems and village hydro projects, and grid-connected mini-hydro, wind, and other renewable energy investments. The project included grant financing to dealers and developers of solar home systems and off-grid village hydro schemes.

An administrative unit was established in DFCC Bank, one of the participating credit institutions, to provide overall project management, process loans and grant disbursement requests, maintain records, compile program statistics, submit quarterly reports, and organize quarterly meetings of project stakeholders. The government assumes the credit risk for each participating credit institution, which directly repay the government. Those institutions were selected according to eligibility criteria.

Where and when: Sri Lanka, 1997-present

Initiated by: Government

Effectiveness: There is now a vibrant renewable energy industry in Sri Lanka. By early 2004, the program had installed 40,000 systems, up from almost zero in the mid-1990s. It has financed 85 megawatts (8 percent of national generation capacity) of small hydropower projects developed by the domestic private sector.