PROJECT FOR REVIEW
PROJECT TITLE: PHOTOVOLTAIC MARKET TRANSFORMATION INITIATIVE
GEF FOCAL AREA: Climate Change
COUNTRY ELIGIBILITY: India: FCCC Ratification: November 1, 1993
Annual 1995 Per Capita GDP: US$350
Kenya: FCCC Ratification: August 30, 1994
Annual 1995 Per Capita GDP: US$260
Morocco: FCCC Ratification: December 28, 1995
Annual 1995 Per Capita GDP: US$1,130
TOTAL PROJECT COSTS: US$ 90-120 million
GEF FINANCING: US$ 30 million
COUNTERPART FINANCING OF GEF COMPONENT: Equity investments by private sector; IFC co-financing as appropriate; local financial intermediaries co-financing and/or end-user credits
GEF IMPLEMENTING AGENCY: World Bank
EXECUTING AGENCY: International Finance Corporation
ESTIMATED APPROVAL DATE: January 1997
PROJECT DURATION: 5-7 years
GEF PREPARATION COSTS: Initial concept financing provided by U.S. government; PDF Block A grant to cover costs of country consultation; European Union and possible donor/foundation assistance for program development and business advisory services development; a PDF Block B grant may be requested for Early Opportunity Notice and RFP preparation.
PHOTOVOLTAIC MARKET TRANSFORMATION INITIATIVE
PROPOSED PROJECT
1. The International Finance Corporation (IFC), the private sector affiliate of the World Bank Group, proposes to establish a Photovoltaic Market Transformation Initiative (PVMTI) to use up to $30 million of GEF funds to support private sector, competitively solicited solar PV market development projects in a selected set of three GEF eligible countries. PVMTI will make multiple investments estimated to range from $1 to $5 million in eligible developing-country-based companies or consortia on a competitive basis for the most innovative and promising proposals for large scale expansion of the market for and use of PV.
2. PVMTI is based on the premise that private sector project selection and management will stimulate more sustainable ventures than government or donor financed PV procurements alone. This market-pull approach is expected to catalyze competition and stimulate formation of joint ventures at the country and international levels in market development and/or manufacturing, employ or pioneer a variety of financing modalities, and promote public-private partnerships bringing country government/utility entities into private ventures as minority participants for additional leverage.
3. Country selection and participation was based on government endorsement of the program, combined with an analysis of market opportunities and commercial maturity of the in-country PV markets. Given the ambitious size and scope of this initiative it was considered prudent by IFC and the Bank to implement PVMTI initially in not more than three countries. Countries for the first tranche were selected based on an analysis of their existing commercial activity, market potential (strong energy demand combined with ability to pay), and government endorsement of the concept. This led to the inclusion of India, Kenya, and Morocco. If deemed warranted by initial program results in the selected set of countries, IFC is prepared to consider implementation of additional phases of PVMTI in other GEF-eligible countries.
4. PVMTI addresses GEF Climate Change Operational Strategy #6 regarding the reduction of barriers to the introduction of renewable energy technologies. While GEF funds are anticipated to be directed towards market development projects and not manufacturing, successful market development projects will indirectly support additional manufacturing and technical improvements, resulting in the secondary benefit of long-term cost reductions (as targeted by Operational Strategy #7).
5. GEF financing support for a proposed private sector business plan or venture will be provided by PVMTI through IFC in the form of grants as well as various non-grant financing modalities. GEF funds are anticipated to leverage three to four times as much private sector, possible IFC and/or other co-financing investment in PVMTI projects. Additional long-term effects resulting from increased market activity, reducing market barriers to PV dissemination, and successful demonstration of private-sector-based financing schemes are anticipated to create a strong multiplier effect.
6. Potential IFC co-investment in PVMTI projects is under review by IFC's management. If approved by IFC's management and Board, IFC co-financing could be made available to eligible applicant financial plans with GEF funds being used to provide an appropriate element of concessionality. To stimulate maximum leverage, IFC will encourage applicants to use various financing modalities including: concessional or contingent loans, guarantees, equity or quasi-equity, or other non-grant uses of GEF funds. Eligible companies will include those legally registered in the project country and with 51% or greater beneficial private sector ownership. IFC will ensure that PVMTI incorporates adequate due diligence of potential investee companies so that prudent risk management strategies are incorporated in investment proposals and negotiated financing agreements.
7. PVMTI will be administered by IFC through its arrangements with the
World Bank. An Investment Committee supported by experienced investment staff
will review individual projects submitted for GEF support. IFC and the Bank's
Global Environment Division will provide oversight of proposals reviewed to
ensure that GEF eligibility and incremental cost criteria are satisfied. A
similar project selection and review approach is currently being used in the
IFC/GEF Small and Medium Scale Enterprise (SME) Program and the IFC/GEF
Renewable Energy and Energy Efficiency Fund (REEF). IFC will consult with the
Bank and GEF Secretariat in developing operational criteria for the treatment of
incremental costs in projects to ensure that the proposed applications of GEF
funds by potential investee companies meet GEF eligibility and incremental cost
criteria. GEF funds will be applied to proposed projects on an incremental cost
basis to mitigate risk, reduce market barriers, and help lower transaction costs
(see Annex 1).
BACKGROUND AND PROJECT CONTEXT
8. Globally, there are approximately 300-400 million unelectrified
households, leaving between one billion and a billion seven hundred million
people without access to electrical energy. As a result of rapid economic
growth, future increased energy usage by these currently unelectrified
populations will continue to contribute to both significant growth in emissions
of greenhouse gases (GHG) and continued investment by national governments in
both fossil-fired generation plants with 30+ year lifetimes and grid extension
or connection strategies. This investment in conventional power generation
technologies, combined with the difficult price competition presented by the
well-established grid system in the developed world, continue to inhibit the
emergence of lower carbon substitutes. In the developing world, where energy
systems are less mature, greater opportunities exist for renewables such as PV
to compete on an economic basis. Projects or venture investments supported by
PVMTI can help provide the financial intermediation needed to reach
larger numbers of end-users who can afford electricity but are unlikely to
receive it through grid connections in the foreseeable future. One result of
PVMTI will be promotion of decentralized, environmentally benign energy
services rather than central station grid connected supply options.
Technology and Markets
9. Photovoltaics (PV) are a low emission technology which have enormous potential for mass production and dissemination. PVMTI can provide a commercialization stimulus that will enable energy decision-makers and potential PV customers in the developing world to help establish renewable energy as a viable alternative to conventional energy technologies and grid extension. PV technology is arguably among the most modular in meeting the broadest range of energy needs in the developing world where insolation conditions are adequate. Given its current status of commercialization and manufacturing scale-up, PV is considered to be among the technologies most responsive to accelerated cost reductions due to increased investment, and has high prospects for broad acceptance both as a consumer product as well as for centralized and dispersed grid applications.
10. PV technology includes crystalline silicon and thin-film technologies that produce electricity from sunlight. PV manufacturing costs have dropped from several hundred dollars per peak watt (Wp) in the early 1970's to current prices of $4 to $5 Wp and installed costs of about $10 to $12 Wp for relatively simple household systems of 10-75 watts. Producing power at about $0.25-0.30 per kWh, PV is competitive with diesel generators in many locations and is often the least cost option for off-grid applications. Continued price reductions are making PV increasingly attractive as a peaking option even for grid applications.
11. PV shipments (80 MW annually in 1995) are expected to grow by over 15% annually to 800 MWp by the year 2010 in a business-as-usual scenario, with cost reductions to $2.00 Wp. At this price, PV-generated electricity would cost about $0.15 per kWh for grid-connected applications. An accelerated scenario predicts PV production of 4,000 MWp in 2010 (with costs dropping to $1.30 Wp or approximately $0.08 per kWh) and assumes overall annual PV sales growth at well over 20% (with grid-connected markets growing at 27% or higher). PVMTI could be an important contributor to such an accelerated PV dissemination scenario. With market growth of this magnitude, PV manufacturers may have sufficient incentive to justify investing in manufacturing plants with capacities greater than 10 MW p.a., the level at which increasing scale economies are expected to be realized. PVMTI should create sufficient "market pull" to help justify expansion of PV production facilities from current capacities of 1-5 MW p.a. to the 10-20 MW p.a. range.
12. Developing countries now account for about one-half of current PV shipments, and the lack of extended electrical grids in many of these countries makes PV competitive in a broad set of markets even at current prices. Off-grid markets include telecommunications, village water and irrigation pumping, and specialized power sources, with small solar home systems (SHS) representing a particularly large untapped market. The near-term off-grid market potential is extremely large: some 1.7 billion people (300 to 400 million households) in developing countries lack access to dependable power, and most will not be served by grid-expansion programs in the next 10 to 20 years. Over 500,000 SHS are now installed, with over 80,000 systems being added annually. Grid-connected applications are of increasing interest for peaking power and distributed line voltage augmentation and can be part of a manufacturing strategy to achieve greater cost reductions.
13. The most promising markets (in terms of number of SHS installed) for both
domestic private sector companies and current international PV suppliers
include: China (50,000); India (50,000); South Africa (50,000); Mexico (40,000);
Kenya (40,000); Indonesia (20,000); Morocco (10,000); Sri Lanka (5,000);
Pakistan; and Brazil.
PROJECT OPPORTUNITIES
Types of Projects and Likely Participants
14. Off-grid PV projects would address mass markets encompassing households, enterprises and communities in regions unlikely to be served by the grid. Major market segments include: (i) commercial deployment of SHS using PV technology in the 20-500 Wp range and costing $200 to $5,000; and (ii) concentrated markets for small power plants serving commercial end users, municipalities and villages, in the 50 kW to 5 MW range and frequently using hybrid technologies (solar systems backed by wind or diesel/gas generators). There are also associated business opportunities in developing local financial and service infrastructure, assembly, manufacture, and system integration.
15. Financing requirements for project opportunities vary. For wholesale distributors of PV systems, working capital is needed to expand operations and obtain equipment on competitive terms through bulk purchases or joint ventures. Funds are needed to expand investment in building PV market infrastructure including: marketing efforts, training and support of independent dealers, extension of short-term supplier credit, securitization of receivables, and offering term credit or lease financing directly to consumers. Financial intermediaries (FIs) can invest directly in local PV companies or projects or help them leverage funding from external sources. Activities directly involving FIs could include: establishing of franchise funds to provide start-up capital for local dealers, making equity available for investors in national PV distributors, and establishing end-user credits for sales of SHS.
16. Competition for PVMTI awards will likely encourage potential applicants to form broad-based consortia corporate joint ventures or teaming arrangements combining various types of in-country organizations and expertise (including that of NGOs), manufacturers and system integrators, financial intermediaries, and investors. The lead organizations must be duly incorporated or chartered in the target GEF-eligible recipient country and will act as the controlling entity and fund recipient. Projects and business organization could include the following: (i) mini-utilities where private concerns sell energy services through system leases rather than outright sales; (ii) agricultural service or telecommunications companies teaming with manufacturers to build up existing infrastructure to aggregate large markets in communications, productive-use applications, or lighting services; and (iii) distribution partnering with manufacturers of complementary equipment (BOS components, pumps, batteries, diesel and generators).
17. On-grid projects could promote the development of utility or privately owned installations on commercial rooftops to relieve peak loads, or grid-augmentation projects to defer line or transformer upgrades under a distributed utility approach. Recent private sector efforts have sought to establish PV-based power purchase agreements (PPA) with utilities or governments similar to conventional grid-connected power generation projects. PVMTI might also consider limited support for financing proposals involving highly cost-effective central station PV applications tied to a suitable PPA and/or local manufacture or assembly to achieve available production economies of scale.
18. While primarily private-sector driven, additional investment from or
cooperative activities with country governments or utilities could leverage
larger joint venture activities. Such participation could take the form of
license, franchise, or concession agreements to operate PV rural electrification
facilities within a country or region; joint venture activities with a national
utility; public commitment to expanded support for PV in public programs;
government encouragement for expanded PV financing through established financial
intermediary networks; and PV industry financing incentives such as reduced
import taxes and accelerated depreciation.
PROJECT OBJECTIVES
Global Environment Objectives and Benefits
19. The objective of PVMTI is to significantly accelerate the commercialization, market penetration, and financial viability of PV technology in the developing world, and provide a window for promoting large scale use of PV as one of the best long-term strategies for a low carbon energy future.
Specific Project Objectives and Benefits
20. PVMTI will seek to mobilize new financial resources for investments in privately-sponsored PV projects or ventures in targeted non-OECD countries, and will help catalyze further private investment, and engage and expand new sources of commercial financing. By aggregating supply and demand for PV and catalyzing existing networks of intermediaries in the private, NGO, and government sectors, PVMTI will assist in signaling the commercial viability of PV in selected markets as well as global markets for PV, and spur further incorporation of PV projects into normal financial channels. Specific PVMTI projects or ventures will provide service, training, and institutional development sufficient to support widespread and long-term technology dissemination. High levels of financial leveraging to augment GEF and private capital resources are expected to expand the impact and duration of the initiative and create favorable conditions for replicability.
21. Programmatic Impacts and Cost Objectives: In terms of market
development, PVMTI is anticipated to increase the number of household
systems (in the 30-50 Wp range) from approximately 80,000 per year to over
125,000 per year. Market expansion is also anticipated in diverse PV
applications such as: dispersed village power; services for schools, clinics,
and other institutional or business operations; water pumping; and
telecommunications applications. While it is not possible to predict a specific
cost reduction target, it is believed that PVMTI will provide market
signals that spur manufacturing expansion and distribution infrastructure and
help achieve accelerated manufacturing cost reductions from the current $4 per
Wp to under $2 per Wp by the year 2000.
PROJECT DESCRIPTION
Management Structure
22. The proposed administrative structure for PVMTI, summarized
in paragraphs 5, 6 and 7, is still under review by IFC's management. PVMTI
will be executed by IFC, either internally or through an external agent,
over a period of 5-7 years. Some financing activities may range up to 15
years.
Country Selection
23. In late 1995, the World Bank completed an initial canvassing of a broad set of GEF-eligible countries (with adequate solar insolation) with respect to interest in PVMTI. Country screening was then applied by the Bank and IFC only to these GEF-eligible countries who had expressed written interest in PVMTI and where market information suggests that commercial potential exists for relatively large-scale, sustainable PV dissemination (including current PV activities and potential for market growth, cumulative module sales, number of firms currently active, moderate income levels and sufficient willingness to pay to support a mix of cash and financed/leased markets, as well as strong demand for power with limited potential for service by the grid). With the exception of India (see para 33-36) a number of countries where new or ongoing GEF-funded PV projects are planned or already underway were also specifically excluded.
24. Country consultations were undertaken by the Bank and IFC between January and June 1996 with eight countries with significant untapped market potential and from which written expressions of interest in participating in the initiative had been received. These countries included: India, Pakistan, Thailand, Brazil, Kenya, Morocco, Tunisia, and China. These discussions resulted in strong expressions of government and private sector support for the initiative. In general, the countries welcomed the private sector project design and implementation philosophy of PVMTI as an opportunity to address energy needs and build indigenous industries, and were prepared to endorse the initiative for GEF funds. Government organizations expressed an interest in playing a significant role in stimulating or advising PVMTI projects. The countries were aware that project design and funds flow would not be under direct government control, were prepared to endorse the IFC administration of GEF funds, and accepted the competitive and private-sector oriented nature of PVMTI.
25. IFC management, in consultation with the Bank and GEF Secretariat,
selected India, Morocco and Kenya to participate in the initial phase of
PVMTI. Letters of endorsement in support of PVMTI from the
governments of India, Kenya, and Morocco are included in Annex 2. Based on these
countries' interest in alternatives to grid extension, expected levels of
government support, and an estimate of each country's absorptive capacity, it is
proposed to implement a first phase of PVMTI with $30 million in GEF
funding to be allocated on an indicative basis as follows: India, $15 million;
Kenya, $5 million; and Morocco, $5 million. In the event that the PVMTI
program's initial implementation experiences in these selected countries are
favorable, IFC is prepared to consider implementation of an additional phase
of PVMTI in a number of additional countries.
Project Evaluation and Selection Criteria
26. Investment policies and project selection criteria for PVMTI are still under development. Winning responses to PVMTI's request for proposals are expected to take the form of business plans (similar in form and content to those normally submitted to IFC). For evaluation and scoring, they will be subject to the same financial and technical due diligence IFC uses to evaluate investments of its own funds, and proposals submitted will need to demonstrate an adequate basis for the promised financial and technical performance. IFC standards will also drive selection towards projects that will be profitable within a stated time-frame. If approved by its management IFC will also consider requests for IFC co-investment alongside GEF funds.
27. Project selection criteria will likely include (but may not be limited to): evidence of significant financial leveraging relative to the proposed GEF funds application (i.e. > 3:1); minimization of proposed use of GEF funds as grants; maximization of use of the proposed GEF funds in non-grant concessional financing arrangements; involvement of local financial intermediaries as co-financing sources; approval of and possible minority participation of government/utility partners; potential for replicability/expansion (in that country and/or others); relative cost effectiveness (based on cost per Wp delivered); projected price reductions over time; and number of people served. Sustainability of project financing will be a key requirement, and will entail adequate provisions for system maintenance, payment collection, service infrastructure, and evidence of longer term financing arrangements. Funds disbursement will be performance-based to stimulate achievement of measurable business objectives.
28. All uses of GEF funds to support PVMTI's investment activity will
adhere to GEF criteria, and will be consistent with the Climate Change Action
Strategies and Programs and energy sector development plans adopted by the
respective host countries. IFC will apply rigorous environmental screening and
monitoring procedures in its investment activities, including but not limited to
the World Bank Group's environmental guidelines, procedures and policies. The
financing modalities anticipated are discussed more fully in Annex 4.
Early Opportunity Notice
29. PVMTI will likely encourage formation of complex ventures or projects that will require both significant corporate decisions and the identification and cultivation of new relationships among consortia partners and that in some cases may include country government or utility partners. A broadly defined "early opportunity notice" (EON) will be issued in the target countries as soon as GEF funding commitments are secured to gauge interest in the program and solicit feedback on potential projects and project types, and provide opportunities for greater information flow between PVMTI, potential partners, and stakeholders in recipient countries on possible partnering.
30. Limited technical assistance to facilitate project development and the
formation of consortia will be provided through a proposed GEF PDF Block B grant
to be administered by IFC, and supplemented by contributions from interested
charitable foundations. Operated in parallel with the EON process, this program
will help provide business advisory services to local companies in order to
level the playing field between local developing country organizations (in both
the private and NGO sectors) and international companies. PVMTI will also
facilitate teaming among country partners.
RATIONALE FOR GEF FINANCING
31. The PVMTI competitive procurement process is expected to maximize financial leverage, and is consistent with FCCC objectives and the GEF's Operational Strategy which suggests that GEF funds be used to leverage additional finance including through collaboration and funding mobilization with the private sector. PVMTI is consistent with GEF's focus of its climate change resources on new "technological lifeboat" solutions -- technologies that have high present costs but substantial future potential (including PV, solar thermal electric, biomass gasification, and fuel cells).
32. In terms of reducing and overcoming barriers, the private sector is considered the best agent to catalyze investment and business activity to accelerate this important low-emission technology. There are a number of barriers that are broadly endemic to many renewable energy technologies. These include: substantial transaction costs of developing and servicing small, dispersed markets; market distortions in electricity tariffs, tax and investment policies, and fuel subsidies; financing barriers such as the need to amortize the up-front capital costs of PV and working capital and production investment requirements; and lack of customer awareness among potential rural users who can afford electric power but do not currently have market choices for either grid-connection or PV alternatives. For all three countries, PVMTI is expected to reduce transaction costs by aggregating and expanding market activity through provision of working capital and/or extension of financing to end-users. PVMTI is expected to address both general and specific barriers in the selected countries as described below:
India
33. India is the world's largest PV market, currently at about 9 MW annually. The national target is 55 MW installed by the year 2000; it is anticipated that India could be a 20-30 MW annual market by that time. Currently, there are about 115 million unelectrified households, and even in the areas where the grid does reach, connections remain few and service is poor. India offers very large opportunities to demonstrate private sector based PV energy delivery as a grid extension alternative.
34. While India offers broad incentives for renewable energy development (including 100% depreciation, relief from many import duties, and a growing number of private power schemes), the results for PV have been uneven. Government-run and heavily subsidized water pumping and street-lighting programs have stimulated market attention, but are not considered sustainable and have served to distract market players from commercial projects.
35. A number of lessons have already been learned from the IBRD/GEF Alternative Energy Project which became effective in 1993. It includes a PV project concessional financing window for the private sector implemented through the India Renewable Energy Development Agency (IREDA). IREDA's PV funding initially failed to deliver an attractive cost of financing, and the lack of a pipeline of commercial projects caused significant delays in implementation. With reduced interest rates a substantial number of PV sub-projects have now been proposed and at least 45 have been approved for financing and the GEF funds are now fully committed. It is also notable that: (i) PV required much greater promotional efforts than comparable renewable energy technologies supported by IREDA; (ii) some PV producers/suppliers are still not market-oriented or are reluctant to take on retail marketing involving credit finance; (iii) a number of PV-related loans have been non-performing; and (iv) no commercial follow-up to government-financed PV programs is available.
36. Some proposed sub-projects have included various forms of supplier/distributor relationships that are ineligible under program procurement guidelines. IFC's greater flexibility in project financing can overcome such problems, and PVMTI will be able to address a limited number of projects that cannot be advanced through the existing IREDA credit line. Further, competitive awards through PVMTI will permit private sector consortia to propose projects on the basis of their own financing requirements while minimizing the use of PVMTI funds as grants, and PVMTI resources may strengthen their ability to remove specific market barriers that they face.
Kenya
37. More than 40,000 PV systems have been installed in Kenya, greater than the number of rural connections provided by the national utility but well over two million homes remain unelectrified. A thriving PV private sector has emerged despite the absence of end-user credit financing mechanisms and frequent shifts in government policies. For example, import tariffs for PV were lifted in 1986, only to be reinstated in 1991, and again removed in 1995. The result has been unevenness in market development (placing limits on the technical and entrepreneurial abilities available to the market), high system prices (two to three times prices in otherwise similar markets) and a reliance on cash sales (now reaching the saturation point). It is expected that significant additional market growth is possible with sources of credit financing made available, and that availability of PVMTI support can buttress private sector based approaches.
Morocco
38. Over 1.7 million households remain unelectrified. Despite considerable
private sector entrepreneurship and broad PV opportunities resulting from slow
grid extension, lack of intermediate and long-term financing has constrained PV
industry growth. The existing PV industry includes local manufacture and
assembly of balance of systems (BOS) components, but requires additional
financing sources to reach readily accessible, non-electrified rural customers
in remote, and often mountainous regions. It is expected that PVMTI will
stimulate a number of PV franchising and leasing schemes combining system
integrators with local financial intermediaries to tackle these market
segments.
PARTICIPATION AND SUSTAINABILITY
39. Country consultations supported by PDF Block A funds administered by the World Bank were performed as described earlier. The consultations resulted in strong expressions of both government and private sector support for the initiative. A wide variety of manufacturers, suppliers, NGOs, and foundations were also consulted by the Bank and IFC in preparation of PVMTI, and offered broad advice on market development needs and implementation options. PVMTI will offer additional opportunities for stakeholder participation at the national and local level through engagement of municipalities, commercial credit facilities, and expanded small entrepreneur activity. PVMTI will also support national climate change action strategies.
40. The initiative addresses sustainability in terms of: achieving renewable
energy supply; providing the necessary market development to initiate and
sustain activity; building the training, service, and maintenance infrastructure
required to make PV installations more sustainable in a local context;
development of more lasting financing mechanisms for end-use customers; and
developing private investment vehicles for local companies providing PV
integrated service delivery. Rather than a "top down" approach that might expire
when funds are exhausted, this use of GEF funding through private-sector
financing channels administered by IFC can stimulate PV players to stretch their
technological and marketing capabilities in pursuit of private interests. The
objective is to drive PV technology towards profitability, which will provide
the greatest possible long-term sustainability.
Additional Domestic Benefits
41. As a result of PVMTI, rural energy users will have access to a
least-cost energy resource with higher lighting values without the smoke and
fire risk associated with indigenous non-electric lighting sources (e.g.
kerosene lanterns, candles). In-country entrepreneurial interests will be able
to respond to expanded opportunities for organizing PV distribution, assembly,
and financial business enterprises. This will likely result in considerable
employment generation.
LESSONS LEARNED AND TECHNICAL REVIEW
42. PVMTI builds on lessons learned from "market pull" initiatives undertaken over the last several years in North America and Europe that utilize financial innovation to encourage, facilitate, and accelerate market entry of new energy and energy efficiency technologies. Included in the World Bank Group's experience is the IFC/GEF Poland Efficient Lighting Project (PELP), which has used the competitive award of GEF-funded manufacturer incentives to stimulate growth of domestic markets for energy efficient lighting technologies while reducing costs to end-users.
43. Previous GEF-supported World Bank projects have had or are beginning to have success in building PV markets and infrastructure, and have helped address the up-front investment barrier by providing subsidy elements and/or term financing. However, in some cases, government/donor activities in PV have undermined local price competition or market participation, tilting supplier attention toward temporary subsidized opportunities and away from commercial markets. Highly concessional systems pricing has in some cases minimized end-user sense of ownership, encouraging short-term treatment of markets and customers and undermined cost recovery principles necessary to maintain and regularly service systems. Reliance on temporary, public sector financial control and payment collection has impeded the rational development of private sector management and discipline. In contrast to such previous experiences, PVMTI will address barriers by promoting projects conceived by private sector entities already attuned to specific market conditions in their country, and implemented in a context of private sector incentives and discipline.
44. Other countries being addressed by GEF projects now under implementation (such as in Zimbabwe, Indonesia and Sri Lanka) were not considered for PVMTI participation in the first phase. Potential conflicts with PV projects or operational programs being addressed by other GEF implementing or executing agencies will be minimized by the early identification of countries involved in PVMTI projects and close consultation during PVMTI's implementation with other such efforts.
45. This project proposal was subject to an Independent Technical Review by a suitably qualified technical expert from the STAP roster, whose summary comments are attached as Annex 3. The reviewer found the document accurate in its understanding of the current market situation, comprehensive in its description of possible implementation options, and endorsed IFC as the executing agent of the project concept.
PROJECT FINANCING AND BUDGET
46. The US$ 30 million GEF funding contribution to PVMTI will be
applied as described earlier, with most GEF funds being used to provide direct
project or venture financial support. The remainder of investment for the
initiative would come from private sector debt or equity investment, potential
IFC or other co-financier investments, and additional investment or in-kind
services provided by in-country stakeholders. The GEF financial component is
expected to leverage approximately $90-120 million in total financing to
selected investments worthy of support through PVMTI.
Operating Costs
47. The operating budget for PVMTI will be determined in part by the
administrative approach selected by IFC management to administer the program.
The management modality adopted by IFC will require a reasonable allotment (in
the range of 9 to 15% of GEF funds under management) to cover specified
project-related costs (issuance of an RFP, investment evaluation and selection,
technical assistance activities, involvement of local financial intermediaries
investment supervision, and GEF evaluation and monitoring). A total of $5
million in funds has been reserved by IFC for specified project-related costs
involved in program administration including costs associated with local
financial intermediaries involved in program administration. Reflows to the
program will be retained by IFC until program activities are concluded when all
remaining funds will be transferred back from IFC to the GEF Trust Fund.
INCREMENTAL COSTS
48. As the number and exact type of projects are not known, it is not possible to specifically describe the incremental costs associated with PVMTI projects. However, it is believed that GEF resources can be directed to applications meeting incremental cost guidelines, and that the PVMTI project evaluation process can ensure this outcome through both the competitive aspect of project selection and IFC's stated intention to apply innovative financing mechanisms (including requirements for maximization of financial leverage and minimized use of GEF funds as grants). Annex 1 provides further information.
RISKS
49. Specific PVMTI risks include: (i) project or venture risk, which
includes investee company bankruptcy and/or liquidation, end-user non-payment,
as well as unanticipated high costs in establishing adequate marketing,
installation, and servicing networks; (ii) technology risk, such as a failure to
achieve expected price reductions or actual technology failure (e.g. resulting
from sub-standard cells, modules, or BOS components); and (iii) institutional
risk, in that developing country governments or utilities could fail to respond
to PVMTI consortia or impose unreasonable operational requirements. These
issues can generally be addressed through: sound venture business plan
preparation and good project design; adequate due diligence in venture or
project evaluation, selection and supervision; substantial risk-sharing by
private sector consortia through their own equity investments and those of other
equity participants; and performance-based disbursement schedules. In addition
to these risks, overall PVMTI activities may fail to result in the
anticipated market expansion and price/transaction cost reductions. An
unexpectedly large number of proposals could make project selection unwieldy, or
it may prove difficult to attract the other leveraged investments required.
INSTITUTIONAL FRAMEWORK AND IMPLEMENTATION
50. The proposed GEF support will be administered by IFC as described earlier. IFC will perform evaluation of PVMTI investment projects based on monitored and achieved targets of PV system installations, related GHG emission reductions, and other criteria to be developed with regular reporting to GEF. Monitoring and evaluation will be performed on an ex-post basis and will be integral to investment supervision and financial controls.
51. The implementation modality utilized will be determined by IFC in accordance with its experience in administering private sector financing mechanisms and lessons learned from previous GEF and PV projects. Regardless of the modality chosen, additional technical and financial expertise, including involvement of local financial intermediaries for each country addressed, will be required by IFC to support program implementation.
52. GEF fund disbursement schedules are expected to be specific to each investee company's investment agreement as a function of their business plan and will be subject to IFC approval. To assist in capital formation, provide working capital for market development activities, or establish revolving credit facilities, a portion of each PVMTI investment will be provided initially. Thereafter, disbursements will likely be made on a performance basis with additional transfers of GEF funds provided in relation to delivery of product, completion of investment or operational milestones, and/or other significant accomplishments in developing in-country PV distribution networks.
ANNEX 1
ANALYSIS OF INCREMENTAL COSTS
1. In the three countries identified for participation in PVMTI, a number of rural inhabitants have adequate financial resources to purchase a basic level of electrical service. However, due to small and dispersed electrical loads, grid-extension remains uneconomic and limited financial resources are directed at supporting rapid growth in urban electrical demand. Concurrently, the inertia of established fossil-fueled energy systems and policies continues to inhibit the orderly development of small-scale renewable energy services and markets that can meet these rural needs, leaving many rural households with limited energy choices.
2. As the number and exact type of projects are not yet known, it is not considered possible to specifically describe the incremental costs associated with PVMTI projects. However, it is believed that GEF resources can be explicitly directed to applications while meeting incremental cost guidelines, and that the PVMTI project evaluation process can ensure this outcome through both the competitive aspect of project selection and IFC's stated intention to apply innovative financing mechanisms (including requirements for maximization of financial leverage and minimized use of GEF funds as grants).
3. For the PVMTI project and photovoltaic markets and technology in general, the baseline situation can be gauged in terms of: (i) current activities of PV commercial entities to undertake market development and manufacturing expansion to serve expanded markets; (ii) the failure of households and other users to utilize PV systems because of lack of availability of systems or service, high prices, lack of financing, and/or lack of information about the technology itself; and (iii) the policy and institutional roles of recipient countries in adopting broad based programs and policy adjustments regarding renewable energy.
4. According to these terms, the baseline scenario is that in the absence of GEF support, market risks and obstacles will remain high, and there will continue to be relatively small actions by these parties (or a continued inability to take action) to expand use of PV. The result will be slow, incremental changes in PV market penetration and manufacturing scale, coupled with limited market aggregation and continued slow diffusion of the PV technology. The current small scale of investment and commercial aggregation (relative to established conventional fossil sources of energy) will continue to penalize PV, limiting its value as a strategic technology option for providing GHG reductions and large scale electrical power well into the foreseeable future.
5. Incremental costs for PVMTI can also be described as a surrogate for the risk undertaken in developing PV markets, with risk representing a composite of the various barriers faced in a particular market situation. One approach to measuring this risk would be based on the incremental internal rate of return (IRR) that would be required to undertake the expected projects in these country markets. It is expected that for the private sector, the IRR for a variety of projects would be insufficient to address the incremental risk of such projects. A level of support from PVMTI could increase the IRR on many such projects or provide adequate security or credit enhancement to justify investments with lower IRRs, thus lowering the risk threshold to the point where such investments would proceed.
6. Screening of proposed ventures or projects prior to final selection will include development of accurate baseline estimates, and evaluations by PVMTI of projects against incremental cost guidelines as applied to private sector investments. The RFP will direct proposers to provide basic information on characteristics of the barriers faced, their expected level of market activity absent PVMTI intervention, the value of country-teaming arrangements enabled through PVMTI, and a description of how PVMTI assistance alters their ability to engage in the proposed project. Information from all proposals will be used to develop several proxies for cost-effectiveness (e.g., financial leverage, dissemination targets, $/Wp cost target) to ensure that bids of the right magnitude are requested.
7. The EON and business advisory services for business plan preparation are logical components of an iterative process to fine-tune both the quality of proposals and the IFC's evaluation and investment criteria. Different insights from various private sector companies regarding generic and specific market barriers that they actually face in the marketplace will help describe the commercial context. Such information can be used to improve criteria for future incremental cost evaluations.
8. In this manner, project proposers will not be held to an artificial project size or scope, and will instead be free to propose an award size more closely correlated to the opportunities and business realities in their selected target market. Verification of proposer-provided baseline estimation will be augmented by aggregate regional and country baselines based on trends and development plans, estimations of business-as-usual penetration in global and local markets, or other assumptions of energy substitution based on individual country conditions. Calculation of incremental costs will thus be based on a combination of prima facie evidence and interpretive information.
9. In evaluating incremental costs, special consideration of private sector circumstances is considered important to clearly communicate the incremental cost information desired in order to minimize gaming and/or potential misallocations of GEF's scarce resources that could undermine the private sector and commercial nature of PVMTI projects. IFC now has experience with administering such an incremental cost analysis framework for the IFC/GEF SME Program and is preparing a similar approach for use in administering GEF funds made available as project co-financing through REEF.
ANNEX II
LETTERS OF COUNTRY ENDORSEMENT
BY DESIGNATED OPERATIONAL FOCAL POINT
ANNEX III
TECHNICAL REVIEW
PHOTOVOLTAIC MARKET TRANSFORMATION INITIATIVE (PVMTI)
The reviewer found PVMTI to be precisely the kind of initiative that is needed to lower market entry risks and stimulate a wide range of business investments in the PV industry. PVMTI can be important in supporting climate change mitigation especially by supporting the accelerated penetration of the thin film technologies that are expected to be dominant in the coming expansion of PV manufacturing.
Lack of local financing mechanisms was indicated as the major inhibitor to more rapid PV dissemination; with proper financing, PV systems can be affordable to a significant percentage of rural populations. While PVMTI initially provides a range of financial incentives, PV price decreases should obviate the continuing need for incentives; conversely, subsidies for conventional rural electrification are unlikely to decrease over time. Further, the reviewer agreed that the lighting, communication and water pumping services provided by remote PV systems can significantly improve the quality of life of rural populations; in turn, significant use of PV and other renewables will make achievement of developing country goals more compatible with global GHG emission reduction goals.
The reviewer concluded that PVMTI provides important leverage in overcoming the PV commercialization dilemma, wherein markets can be grown significantly if costs can be reduced, but costs can be reduced only if major investments are made in expanding manufacturing capacity. The PVMTI Project Brief was found to identify several key mechanisms to stimulate private sector development of commercial PV infrastructure and thereby increase system affordability. The reviewer clarified that while subsidies to stimulate sales may be an effective short-term mechanism to overcome customer reluctance due to lack of familiarity with PV systems, they should not be supported as a long-term market strategy.
Project selection criteria identified in the Project Brief were found to be comprehensive, and the reviewer indicated that PVMTI is well structured to allow private industry to define its particular needs. Application of IFC financial principles and criteria was found necessary to ensure that sound business approaches and practices are employed. The reviewer added that while evaluation criteria could be kept simple, proposals should explicitly show how PVMTI funds would leverage private sector investment and accelerate the development of market infrastructure.
Recommendations for consideration by IFC and GEF included the use of a single international RFP for project solicitation; acceptance of the reality of possible business synergies between companies in the initial pre-identified countries and other neighboring developing countries, and initiating additional funding phases open to other eligible countries who endorse the PVMTI concept. Finally, it was suggested that the program's accomplishments and direction be regularly reviewed at an international forum consisting of World Bank, government, NGO, industry and other representatives.
ANNEX IV
FINANCING MODALITIES ANTICIPATED
1. It is expected that GEF funds will be applied: (i) as working capital to overcome private sector hesitation to make the substantial financial commitments to develop distribution, sales, and service infrastructure in a country or region; (ii) as a credit enhancement mechanism for financing systems to end-users; and/or (iii) to create and operate a revolving credit facility to leverage system purchases over time. Some projects could also use GEF funds as base capital upon which to attract joint venture partners able to achieve PV price reductions through manufacturing scale-up or scale increases in distribution.
2. To achieve the maximum leverage for the GEF component, IFC will administer PVMTI to encourage innovative financing modalities that are expected to include contingent finance, establishment of arrangements for long-term concessional interest rate loans, guarantee mechanisms to secure FI lines of credit, or other innovative uses of GEF funds in non-grant finance such as equity or quasi-equity. In addition to other equity or debt investment, some proposals may also request financing from IFC under its usual terms. GEF funds can potentially be used to blend with IFC funds to create concessional loans on defined terms. Significant emphasis will be placed in program criteria on encouraging securing of co-financing for consortia bids from FIs (e.g., commercial banks or leasing companies) and in promoting FI end-user credit arrangements for PV system finance.
3. Project proposals are anticipated to request a combination of GEF-provided funds leveraged with other debt and equity to provide working capital for distributors/dealers for cash sales or downstream intermediary financing; project finance for mini-utility companies offering systems through cash sales, leases, or term-financing; or energy service company approaches through PV-based battery charging stations or distributed village power schemes. Other approaches could include development of franchise territory awarded by country utilities, or investment in module assembly/PV module manufacturing and/or local balance of system (BOS) manufacturing tied to other market development activities.
4. Partial funding of guarantee facilities could also be encouraged with the use of PVMTI GEF funds. Credit enhancement mechanisms could be used to support credit facilities administered by financial intermediaries to reduce credit risks and interest rates while building predictable customer repayment histories. Other guarantee mechanisms, such as the use of prepaid meters in conjunction with SHS, and cross-collateralization of loans within a portfolio of projects, may also be used to mitigate credit risk.
5 PVMTI projects may also apply GEF funds toward immediate financing requirements of projects, including medium-or-long term debt or lease financing facilities (e.g., 3-8 years); off-grid PV projects to provide revolving facilities for consumer credit; or funds to extend the maturity of loans provided by other sources. Long term loans (e.g., 12-15 years) may be required for small on-grid RE projects. Partial funding or guarantee arrangements for debt or lease finance facilities will enable PV distribution to evolve beyond a cash basis, and will offset one potential difficulty faced by PV companies to raising working capital, long-term debt or sufficient equity for business expansion.
6. PVMTI funds might also be used in exceptional cases to directly
reduce the capital costs of projects in promising new market segments and/or
technology areas. Such support could be provided on a grant basis in order to
improve returns on projects that would otherwise not be undertaken, or as
contingent finance to be repaid if the project is fully successful. IFC will
consult with the World Bank and the GEF Secretariat the first time a new
financing modality is proposed to ensure that the application of GEF funds meets
GEF eligibility and incremental cost criteria.