SRI LANKA ENERGY SERVICES DELIVERY PROJECT
CREDIT PROGRAMME: A CASE STUDY
Jayantha Nagendran
Senior Vice President (Asset/Liability Management), DFCC Bank
and Manager, ESD Project Credit Programme
May 2001
1.
Project Background
The Sri Lanka Energy Services Delivery (ESD) Project, set up in 1997 with assistance
from the World Bank and Global Environment Facility, has three components:

Credit Programme: To provide medium and long term financing to private sector
firms, non-governmental organisations, micro finance institutions (MFIs) and
community co-operatives for (a) grid-connected mini hydro projects (typically < 5
MW), (b) off-grid village hydro (VH) schemes, (c) solar home systems (SHS), (d)
other renewable energy investments and (e) energy efficiency/demand side
management investments.

Pilot Wind Farm: To demonstrate the commercial viability and long-term economic
potential of wind power in Sri Lanka, and to catalyse future private sector wind farm
development. The Ceylon Electricity Board (CEB) implements the 3 MW pilot wind
farm in the Hambantota District.

Capacity Building: To provide training and technical support for renewable energy
and energy efficiency initiatives by both the public and private sector. In particular, it
supports CEB’s Pre-Electrification Unit and Demand Side Management Unit.
The Credit Programme, which is by far the largest component, is executed by an
Administrative Unit located within DFCC Bank, Sri Lanka. The ESD Project is under
implementation and will end in December 2002. This paper outlines some of the
innovative features of the ESD Credit Programme and the progress achieved to date (31
March 2001).
2.
Long Term Goals
The long-term goals of the ESD Credit Programme are to:

Incorporate environmentally sustainable renewable energy technologies within the
planning framework for grid-connected power generation (wind and mini hydros) and
pre-grid rural electrification (SHS and VH)
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
Achieve acceptance by consumers, project developers and financial institutions of the
viability of grid and off-grid renewable energy systems for electricity generation and
delivery.
The above translate into the following indicators and measures of goal achievement:
3.

Capacity addition of about 21 MW to the CEB grid through mini hydro projects

Electrification of about 20 villages, serving a total of about 2,000 households, through
VH schemes

Installation of about 15,000 SHS (revised goal) in rural households unlikely to be
served by the grid in the medium to long term

Development of sustainable markets for grid and off-grid renewable energy
technologies

Mitigation of greenhouse gas emissions through displacement of conventional
technologies by hydro, solar photovoltaic (PV) and wind power projects.
Results Achieved to Date
With about 45% of households in Sri Lanka not connected to the grid, SHS and VH
schemes offer attractive alternatives to people who would otherwise use kerosene lamps.
This requires a paradigm change in the mindsets of people who traditionally depend on
the state for the provision of practically all services – including electricity. People
seldom realise that they have a choice. This is where the ESD Credit Programme is
encouraging the private sector to provide energy services and empowering people to
access them.
The ESD credit line became effective in 1997 and disbursements commenced during the
latter part of the following year. Some key results achieved by 31 March 2001 are as
follows:

13 nos. grid-connected mini hydro projects having total capacity of 23.9 MW
financed by participating credit institutions, three of which are under construction

13 nos. off-grid village hydro schemes to serve a total of 660 households financed,
five of which are under construction

3,200 nos. solar home systems successfully installed in remote rural households.
Participating credit institutions are presently evaluating several more grid-connected mini
hydro, off-grid village hydro and solar home system projects for financing.
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4.
Successes and Constraints
4.1
Standardised Arrangements
Public sector investments in power generation, particularly in the past decade, have
lagged behind Sri Lanka’s demand growth of about 8% per annum. In response, the
government’s strategy involves:

Creating a regulatory and policy environment which encourages private investments
to supplement public resources, and

Improving the efficiency of energy services delivery through demand side
management.
The ESD Credit Programme addressed two key issues to enhance the policy and
regulatory environment for private investments in renewable energy services delivery
through the development of:

A standardised Small Power Power Purchase Agreement (SPPA), and

A non-negotiable Small Power Purchase Tariff (SPPT).
The lack of SPPA and SPPT prior to this were impediments to the development of small
(< 10 MW) grid-connected power projects. Such standardised arrangements reduce leadtime and transaction costs to the developer and utility, and also overcome the weak
bargaining power of small power producers. The successful development of SPPA and
SPPT with the Ceylon Electricity Board (CEB), a state-owned power utility, were crucial
for the market entry of private sector small power producers.
However, the SPPT soon ran into trouble. Being administered by a monopolistic
purchaser in an environment which does not have an independent regulator, the tariff
computation methodology underwent changes and data inputs lost transparency. To
resolve the issue an independent consultant acceptable to both the CEB and the GridConnected Small Power Developers Association was engaged by the ESD Project to
study the problem and make recommendations. The recommendations are now before a
committee appointed by the Ministry of Power and Energy for a final determination.
The regulatory/legal environment in respect of off-grid VH schemes and mini grids is
more complex. The present Electricity Act effectively prevents the private distribution
and sale of power. While the issue is under a detailed study for possible policy reform,
VH schemes being implemented under the ESD Project are presently designed such that
they are owned and operated by electricity consumer societies whose members are the
end-users of electricity.
VH schemes at present do not have strong industry drivers. They are dependent on ESDfinanced consultancy support for project identification and preparation. The learning
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curve is long and hence, the ability to replicate a project in different locations will yield
significant economies in cost and lead time. An alternative model, with dedicated VH
energy service companies (with perhaps the involvement of provincial councils) may
well be an option for the sustainable development of this sector. This aspect has yet to be
investigated, perhaps once the legal hurdles are cleared. It could be undertaken after the
present ESD Project-supported studies on legal, funding, capacity building and technical
issues pertaining to the VH industry are concluded.
4.2
Financing
Credit delivery is through participating credit institutions (PCIs) which meet defined
eligibility criteria. They initially comprised two development banks and three
commercial banks, all privately owned and controlled.
The availability of long-term financing to PCIs was necessary to match the long payback
periods of mini and village hydro projects. The two development banks, by virtue of
their in-house capabilities and nature of business, were quick to finance grid-connected
mini-hydro projects. They also resorted to syndicating loans with other PCIs, which led
to the broader acceptance by financial institutions of the viability of mini hydros. It must
be noted that one development bank (DFCC Bank) provided equity and loan financing to
Sri Lanka’s first build-own-operate mini hydro project a few years before the ESD
Project was launched. In this case the power purchase agreement and tariff had to be
negotiated from scratch, with DFCC Bank often playing the role of project developer.
The credit delivery channels for consumer loans for solar home systems (SHS) proved to
be different. The ESD Credit Programme was originally designed for dealers/developers
of SHS to provide the marketing, technical support as well as consumer credit. They
were to access commercial finance from PCIs for this purpose. Dealers/developers soon
realised that micro credit evaluation, delivery and recovery were specialised functions
beyond their capabilities. The success of such rural micro credit largely depends on a
rural presence, local connections and an understanding of the people themselves. For
these same reasons the PCIs too were not equipped to provide consumer credit in such
geographically scattered and remote locations. The ESD Project thus turned to micro
finance institutions (MFIs) for extending SHS consumer credit.
The unbundling of consumer financing to MFIs, who in turn accessed term loans from
PCIs, freed the SHS dealers/developers to focus on what they could do best. However,
the entry of MFIs introduced another layer in the credit delivery process and pushed up
interest rates. This problem was addressed by introducing a new set of eligibility criteria
for MFIs to become PCIs and thus access the ESD credit line directly. One MFI, which
satisfied these criteria, was admitted as a PCI midway through the project. It is presently
receiving technical assistance to develop its Solar Financing Division into a successful
business unit.
Technical assistance from Global Environmental Facility (GEF) for selected off-grid
activities is an important component of the ESD Credit Programme. Broadly, GEF grant
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funds are used for providing transparent subsidies for off-grid VH schemes and SHS to
overcome initial cost disadvantages inherent in the technologies and for consultancy
services covering off-grid project promotion, project preparation, compliance with
technical standards and consumer protection. Such subsidies are expected to be phased
off over time as market volumes increase and reach a critical mass.
4.3
Political Environment
The absence of an articulated national policy on renewable energy raises awareness and
acceptance issues among policy makers, financiers and potential beneficiaries. The
problem becomes worse for off-grid project developers when grid extension plans are
rendered unreliable by politicians overriding them through ad hoc decisions. Some have
even stifled SHS and VH project development by making false promises of grid supply
just before elections.
Increased awareness of off-grid VH and SHS as viable options, reinforced by success
stories, is now beginning to enlighten politicians. Two recent breakthroughs are
noteworthy. A provincial council and the ministry for plantation infrastructure have each
recognised that full grid electrification is not financially viable. In response, they have
included solar and village hydro electrification in their development plans and have
linked their respective programmes with the ESD Project. They will adopt a marketbased approach and make use of the technical, financial and marketing infrastructure put
in place by the ESD Credit Programme. In addition they will provide a transparent
subsidy which when leveraged with the ESD Project, improves the sustainability of their
respective programmes. It is expected that their success will spur other provincial
councils to also consider VH and SHS technology options as part of the rural energy mix.
4.4
Consumer Awareness and Marketing
To address the lack of awareness, the ESD Project executes a generic promotion
campaign on SHS and VH schemes. The promotion targets end-users, government
authorities, community based organisations, MFIs and the general public. It educates
end-users on the advantages and limitations of SHS and VH power, informs them about
service and warranty arrangements and about available loan schemes. A variety of
communication channels are used, including workshops and demonstrations at villages.
SHS dealers participate in such village level workshops to demonstrate their products. In
addition, community based organisations participating at such events subsequently serve
as potential catalysts for village hydro development.
Progress of the promotion campaign is reviewed monthly. Two non-profit organisations,
the Solar Industries Association and the Energy Forum participate at these meetings and
also provide useful feedback.
Consumer acceptance of SHS in Sri Lanka took a leap with the entry of a multinational
corporation with a well known brand name, and later when a local government authority
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(provincial council) lent credibility to this private sector initiative by linking its rural
electrification programme to the market-based ESD Project. These two events, coupled
with the admission of MFIs into the ESD Credit Programme may be cited as the critical
success factors in the uptake of SHS in Sri Lanka.
4.5
Industry Participation in Policy Development
The ESD Project supported the creation of a solar PV industries association. Members of
the association are dealers and MFIs who have a proven sales record. The Project
provides technical assistance to the association, which interacts with the World Bank,
government and the national power utility (CEB) on matters such as rural electrification,
import duty and taxes. The industry association is presently addressing technician
training and accreditation, a high priority activity, given the recent SHS market take-off.
Good after sales service is an important factor for loan recovery, and both dealers and
MFIs are establishing a cadre of trained SHS technicians.
Unlike SHS, the off-grid VH industry presently lacks strong commercial interests or
industry muscle. The Administrative Unit of the ESD Project is working towards
institutionalising VH (and SHS) electrification options within the planning frameworks of
provincial councils as part of a comprehensive study for the sustainable development of
the VH industry.
In contrast the grid-connected small power developers, who receive no financial
assistance under the ESD Project, have an active association. The association is driven
by commercial interests and as discussed earlier, was instrumental in challenging the
validity of the present small power purchase tariff computation. Such checks and
balances are important for the development of the power sector as a whole.
4.6
Technical Standards
The ESD Credit Programme ensures compliance with technical specifications for off-grid
VH schemes and SHS. These standards are reviewed from time to time based on
experience, and are adjusted for innovations and market development. Standards ensure
quality, safety and longevity and thus reduce commercial risks. GEF grant funds are
available to financiers to verify that VH and SHS designs meet specifications. Grant
funds are also available for investigating unresolved SHS consumer compliants against
vendors and seeking appropriate solutions. Not surprisingly, no major SHS customer
complaints have surfaced to date, and only one early VH scheme had to undergo
rectification work following an installation verification.
Although such technical standards are welcomed by stakeholders, the SHS component of
the ESD Credit Programme was held up for a year after credit effectiveness as dealers
needed more time to source technically certified products. Testing of local batteries for
SHS took even more time and a moratorium had to be declared on battery specifications
for many more months. The VH specifications on distribution lines also required an
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upgrade. These serve to illustrate some of the myriad issues faced by technologies
striving towards large-scale commercialisation.
5.
Conclusion
Several innovations emerged from the ESD Credit Programme, some to capture
opportunities and others to overcome barriers. Many of these were possible because of
the flexible nature of the project design. The ESD Credit Programme has now created a
large pool of stakeholders in Sri Lanka and the foundation has been laid for a follow on
project to build on the momentum created.
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