Going “All in” on Solar Finance: How IDCOL Incubates a Growing Industry in Bangladesh

IDCOL and Solar Home Systems in Bangladesh

While demand for small-scale renewable energy is virtually infinite, a small microfinance institution or energy enterprise needs capital to meet that demand with supply. The Infrastructure Development Company Limited (IDCOL) addresses this barrier to scale in a unique and exciting way. With massive infusion of government capital, management from the private sector and a unique asset finance model using creative partnerships, IDCOL has produced a stunningly successful program.

IDCOL is a Bangladeshi Government-owned financial institution that is implementing a large scale Solar Home System (SHS) Program with support from various local NGOs, MFIs and private entities. Consonant with the Bangladeshi Government’s vision of providing “access to quality electricity to all people at an affordable price by the year 2021,” the program’s objective is to fulfill basic electricity needs in the rural areas of the country.

Prior to IDCOL’s entering the SHS market, its primary remit was large infrastructure finance. IDCOL managed to move into the SHS sector with incredible success: in its first ten years, IDCOL installed over 2.7 million SHSs in off-grid rural areas of Bangladesh. IDCOL aims to finance six million SHSs by 2016, with an estimated generation of 300 MW of electricity. The program has been acclaimed as the fastest-growing off-grid renewable energy program in the world.

As IDCOL’s Director (Investment), Nazmul Haque, characterizes it, IDCOL is “a private company that is government-owned: a public-private partnership, or PPP.” The Bangladeshi government is the founder and investor, but the management is entirely from the private sector. Nazmul describes IDCOL’s initial involvement in renewable energy as “accidental and reluctant,” but with World Bank impetus it developed what was thought to be an aggressive pilot target of 50,000 SHSs over five-and-a-half years. At the time, there were barely 7,000 SHSs installed in the whole country of roughly 150 million people.

The program exceeded targets dramatically. Fifty thousand SHSs were financed within three years – two-and-a-half years ahead of schedule. A subsequent internal target was set for one million systems by 2012 – which was reached two years ahead of schedule, by 2010. A further-revised target of six million was established for 2016. As of December 2013, IDCOL had financed 2.7 million SHSs (see Figure).

These kinds of results are not achieved without massive financial commitments. IDCOL has invested over US$500 million so far, with a billion dollars likely by 2016. Twelve million people have been reached, thirty thousand direct jobs created, and US$39 million in government spending on kerosene subsidies saved. To reach these numbers, IDCOL tapped an impressive network of financers. The program received initial loan and grant support from the World Bank (IDA) and Global Environment Facility (GEF); later on, German Technical Cooperation (GIZ), German Development Cooperation (KfW), Asian Development Bank (ADB), Islamic Development Bank (IDB), Global Partnership on Output-Based Aid (GPOBA), Japan International Cooperation Agency (JICA) and Department for International Development (DFID) came forward with additional financial assistance.

The Financing Model

IDCOL has developed a unique asset finance model for SHSs. It works through 47 partner organizations, or “POs,” comprised of NGOs, MFIs and other private entities on a national partnership basis. IDCOL provides low-cost financing and technical capacity-building support to the POs, which interact directly with customers. Certain components are essential to its success: ownership; multi-party financial contribution; market price determination; independent selection of POs and suppliers; and indirect subsidy to the consumer.

Ownership

IDCOL’s beneficiaries become owners of their SHSs, buying them outright in cash or, more commonly, after completing their installment payments. This encourages proper use and maintenance and confers the long-lasting benefits of solar-generated power to the system owner. Over-utilization of the SHS is minimized by limited on capacity; the systems typically can supply electricity for only 4 to 5 hours during the night to run a few lamps, one black and white TV, one mobile-charger, and/or one DC fan. There is a good reason for this: restricting usage diminishes demand for customer support and keeps systems running in good order. Since customers are more likely to make installments to POs on well-functioning systems, they are therefore more likely to reach the ownership stage.

Multi-Party Financial Contribution

An important part of IDCOL’s program is ensuring that customers as well as POs contribute to the installation costs of the SHS. To procure an SHS, a customer makes a minimum 10% down-payment to the PO, which then installs the system. The remaining cost (90%) is a loan from the PO to the customer, who repays in installments. IDCOL refinances 70-80% of this loan amount, therefore reducing the PO’s outlay to approximately 18-27% of the SHS cost. This multi-party contribution ensures strong buy-in from all stakeholders, and aligns all three parties’ common objective: prompt and consistent repayment of the loan, leading to ownership.

This arrangement incentivizes the POs to provide quality after-sales service: they need to ensure customers are satisfied, so that they repay their loans. The POs have to manage funds for their contribution to the systems’ costs in order to manage further installations of SHSs and they also have to ensure a return on their equity contribution. Quality after-sales service is an important component of solar financing and serves as a marketing incentive as well.

Market Price Determination

Many programs fail because the market is controlled, artificial or manipulated. IDCOL’s approach has been to allow market forces to determine the price of SHSs. While appealing in theory, the reality is that IDCOL continually monitors the prices that customers are paying as well as the component prices, and claims to require reasonable grounds for changes in SHS prices “without ever interfering in the determination of the price” – instead seeking competition between the POs and among equipment suppliers. Each PO has relationships with multiple suppliers for various SHS components, and POs are spread across the whole country. This is meant to ensure that all customers have access to a free and competitive market, on the basis of price, value, and quality of service.

Independent Selection

Two autonomous committees select both POs and suppliers against strict criteria. IDCOL asserts that the selection committees are comprised of professional, experienced people, working in relevant areas, who are not connected to either POs or suppliers, and whose decisions are binding on IDCOL, whose only role is to provide secretarial support.

Indirect Subsidies

IDCOL believes that providing a direct subsidy to the consumer is riven with complexity and risk. An indirect process is simpler for IDCOL as well as for the POs, and gives the POs “the sense of creating value and profit.” In practice, IDCOL provides a small portion of the SHS cost as a subsidy to the POs for the sale of each unit, a subsidy intended to be passed-on to the customer. This subsidy is fixed for SHSs of less than 30Wp and is, at present, 12% of the SHS cost by weighted average. It is a progressive subsidy, meaning that poorer customers buying smaller systems benefit more from the grant support than wealthier ones purchasing larger systems.

Through subsidies, low-cost financing and competition among POs, the system automatically keeps small SHS prices from inflating. Because of the subsidy, POs can often price small systems lower than their actual purchasing cost, and they reduce the selling price as much as possible because of competition with other POs. Frequently, their lowest selling price will equal the purchase price minus the subsidy, and in this way the entire subsidy is passed along to the consumer. POs can afford to do this because they get their return primarily on the difference of the interest income (12-16%) on the loan that they offer and the interest at which that money is financed: IDCOL offers 6-9% financing for 70-80% of the loan that POs provide to their customers.

For systems over 30Wp, there is no subsidy. In this case, POs often sell the systems at a price equal to or slightly higher than their actual purchasing cost from the suppliers. Again, POs get their return on these systems primarily from interest income.

IDCOL as Incubator

Probably none of these features are unique; a rent-to-own solar model isn’t either. Arc Finance partner SolarNow is using this financing mechanism in Uganda – without the benefit of a Ugandan IDCOL to help it grow. But Bangladesh is likely to be the world’s first “solar nation” – with ambitious government targets for renewable energy, pioneering energy companies such as Grameen Shakti, special susceptibility to the consequences of global warming, and a rapidly developing, large population, Bangladesh is for solar what Kenya is to m-banking: the clear leader, and a petri dish for innovation.

Market factors and technological advances have also become more favorable for solar lighting. The price of kerosene and the quality of solar products both went up while the price of photovoltaic generation has plummeted. With the kerosene subsidy gap reduced, and the subsidy to the IDCOL end consumer being reduced too, Bangladesh now has a market almost perfectly conductive to commercial, competitive small-scale solar finance. An organization such as IDCOL is arguably a necessary, but not sufficient, criterion for reaching massive scale in small-scale renewable energy access. Marrying government support and funding with private sector expertise, dynamism and respect for competition has created an environment propitious to the economies of scale that come with reaching millions. Many other countries would benefit greatly from having their own equivalent of an IDCOL – the archetype for scaling up a nascent industry.