Challenges and Needs in Financing Mini-Grids

Securing debt and equity for mini-grid projects can be challenging, but it is essential to see a project through permitting, design, construction and commissioning. Commercial loans can have high interest rates, short repayment periods and high collateral requirements, but governments, donors, banks and private investors can create new financing opportunities.

Financing mini-grids in developing countries is challenging. Mini-grid projects typically require long-term funding (10–15 years) with low cost of capital. Banks in developing countries are often reluctant or unable to offer long-term loans, either because they lack funds or can’t risk losses due to high or uncertain inflation. In developing countries, interest rates for commercial loans may exceed 15 percent and have high collateral requirements.

Local banks are often not familiar with small-scale renewable energy, and they may lack the knowledge to assess the risks associated with these projects. This is complicated by the fact that mini-grid projects generally require customization; populations, loads and renewable energy resources vary from village to village. From the bank’s perspective, mini-grid assets in rural areas offer little collateral, because they are difficult to repossess and have limited value when moved from their installation location.

Mini-grid project developers often lack experience in financial analysis, risk mitigation and business plan development, and may not have resources to hire dedicated financial professionals. Securing loans is more difficult if the project developer cannot meet equity requirements. Project investors require greater financial returns to compensate for the risk of mini-grid projects developed in risky political and economic environments. Despite overwhelming interest in the sector, the World Bank/GVEP International find that private capital lenders still prefer grid-connected investments, because they are perceived as lower risk and provide features such as offtaker insurance, which protect their investments.

Project developers must find creative, workable solutions to funding challenges. Governments, donors, banks and private investors need to create financial instruments that provide funds when needed while allocating risk to parties in ways that attract investment.

What are the sources of capital for mini-grid projects?

Various investors can be sought out to provide capital according to the three key project stages: prefeasibility and feasibility studies, construction and commissioning and operations. Read more »

What financial instruments are available to cover the costs of building a mini-grid?

Grants, debt, equity and mezzanine finance are common, while project-based financing, first-loss loans, renewable energy funds and in-kind or cash-equity contributions from beneficiaries have also been used. Read more »

What sources of grants or concessional financing exist to help with mini-grids in developing countries?

International funding agencies, private foundations, non-governmental organizations and developing-country government programs can be sources of free or cheap capital in the form of grants or concessional loans. Read more »

If mini-grids are integrated with the centralized grid, who will finance the necessary upgrades to the main grid?

Utilities, project developers, rural electrification agencies or donors may pay for the upgrades based on a variety of considerations. Read more »

Last updated: February 13, 2018

Share This Page