PERSPECTIVE

In conversation with DIPTI, Thomas Pullenkav, Technical Advisor, SELCO Foundation, shares his thoughts on the role of enterprise financing for catalyzing emerging opportunities in the distributed energy access segment. 

Despite there being capital available for enterprises, why does financing continue to be a gap for enterprises in the distributed renewable energy (DRE) segment?

There are essentially three types of enterprises i.e. small, medium and large. The small enterprises usually require INR 1-2 million, whereas the medium enterprises have a requirement of INR 3-5 million. On equity front, impact investors typically provide financing with a ticket size of USD 500 k- USD 1 million whereas most of the enterprises in the distributed energy access space, particularly the smaller ones, do not have the capacity to absorb that kind of capital upfront. Essentially, there is a mismatch between what the investors are willing to provide and the requirements of these enterprises. Furthermore, there is also a mismatch with respect to return expectation as also the time frame of the return between the investor and the enterprise. Investors often expect firms to make profits within a period of 3 to 4 years of operation, but enterprises require a longer time frame to scale.

On the debt front, there is a lack of lenders where these enterprises operate. In order to meet the working capital requirements, the only option that these enterprises have, is to approach the banks. However, banks typically require collateral, which is significantly large and the small and medium enterprises are unable to provide that guarantee. Thus, even though the capital is available theoretically, it is difficult for the enterprises to access that capital. 

What are some of the innovative financing mechanisms that you think can help catalyze the emerging opportunities in the segment?

There is a need for innovative financing mechanisms to enable access to financing for enterprises in the distributed energy access space, given the risk associated with it. Given its expertise in the energy access segment, the SELCO Foundation has recently launched an energy access fund with a size of INR 200 million which will provide early stage funding to energy enterprises that seek to serve the poor, with a focus on Northeastern states, Odisha and Jharkhand. The minimum ticket size of the funding would be INR 5 million, which is in alignment with the capital requirements of the enterprises. The amount would be given in the form of equity with the expectation of zero- or single-digit returns (~4-5%) with a tenure of around 5-7 years, which again is flexible in nature. Furthermore, there would be an option to infuse the capital in a phase-wise manner i.e. INR 5 million can be disbursed over a period of time based on certain milestones. One of the benefits of providing capital in such a way ensures that the enterprises are able to absorb it. The target is to finance 8 small enterprise, 5 medium enterprises and 3 large enterprises. The fund is expected to allow enterprises to scale their businesses with more flexible terms and conditions of investment.

In terms of innovative financing mechanisms, there is a need to incentivize the private banks to lend to the enterprises. While there are private banks who would be willing to invest, there is a need for institutions which can provide guarantees to banks to reduce their risk perception and increase willingness to invest in the distributed renewable energy access segment.

In terms of providing enterprise financing for working capital requirements, banking sector would continue to play significant role. As of today, public sector banks are best suited to provide loans to the enterprises. There has been active participation by banks such as Syndicate Bank, Vijaya Bank, Canara Bank as also private bank such as RBL Bank, Karnataka Bank. The willingness of the banks would be higher if their risk perception could be reduced. 

In terms of end-user financing, Regional Rural Banks (RRBs) have a key role to play since they understand the needs of the target audience much better. Despite the important role that Microfinance Institutions (MFIs) play in the distribution of energy access solutions, the loan products offered are standardized in nature which covers only limited products (such as solar lanterns, multi-light systems) with stringent terms of repayment. 

According to you, what could be specific policy enhancements that can enable private sector participation in the distributed renewable energy access segment? 

For lending to small and medium enterprises, the government had launched a credit guarantee scheme under which collateral free loan can be availed up to INR 10 million. For the energy access segment, a similar guarantee mechanism can reduce the risk perception of private sector banks thus catalyzing lending. 

Further, there is an increasing focus on livelihood-based applications. As a foundation SELCO hopes to engage with the government to push energy access solution for livelihood application through evidence-based policy approach wherein current case studies can be used to leverage policy-based decisions. Going forward, the expectation is that when a state nodal agency floats a tender for public health centers/rural health delivery centers, there can be a clause regarding the solar solutions which offer more reliability for the rural consumers and also reduce the costs of delivery solutions (such as vaccine shots) for rural consumer. This can potentially be supported by funding from organizations like World Health Organization (WHO).  Thus, there is a need and scope for continued engagement with government and international bodies to increase the impact of distributed renewable energy access segment. 

Thomas Pullenkav is the Technical Advisor to the SELCO Foundation, where he advises the foundation on innovative approaches to clean energy access. In addition to his work at the SELCO Foundation, Pullenkav consults with community service organizations, NGOs, bilaterals and multilaterals, providing advisory, analytical and design support for their activities in the clean energy access and low carbon development sectors.