Barriers to Finance Decentralised Solar Energy System

Energy decentralisation can be used to mitigate energy security issues. High distribution losses, transmission losses, and limited and unreliable energy production resources are some of the important factors which are forcing the energy sector to come up with a better solution. These reasons also encourage the energy planner to evaluate technically and economically feasible alternatives such as distributive generation. Renewable energy (RE) and distributed generation are the two main ways to generate electricity. With 178GW of capacity addition in the year 2017, RE-based power generation is accountable for more than 66% of the global electrical power growth. It is apprehended that RE capacity will increase by more than 1TW in the year between 2018 – 2023 ( IEA, 2018).

The per capita energy generation of Pakistan is low compared to the rest of the world. Pakistan has a high potential to generate renewable energy but still struggling got fulfil the energy demand. Moreover, the energy mix is mostly fossil fuel dependent. To horizontally increase the excess of electricity it is important for the government to make an effort to upgrade it to a decentralised energy system.

Solar Energy Potential of Pakistan

The geographical location of Pakistan makes it one of the most solar irradiance-receiving zones. It is the sixth most solar-abundant country and among all the provinces Balochistan receives the highest irradiance which is 7 -7.5 kWh/m2/day in case of direct normal radiation. Whereas, is all other cities of Pakistan is receiving an annual average 5kWh/m2/day. Apart from producing electricity, the large solar plants are used for water pumping, water heating and power telecommunication power.  Pakistan’s total solar PV install capacity is 1568MW by the end of 2018, making 12% of the total renewable installed capacity. In all parts of the country, the rural population is affected more as compared to urban areas as these areas are far away from big power stations resulting in high transmission losses. There is a need to replace the existing infrastructure because of its poor performance.

Barriers to Finance Decentralised Solar Energy System

This section will highlight the barriers that hinder financing the decentralised solar energy system.

Lack of Enabling Regulatory Framework

One of the main reasons that hinder the implementation of solar panels is the strict legal restriction. The legal framework includes subsidies, tariffs, incentives, regulation on foreign direct investment, and financial transparency of the businesses and projects operating within the country.  The government of Pakistan has drafted the “Solar Panel and Allied Equipment Manufacturing Policy 2023  to address the prevailing severe energy crisis, global hike in fossil fuel prices and resulting high import bill which directly affect the country’s balance of payment. This policy is yet to formulate and implement. All the countries in South Asia wanted to change the energy production framework because its cost of production is very high. And few countries want to implement to improve their portfolio of energy production such as the Philippines.  The strict and lengthy process of the solar transition method is delaying its implementation process. Indeed, insufficient regulatory frameworks can result in a failure to ensure last-mile delivery, i.e. providing secure and affordable energy access to each household.

Business Risk Impede the Investment

Business risk is one of the key factors that keep investors away from the investment. It mainly arises due to insufficient regulatory frameworks and a lack of transparency from the government in disclosing plans for the expansion of the national grid. And the sudden change in government plans and policies may affect the profit of the businessmen. There are several other barriers also which are elevating the business risks such as high upfront costs, low rate of return and local payment capacity. These high risks restrict investors to invest. Nonetheless, most of the developing fossil fuel-based energy generation receive more subsidies as compared to renewable energy. This has resulted in investors choosing to support the less risky subsidized energy sources instead of the unsubsidised ones.

Limited Interest in Local Commercial Banks

The local banks are not preferring to invest in solar panels because of high foreign investment risks. However, to boost the decentralised energy system it is mandatory to get involve local banks in designing and executing financing solutions, guarantee-based loans, straight loans, credit notes or other special-purpose vehicles that could be used to help finance these projects. As local banks lack support to finance the decentralized solar energy sector because of this foreign investors are not preferring to invest in the decentralised energy sources. This will drawback the energy transition at the local, national and global levels.

Lack of Capacity

Another issue that is also affecting the instalment of decentralised is maintaining the technology related to the solar system. The main reason that appears in response to maintaining the technology is related to the lack of technical understanding and maintenance of the energy system in their own areas. This presents a large barrier to the longevity of any solar energy project as lack of maintenance is the main reason for failure and reduced efficiency in these systems. Education for financial literacy can be seen as one of the important barriers.

Enablers to Finance the Decentralised Solar Energy System

Transparency

There is a need for appropriate policy design to implement the decentralised solar energy system. Transparency and regulations against corruption would attract more investors and help the government to combat energy security.

Blended Finance would De-risking the Private Investment

The blended finance option would help to derisk the investment and would be the enabler to addressing the energy security issue. Blended finance uses a mix of public investment/philanthropy, venture philanthropy plus private investment.

Pay as you Go Model (PAYG)

One of the innovative business models to finance the decentralised energy solar system is Pay as you go which allows consumers to buy the equipment in instalments. It is an innovative credit system that removes the initial financial barrier to solar energy access by allowing consumers to make a series of modest payments to purchase time units for using solar electricity instead of paying upfront for the entire solar system.

Capacity Building

To implement the solar energy system it is imperative to educate the dwellers. It can be improved by providing financial literacy and technical knowledge which will help to improve the durability of the projects and empower local communities.

Conclusion

The decentralisation of energy is important for the countries which have energy scarcity issues. There are several barriers that will affect the implementation of decentralising solar energy systems such as lack of enabling legal framework, business risk, limited interest of commercial banks and lack of capacity. This framework can be implemented by introducing transparency and blended financing, pay-as-you-go model and capacity building.