Page 1 Financing Energy MSME Challenges and Way Forward Santosh Singh GIZ India

Page 2 MSMEs in India 30 million SMEs Employ 69 million people Contribute 45% of the industrial output Contribute 40% of the export 95% are in informal sector

Page 3 Demand for Finance MSME sector’s finance demand is estimated at $650 billion 80% of the demand coming from informal sector Formal sources of finance supply $140 billion An estimated 67% of enterprises remain un-served by formal financial sector. Source: IFC-Intellecap Study All kinds of MSME are struggling for finance; Energy MSME are struggling comparatively more than others.

Page 4 Financing MSME: Challenges for FIs Information asymmetry lack of financial information High Risk High failure rates Little or no collateral Low capitalization Vulnerability to market risk Inability to assess Technology Business Model Team capabilities

Page 5 Energy MSME: Understanding Risks Technology / Technical Risk Immature or early stage technologies Natural Resource Availability Assessment Poor technology performance data Outcome Risk Uncertainty of delivering public interest goals objective Limited public resources Budget constraints Source: Climate Policy Initiative Study

Page 6 Energy MSME: Understanding Risks Policy and Social Risks Short Term Policies, long break-even period Dependence on government support and public finance Environmental Impact and social resistance Market Risk High cost of capital Long investment period High upfront cost of projects Lack of historical data on green investments/lack of familiarity of investors

Page 7 Overcoming Challenges: The Instruments ContractsEnhancing CreditsInsurance Operation and Maintenance Contracts Interest Rate SubsidyPrivate Insurance Emissions Reduction Purchase Contracts Letter of CreditPublic Political Risk Insurance Power Purchase Agreements First Loss InsurancePrivate Political Risk Insurance Loan and Credit Guarantee Securitization

Page 8 Overcoming Challenges: The Instruments Revenue Support Policy Direct InvestmentCapacity Building Feed in TariffsDedicated Private Equity Quality Standards Tradable PermitsEquity Investment by DFIs Capacity Building Tax CreditsConcessional LoansDatabase and Performance Tracking Fossil Fuel Subsidy Policy International Climate Fund Public Private Partnership

Page 9 Success Stories from India MSME Credit Guarantee Fund Trust Provides guarantee covers up to 80% More than 100 member lending institutions Dedicated Renewable Energy Funds DFID, ADB, UNDP and WB have set up/sourced dedicated funds and provided line of credit to existing financial institutions Cookstove PoA for Improved Cookstove Enterprises/Consumers GIZ submitted national level PoA, expected to be registered soon.

Page 10 Success Stories from India SELCO Revolving Fund for energy entrepreneurs S3IDF Social Merchant Banking Approach Interest Rate Subsidies / Accelerated Depreciation Wind Energy Sector Power Purchase Agreements Biomass or renewable based power plants Renewable Energy Certificates / RPOs States need to source a certain percentage of their power consumption through renewables

Page 11 GIZ Interventions: Understanding Financial Barriers There are various subcategories within renewable energy sectors, based on Capacity, Technology, Business Model, Customers Each of these categories have very distinct risk and return profile as well as resource requirements. The requirements differ in terms of source of finance (Venture Funds, Banks, Guarantee Funds etc.) and in forms of finance (debt, equity, guarantee, interest subsidy etc.). The resource requirement and availability also depend on the different stages of growth of the RE Enterprises. Each stage of growth has its unique needs. Mapping of sources, needs and product availability, critical to identify the gaps.

Page 12 Thank You.