Financing Inclusive Low-Carbon Resilient Development: The Role of the Alternative Energy Promotion Centre in Nepal

Submitted by Julia Barrott | published 7th Dec 2015 | last updated 28th Oct 2019

Introduction

Several of the world’s poorest and most vulnerable countries are leading the way in developing and implementing low-carbon climate-resilient development (LCRD) strategies. International and domestic climate finance can play an important role in implementing LCRD policies and plans in the least developed countries.

This report analyses the new financial delivery structures in Nepal that have been set up to channel LCRD finance to the poor, focusing on the Alternative Energy Promotion Centre and its flagship initiative the National Rural Renewable Energy Programme. Using a political economy analytical approach, this report outlines the incentives shaping LCRD investment in Nepal, and whether these incentives have led to the design of new financing channels that are effective in delivering inclusive LCRD investment to the poorest and most vulnerable to climate change.

The summary of this report is provided below. The full report can be downloaded from the right-hand column of this page or via the link provided under further resources.

Report Summary

LCRD strategies bring together the two main policy responses to climate change — adaptation and mitigation — to help promote poverty reduction and lead countries towards a pathway of long-term sustainable development. Many LDCs are setting up new financial architecture to help access and deliver climate finance — including new funding institutions, financial intermediaries, instruments and financial planning systems. This report is part of a four-country research project that examines the new financial infrastructure LDCs are setting up to channel LCRD finance to the poor. In particular, it focuses on the role of new financial intermediaries to understand how they provide opportunities for financing inclusive LCRD investment that benefits the poorest and most vulnerable to climate change.

In Nepal, investment in renewable energy (RE) technologies to rural communities provides one of the greatest opportunities to shift the country to a low carbon climate-resilient development pathway. The main agency responsible for promoting off-grid RE investment in Nepal is the Alternative Energy Promotion Centre (AEPC), which provides LCRD finance under its flagship initiative the National Rural Renewable Energy Programme (NRREP). Since its establishment in 2012, the NRREP has brought all of Nepal’s small-scale RE projects together under a single programme modality. It has also adopted important new design features – new financial intermediaries (commercial banks) and new financial instruments (credit) – that have changed how RE finance is delivered to communities and households in rural areas.

Based on these new design choices, this report analyses the AEPC and NRREP investment model to determine how effective it is in promoting inclusive LCRD investment. It begins with an analysis of Nepal’s RE investment needs and the design choices in the financial landscape that have been selected under the NRREP. It then uses political economy analysis to analyse the incentive structures that have shaped the NRREP’s design and the incentives that are shaping investment in LCRD under the programme. The report then turns to the question of effectiveness, to understand whether the incentives have shaped the design of new financial delivery mechanisms that are effective in delivering co-benefits, leveraging additional finance and delivering finance that is appropriate for the poor.

Recommendations

Renewable energy investment will continue to play an important role in Nepal’s transition towards lowcarbon resilient development in the years ahead. This study has shown a major shift in the way off-grid RE infrastructure is being financed in Nepal under the National Rural Renewable Energy Programme (NRREP) – particularly through the use of new financial intermediaries and instruments.

Although changes in the financial design choices of the NRREP have the potential to bring long-term sustainability to Nepal’s renewable energy (RE) sector, we have identified several factors that may restrict inclusive investment as the NRREP moves away from a subsidy-based model towards one that focuses on credit financing.

Based on our findings, the following recommendations can help strengthen the delivery of inclusive investment in RE under the NRREP.

  • As part of the subsidy policy revision process, Nepal's Alternative Energy Promotion Centre (AEPC) should provide clear guidance on how they will provide targeted subsidies to the poorest and most vulnerable communities and households as the NRREP moves towards credit-based financing. This guidance should include provisions to target ultrapoor households and individuals for whom 30-50 per cent subsidies are insufficient.
  • AEPC should review the subsidy application process in an effort to reduce red tape and streamline the delivery of subsidies, to make it easier for communities and households to invest in RE technologies.
  • AEPC should work more closely with District Development Committees, Village Development Committees and regional service providers to set subsidy delivery targets at national and sub-national levels. The lack of consultation on targets is leading some service providers to promote RE subsidies to non-target beneficiaries to meet their quotas. These incentives should be reversed so that subsidies can be targeted to the poorest and most vulnerable.
  • Decision makers should examine what incentives need to be provided to encourage commercial banks and microfinance institutions to open new branches in rural areas and offer new financial products for RE investment that target the poor, to ensure they can access financing under CREF.
  • AEPC should consider launching a programme to support existing rural microfinance institutions, which may not have the financial management, technical knowledge and human resource capacity to enter the RE market and provide new financial products that are targeted at the poor.
  • AEPC should commission a study in 2016 to review lessons from the first year of providing credit financing under the NRREP with Global IME Bank and its seven partner banks. This review should specifically analyse how effective credit financing has been in reaching poor and marginalised households and communities.
  • Government, AEPC and donors should indicate their future financing commitments beyond 2017, when the five-year NRREP comes to an end. They should provide an early indication of whether the NRREP will be renewed or replaced with a new programme or initiative. In either case, they should also outline probable financial arrangements beyond 2017, to provide clear policy signals to the private sector and potential beneficiaries so they can plan their investment decisions.
  • The main actors involved in energy supply in Nepal — particularly AEPC and the Nepal Electricity Authority — should begin a dialogue to develop a long-term integration plan for AEPC’s decentralised energy systems and the national grid as the grid expands. One option for fast tracking this integration in the short term is creating mini-grids from existing microhydro systems, which could optimise their use and ensure a more reliable supply of energy.

Further resources

  • Recommended citation:

    Dave Steinbach, Sunil Acharya, Ramesh Prasad Bhushal, Raju Pandit Chhetri, Basanta Paudel and Krity Shrestha. 2015. Financing inclusive low-carbon resilient development: the role of the Alternative Energy Promotion Centre in Nepal. IIED Country Report. IIED, London.

    View online at http://pubs.iied.org/10140IIED ISBN: 978-1-78431-244-2

     

    About the authors

    Dave Steinbach is a researcher in the Climate Change Group at the International Institute for Environment and Development (IIED) in London.

    Sunil Acharya is an environment and sustainable development policy analyst affiliated with Digo Bikas Institute in Kathmandu, Nepal.

    Ramesh Prasad Bhushal is a climate change policy researcher based in Kathmandu.

    Raju Pandit Chhetri is a climate change policy researcher based in Kathmandu. Basanta Paudel is a program associate at Clean Energy Nepal in Kathmandu.

    Krity Shrestha is a research and policy officer at Clean Energy Nepal in Kathmandu.

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    Further reading

    You may also be interested in a sister report analysing the financing of low carbon development in Bangladesh.