• Sisilia Adysti
    Sisilia Adysti
    Seorang mahasiswa ilmu administrasi negara tahun ketiga di Universitas Airlangga

A Microfinance Scheme for Affordable Renewable Solar Energy Production

May 21, 2020

Located along the equator, Indonesia’s solar energy has enormous potential. According to the World Bank’s report in 2017[1], the country receives an average of 4 kWh/m of solar irradiation intensity per day, which is equivalent to a power output of 1,170-1,530 kWh/kWp per year. Based on this number, the National Energy Policy has set a target of solar generation at 6.5 GW in 2025 and 45 GW in 2050[2]. Among the influencing factors that drive people to convert to solar energy, many studies have found that economic factor plays a vital role in determining the choices of energy consumption. However, the expensive cost of solar installments and equipment inflicts a financial hindrance to the prospective customers. In the case of Indonesia, the Central Bureau of Statistics reported that nearly 97.5 percent of households in Indonesia have had access to electricity; meanwhile 2.5 percent of households still got lack access to it. 

To this day, there is a limited financing scheme available on the market, with no available specific scheme for rooftop solar, making the interest rates to be considerably high. The absence of a good credit system and facilities for solar installment could eventually retard the growth of the country’s solar energy usage. We perceive that there is a need to establish microfinance institutions that could provide microcredit scheme for prospective customers with low-interest rates. Accessing a grid connection or solar home system requires a sizeable chunk of cash and poor households could not afford it. They need to spread the investment out over time, paying in smaller increments, which is exactly what microcredit allows.

A microfinance institution (MFI) is different than traditional money lenders which commonly used to give affordable credits for new developers, including energy developers. In the case of Indonesia, it would at least provide two novelties from the cost and benefit analysis. First, it helps new developers to invest in the improvement of renewable solar energy with more affordable-credit-scheme and faster loan approval in comparison to conventional banking standards. This would eventually boost the installment of such projects and help State’s electricity company in empowering the renewable solar energy sector for electricity. But secondly, MFIs would also provide short repayments to save the capacity flow in order to propagate more energy projects and conserve their own sustainability as well. This then leads to a dense growth of green energy, which is projected to accomplish the national demand for electricity in a more efficient way.

The implementation of this affordable-credit-scheme for renewable solar energy requires the establishment of microfinance institutions as intermediaries between investors and customers. The business model should also involve transparency mechanism, which includes the disclosure of rate calculations and regular reports for both cohorts. Such a multi-level transparency mechanism is necessary to ensure the protection of customers as well as clients’ assets. Apart from that, this project also requires the involvement of other stakeholders, such as governments, non-governmental organizations, experts, and the association of solar energy industries.

First and foremost, governments play a vital role in facilitating rate disclosure within the microfinance industry. As regulators, they can design and implement policies that facilitate the practices of transparent credit ratings, the disclosure to both parties, and the annual reporting for the broad benefit of the industry in general. Secondly, the association of solar energy industries serves as a valuable platform to facilitate a self-regulation mechanism among the players. The networks established within the association of industry have closer proximity to remote or underdeveloped villages compared to the governments. Last but not least, non-governmental organizations and experts share the role to provide technical assistance in order to build the capacity of involved parties. This includes a number of activities, such as conducting baseline studies to identify the financial literacy levels of both cohorts and administering financial education programs.

Facilitating access to renewable energies through microfinance, we believe, will help Indonesia to maximize several aspects including economics, environment, and empowerment. In the economic aspect, solar energy could be the solution to supply such reliable energy because it is deployed anywhere in Indonesia with its tropical climate. It is also cost-effective for those living in remote areas which far from the national transmission lines. Meanwhile, in the environmental aspect, this solution offers the least negative impact on the environment compared to any other energy source because it does not produce greenhouse gases and does pollute the water. On top of that, this renewable solar energy project will empower and create income-generating activities for people in remote areas. They could create a community working on managing the energy, gaining direct ownership, control over the technology and its applications.

Although the scheme of microfinance institutions for renewable solar energy projects is possible to be done, we perceive that the government would at least face three main challenges. First of all, the volatility of microfinance institutions could create an environment that might enable rent-seeking behaviors within the public sector. Secondly, the problem of inefficiency due to moral hazard would cause most credit programs cannot reach the targeted recipients. Therefore, in order to address such problems, the government needs to save mobilization in order to encourage the market discipline of microfinance institutions. Apart from that, the government also needs to create an appropriate ecosystem to ensure the sustainability of microfinance institutions, particularly in dealing with the possible challenges. Only by the establishment of a sustainable microfinance environment would we able to reap the maximum benefits of the MFIs, and thus bringing us closer to the plausible prospects of affordable renewable solar energy.

[1]World Bank. (2017). Solar resource and photovoltaic potential of Indonesia (English). Energy Sector Management Assistance Program. Washington, D.C.: World Bank Group. http://documents.worldbank.org/curated/en/729411496240730378/Solar-resource-and-photovoltaic-potential-of-Indonesia

[2]Euromonitor International. (2018). Indonesia in 2030: The Future Demographic. Retrieved from https://www.euromonitor.com/indonesia-in-2030-the-future-demographic/report