Experience and Challenges for Green Banking in Sri Lanka

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1 Financing the Sustainable Development: 2nd National Workshop on Innovative Climate Finance Mechanisms for the Financial Institutions in Sri Lanka 7 8 November 2017, Sri Lanka Experience and Challenges for Green Banking in Sri Lanka Nalin Karunatileka Vice President (Project Management & BCP) DFCC Bank, Sri Lanka 8 November 2017

2 Green Banking Experience in Sri Lanka The Green Banking focus so far has been on mitigation efforts Essentially funding private sector Non Conventional Renewable Energy (NCRE) projects Grid connected projects from the mid 1990s: Mini Hydro (1996) Bio mass (2004) Wind (2010) Solar (2016) Waste to Energy (loan approval s in place) Off grid Solar Homes Systems and community village hydro systems Grid Tied Solar Domestic and Commercial Roof Top Solar installations Consumer financing of Hybrid/Electric vehicles; Financing of Green Buildings

3 Credit Lines for NCRE Project Amount (millions) Funding Agency Energy Services Delivery ( ) Loan USD 19.7 WB (IDA) Grant USD 3.8 GEF Renewable Energy for Rural Economic Development ( ) Loan USD Grant USD 8.0 GEF WB (IDA) Green Energy & SME Global Loan ( ) Loan EUR 90.0 (RE Comp. 27.0) EIB Environmentally Friendly Solutions Fund (E friends) ( ) & Revolving Fund 1 & 2 Loan Yen 2,740 JICA In addition, various funders have provided credit lines to specific banks. A new USD 50m credit line from ADB for Roof top Solar is about to be launched Key benefits of a credit line : long term funds available in Sri Lankan Rupees where the Government of Sri Lanka (GOSL) assumes the exchange risk and the credit risk of the bank

4 NCRE Projects funded by Credit Lines to Date Grid Connected Projects ESD RERED SME & Green Energy Total All NCRE Installed (including noncredit line funded) As at July 2017 Hydro 15 (31 MW) 68 (164.5) 14 (22.6MW) 97 (218.1MW) 181 (353.7MW) Wind 2 (19.8) 2(20MW) 4 (39.8 MW) 15(128.9MW) Solar 1(10MW) 1 (10MW) 8(51.4) Bio mass *1(1MW) 1(4MW) 2 (5MW) 9(24.1MW) Off Grid (Households Electrified) Solar Home Systems Community Hydro & Biomass 20, , ,528 1,732 households; 35 schemes (350 kw) 6,220 households; 175 schemes (1,770 kw) 7,952 Source: World Bank Publications, Ceylon Electricity Board; *Note: The RERED funded bio mass project is no longer in operation

5 Source: CEB Website Progress of NCRE Since 1996

6 Internal Bank Funding Ending of credit lines did not end bank funding for Renewable Energy projects Projects are attractive to fund due to Cost based, technology specific fee in tariff cost of funds taken into account in tariff computation Standardized Power Purchase Agreements No delays in CEBs payments Many Commercial Banks are now comfortable with funding new technologies Banks wish to establish their Green credentials Consumer demand created by Government Policy Initiatives Recent Government Policy Measures for Private Sector Involvement Encourage private sector investment in grid connected Wind/Solar/Waste to Energy Power generation Tenders for 60, 1 MW solar plants Net Metering/Net Accounting/Net Plus Schemes with attractive feed in tariffs Surya Bala Sangramaya (Battle of Solar) initiative for 1 million solar roof tops Rivi Bala Saviya interest subsidy scheme Differential duties for Electric/Hybrid vehicles To be fully implemented: Developing technical standards, Energy labelling, Electric Vehicle charging standards, Green building codes Licensing Service providers Hiring of roof tops for Solar power generation

7 Current Challenges Awareness Understanding of climate risks and the urgency for action at all levels Attributes and risks of various technologies Knowledge to design and promote Green Banking products to customers High Cost of Investment (now reducing!) Higher nominal cost for the utility/consumers (domestic & industrial)/government Affordability for mainstreaming Lowering the cost of funds Feed in tariffs to Auction Based Tariffs for grid scale power generation projects To make climate initiatives attractive and affordable Domestic long term debt financing from the capital market is expensive! Long terms investors are few is Sri Lanka (only a few pension funds & insurance companies) and the demand for long term funding is high Risks are high history of volatile inflation and interest rates Hedging mechanisms are not prevalent

8 Current Challenges (cont d) External Sources of Climate Finance Foreign Exchange risk is unacceptably high only companies with forex revenues have capacity to borrow Hedging cost is also high Climate Change itself! Recent draughts and floods have adversely effected mini hydro projects DFCC had to reschedule some projects first due to drought, then due to flood/landslide damage! Insurance for floods/landslides/changed weather patterns Local insurers are hesitant. Re Insurance Regulatory Requirements and Accounting Rules can discourage Climate Finance BASEL 3 IFRS 9 Compliance Cost of compliance Capacity to monitor post implementation Cost of monitoring compliance

9 Overcoming Challenges High Cost of Investment Mobilizing Domestic Sources External Finance Sources Awareness among bankers Regulatory Requirements Longer term credit to spread cost Concessionary funding Interest Subsidies Co financing grants Risk Mitigation Partial credit guarantees Insurance Re insurance Loan structuring building buffers Big commercial banks have a large pool of low cost CASA funds thus the capacity for long term Green Financing Need to transition from business as usual A nudge from the Regulator? Ensure all Govt. backed credit lines have Green safeguards/incentives Green Climate Fund Multi lateral and bilateral funding, private sector funds JICA funding for LRT, ADB funding for wind farm, rail electrification (Govt Projects) Credit lines for private sector projects Issuance of Green Bonds Exchange risk mitigation is vital for private sector investment Awareness Training Sustainable finance, Climate Finance in IBSL curriculum, Courses at Centre for Banking Studies Sustainable Finance Road Map by Central Bank of Sri Lanka Macro prudential rule changes by regulator Mandatory reporting of climate change projects

10 Thank You for Your Attention! Nalin Karunatileka Vice President (Project Management & BCP) DFCC Bank PLC 73/5 Galle Road, Colombo 3 Sri Lanka Tel Fax Nalin.Karunatileka@dfccank.com