Financing

Sri Lanka’s Financial Puzzle

March 31, 2023

Financing, domestic, commercial and utility scale solar projects in Sri Lanka.

In this article we explore which points need to be considered when looking for solar project finance. What types of finance are available, and more importantly, what mechanisms may become available in the coming months of 2023 through to 2024.

Table of contents:

Sri Lanka – Financial Situation Summary, Causes And What Is Being Done To Combat It.
Points To Be Considered When Seeking Solar Project Finance
Finance Options: What Is Available And What Mechanisms May Become Available So on.
Sri Lanka’s Financial Puzzle – Summary

Sri Lanka – Financial Situation Summary, Causes And What Is Being Done To Combat It.

Sri Lanka has been facing a financial crisis in recent years, which has been exacerbated by the COVID-19 pandemic. The crisis is characterized by high levels of government debt, a large budget deficit, and a depreciating currency. Some of the main factors contributing to the crisis include:

High Levels of Government Debt: Sri Lanka has one of the highest levels of government debt in the world, which is estimated to be around 101% of GDP. This high level of debt has been fuelled by a combination of factors, including excessive government spending, borrowing to finance infrastructure projects, and a large trade deficit.
Large Budget Deficit: Sri Lanka has been running a large budget deficit for many years, which has contributed to the high levels of government debt. The budget deficit has been driven by a combination of factors, including high levels of government spending on salaries and subsidies, a large military budget, and low tax revenues.
Depreciating Currency: Sri Lanka’s currency, the Sri Lankan rupee, has been depreciating rapidly in recent years, which has made it more expensive for the government to repay its foreign debt. The depreciation of the currency has been driven by a combination of factors, including a large trade deficit, weak investor confidence, and political instability.
Impact of COVID-19: The COVID-19 pandemic has had a significant impact on Sri Lanka’s economy, with the country’s tourism industry, a major source of foreign exchange, being particularly hard hit. The pandemic has also led to a decline in remittances, which are a key source of income for many Sri Lankans working abroad.
Political Instability: Sri Lanka has experienced political instability in recent years, with frequent changes in government and policy direction. This has led to a lack of investor confidence and has contributed to the country’s financial crisis.

In response to the financial crisis, the Sri Lankan government has implemented a number of measures to try and address the situation. These measures have included austerity measures to reduce government spending, efforts to attract foreign investment, and negotiations with international lenders to restructure the country’s debt. However, the country’s financial situation remains challenging, and it will take sustained efforts to address the underlying causes of the crisis and restore economic stability.

Points To Be Considered When Seeking Solar Project Finance

When evaluating financing options for solar projects, it is important to consider the upfront cost of installation, the ongoing maintenance and operational costs, and the expected return on investment. It may be helpful to consult with a financial expert or renewable energy consultant to assess the financial viability of a solar project and to identify the most appropriate financing options. Additionally, it is important to ensure that the solar project complies with all relevant regulations and permits in Sri Lanka.

It is important to carefully consider the financing options available and to choose the option that best suits the needs of the specific solar project.

Speaking to an expert in financing solar projects can be highly beneficial for several reasons:

Expertise: A financial expert or renewable energy consultant can provide valuable expertise and insights into the financing options available for solar projects in Sri Lanka. They can help to evaluate the various financing options, identify potential risks and challenges, and provide advice on the most appropriate financing option for the specific project.
Financial Analysis: An expert can conduct a financial analysis of the solar project to determine its potential profitability, return on investment, and payback period. This can help to identify any financial constraints and to ensure that the project is financially viable and sustainable.
Regulatory Compliance: A financial expert can help to ensure that the solar project complies with all relevant regulations and permits in Sri Lanka. This can include understanding the legal and regulatory frameworks, identifying potential risks and challenges, and providing advice on how to mitigate these risks.
Cost Optimization: An expert can help to optimize the costs associated with the solar project. This can include identifying cost-effective financing options, designing a solar system that meets the specific needs of the project, and identifying ways to reduce operational costs and increase efficiency.
Network: A financial expert may have a network of contacts within the renewable energy industry in Sri Lanka. This can include contacts in commercial banks, government agencies, international development banks, and private equity firms, among others. This network can help to identify potential financing options and connect the project with the most appropriate financing option.

Finance Options: What Is Available And What Mechanisms May Become Available Soon.

In addition to the below financing options, it is important to note that there may be additional incentives available to encourage the adoption of solar energy in Sri Lanka. These incentives may include tax credits, accelerated depreciation, and net metering.

Commercial Banks: Many commercial banks in Sri Lanka offer loans and financing options for solar energy projects. These loans may be specifically tailored for solar projects and can have favourable interest rates and repayment terms.
Government Programs: The Sri Lankan government offers several programs to support the development of renewable energy projects, including solar. The government may provide subsidies, grants, or other financial incentives to encourage the adoption of solar energy.
International Development Banks: There are several international development banks that will offer funding for renewable energy projects in Sri Lanka. These banks may provide loans, grants, or other forms of financing to support the development of solar energy.
Private Equity: Private equity firms may also invest in solar projects in Sri Lanka. These firms may provide funding in exchange for a stake in the project or other financial benefits.
Crowdfunding: Crowdfunding platforms can be used to raise funds from a large number of individuals who are interested in investing in renewable energy projects. This can be an effective way to raise funds for smaller-scale solar projects.
Energy Service Companies (ESCOs): ESCOs can provide financing options for solar energy projects, particularly for commercial and industrial installations. ESCOs may provide a turnkey solution for solar projects, which includes design, installation, and financing.
Lease and Power Purchase Agreements (PPAs): In a lease or PPA agreement, the solar panels are installed and owned by a third-party financing company, and the project owner pays a monthly fee or buys electricity from the third-party provider. This option may be particularly attractive to those who do not want to bear the upfront cost of purchasing and installing the solar panels.
Green Bonds: Green bonds are a type of debt instrument that is specifically used to finance environmentally sustainable projects, including solar energy projects. These bonds are issued by governments, development banks, and corporations, and they can provide a source of funding for large-scale solar projects.
Carbon Credits: Carbon credits are a type of tradeable permit that allows a company or organization to emit a certain amount of carbon dioxide or other greenhouse gases. In Sri Lanka, companies that invest in renewable energy projects, including solar, may be eligible to receive carbon credits that can be sold on the global market. This can provide an additional source of revenue for solar projects.
Microfinance: Microfinance institutions can provide financing options for smaller-scale solar projects, particularly for households and small businesses in rural areas. These loans may have lower interest rates and flexible repayment terms to make solar energy more accessible to those who may not have access to traditional financing options.
Green Funds: Green funds are investment vehicles that specifically focus on environmentally sustainable projects, including solar energy projects. In Sri Lanka, there are several green funds that invest in renewable energy projects, such as the Sri Lanka Green Investment Scheme (SLGIS) and the Green Energy Fund (GEF).
Philanthropic organizations: Philanthropic organizations may also provide funding for solar projects in Sri Lanka. These organizations may have a particular focus on environmental sustainability and renewable energy and may provide grants or other forms of funding for solar projects.
Public-Private Partnerships (PPPs): Public-Private Partnerships are agreements between the government and private sector entities to jointly fund and implement infrastructure projects. In Sri Lanka, PPPs have been used to finance renewable energy projects, including solar. These agreements can help to reduce the financial burden on the government and can provide access to private sector expertise and resources.
Venture Capital: Venture capital firms may also provide funding for solar projects, particularly for innovative or emerging technologies. These firms may provide seed funding or early-stage investment for solar start-ups and may help to bring new solar technologies to the market.