De-risking Investments to Build a Green Maldives

"The electricity bill is my biggest expense. As all of the machines run on electricity, my electricity bill is quite high. In some months, when I don't have enough revenue, I have to use my personal funds as well to pay the bill," shares Aminath Rasheeda, a 42-year-old mother of two who runs a tailor shop in the northern city of Kulhudhuffushi.

The Maldives has succeeded in bringing electricity to even the most isolated atolls, resulting in 100% electricity connectivity in the archipelago – but also, tragically, near-complete reliance on diesel fuel to run the generators. In 2019, the country imported more than 700,000 metric tons of fuel, with diesel accounting for 80 percent of the total. The utilities use a substantial proportion of this imported fuel to generate electricity. The country's reliance on expensive imported diesel for power generation, a lack of economies of scale, and poor infrastructure have resulted in one of the highest power tariffs in the region – as high as MVR 4.5 for domestic users and MVR 7.5 for institutions – making it challenging for entrepreneurs like Rasheeda to free up cash to expand their business.

The high fuel bill has also put extra pressure on the Maldives' already strained fiscal space. To cushion the blow on people's livelihoods from the unprecedented shocks of COVID-19, the government offered a utility bill waiver. This was on top of the US$61 million subsidy – about 1 percent of the GDP-offered on fuel and electricity. This, coupled with reduced electricity demand, falling collection rates, and the inability to increase tariffs, led to significant losses for the two state-owned utilities, STELCO and FENAKA. In addition, the COVID-19 pandemic has resulted in widening fiscal deficits and rapid build-up of debt vulnerabilities.

Moving from a fossil-based to a renewable-based energy model is the best way to make electricity cheaper for everyone and protect the pristine island paradise.

De-risking Investments

The World Bank, with the help of the Agence Française de Développement (AFD), the International Solar Alliance (ISA), and the International Renewable Energy Agency (IRENA), created the Sustainable Renewables Risk Mitigation Initiative (SRMI) in 2018 for COP24. SRMI's goal is to assist nations in establishing and executing sustainable renewable energy programs that will attract private investment while lowering dependency on public funds.

SRMI brings together development and climate finance to provide technical assistance in developing evidence-based Variable Renewable Energy (VRE) sources such as wind and solar, implementing a sustainable renewable energy program, and establishing robust procurement processes with transaction advisors to select Independent Power Producers (IPPs). Critical public investments are also secured to integrate energy sources such as wind and solar into existing power grids, finance solar or wind park infrastructure, and increase access to electricity. Measures such as investment guarantees and escrow accounts are introduced to reduce investment risks and concerns of potential investors.

"Bankability of renewable energy projects is key to mobilizing private sector investment. The 11-megawatt solar project has been structured to increase investor confidence by incorporating a three-tier SRMI framework including: Currency Convertibility Clause for PPA payments, an Escrow Account for delayed utility payments, and the option of Guarantees for defaults. These are a part of the SRMI framework and showcase that the SRMI is a great tool to engage private sector investment in renewable projects," says Amit Jain, the team leader for the World Bank's energy projects in the Maldives.

Partnering for Progress

The Maldives has received assistance from the World Bank through two projects to meet its ambitious 2030 net-zero target: the Accelerating Sustainable Private Investment in Renewable Energy (ASPIRE) project, which began in 2014, and the Accelerating Renewable Energy Integration and Sustainable Energy (ARISE) project, which was signed in 2021.

"ASPIRE showcases that there is an opportunity to reduce fossil fuel subsidies, reduce the fiscal deficit burden on the government, and present a clear business case for renewable energy projects in the Maldives," said Simon Stolp, Practice Manager for Energy in South Asia at the World Bank. "The ASPIRE and ARISE projects have enhanced the investment climate in the Maldives' renewable energy industry by providing a solid risk mitigation package for IPPs while maximizing socio-economic advantages for the country and its people."

As part of the ASPIRE project, the World Bank has supported the government in implementing solar projects that have gradually increased the renewable energy capacity from 1.5 megawatts to 17.5 megawatts.

Given the government targets, the Maldives is positioned to achieve at least an additional 41.5-megawatt solar installations through ASPIRE and ARISE. Under the US$ 100 million ARISE project, battery energy storage systems will be established, enabling energy produced from solar and other renewable sources to be stored until needed by the utilities, which is also an integral part of the country's energy transformation. ASPIRE and ARISE will help the government mobilize projects to the scale of 50 megawatt-hours of battery energy storage systems by 2025.

With frameworks such as the SRMI, the Maldives has become an attractive renewable energy investment destination, as evidenced by 61 global investors showing interest in the 21-megawatt solar project the government floated during COVID-19. The recent signing of the 11-megawatt solar project, which will see private investments deployed in six population centers across the archipelago, including Kulhudhuffushi, also showcases how far the Maldives has come on renewable capacity.

While this 11-megawatt project will help usher in innovations in solar and storage for the Maldives, ASPIRE and ARISE will move on to a new phase where the potential for offshore wind, tidal energy, hydrogen fuel cell, and electric vehicles (EVs) will be explored.

"The private sector plays a critical role in supporting the development of renewable energy. The 11-megawatt project showcases the confidence investors have in Maldives' renewable energy promise and in the country's commitment to changing the way it produces energy," said Chiyo Kanda, the World Bank Country Manager for Maldives and Sri Lanka.

The proactivity of successive Maldivian governments, coupled with development financing from organizations such as the World Bank, will help the country achieve its ambitious 2030 net-zero target. The Maldives is on track to transform from a tourist haven into a small island nation leading the way in sustainable, renewable energy within the next few years. For Maldivian entrepreneurs like Rasheeda and others, these energy innovations will allow them to pay less for power and free up cash to expand their businesses and improve their livelihoods.