Energy Policy 47 (2012) 79–86

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Energy Policy

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A case study for sustainable development action using financial gradients

Arnab Bose n, Aditya Ramji, Jarnail Singh, Dhairya Dholakia

The Energy and Resources Institute, IHC Complex, Lodhi Road, New Delhi 110003, India

a r t i c l e i n f o

Article history:

Received 7 December 2011

Accepted 14 March 2012Available online 4 April 2012

Keywords:

Sustainable development

Financial gradients

Sources of finance

15/$ - see front matter & 2012 Elsevier Ltd. A

x.doi.org/10.1016/j.enpol.2012.03.038

esponding author. Tel.: þ91 11 2468 2100; fa

ail addresses: arnab.bose@teri.res.in (A. Bose)

amji@teri.res.in (A. Ramji).

a b s t r a c t

Energy access is critical for sustainable development and therefore financing energy access is a

necessity. The key is whether to focus on grants or public finance for sustainable development projects

or move to a more diffused financing mechanism, involving investment grade financing sources like

debt and equity. In other words, financing sustainable development action via grants is becoming a

constraint. To address this constraint, it is important to consider the relationship between the nature

and sources of financial flows. The concept of ‘financial gradients’ emerged while analysing the financial

and business strategy developed for Lighting a Billion Lives (LaBL) campaign. This paper espouses the

idea of ‘financial gradients’ which is a potential financial mechanism for sustainable development

action. Financial gradients, can contribute in three different ways—first, as an approach to analyse

financial flows in projects; second, as a tool to generate a single, long term and stable inflow of finance;

third, as a financial mechanism to help in creating long term strategies to sustain projects. This paper

will concentrate on financial gradients as a potential approach to analyse financial flows in a

sustainable development programme.

& 2012 Elsevier Ltd. All rights reserved.

1. Introduction

Since the formulation of Agenda 21 (a global agenda fortransition to sustainability in the 21st century agreed to at the1992 Earth Summit (UNCED), at Rio de Janeiro) in 1992, adoptinga development path based on the principles of sustainabledevelopment has become an aspiration for countries across theworld. The concept of sustainable development is relevant inprinciple to all countries or societies, whether they are developingor developed. To achieve sustainable development goals, manycountries have initiated strategies including programmes at local,regional, and national levels (Biermann, 2010).

Climate change is a phenomenon with pervasive andfar-reaching social, economic, environmental, and political reper-cussions. The assessment by the Intergovernmental Panel onClimate Change (IPCC) and other analyses have brought forththe potential negative impacts for poverty alleviation efforts,which threaten to undo many of the development gains achievedin recent times. Climate change has the potential to underminethe existence of many of the world’s poorest and most vulnerablepeople, who lack the financial, technical, human and institutionalresources to adapt.

ll rights reserved.

x: þ91 11 2468 2144.

,

So far, the course of action across the globe has been a widespread of both mitigation and adaptation strategies. However,much can be done to turn the challenge of climate change intoopportunities for sustainable development. By promoting cleanenergy technologies and sound tropical forestry, we can involvethe poor in an urgent global effort to mitigate greenhouse gasemissions, such that it leads to improved livelihoods, whilereducing climate vulnerability (Fankhauser and Burton, 2011;Eriksen et al., 2011).

The paradigm of sustainable development reflects a consen-sual shift, from a singular focus on economic growth to a conceptof socio-economic development, that is, ‘‘modified to take intoaccount its ultimate dependence on the natural environment’’.After several decades of effort and thought, the concept hasevolved to explicitly comprise three overwhelming concerns forhuman welfare—economic, social, and environmental—as well asthe inter-dependencies and inter-linkages between them (Harveyand Pilgrim, 2011).

The current situation suggests that a major departure has to bemade from the past pattern of development. It is also true, that fora developing country like India, promoting economic growth anddevelopment will continue to remain a primary goal. Therefore, itis crucial here to understand the need to achieve future develop-ment that is economically viable, socially equitable, environmen-tally sustainable, and most importantly, ethically acceptable(Heyd, 2010).

India’s development goals are quite complex. With a consider-able rural population, there is a greater need for programmes to

1 TERI internal documents.

A. Bose et al. / Energy Policy 47 (2012) 79–8680

address the synergy between sustainable development and cli-mate change. Some of them include programmes for biodiversityprotection, energy security, diversification of agriculture and rurallivelihoods among many others. While there is an urgent need toadopt a multi-pronged strategy to prepare for sustainable devel-opment pathways—energy efficiency and mainstreaming ofrenewable sources into the country’s energy mix are indispensa-ble in order to achieve its developmental objectives. Energyaccess is critical for achieving our development objectives.

If all these programmes are to deliver the objectives ofsustainable economic growth and social progress, it wouldrequire a large amount of financial support. Financial stability isa key challenge for the implementation of such programmes.

In the context of financial needs, a commitment of $100 bnwas agreed upon in the Copenhagen Accords for climate changeadaptation and mitigation in developing countries. This sum isroughly equivalent to the total current global flows of OfficialDevelopment Assistance (ODA). Climate change thus presents asignificant additional challenge that requires resources equal toODA. It is not as simple as just ‘slotting in’ climate financeobligations into ODA budgets.

Alongside the commitment to mobilise annual climate financereaching $100 billion per year by 2020, in the CopenhagenAccords developed countries also committed to collectivelymobilise $30 billion of ‘Fast Start Finance’ between 2010 and2012 for adaptation in the most vulnerable countries and mitiga-tion in emerging economies. This ‘Fast Start Finance’ was to bemade up of existing ODA commitments and intended to cover theperiod of 3 years in which developed countries can agree andimplement their ‘new and additional’ commitments to the $100billion per year (Burgess, 2011).

In the Indian context, the issue of climate change cannothowever be taken up without linking it to developmental needssuch as poverty, health, energy access and education. Estimatessuggest that it will cost US$130 billion simply to ensure that allIndian households enjoy access to electricity by 2030—a cost thatwould rise if this power were to come from clean fuel sources.Prof. Nicholas Stern has also acknowledged that adverse impactsof climate change on developing countries must be addressedthrough adaptation measures; that the costs of such measures arealso significant and while developed countries do have a respon-sibility to provide the necessary resources for adaptation, it wouldbe politically infeasible for them to go beyond the Monterrey ODAtarget of 0.7% GDP. Accordingly, ways must be found of ‘‘harmo-nising’’ climate change adaptation needs with accomplishmentsof the Millennium Development Goals (MDGs) with the sameresources (Prasad and Koccher, 2009).

It is critical to understand that money alone cannot solve theproblem. There are large risks associated. Uncertainties can be ofvarious types, for instance, socio-economic uncertainty, e.g.development of different macroeconomic factors; policy uncer-tainty, e.g. about commitment to specific targets and stability ofCO2 prices; scientific uncertainty, e.g. about climate sensitivity,feedback effects, etc.; market uncertainty like fuel price volatility;technological uncertainty e.g. availability of renewable technol-ogy (Fuss et al., 2010).

We know that given the uncertainties and the scale of finan-cing required, innovation is crucial. Therefore to address theproblem, a trend to innovate financial options for sustainabledevelopment action has evolved known as ‘Financial Gradients’(Bose, 2011).

There is a simple underlying argument in this paper. Theproblems faced for financing sustainable development actionacross the globe were also the problems faced by a programmefor Energy Access using Renewable Energy (more details in thecase study below). A financial gradient understanding was

developed during the analysis of the programme, which can bevery helpful in three ways. First, as an approach to analysefinancial flows in programmes or projects in the sustainabledevelopment space—it can come up with key financial indicatorswhich can point towards the health of the programme or project.Financial gradients can also act as a tool by which individuallyvolatile sources of finance can be combined together to generate asingle long term and stable inflow of finance to fund a programmein sustainable development. Another way to describe FinancialGradients would be as a financial mechanism to help in creatinglong term strategies with the help of both business and financialmodels to sustain the programme or project. This paper will focuson financial gradients as an approach in a sustainable develop-ment programme.

2. Energy access using renewable energy1 (Palit and Singh,2011)

While renewables have significant potential in contributing todecrease in fossil fuel use and thus make a huge difference toenergy security goals, they would also lead to a reduction inenvironmental impacts. It would also significantly improve liveli-hoods in rural areas where energy access has been a majorhindrance towards the achievement of development goals. Con-ventionally, the role of renewables has been considered primarilyfor decentralised applications. The potential of solar thermalenergy is very large, varying from megawatt level solar thermalpower plants to domestic appliances such as solar cooker, solarwater heater and PV lantern.

Lighting a Billion Lives (LaBL) campaign is an initiative by TERIthat has evolved as an innovative renting model for providingaccess to clean lighting through solar lanterns. The campaignlaunched in the year 2008 aims to bring light into the lives of onebillion rural people by displacing kerosene and paraffin lanternswith cleaner and efficient solar lighting devices, thereby facilitat-ing education of children; providing better illumination andkerosene smoke-free indoor environment for women to do house-hold chores; and providing opportunities for livelihoods both atthe individual and at village level.

LaBL operates on fee-for-service or rental model wherein cen-tralised Solar Charging Stations (SCS) are set up in villages forcharging the lanterns which are provided daily on rent to house-holds and enterprises. A typical solar lantern charging stationconsists of 50 solar lanterns with five solar panels and junctionboxes. The charging stations are operated and managed by entre-preneurs belonging to the local community (Self Help Groups/individual youths) who qualify the selection criteria set as part ofthe LaBL campaign. These entrepreneurs are selected and providedhandheld support by local LaBL implementation partners, each ofwhom is called a ‘LaBL Partner Organisation’ (LaBL-PO). The rent iscollected by the entrepreneur, a part of which is used for O&M of thecharging station and for replacement of battery as may be requiredafter 18–24 months of operation.

So far, TERI has successfully extended the initiative in around900 villages spanning 17 states in India, impacting more than240,000 lives. Be it lighting or livelihood generation, the LaBLinitiative has successfully demonstrated in India how solarlanterns could impact the community at both the householdand village level. The impact of the initiative is not simply theprovision of lighting purely in a physical sense, but it has turnedto be an instrument which transforms lives and generates hopesand aspirations that clearly enhance human welfare substantially.

A. Bose et al. / Energy Policy 47 (2012) 79–86 81

There is a direct livelihood benefit in the form of ‘green jobs’ forthe entrepreneurs managing the SCS and earning through rentingout the solar lanterns. The operators—more than 15% of whomare women—earn approximately INR 2000–3500 per month byrenting out solar lanterns. At the household level, the programmehas been instrumental in encouraging children—particularly, thegirl child, who is usually busy during the day with householdactivities—in opting for longer study hours. Apart from inducing asmoke-free indoor environment for women, there is improvedmobility and safety after dusk for both women and the elderly. Inaddition, the programme is also advantageous to those who areusing the lanterns to earn a living by way of weaving, sewing,vending, running tuition centres, and by providing other villagelevel services.

The choice of suitable technology for a particular area woulddepend upon the availability of resources, the consumptionpattern of consumers and degree of dispersion of the population.If it is a highly dispersed population and the main use ofelectricity is only for the purpose of lighting, then stand-alonesystems based on solar are most suitable while for concentratedpopulations with some productive load, village mini grids aremore appropriate.

Also, many communities residing in rural areas, particularly inthe remote areas, may indicate a visible need for electricity, butthis may not necessarily mean the ability to pay for the service.Many a times, the residents in these areas have low levels as wellas irregular streams of income. Though, the scarcity of a service,in this context, electricity, may seem an exciting market oppor-tunity for an investor or entrepreneur, the lack of capability to payor demand in the open market combined with the need for powerplants to maintain a certain load factor so as to not operate inloss, underscores the need for careful demand estimationwhile selecting target villages. The LaBL model has been success-ful as it conducts a scoping survey to estimate the likely demandfor lighting and ability to pay and sizes the plant/operationaccordingly.

Financing is a key challenge for a solar PV programme. Thefinancial model under the LaBL initiative attempts to bringtogether all stakeholders together on one platform. The govern-ment, TERI, local NGOs (LaBL Partner Organisation) and thecommunity are all involved, reflective of the Public–Private–People Partnership model. The capital costs for setting up theSCS in remote locations are mainly grant-supported from the LaBLFund (raised from corporate and government schemes) and co-financed by the LaBL-PO. For ‘not so remote’ villages, where thevillagers have some paying capacity, the operators are providedwith the option to set up SCS as their own enterprise eitherputting in their equity or availing loans (facilitated under LaBLinitiative), with part of the SCS cost being subsidised by theLaBL Fund.

At this point, it is worth mentioning the work of Michael Porteron creating shared value. Mr. Porter recently mentioned thatCorporate Social Responsibility (CSR) has not really worked becauseultimately it does not have enough impact; it is not focused onresults; it is not scalable; it is not sustainable and therefore weactually have to see if we can move beyond the idea that the role ofa business in society is to do CSR. Though it may not directly link tothe analysis pursued in this paper, it does have relevance to theunderlying theme of the Lighting a Billion Lives (LaBL) programmeand the emergence of financial gradients as an application in thedomain of sustainable development (Elkington, 2011).

Kenneth Galbraith once contended that a business wasimmune from the corrective processes of markets, as it wasgoverned by competition. Although, if the concept of shared valuegiven by Porter and Kramer was to be applied, competition can beused as a corrective form, governed by the shifting interests of

society, thus, ensuring that the corporation rethinks the mannerin which it creates economic value to remain competitive. Thus,social enterprises and hybrid for-profit frameworks can act as ablueprint for corporations to generate economic value that servesa social purpose, and simultaneously increasing the competitive-ness and stakeholder accountability of the organisation, as long asit is fully integrated into the value-chain (The Entrepreneuralist,2011).

Carrying this thought further, Porter and Kramer say that abusiness can have multiple objectives, rather than having a solemission, as long as it is fully integrated into its core strategy and isin adherence to the competitive context. Furthermore, a businessshould be driven not by its adherence to a social cause, but by itsability to identify an opportunity to create shared value; and oneshould argue that beyond the noble and altruistic notion ofsocietal change, the same should be applied to a social enterprisefor it to be sustainable, whatever its mission (Porter and Kramer,2006).

Although social entrepreneurship has without doubt gainedmomentum, for many, hybrid organisations that consider thebalance between societal and economic needs are much lessstable, may succumb earlier to mortality, and may face a delicatebalancing act between stakeholders, resulting in the subversion oforganisational goals in favour of personal goals (Pirson, 2011).

The LaBL programme is an example of social entrepreneurshipwhich alongwith business simultaneously aims at achievingsocietal and developmental goals of improved livelihoods, accessto basic energy services, and climate change mitigation, thusfocusing on both business sustainability and sustainable devel-opment. This paper as Pirson puts it, ‘‘makes an attempt toexamine the level of embeddedness between shared value, andthe social enterprise, and if these can be complimentary’’. In thecontext of creating shared value, this paper with the help offinancial gradients looks at the financial sustainability of the LaBLprogramme while the programme simultaneously aims at achiev-ing the goals of sustainable development.

3. The genesis of financial gradients

While analysing financial data for Lighting a Billion Lives(LaBL), there was a need to structure the sources of finance. Itwas noticed that while sources of finance for the corporate sectorwere well researched and theorized and now an establishedsubject called corporate finance; the same could not be said forthe sustainable development sector. It was also seen that not onlywere the nature of projects differ from the traditional corporatesector, the sources of finance also had differences in terms of‘nature’: some adhering to conventional norms, while somesources of finance were particular to the sustainable developmentfield and had very different characteristics to any other financialsource. Also, sustainable development projects were traditionallythought to be financed only with public finance or grants and aid,however, overtime and certainly in recent times, there was a needto attract other sources. Sometimes it was felt that the nature ofthe same source was changing as well. For instance, publicfinance, which primarily consists of government money withfiscal objectives, was becoming more in the nature of soft loans.To sum up the above argument; it can be said that the sources offinance in the sustainable development sector have differences interms of its nature; plus in the life of the sustainable developmentaction the sources and its nature are dynamic; or the source,nature or both (of finance), change over time.

Overall, there is a general tendency or a noticeable trend of thenature of finance in this sector to move away from developmentalobjectives to an investment category of financing. It was also felt

Fig. 1. Financial Gradients—the decreasing slope of grant inflows.

A. Bose et al. / Energy Policy 47 (2012) 79–8682

that financing of sustainable development projects start with anemphasis on grants; however, if the project has to sustain overlong periods of time, then the project should also be financiallysustainable. It was noticed that grants were particularly volatilein nature, and in recent times it is increasingly so. There areserious issues the world over with the availability of publicfinance as a pure expenditure source, with governments wantingto cut down public expenditure, and grants becoming increas-ingly difficult to avail. Here, we are not saying that the projectshould be profitable, but merely saying that for the project tocontinue—there should be sufficient financial inflows to carry onwith the project. Once there is a stable and sustainable financialinflow then sustainable development projects will last over a longtime say for at least for 25 years or longer. They will have timespans commensurate with major infrastructure projects. How-ever, if the financial backing was being availed only via grants,then it will be difficult to move beyond a three-year time horizonand the project will die an untimely death. In order to avert such asituation, project managers will have to adjust their financialsourcing mechanism, or in other words need to look for a morediffused financial mechanism, where the share of non-grant ornon-public finance sources increase. If we view this as a series ofyearly bar graphs where the amount of money is on the y-axis andsources on the x-axis, then in the initial years, the slope orgradient will be steep as one transitions from grant participationto say, private equity participation in the project. However, theslope will become more gradual after a few years of the projectbeing in existence. This will be indicative that the project isworking well and is attracting investments on its own merits. Ingeneral, the diminishing percentage of the grant component is agood sign of the programme, and in Fig. 1 we see precisely thatthe grant component for the LaBL campaign is decreasing over aperiod of three years thus indicative of the programme attractingnon-grant financial sources including pure investment sources offinance, as we shall see later.

Financial gradients can be indicative of the long termviability, sustainability, and acceptability of the project.

4. Financial gradients: a method for financing sustainabledevelopment action

To develop a financial theory on programmes or projects in thedomain of sustainable development is a daunting task. None-theless, in this paper, an attempt is made in that direction

following the experience with similar projects in the domain ofsustainable development. The recent financial crisis of 2008 haschallenged conventional positions in finance. A pertinent conven-tional view point is elucidated in the Modigliani–Miller proposi-tion (Modigliani and Miller, 1958). It is present in all corporatefinance text books, and is considered seminal work in capitalstructure of the modern corporate. It has served its purposeespecially in the corporate sector (Miller, 1988); however, in thewake of the 2008 financial crisis, this proposition has to beunderstood in a new light—many papers allude to this topic withvarious entry points; for instance, one looks at it from anentrepreneurial angle (Koch et al., 2010); or from the moreholistic viewpoint of mortgages (Ostaszewski, 2009)—the out-come of these papers point towards the premise that the natureand sources of finance are important and crucial from theinstitutional and extremely important from the governancepoints of view. The Modigliani–Miller proposition assumes sym-metric information and efficient markets. However, given thepresent scenario, the previous assumptions may not be as valid asoriginally inferred.

An inference can be drawn that the nature and sources of finance

play a crucial role in the process of value creation, both at the firm

level and more importantly at the institutional level.

Another facet of this paper is sustainable development. Sus-tainable development has evolved over the years, after muchdeliberation, to include three most crucial aspects of humanwelfare—economic, social, and environmental—it also includesall common areas between them. Sustainable development hasinduced a change in thought from a singular focus on economicgrowth to a more multi-faceted approach. And since the formula-tion of Agenda 21 in 1992, adopting a development path on theprinciples of sustainable development has become the goal for ahuge majority of countries around the world (Kumar, 2011).

Given the new challenges of the financial world and theemergence of the concept of sustainable development, projectsand programmes in the domain of sustainable development haveto be structured and thought about in a fresh perspective.

The method of ‘‘financial gradients’’ is the understanding ofthe nature and sources of finance. Inherently, a financial commit-ment is made for a particular purpose; also, the mix of finance in aparticular project can guide the results or outcomes, particularlyat the institutional level. As we have seen, a seemingly innocuousdebt–equity ratio, if not interpreted correctly can cause aglobal financial crisis. In considering the financial aspects orinteractions, the nature of finance with the source of finance arethe most important, the change of capital structure over time,the nature of the business model, and so on—all can beconsidered—but the essence of financial gradients lies in theunderstanding of these interactions. In other words, there aredifferent aspects or factors in financial theory. These aspects orfactors interact with each other, but the most important interac-

tions for ‘financial gradients’ is the interaction between the nature

and sources of finance.In each case, the programme or project will have its own story

and its own set of priorities, but in the financial sense andespecially in the context of sustainable development, the natureand sources of finance are at the core.

A case study below will explain this further. There we will seesome interesting notions emerging, for example, financingsources like grants, which have low monitoring requirementsare actually very expensive, as here the project implementer willhave to identify appropriate monitoring mechanisms and pay forit. However, in the case of equity, which has the highestmonitoring requirements, as a source of finance it is much less

A. Bose et al. / Energy Policy 47 (2012) 79–86 83

expensive, as the equity investor will monitor the project on hisor her own self-interest, thus it can be hypothesised that the costsof the project implementer for monitoring is virtually reducedto zero.

Table 1Sources of LaBL finance.

S.No Source of LaBL finance

1. Bilaterals

2. Multilaterals

3. Events

4. Registration charges

5. Co-funding

5. Financial gradients as an approach

Let us recall that financial gradients can be seen as anapproach to analyse financial flows in programmes or projectsin the sustainable development space. It can develop indicators toassess the health of the project. We can infer that the health of theproject is good if the key challenges are met while the project isrunning. Financial gradients as an approach is described below asa case study for a project in the sustainable development field inthe initial years of its activity.

5.1. Case study

(All details in terms of data analysis and figures given here are

only for exposition. The case study has been developed with the

help of the data available from TERI’s Lighting a Billion Lives&a

initiative. For further details on the LaBL initiative, refer to the

web site http://labl.teriin.org).

The key challenges will be addressed and then the analysis willfollow using financial gradients approach. The key financialchallenge to implement projects in the sustainable developmentspace is to secure long-term, stable finances. This challenge can bebroken down to two parts (particularly for non-governmentalimplementation of projects). First, how does the project diversifythe sources of funds; and, second, how does the project scale upfunds from all the sources.

Given these challenges, it can be said that a programme orproject in the sustainable development space has attained cred-ibility in terms of its financial and business models, if there arepositive trends in two key financial indicators. First, the overallfinancial inflows have to increase from all sources—this isparticularly true when a project has just started and scaling upis an inherent programme-level requirement. Second, over timethe sources of finance should be diversified. Therefore, over timethe percentage share from different sources should trend towardsa more equal distribution.

The project used to describe financial gradients as an approachis Lighting a Billion Lives and is referred to as LaBL hereafter. Theperiod of analysis is from 2008–09 to 2010–11. LaBL funds havebeen generated through a range of financial instruments, whichlargely include grants, but also equity investments, loans, syndi-cation, payment for services, research grants, and so on. Apartfrom the two key challenges, there are a wide variety of questions,which came up and a few relevant ones are given below:

6. Government

7. Corporate social responsibility

� 8. Institutional social responsibility

9. Individuals

10. Payment for services

How can the financial flows for the LaBL campaign be analysedand trends interpreted?J Is there an increase in the volume of financial inflows in the

project?J Is there diversification in terms of the sources of finance?

�

Table 2

Do the trends show progress in financial viability and sustain-ability of the business model developed by LaBL?

Nature of LaBL finance.

� To what extent is LaBL leveraging private finance? �

S.No Nature of LaBL finance

1. Pure grant

2. Research grant

3. Loans (soft or otherwise)

4. Equity (including co-funding)

5. Public expenditure

What is the nature and quantum of public finance beingleveraged by LaBL?

To answer the above questions, financial gradients as anapproach will be put to use.

Now, using the financial gradients methodology, capital‘‘inflow’’ for the LaBL project will be analysed. For the purpose

of this analysis, two schemes of classification have been createdviz. Sources and Nature. Source identifies the entity providing thefund, while Nature gives us the information about the character-istics of the financial inflow, whether it is equity, debt, publicfinance or grant, and what kind of tax or other kinds of financialimplications are attached to them. All inflow transactions wereanalysed and clubbed together in different categories within theclasses. These were created keeping in mind the sources andnature of the fund. Table 1 will give out the details of eachcategory.

The categories were created such that each one is mutuallyexclusive of the other. Table 2 indicates the nature of financing.

Again, the categories have been created such that they aremutually exclusive and give us a clear indication of the evolutionof the pattern of financing in LaBL. Table 3 sums up the nature offinance with respect to monitoring requirements very specific tothe LaBL programme. Two points to note are as follows.

Lower monitoring requirements essentially mean that the costof monitoring will be much higher. This is because financingsources like grants which have low monitoring requirements areactually very expensive—as here the project implementer willhave to figure out monitoring mechanisms and pay for it.However, in case of equity, which has the highest monitoringrequirements, as a source of finance is much less expensive, as theequity investor will monitor the project on his or her own self-interest, thus it can be hypothesised that the costs of the projectimplementer for monitoring requirement is virtually reducedto zero.

One point of information is that a research grant should beinterpreted as equity, as the output of the research grant canpotentially be monetized and returns can be earned as a result ofthat. Keeping this in mind then equity and research grant bothshould constitute equity.

5.2. Case study analysis

The bar charts represented in Figs. 2–4, help us understand thefinancial trends observed in the nature of funds received by LaBLfor the three financial years being analysed. From the bar charts, it

Table 3Nature of finance and monitoring requirements.

Category Definition Monitoring requirement

Pure grant Funds given as a part of philanthropic activity or partly with an intention to claim tax exemption Negligible

Research grant Funds given with a research objective and a tangible outcome is expected (a report, a product etc.) Low

Public expenditure/subsidy Government funds with fiscal objectives Medium

Loans Funds provided by a bank with a ToR similar to retail lending High

Equity User/community/entrepreneur contribution towards the project hardware cost Highest

Fig. 2. Financial Inflows for the year 2008–09.

Fig. 3. Financial Inflows for the year 2009–10.

Fig. 4. Financial Inflows for the year 2010–11.

Fig. 5. Inflow in Indian Rupees (INR) from 2008–09 to 2010–11.

A. Bose et al. / Energy Policy 47 (2012) 79–8684

can be inferred that there is a movement from a pure grant-basedmethod of financing to a more community or private equity-based method of financing. This equity-driven model will getfurther impetus when there are more lines of business, likeprovisions for charging for mobile telephony in addition tocharging solar lanterns, are attached to the core model. Thereare various possibilities of increasing lines of businesses; how-ever, the charts below for the first three years are purely for solarlanterns as the only line of business.

It can be seen from the bar charts that in the first year of LaBL’soperation, there was no equity component. This then rises to 1%in the second year and then to 7% in the third year. We also seethat the pure grant component is decreasing rapidly from anominous 91% in the first year to 81% in the second, and a far moreviable 66% in the third year. If we add the research grant to pureequity, we find that the equity component is doing very well,from a 7% in the first year to 16% in the second year, and finally avery promising 27% in the third year. Overall, the non-grantfinances are rising fast from 9% to 19% and then to 34% in thefinal year.

We should remember that this strong performance in buildinga sustainable financial model was built with only one line ofbusiness; the charging stations have the potential to stand aloneas a viable business without any grant component in the futurewhen more lines of businesses are included. Also, we must notethat here we have talked in terms of percentages, we must bear inmind that in absolute numbers (or amount of money beingallocated for LaBL) there has been huge increase across allcategories. The picture above is surely a cheerful picture for‘sustainable’ business models in ‘‘real life’’.

In Fig. 5, we can see that there was an overall increase infinancial inflows from year to year, and also we can see that eachindividual component also saw an increase in magnitude offinancial inflows.

The analysis so far outlines two gradients as key—one, anincrease in total finance which is an indication of scaling up ofefforts as funds are invested towards workable solutions andsecond, decrease in non-investment category finance, particularlygrants, as a percentage of total finance.

Fig. 6. Project Costs over time in Indian Rupees (INR) from 2008–09 to 2015 (projected).

A. Bose et al. / Energy Policy 47 (2012) 79–86 85

A third kind of gradient that would be essential to assess thesustainability of projects in the domain of sustainable develop-ment would be to see the financial help (mostly governmentsubsidy or grant) per beneficiary decrease as scaled up effortsreach economies of scale and a decrease in the risk capitalrequired to broaden the domain of activities within the projects.Fig. 6 captures this aspect.

We can see that with time as efforts are scaled up the projectcosts reduce significantly and will reduce further as the outreachand domain of activities under the programme increase.

5.3. Case study conclusion

There is a clear trend that the grant component is decreasingand the equity component, both pure and in other forms, isincreasing. We also see that the total funding across all compo-nents is increasing as well. This definitely augurs well for the LaBLfinance models. There is a clear trend that LaBL finance is movingfrom a pure grant-driven financial model to a more flexible modelwhere private or investment category financing mechanisms areplaying larger roles. We can also see that the two key indicators,one of scaling up financial inflows, and second, of achievingdiversification from the point of view of sources of finance wasalso achieved.

6. Summary

In this paper, we have addressed the central debate insustainable development finance, and noted that sustainabledevelopment action needs to attract investment-grade financingsources. The paper notes that sustainable development action andclimate action have a common goal and financing both has acommon problem. The key is to understand both—the nature andsources of financial inflows as well as the synergy between them.To address this problem, the concept of ‘‘financial gradients’’ hasbeen developed.

‘Financial gradients’ is a method of understanding financialflows in relation to the nature and sources of these flows. It cangive us an indication of the health of a sustainable developmentprogramme. The case study in this paper reflects that it has thepotential to develop better understanding of the financial

mechanism prevalent in the sustainable development and climateaction space. However, much more research needs to be done andmany case studies applying the financial gradients method needsto be carried out to make financial gradients a robust andimplementable concept.

Appendix A. Supporting information

Supplementary data associated with this article can be foundin the online version at doi:10.1016/j.enpol.2012.03.038.

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