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close this bookPhotovoltaic Household Electrification Programs - Best Practices (WB)
close this folderAttaining financial sustainability
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View the documentTerms and conditions
View the documentPricing strategies
View the documentGrants and subsidies
View the documentEnforcing repayments
View the documentFinancing battery replacements

Pricing strategies

6.4 Market surveys provide a useful tool for assessing consumers' willingness to pay for PV electrification services and should be incorporated into program planning. Some government sponsored household PV programs set very low monthly fees, based on average household expenditures for kerosene. This policy assumes that rural consumers have a very low capacity to pay. Such programs are intrinsically unsustainable because they do not plan for full cost recovery; in addition, they often have difficulty collecting fees. In the Sri Lankan Pansiyagama Project, beneficiaries considered the program a government giveaway (in some ways it was, since funds were lent at zero interest and little attention was initially given to fee collection). Fee collection rates were only 52 percent, even though only a minimum payment of $1.50-$2.50/month was required. However, the Pansiyagama repayment rate increased significantly when the modules of several delinquent customers were removed. The BANPRES project in Indonesia also did not give high priority to cost recovery. The average fee collection rate ($3.75/household/month) was about 60 percent, although it varied from 5-95 percent among participating cooperatives. Several subsidized schemes in the Pacific Islands have also failed, due to financially unsustainable pricing policies.

Table 6-2. Terms for Solar Home System Financing in Selected Countries

Country/ Solar Home Systems Initiative

Type of Financing

Source of Funds Solar Home Systems

Down Payment (Percent of Rate (Percent)a Cost)

Annual Interest (Years)

Repayment Period Rate (%)e

Prime/One Year T-Bill

Indonesia







BANPRES

Leasing

Gov't

5

0

10


Dealer

Consumer

Supplierb

30

18

3


Dealer

Consumer

Supplierb

50

18

2

18.0/10.0

Sri Lanka







Gov't

Leasing

Donor/Gov't

0

0

20


Dealer

Consumer

Dealer

25

30-34

2


Cooperative

Leasing

Donor

15

7

8


NGO

Leasing

Donor

10

10

10


Dealer

Consumer

Bank

20

22

5

17.1/13.9

Philippines







RECs

ESCO

Gov't/Donor

18

22c

10

15.1/12.9

Dominican







Republic

Dealer/






Dealer

Consumer

Supplier

50

0-50

0.5


NGO

Consumer

Donor/Bank

25

20-36

1-2

29.0/18.0

USA







Utilities

ESCO

Utility

5

1.6%

15-year

7.75/6.0





monthd

minimum


Notes: The majority of sales in the Dominican Republic, Indonesia, and Sri Lanka have been cash sales, owing to the lack of credit facilities.

a. May include service and administrative fees.

b. Suppliers use working capital loans or lines of credit from commercial banks to finance sales through dealers.

c. Includes a 10 percent margin for administration. Consumers do not pay this cost, so this rate should not be compared with consumer loans.

d. The fee for service is given as a percent of net installed cost. It includes capital recovery as well as PV systems servicing and maintenance costs.

e. Indonesia: rate as of mid-August '94 (Indonesia does not have a one-year T-Bill; rate given is 90-day bank CD rate). Sri Lanka: rate as of mid-September '94. Philippines: mid-July '94 rate; United States mid-October '94 rate.

6.5 Consumers are often willing and able to pay more than government programs charge for energy service. Government and bilateral donor-funded PV projects, designed without regard to cost recovery, may also damage private efforts if customers expect to receive subsidized systems. Recent commercial sales in Indonesia demonstrate that consumer willingness and capacity to pay is influenced more by the size of the down payment than by the number or magnitude of monthly payments. Commercial suppliers in Indonesia note that a down payment higher than 30 percent of the cost of an installed system (around $120) severely limited demand. For example, consumers prefer to purchase a solar home system at Rp. 800,000 with a payment scheme that requires a Rp. 250,000 down payment and 36 monthly payments of Rp. 20,000 rather than purchasing the same system with a down payment of Rp. 300,000 and 40 monthly payments of Rp. 16,000 (de Lange 1994). Clearly, not all consumers can pay these fees, and thus sales are limited primarily to wealthier consumers in these rural areas.

6.6 Full recovery of the capital investment, borrowing and operating costs is crucial for financial sustainability. In an ESCO, these costs will include: debt servicing, staff salaries, administrative expenses (for instance, account, billing and collections, disconnections and reconnections, consumer education, and staff training), expenditures for facilities, maintenance costs (battery replacement and recycling, spare parts, and consumables), allowances for defaults and losses, and transportation expenses—and of course profits. In a sales scheme, costs will include purchases of materials, debt servicing, staff salaries, dealer margins and other sales expenses, general administrative expenses, and expenditures for such essentials as facilities, consumables, and transport, as well as profits.

6.7 Ideally, repayment periods for consumer loans should be short, for example, less than the average life of the battery (three years) as in the Dominican Republic programs and in commercial ventures in Sri Lanka and Indonesia. In this way, borrowers will have repaid all or most of their loan by the time the battery has to be replaced and will have the necessary funds to replace the battery. Shorter repayment periods also reduce lender risks. While they increase the monthly payment, short loans are less sensitive to interest rates. For example, a 25 percent rise in interest rates increases monthly payments by only 6 percent in a three-year payment scheme, while the monthly payment increases 15 percent with a ten-year repayment period.

6.8 The down payment should ideally cover a significant portion of the system cost, if it is to serve as the primary security for the loan. A reasonably large down payment is a useful mechanism for screening consumers and establishing creditworthiness. At a minimum, the down payment should cover the sunk costs of transport, labor, wiring, and fixtures, allowing for full recovery in case of default. Alternatively, the down payment can equal the cost of the battery, to select out those customers capable of meeting battery replacement costs. The most sizable down payment would equal the cost of the module, typically 50 percent of the total system cost. While a large down payment provides additional loan security and reduces monthly payments, it does limit the number of households that can afford the system. Energy planners, financiers, system suppliers, and others involved in household PV programs must strike a balance between program goals and participants' ability to pay.

6.9 Serving Customers with Limited Ability to Pay. To increase the number of households able to pay for solar home systems, pricing strategies can include flexible repayment, fee schedules that match customers' income streams, or extending this repayment period (with due regard to the additional risk this entails). Farmers, for example, may prefer a semiannual or quarterly payment plan, while salaried workers may find it easier to pay monthly or authorize payment deductions. Defaults can be avoided if users make a deposit before the system is installed—a scheme similar to the "lay-away" programs offered by US retailers. Payment due dates can also be extended on a case-by-case basis.