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close this bookPhotovoltaic Household Electrification Programs - Best Practices (WB)
close this folderBarriers to affordability
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View the documentFirst cost barriers
View the documentHigh transaction costs
View the documentMarket distortions

First cost barriers

4.2 Solar home systems use renewable energy and are self-contained generation and distribution systems. They consequently have low operating and maintenance costs in comparison to fossil fuel alternatives. Thus, the initial capital cost of a solar home system is very high in proportion to its total life-cycle costs (typically more than 75 percent). As noted in Chapter 2, the actual purchase price of solar home systems range from $100 (10 Wp, China) to $1,400 (53 Wp, Kenya). For many low- and middle income rural households, the purchase price of a solar home system represents almost one year's income (Foley 1994). The price of solar home systems is one of the greatest barriers to ownership among rural populations, especially given the virtual absence of credit. Figure 4-1 demonstrates the relation of cash-only purchases with leasing and rental options in the market for solar lanterns and solar home systems. It indicates that relatively few Indian households are willing to pay cash for the systems when credit purchases are available (Admar Services 1994). Although outright cash purchase of solar home systems does occur, only the wealthiest of rural consumers have this option. In the Philippines, it is estimated that only 10 percent of potential purchasers can pay cash, while 20-60 percent could afford to buy a system on credit, depending on payment conditions and terms (ASTAE 1995c).

Figure 4-1. Demand for PV Systems in Rural India. by Tome of Financing

4.3 Term credit for the purchase of PV systems is unavailable in most countries. In general, banks extend credit to rural customers for productive purposes only. Since solar home systems are considered consumer goods, they are excluded from such credit options. Where commercial financing or leasing schemes are available, a down payment of 25-30 percent is often required. Interest rates on bank loans generally range from 1825 percent, while dealer financing may carry interest rates of over 30 percent. The loan repayment periods for commercial loans are generally short (from 2-3 years). The combination of high interest rates and short maturities increases the size of monthly payments and thus reduces the number of households that can buy on credit. A number of options are available to overcome the problem of limited credit access (see Box 4-1).

Box 4-1
Increasing Credit Availability for PV Systems

The limited credit availability or stringent loan terms to PV enterprises and purchasers constricts the rural market for PV systems. Reasons are: unfamiliarity of the lenders with the technology; high transaction costs relative to the size of loans; inadequate collateral; and borrowers with no credit history, limited or lumpy cash flows (de Lucia and IFREE, September 1995). Some approaches to increase rural credit for PV are:

· Seed Capital Fund - Funds provided by philanthropic organizations or development aid agencies create a revolving fund that is used to purchase PV systems. This approach is often used in the early stages of a solar home system program. Examples include: Enersol NGO in the Dominican Republic; Solanka NGO in Sri Lanka; and the BANPRES project in Indonesia.

· Equity Investments and/or Debt Financing by the Government - As with grid-based rural electrification, the government finances the initial capital equipment of a PV project through an equity contribution or loan. This approach is used in Mexico.

· Asset-based Lending- A solar home systems enterprise obtains a loan by mortgaging its assets. Unfortunately, many solar home system enterprises have limited assets and therefore the amount they can borrow is restricted. In lieu of fixed assets a bank could ask for other forms of security (e.g., post dated checks, personal guarantees, bank guarantees). A bank may accept the PV system as partial collateral, but this is rare because banks perceive PV systems as difficult to repossess.

· Non- or Limited-recourse Financing - A lender agrees to financing credit for a solar home systems enterprise, based primarily on the project cash flows. At present, this option is rarely used as the enterprises do not have sufficient operations experience. The solar home systems program executed by the RECs in the Philippines did receive such financing from the National Electrification Administration.

· Consumer Financing - A bank gives a personal loan to a consumer for the purchase of a solar home system. The bank may require that the consumer pledge other assets to cover the loan or attach a portion of their salary to ensure repayment. Examples are the solar home system loans provided by the Peoples Bank and Hatton Bank in Sri Lanka.

· Supplier Credits - Some PV module suppliers offer credit to their dealers or PV systems integrators. The length of the credit terms is likely to be short (six months), but such credit can improve cash flows. PV companies in Indonesia have received these supplier credits.

4.4 Financing costs may increase the life-cycle costs of PV systems but they make the systems more widely affordable. For example, in the Dominican Republic, a $700 solar home system can be purchased for a 25 percent down payment and 24 monthly payments of $30. In contrast, combined household expenditures on kerosene, dry cells, and automobile batteries for lighting and power can reach $35 per month. Moreover, the householder's monthly outlay for the solar home system will end after two years, with the exception of battery replacement. Data from a dozen countries indicate that current monthly expenditures by families in the highest income group in unelectrified areas average $17.60, including $7.90 for kerosene, $4.10 for candles and dry cell batteries, $2.50 for automotive battery recharging, and $3,10 for battery amortization (Meunier 1993). Monthly expenditures for lower-income groups ranged from $2.30 to $3.80 for kerosene and candles to $8.30 for kerosene lamps, candles, and dry-cell batteries.

4.5 The affordability of solar home systems can be extended to a greater number of consumers if an energy service company (ESCO), such as the local electric utility or distribution company, offers electricity services using solar home systems, rather than grid extensions (Box 4-2). The ESCO retains ownership of the equipment and recovers its costs over a long period of time. If an ESCO can obtain long-term credit at relatively low interest rates, this option can be an effective way of lowering household monthly payments. As discussed in Chapters 5 and 6, a number of pioneering initiatives are successfully demonstrating this approach.

4.6 Unless subsidies comparable to "lifeline rates" for grid electricity are offered, the market for PV systems will remain limited to middle- and upper-income rural households. Purchases of PV systems can be expected to follow patterns similar to those found in traditional rural electrification projects. In Indonesia, for instance, studies show that the poorest 25-50 percent of the population is unable to afford electricity service even if the connections are financed through power company loans. Direct observation tends to support this supposition for most countries with per capita incomes of less than $200 per year (World Bank 1994b).

Box 4-2
Idaho Power Company and Southern California Edison Programs for Solar Photovoltaic Service

Two US electric utilities have pilot programs that offer PV electricity services to eligible customers. Eligibility is determined through a comparison of PV systems and grid extension costs. Remoteness of site, accessibility, load size, load profile, solar resources, solar impediments, and suitability are taken into consideration in determining eligibility.

A minimum PV system size of 1-kWp is required per customer. The maximum the utility will pay per installation is $50,000 net of the down payment made by the customer. An initial fee of 5 percent of the installed cost is charged as a down payment. The balance of the net installed costs and all replacement, repair, and maintenance costs are recovered at 1.6 percent of the net installed cost per month.* A minimum 15-year agreement is required; at the end of this period, the customer assumes ownership of the system. The customer can also purchase the system at any time at its depreciated value.

The system is installed and maintained by licensed independent contractors on request. The utilities will also offer a back-up generator for a customer. The customer is responsible for providing fuel and fuel storage for the generator.