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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

High transaction costs

4.7 The PV home system industry is relatively new. Markets are small and still developing in many countries. In the early stages of market development, it is difficult for sales and service networks to reach the economies of scale that would allow for price reductions. The Indonesia experience clearly illustrates how economies of scale can affect the production, sales, and servicing of PV systems. A solar home system in West Java (where annual sales are in the thousands) is 50 percent cheaper than in Lampung, Sumatra (where sales are in the hundreds). The combined effect on prices of a small market and limited competition is also seen in Kenya, where the total installed price of a 53-Wp system is $1,378, compared with an estimated financial cost of $670, based on competitive prices plus taxes and duties (see Figure 4-2).

Figure 4-2. The Impact of Duties and Taxes on the Initial Cost of a Solar Home System in Indonesia, Kenya, and Sri Lanka (in 1993 dollars)

Note: Costs assume the existence of a mature sales and service system. Base CIF price is adjusted by applicable local transport, sales, and installation margins in each country.

a Maximum import duty of 5 percent; 10 percent VAT; 17 percent distribution, installation, and retail margin.

b Import duties of 15 percent; 13 percent taxes; 33percent margin.

c Import duties of $2.50/Wp; effective business and sales tax of 32 percent; 17 percent margin.

Source: ASTAE (1994b); ASTAE (1994d); UNDP/ESMAP (1994).

4.8 The costs of solar home systems should fall as markets mature, sales and support networks develop, and competition grows. Using existing durable goods, sales, and service outlets could help reduce these overhead costs. However, as experience in Sri Lanka shows, unless the margins offered to such rural outlets are sufficiently high - they will not have much incentive to support solar home system sales. It is difficult for a new and somewhat marginal PV home system industry to make substantial investments in retail and service networks. Support from government and donor agencies can help build the necessary infrastructure to accelerate development. Such assistance can include:

· Supporting and conducting least-cost rural energy planning that includes PV home system options;

· Making investment capital available for solar home system programs;

· Encouraging the commercial banking sector and financing agencies to finance PV home systems on reasonable terms by offering support mechanisms refinancing arrangements;

· Supporting promotional campaigns for PV household systems among rural households;

· Removing regulatory barriers that limit competition among energy service providers; and

· Offering training and technical assistance to help establish retail and service networks.

These issues are discussed more fully in Chapter 5.