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Market distortions

4.9 Import duties. As a relatively new and evolving technology in developing countries, PV systems often require imported components, which can account for virtually all equipment costs. Several countries impose high tariffs on PV components, driving prices prohibitively high. Often protective tariffs are set to encourage local manufacture (Figure 4-2). In Kenya, for example, import duties and value-added tax (VAT) for PV system components effectively add 16 percent to the CIF cost of PV modules and as much as 89 percent to the cost of batteries. As a result, the wholesale price of a solar home system is nearly 40 percent more than the CIF price. In Sri Lanka, import duties added about $2.50/Wp to the cost of a PV module in 1993/94. In 1994, India levied import duties of 45 percent on PV equipment and as much as 300 percent on solar lanterns. Duties on electronic components are particularly harmful to the PV system market, since suppliers are tempted to substitute locally-made inadequate or poor-quality battery charge controllers or to dispense with controllers altogether (World Bank 1 994a).

4.10 Subsidies for Other Rural Energy Options. While duties and taxes on PV system components raise the financial costs of PV systems, subsidies for rural grid service and kerosene often lower the cost of these energy options to well below their economic value. A recent study of six rural electrification programs using grid-based electricity revealed that the costs to consumers were well below the full economic costs in all cases. The actual costs of residential use, which coincides with the peak system use, were estimated at $0.31/kWh for Maharashtra (India) and Java-Bali (Indonesia), while average tariffs were $0.027/kWh and $0.055/kWh, respectively (World Bank 1995). While subsidies may be justified on social or developmental grounds, unfortunately, they reduce the costs of grid service to levels well below those of PV systems, even when solar home systems are the least-cost economic option.

4.11 Figure 4-3 illustrates the effect of these market distortions in Indonesia, which levies a 10 percent VAT on all goods and imposes import duties on PV modules, while subsidizing rural grid service. While the economic life-cycle costs of PV home systems are lower than they are for service from a remote grid, the actual life-cycle costs paid by rural households are much higher for PV than for subsidized grid service. Therefore, the strong customer preference for grid service is not surprising.

Figure 4-3. Comparison of the Economic and financial Costs of PV- and Grid-Based Service in Indonesia (in 1993 dollars)

Note: The villages involved comprise approximately 250 households, the load 100 households/km2 (20 hh/km distribution line). The household service level is set at 8 hours area lighting, 6 hours task lighting, and 60 Wh/ day for appliaces. See Annex 2 for a discussion of the methodology used.

4.12 As PV home systems become accepted as a complement to grid extension, manufacturing and marketing networks will mature and costs will fall. To support this process, governments can help develop larger sales and service networks to capture the advantages of economies of scale. Governments can also rationalize the fiscal treatment of PV systems and conventional rural energy in more open trading policies and market pricing of rural energy services.