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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


4.1 The previous Chapter outlined the conditions under which solar home systems are the least-cost option for rural lighting and power supply. However, from the point of view of the potential user, the key issue is the affordability of the PV system in relation to its perceived value. While many beneficiaries of rural electrification benefit from subsidies, PV users are generally expected to pay for most of the costs of their systems. This Chapter examines barriers that constrain the purchase of solar home systems. These include:

· High capital costs and lack of access to credit make solar home systems too expensive for many rural households;

· High transactions costs arise in purchase or servicing of solar home systems due to limited supply, sales outlets, technicians and financing infrastructure in rural areas;

· Market distortions often increase the price of solar home systems relative to alternatives. These include:
- import duties, tariffs, and taxes; and
- subsidies for kerosene and grid-based service to rural consumers.

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.

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.

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.