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close this bookBasic Electrification for Rural Households (GTZ, 1992, 28 p.)
View the document(introduction...)
View the documentForeword
View the document1. Background information and recommendations
View the document2. Photovoltaics as an energy option for rural areas: benefits and over all social and economic context
Open this folder and view contents3. PV systems for supplying electric power to rural households
View the document4. The demand situation of potential shs target groups
View the document5. Criteria for assessing the economic feasibility and financing options for solar home systems
Open this folder and view contents6. An appropriate dissemination strategy for shs and the role of GTZ
View the document7. References

5. Criteria for assessing the economic feasibility and financing options for solar home systems

Depending on the interest rate that is applied, households that utilized an SHS to meet their energy needs for lighting and the operation of radios and TV sets would pay between a fifth and a third more than they are currently paying to meet these needs with candles, kerosene and batteries. Consequently, if electricity is required exclusively for lighting purposes, an SHS will continue to be considerably more expensive than the conventional alternatives, even if the introduction of improved production methods leads to a substantial decrease in solar cell prices. The picture changes in cases where the energy demand is more highly differentiated, as In Group 2 and Group 3 (see Table 1). At some time in the not- too-distant future, the prices of solar cells may decline to the point that SHS will be competitive with - or perhaps even cheaper than - the conventional alternatives for users in these two groups. In all fairness, though, it should be pointed out that the above comparison does not make allowance for the fact that, unlike the conventional options, the purchase of an SHS involves a large initial outlay, and in most cases this means that the users would have to take out a loan to finance the required investment. However, the segments of the rural population that make up the target group for SHS in developing countries rarely have access to formal-sector credits.

The purchase of an SHS involves a sizeable cash outlay, and the amounts involved are quite substantial for rural households:

approx. 500 US$ for a 20-Wp system
approx. 800 US$ for a 50-Wp system
approx. 1,400 US$ for a 100-Wp system

Thus, if SHS are to be disseminated on a large scale, the technology will have to be offered as part of a package that includes financing arrangements.

The following barriers to financing solar home systems through credit transactions supported by governmental development and private business banks are commonly observed:

- Governmental development banks often do not follow common economic rules. As a result, they are not likely not able to make a special long-term credit offers. Due to exaggerated security (guarantee) requirements, the banks often exclude the very target group in need of credit

- Private banks prefer cities; they are seldom active in rural areas. The respective credit need is for the most part small so that the specific administrative costs become excessive. Moreover, these banks work with very high interest rates and demand guarantees which usually not can be provided by rural borrowers.

In some instances, informal rural financial systems may be able to cater to the credit needs of the prospective SHS users, especially in West Africa. In rural areas, the informal financial sector includes not only traditional moneylenders, who charge extremely high interest rates (not infrequently in excess of 10 % per month), but also informal savings and loan associations.

However, the most sensible approach is to let the people who sell the systems organize the payment schemes themselves:

- SHS vendors have a very real incentive to grant loans to their customers. They must, however, have some means of financing their lending activities, and thus the banks will be involved in the credit extension process indirectly.

- The vendors retain ownership of the systems until the last instalment has been paid, and thus the entire problem of collateral is neatly avoided (rural target groups are rarely able to provide bankable collateral). In the event of breach of contract, they can simply demand that the equipment be returned. At a practical level, however, this can be difficult because the borrowers risk losing face with the other members of the household if the system is repossessed by the vendor.

In addition to buyers taking out loans themselves and instalment plans offered by vendors, there is a third, very interesting alternative, namely distribution of the solar home systems by the government institutions responsible for rural electric power supply. The panels themselves are "leased", and the users are responsible for acquiring the rest of the system (charge regulator, battery, lamps). The utilities or cooperatives finance the purchase of the equipment with funds allocated from government budgets or loans from international development banks.

However, all of these approaches have one problem in common: each involves the collection of small loan instalments from users living in widely scattered rural settlements, a time-consuming task which pushes up the administrative costs to such a high level that private vendors - and many utility companies as well - Will find that credit extension to SHS owners is unprofitable. Thus, it is extremely important to encourage the initiation of self-help financing activities by cooperatives, especially since these institutions are also working to eliminate other infrastructural deficits in rural regions (e. g. substandard drinking water supply, lack of roads).