Overcome the first cost barrier

8.2 The preceding Chapters have identified financing arrangements, pricing and cost-recovery strategies, areas for use of grants and subsidies, and the need to rationalize or eliminate discriminatory import taxes and duties.

8.3 Financing. Given the first initial cost of solar home systems, some form of term financing is essential and can be accessed through ESCOs, hire-purchase and leasing arrangements or financing through dealers or the banking system. Consumer loans which feature high down payments (to minimize defaults) and short maturities (three or four years) limit solar home system purchases to high-income groups. ESCOs that can obtain relatively low-interest, long-term loans and reduce equipment costs by purchasing in bulk may greatly increase the affordability of solar home systems. Any long-term leasing or ESCO financing arrangement should incorporate provisions for battery replacement, since batteries are a significant cost over the lifetime of the system. To increase rural customers' access to financing, solar home system program design should include streamlined loan application procedures and flexible arrangements for securing and repaying loans. Loan officers must be familiar with the PV system in order to facilitate and accelerate loan processing. Finally, banking facilities or outreach efforts will stand a better chance of success if they are conveniently located to users who need to make regular loan payments.

8.4 Pricing Strategies and Cost-Recovery Mechanisms. Solar home system pricing and repayment arrangements should reflect consumers' willingness and ability to pay. In government-sponsored programs, payments have often been set too low (at the same level as expenditures for kerosene), even though consumers (recognizing the improved quality of PV systems services) are often willing to pay more. Prices and fee structures should be low enough to attract customers but high enough to cover capital, financing, servicing, equipment replacement, and administrative costs, as well as possible defaults. The size of the down payment appears to affect the ability and willingness to pay for a solar home system more than the number or the size of the monthly payments. Rural households with irregular income streams may require seasonal rather than monthly payment schedules. Fee collection and enforcement are best handled by appropriate local and/or national organizations.

8.5 Grants and Subsidies. Judicious use of grants and subsidies may help catalyze a PV program but should be limited to market-conditioning activities or (under the appropriate conditions) limited injections of equity to buy down capital costs. Since there is no guarantee that subsidies and grant money will continue indefinitely, these funds should not be used to finance operating costs.

8.6 Rationalize or Eliminate Tax and Duty Structures. High import duties, particularly on PV modules, artificially inflate PV pricing and hinder development of large-scale, commercially viable, market-driven solar home system programs. A reduced market raises the cost of maintenance and other support services. This in turn decreases user satisfaction. The resulting market distortions may also induce local suppliers to use poor quality components that make systems less reliable.