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Who benefits from solar home systems in India? by Kunal Mehta


Table of Contents

Boiling Point
Front cover of Boiling Point issue 51
Issue 51 (2006) Sharing information and communicating knowledge
ArticleWho benefits from solar home systems in India?
AuthorKunal Mehta

[top] [end]Introduction

Solar Home Systems (SHS) are one way of providing electricity to nonelectrified and under-electrified rural households to contribute to the overall goal of poverty alleviation. They have been promoted for three reasons;

  • quality of life, for example, health benefit, such as clean kitchen lighting (Figure 1), better quality of light for reading and studying

Figure 1: Clean safe kitchen lighting (photo: Kunal Mehta)
Figure 1: Clean safe kitchen lighting (photo: Kunal Mehta)
  • enhancing income-generating activities for the end-user such as tailoring units, telecommunication booths and other small businesses (Figure 2)

Figure 2 Installing solar lighting in a shop (photo: Kunal Mehta)
Figure 2 Installing solar lighting in a shop (photo: Kunal Mehta)
.
  • providing electricity in an environmentally benign manner in a world increasingly alarmed by global climate change.

India has a large market potential with a population of 1.2 billion people (of whom over 50% lack access to electricity), and has the third highest number of installed systems. Despite this, India’s SHS programme is still very small in terms of the percentage of the population served by SHSs, with only 0.03% of households with solar home systems. In the last decade, strong emphasis has been placed on their successful dissemination in rural areas, but a number of financial, technical and institutional barriers such as the high capital costs, lack of affordable credit, and unsupportive energy policy still hinder widespread dissemination.

Financial affordability and lack of affordable credit at the end-user level is one of the fundamental barriers to uptake, making the technology unaffordable for lower-income rural households. This paper explores this barrier by using the example of Solar Electricity Light Company’s (SELCO) operations in Dakshina Kannada, a district in Karnataka, India.

[top] [end]Research aims and methodology

The research aimed to analyse the target groups benefiting from solar home systems to explore the success (or otherwise) of SELCO’s operations in targeting the lower-income households using a subsidy-assisted market model.

The research for this paper was carried out in June 2004, in the district of Dakshin Kannada, in Karnataka, India. Primary research in the form of structured questionnaires was conducted in Puttur and Belthangady; two among twenty-three rural service areas of SELCO. Questionnaires were conducted in households that had purchased SHSs and in households that had not purchased SHSs. A total of 28 households with a SHS each in area were interviewed and 18 households in Puttur without a SHS were interviewed.

[top] [end]SELCO’s market-based model

SELCO is a successful energy services company (ESCO) by industry norms, with the largest sales of SHSs in Karnataka. The business model adopted by SELCO is typical of one that is gaining importance as development moves from donor/governmentled operations to a market-based renewable energy services model. SELCO’s aims are twofold: firstly – to develop an efficient way to electrify rural areas by increasing affordability of off-grid renewable energy sources, and secondly – to achieve commercial viability in the process of creating a sustainable market.

One of SELCO’s primary aims is to provide electricity to the lower-income rural households – the ‘underserved’ in South India. To achieve this, SELCO’s market-based model uses a combination of financial instruments (methods) to break the first barrier for end-users – the capital cost – and provide several financing options including:

  • Cash sales – The end-user pays full cash and immediately starts owning the system;

  • Short-term credit and long-term financing – The end-user acquires a SHS with credit either financed by SELCO or a financial institution; and

  • Fee-for-service – In this model, an ESCO owns the system, and provides an energy service to the enduser who pays a rental to the ESCO.

The use of a combination of financial instruments is promoted in order to increase affordability at the end-user level, as the initial cost of a SHS can be many times a low-income household’s monthly average income. Subsidies, which help to reduce the investment cost, also form an integral part of this market-based model. These are provided by the government or/and development agencies. It would then be more appropriate to describe it as a subsidy-assisted market model. The details of SELCO’s sales programmes are given in Table 1.
Table 1: SALCO’s sales programme
Table 1: SALCO’s sales programme
SELCO, along with other major players (Shell and Tata-BP), is using a range of financial instruments to scale up operations and cater to increasing demand. This makes it imperative to explore the ability (or lack) of this model to cater to the lower-income households. Otherwise, the increasing profits could make the commercial success outweigh the concerns of the operators to cater for the underserved, including the lower-income households, and thus fail to achieve the primary aim of increasing access to ‘underserved’ households.

[top] [end]Affordability analyses

Based on an affordability analyses by SELCO, the estimation of the ability of households to pay in South India is given in Figure 3. This clearly indicates that unless system prices are to fall substantially in the near future, cash sales will be restricted to the higher income rural households in India. As it has been envisaged that SHSs will provide power to the low-income non-electrified and under-electrified rural households, other means of financing the systems are imperative.
Figure 3: Affordability analyses for Southern India
Figure 3: Affordability analyses for Southern India


Consumer credit is another approach to increasing affordability. While low-income households may not be able to pay full cash, they might be able to purchase a system using credit. Referring again to Figure 1, the affordability analyses by SELCO suggests that around 2.5 million households in Southern India would be able to purchase a SHS. Providing subsidies or a fee-for-service programme increases this to 5 million households (50%). This would lead to the inclusion of low-income and middleincome households to purchase a SHS, one of the primary aims of SHS programmes in general, and the SELCOled programme specifically.

The market model today is thought to be the answer for three main problems with the use of PV for rural electrification: insufficient financing; the low incomes of the potential customers in the rural areas; and the high initial investment costs of SHSs. SELCO has been cited as a successful example of this market model by reducing the financial barrier for the end-user. Effectively this means that using the market, SELCO has increased access to electricity for rural lower-income households.

[top] [end]Results and analysis

Has the model helped to deliver its primary goal: increasing affordability of SHSs by using a range of financial instruments, and has it helped to increase access to electricity to the low-income household? Whilst the interest subsidy, provided by UNEP, buys down the interest rate from market rate of 10%–15% to 5%, the capital subsidy reduces capital cost, as shown in Table 1.

[top] [end]Capital subsidy

Figure 4 puts the findings into perspective, comparing percentage of users and non-users to percentage of India’s rural population in different income-groups. It clearly shows that the combination model of SELCO is not targeting the low-income groups in Puttur, with their most significant customer base being the rural middle class. In Belthangady, SELCO does manage to include the lower-middle income group, but only with a substantial capital subsidy of Rs. 5500 on a 37-Wp system.
Figure 4: Target group analysis of SELCO
Figure 4: Target group analysis of SELCO
The capital subsidy has lost favour in the market model as it distorts market pricing and the time-lag between when the company installs the system to receiving the subsidy from the government (6 months) is proving to be too expensive. Because of this, SELCO stopped using the capital subsidy in Belthangady from March 2004. It is important to note that of SELCO’s 23 service areas, Belthangady was the sole recipient of the capital subsidy.

Importantly 86% of the respondents in Belthangady stated that they could not afford the system without the capital subsidy. Clearly the capital subsidy for all its market negativities was allowing a wider section of economic groups to purchase a SHS and SELCO’s decision has decreased affordability in Belthangady. In the field this was reflected by a sharp decline in sales in the Belthangady service area after March 2004. Interest subsidy

The interest subsidy is another example of a subsidy failing to reach its target audience. It was intended to benefit the ‘poorest of the poor’ by helping them switch from traditional fuels to electricity, a cleaner source of energy for the end-user. By benefiting the middle and high-income households (the ‘error of inclusion’ – UNEP, 2002) the subsidy is failing to increase affordability to the low-income households.

Nevertheless, it would be unfair not to mention briefly SELCO’s successes in helping create a market, as there have been many to note, including for example:
  • Creating significant awareness of solar electricity in the state, which has helped to boost the confidence of both end-users and financial institutions;

  • SHSs have moved from being an ‘unknown’ technology with high risk investment to becoming ‘priority sector lending’ in Karnataka. Financing SHSs is a good way to build the loan portfolio of rural bank branches as repayment is positive and risk is small due to the small size of the loan;

  • Showing that a combination of financial instruments can be used successfully to sell SHSs; and

  • SELCO has demonstrated that rural consumers have the ability and willingness to pay for particular energy services.

At the time of research, SELCO’s fee-for-service programme was in its infancy stage, but the early indications seemed to suggest that it was more successful than the other financial instruments. It is important to continue this research to include the fee-for-service customers, as breaking the barriers associated with initial costs would provide the greatest potential for increasing the numbers of adopters. At the moment though, the fee-for-service business constitutes a very small percentage of SELCO’s total business operations.

[top] [end]Conclusion

SELCO’s successes cannot be underestimated, but unless system prices are lowered substantially, this subsidyassisted model is still failing to include the rural low-income households. This group constitute over 65% of India’s population, whilst SELCO is currently catering to the ± 10% of the middle to high-income segment (with the exception of those benefiting from the capital subsidy). A well-designed microfinance programme is unlikely to positively benefit the poor, especially when commercial viability becomes the parameter for success, as there is a strong tendency for these finances to benefit the top of the clientele group. Lowering capital costs by using a capital subsidy seems to hold positive value for the end-user, even though it poses a hindrance to the process of creating a sustainable market. In the process of scaling-up operations, the fee-for-service model needs greater attention as it is the one method with potential to break the first-cost barrier effectively, and provide electricity to the underserved in rural areas.

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[top] [end]Contents: Boiling Point 51 - Sharing information and communicating knowledge

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Theme Editorial - The Gift of Knowledge - The Upesi Rural Stoves Project - HEDON-The Household Energy Network - Locally-made solar panels for small appliances - Sharing knowledge and spreading information using the Internet - Promoting Solar Cookers Through The Solar Cookers International - Improved Cookstove Technology For Rural Livelihoods For Women - Improved Cookstove Dissemination - HERA Household Energy Programme? - Household energies to improve the quality of life of rural communities - Financing watermill upgrades - Who Benefits From Solar Home Systems In India - The Human And Livelihoods Cost Of Fuel-switching In Addis Ababa - Consensus Reached By Participants At The International Workshop - Monitoring The Charcoal Production Of An Area Under A Sustainable Licensing System - Whats Happening In Household Energy BP51 - Energy News From Practical Action BP51







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