If There Is No Rural Finance Target Smaller System Sales Instead

Financing solar remains the ideal, because it allows customers to buy bigger systems that meet more of their energy needs. Finance takes a bigger solar system, and breaks it into smaller, more affordable chunks, paid for over time. It's a bit like buying a bigger house in a better location with a mortgage, rather than buying a house on a cash basis and living in something very small and far away from the action.

But there are some emerging markets where it would appear that no banks or MFIs are willing to finance solar. In such cases the trick for the policymaker is to make the product more affordable by making the product offering smaller. This is not always ideal from the customer's point of view, because they would always prefer a larger system that can provide more power for lights, radio and possibly a television. But in the end, a policymaker wants to ensure that unelectrified households receive, at a minimum, a modicum of light.

As we have seen, Kenya received a good deal of donor support to kick-start solar diffusion. Although a lot of the donor programmes left systems without adequate after-sales maintenance, meaning they consequently failed, they also served to train many local technicians and would-be entrepreneurs in the technology. When the donor funding dried up, these individuals went on to work for and establish their own companies to sell and install solar on a commercial basis.41

By the end of the 1990s, there were said to be ten solar module distributors, and at least five companies manufacturing the other components in the system.42 In many parts of Kenya customers could now find shops stocking components of solar systems, and many live demonstrations of solar systems in market towns. Despite the lack of finance from banks or microfinance institutions, this strong market infrastructure led to between 120,000 and 150,000 solar systems installed by 1999. Furthermore, annual sales were estimated at 15,000-25,000 systems per annum in 1999, with estimated growth rates of between 10 and 25 per cent per annum in the 1990s.43

In terms of the amount people paid, historically the prices in Kenya have been some of the highest in the global market for solar systems - as high as US$26 per watt in the mid 1990s, roughly twice the price in Sri Lanka. So it is not surprising that customers in Kenya would have preferred a finance option. For example, when offered a trial scheme of 25 per cent down payment and 12-18.5 per cent interest over just two years, rural customers still gladly signed up. The conclusion of the scheme was that:

The desire to have access to electricity is so deeply rooted that households that have a chance to obtain a loan to acquire a solar electric system will do so.44

Recently there has been some talk of commercial banks in Kenya entering the loan market for solar. But historically, customers in Kenya have had to fend for themselves. Some dealers offered some credit schemes or lay-away plans, but by and large, it has been a cash market.

So in this situation, customers cut corners to make solar affordable. The vast majority of systems sold in Kenya have been the small 10-20-watt variety, enough for one or two lights and maybe a little bit of radio. Often customers bought these systems gradually, component by component; installed them themselves and did not invest in a charge controller to help them regulate the flows to and from the battery. Moreover, with smaller systems and little or no servicing, many customers experienced failure in their system. So in what way does the Kenyan example provide us with a model for policymakers of any kind?

Kenya actually served as a model to many policymakers in South Africa of how they did not want to do things, which is ironic, because if they had followed this model, diffusion would have been better off. What Kenya demonstrates is that when faced with a situation of no finance, customers are willing to pay commercial prices on a cash basis for small systems. This is something powerful that a policymaker can build upon, rather than tearing it down by putting in place a fee-for-service programme.

How would a policymaker build upon such a market? First of all, as per our earlier discussions, a grant per unit installed could be offered to the sellers of solar systems. This would catalyse the industry to push out, build its rural market infrastructure and sell more. With increased competition and awareness of the programme, the sellers would inevitably be forced to pass on more and more of the grant to the customer over time. And with a grant now in place, policymakers would gain some leverage over the firms selling solar in terms of quality of components and service delivered. This is precisely what the World Bank did in its China project.

We saw in Chapter 6 that the World Bank's project in China was not able to put a line of credit to work for solar. This is not surprising, as there was, and remains, little in the way of rural banking or a microfinance tradition in China. But in this respect the solar market in China was already ahead of the World Bank.

Like Kenya, those selling solar had already accommodated for the fact that there was no finance, and were selling small 10-, 20- and 30-watt solar systems with one or two lights. Indeed this market infrastructure was already quite developed in the northwest provinces and autonomous regions of Qinghai, Tibet, Inner Mongolia, Xinjiang and Gansu, as well as in Sichuan and Xining. For instance, in Xining you will find a street lined with solar shops, all selling very different types of small solar systems. So, in the absence of any viable finance route, the World Bank focused on using its grant per unit installed (determined by the watts in the system) to accelerate and excite the market, and to build in higher quality standards.

The Chinese Government also built upon the approach of selling smaller systems in the absence of credit. They took the position that they wanted to heavily subsidize the sale of these smaller systems in certain provinces to reach unprecedented levels of market penetration. The name of the overall umbrella programme this approach fell under was the 'Brightness Programme', designed to bring electricity to 23 million people in the western provinces estimated to be without electricity. 45An example of a project that fell under this initiative was the 'Silk Road Project', implemented by Shell Solar and a local Chinese partner and supported by a 14 million euro grant from The Netherlands. The aim of the project was to sell and install 78,770 solar systems of 25 watts and two lights among a mainly semi-nomadic population of 300,000 unelectrified households in Xinjiang. This was a tall order - attempting to reach 25 per cent market penetration. To do it, the Chinese Government decided to apply extra subsidies.

A typical two-light solar system at this time, without subsidy, cost RMB2000 (roughly US$250 at the time of the project). The Dutch subsidy helped to reduce the price by 60 per cent of its normal level - to RMB800-900 (US$100-110). Then further provincial government grants (from the Xinjiang Government) meant customers were receiving systems for as little as RMB100-200 (roughly US$20-30). Furthermore, the project could rely on local government office support to sometimes buy the systems on behalf of the population, and then collect the money from the rural customer base.

The project was ultimately successful in meeting its highly ambitious sales targets. This was no small achievement, and 25 per cent of the unelectrified population in Xinjiang now have a solar system for some modicum of more convenient light. Moreover, the target was achieved with far less subsidy than was used in, say, the case of South Africa. Even if you assume the Government bore the full cost of a RMB2000 system, that is still only US$250 per system -half as much subsidy as the grant in South Africa - and diffusion was more than twice as fast.

Figure 7.14 Mobile solar system for semi-nomadic family, returning to valley for the winter

Figure 7.14 Mobile solar system for semi-nomadic family, returning to valley for the winter

Figure 7.15 Mobile solar system for semi-nomadic family, in the highlands during spring

Figure 7.15 Mobile solar system for semi-nomadic family, in the highlands during spring

Figure 7.16 Family in China using solar system for home that also serves as village shop

The only criticism that should be made of the way things were done in Xinjiang is that a policymaker should ensure that such a grant is available to all local players. Unlike the Silk Road Project, where the grant was only available to the local Chinese player, it needs to be available to all to encourage competition both in the use of the grant and in developing a quality product and service.

Figure 7.18 Typical retail site for solar systems in China

Under a programme of heavily subsidizing smaller solar systems, a policymaker cannot ensure that customers have enough power to run a TV, for instance. But they do have enough for the essentials - light. The next trick is to assure that a customer is receiving a high-quality product and after-sales service.

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