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Source: Miller and Hope (2000), p90

Source: Miller and Hope (2000), p90

of charge. The only ongoing costs of running a solar system are battery changes every 3-5 years and possibly new electronic components (for example the charge controller or inverter) every 5-10 years. The bottom line, however, is that compared to a diesel generator or kerosene lantern, where the up-front costs are low and the running costs relatively high, in the case of solar 75 per cent of the lifetime costs are paid at the time of purchase.37

This cost structure of solar would not be such an issue if unelectrified households in emerging markets had the same purchasing power as households in Organisation for Economic Co-operation and Development (OECD) countries. If your average income is US$40,000, for instance, then affording a $600 solar system with four or five lights is not an issue. But at the risk of stating the obvious, the average customer in rural areas of emerging markets does not have this kind of purchasing power. For the typical farmer in Sri Lanka, for instance, who has 2-4 acres of land and who manages to harvest two crops per year, buying a $600 solar system typically entails 20-30 per cent of his or her annual income. The system will pay for itself in just four years compared to kerosene and battery charging,38 but these up-front costs are nevertheless high relative to annual incomes.

Thus, it is not surprising that solar systems first found rapid uptake in pockets of relative affluence. Take Kenya, for example, where the average income of a solar customer was estimated in the mid 1990s to be US$2800 -three times the mean household income in Kenya at the time.39 And a similar pattern has been reported in other emerging markets, such as the Dominican Republic.40

Such affluence is often clustered in geographic pockets of fertile land and cash crops. In Kenya, for example, it was found that 'the rapid growth in sales has occurred because of the relatively prosperous and sophisticated rural middle class in the densely populated and fertile highlands of the country'.41 Similarly, professionals such as doctors, nurses, professors and teachers were found to be early adopters of solar in emerging markets because they had enough disposable income to purchase a solar system outright on a cash basis.42 But how many people in rural areas could afford to pay outright? The most generous estimate was that 15 per cent of the rural unelectrified households in the world were able to pay on cash terms.43 The more conservative figure was that only 5 per cent had this kind of purchasing power.44 On this basis, analysts tended to conclude that the 'lack of relatively large cash sums required for the purchase of PV installations is the most significant obstacle to their wider use by rural families'.45

If we think back to the development perspective described in Chapter 2, we recall that a technology that is more 'divisible' will tend to diffuse more easily, because its costs can be broken down into more affordable (bite-size) amounts. But a technology like solar cannot easily be broken up and sold in smaller bits (without compromising the functioning of the system).46 In such situations, consumer finance becomes essential for rural households to manage the up-front costs:

Institutional arrangements have helped to introduce new technologies (even those that are perceived as expensive as solar photovoltaic power) into rural settings. The key feature is an arrangement that allows the high initial cost of the technology to be converted to an operating cost, thereby enabling modest payments from households.47

Most people assume that the cost of solar technology has been the key barrier to its diffusion, however, analysts in the 1990s were coming to very a different conclusion - that while the cost of solar technology was typically:

deplored by all as the main impediment to acceptance, no lowering of prices ever yielded a corresponding increase in physical turnover. ... [T]he minimization of costs therefore is (currently) not a proven instrument of dissemination.48

This view was supported at the same time by analysts at the World Bank, who concluded that:

Even with ... cost reductions, unless adequate financing arrangements, geared to low- and middle-income households, are in place, solar home systems cannot play a significant role in rural electrification.49

To test this conclusion, we can take an absurd example. Imagine for a moment that instead of $4.5 per watt, the cost of a solar module had fallen so steeply that by the mid 1990s, a 50-watt panel cost only 1 US cent - effectively nothing. What would have been the effect on diffusion? The answer is not that much. Because the solar module then represented only 35-40 per cent of the average retail price of a system, the price of a 50-watt system with four or five lights would still have been US$400. And at US$400, this would still have been more than 50 per cent of the mean income in Kenya, for example. Thus to make the product more affordable to the majority of customers would still have required consumer finance.50

Of course, many emerging markets have a rural banking infrastructure. It's just that very few, if any, finance institutions came forward in the 1990s to lend for solar. The product was still new, the firms selling it were small and new, and the banks were reluctant to lend for a product that was not seen to provide an income stream (like a tractor or a water pump).51 So there was little, if any, consumer finance for solar.

To illustrate the impact on diffusion, analysts offered the following comparison to the automobile:

In the case of the car purchase, a well-established financial infrastructure links customers to manufacturers to capital markets, and a wide array of financing choices is available from banks, leasing companies and dealers. . Imagine the negative effects on the automobile industry if every customer had to pay the full cash price. And imagine the positive effects on the SHS industry if the same financing options available to car purchasers were available to solar home system buyers.52

Returning to our perspectives on innovation diffusion, we can see why the development perspective emphasized the role of finance. Even though solar as an innovation was already cost-competitive with the alternatives in unelectri-fied markets, its diffusion in the 1990s was hampered by the absence of consumer finance. That said, it was not the lack of finance alone that held back solar diffusion. The market infrastructure was also missing.

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