Financing Models for Solar Home Systems

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Photovoltaic (PV) has considerable potential to contribute to meeting the energy needs of rural and remote communities in developing countries. Solar home systems (SHS) have been implemented both in donor supported programmes and projects as well as through market initiatives world-wide. However, in many cases a sustainable PV market has not developed.

Critical Factors for Success

A successful SHS programme must take the following issues into account:

1. Policy: governmental policy, taxes and tolls, standards and certifications
2. Technology: technology-costs, technical skills of the staff
3. Marketing: setup of a rural (after-sale-) service, entrepreneurial skills of the staff
4. Finance: availability of affordable small loans and refinancing credits for enterprises and MFIs
5. Awareness: publicity of the technology, confidence at the product and service, status value of the technology (is it a status symbol or not?)

The high initial investment and the high costs of operation and maintenance (e.g. the battery) of PV result in a small market for any entrepreneur. Other factors include the lack of clear ownership of the technology and the ultimate failure of the PV system with consequent rejection of the technology.
There are a number of innovative PV implementation models that have been developed and used in order to encourage the widespread affordability and acceptance of PV. These range from direct sales of SHS to charging a fee for the electricity service from a solar home system


For the dissemination of SHS three different approaches are considered, from direct sales, credit sales and hire purchase to a fee-for-service model.

Model 1: Cash Sales: A PV system is sold directly or via a dealer to the end-user. The end user immediately becomes owner of the system.

Model 2: Credit Sales: The end-user acquires the PV system on credit. Credit sales are divided into three categories:

  • 2A Dealer Credit (One hand model): The PV supplier/dealer sells the PV system to the end-user, who enters into a credit arrangement with the PV dealer. Depending on the arrangements, the end-user immediately becomes the owner of the system, or becomes the owner when all payments are made.
  • 2B End-user Credit (Two hand model): The PV supplier/dealer sells the PV system to the end-user, who obtains consumer credit from a third party credit institution. Usually the end-user becomes the owner of the system immediately, but this can be delayed until all payments are made. The PV system can be used as collateral against the loan.
  • 2C Lease / Hire purchase (either One hand model or Two hand model): The PV supplier/dealer or a financial intermediary leases the PV system to the end-user: At the end of the lease period, ownership may or may not be transferred to the end-user, depending on the arrangements. During the lease period, the lessor remains owner of the system and is responsible for its maintenance and repair -- besides.

Model 3: Fee for service: An energy service company (ESCO) owns the system, and provides an energy service to the end-user, who pays a periodic fee (e.g., monthly) to the ESCO. The end-user is not responsible for the maintenance of the system and never becomes the owner.

Cash Sales

This is the simplest implementation model: a PV supplier distributes PV systems directly or through a dealer network to the end-users, who usually, but not necessarily, do the installation themselves. The end-users pay in cash for their system and either take it away or arrange delivery. No other actors are directly involved, although, of course, a conducive environment can be created through government policies. The operation and maintenance of the system is the responsibility of the end-user.

In some cases the installation can be carried out by the dealers, who would then require a network of installers. In practice, installation and maintenance or after-sales service usually form no part of the deal; however, for the long-term sustainability and a reliable image of the supplier, it should be a matter for consideration – as it is in the case of household appliances such as refrigerators. Where the equipment has a warranty on its technical performance, the dealer should honour the warranty, separate from any after-sales agreement, but enforcement of this can be difficult.

This model is most prone to the ‘initial investment barrier’, resulting in a small market for the wealthiest of the “rural poor”. It also tends to encourage the sale of smaller products such as solar lanterns or cheaper, low-quality SHS.

Credit Sales

Dealer Credit (One hand model)

To reduce the high initial investment barrier for the end-user - the main disadvantage of the cash sales model - a company selling PV systems may consider starting a consumer credit or installment payment facility. The PV company still supplies hardware to the rural clients, via a dealer network or directly, but the client is able to pay in installments. The payments can be monthly or adapted to income cycles. Usually these kinds of end-user credit are characterized by relatively short terms (mostly between 6 months and one year), high down payments (up to 50 %) and high interest rates (rates of 20 % to 25 % are not uncommon). However, these credit systems can be popular because the extra amount spent on the credit facility is relatively low.

Generally the PV supplier / dealer does not have the working capital required to offer credit to the end-user. Therefore, they must approach a funding source or credit provider to access credit (dealer re-finance). This results in the high interest rates common with the dealer credit model.

The ownership of the system is transferred either when the down payment is paid or when the credit is repaid. Normally, the end-user is responsible for the maintenance of the system, although in some cases it can be carried out by the dealer. The PV module(s) acts as collateral during the credit / installment period as the balance-of-system (BOS) components are usually covered by the down payment.

End-user Credit (Two hand model)

In general terms, this model is the same as the dealer credit model; only the division of roles between the stakeholders is different. In this case, the credit scheme is implemented by a separate credit organisation - preferably one with rural outlets and experience with rural credit - that lends directly to the end-users. This means that the PV company / dealer is not directly involved in the credit scheme and that valuable working capital remains available for the company / dealer.

The PV company remains responsible for the sales, distribution and installation of the PV system. The end-user usually pays a down-payment (either directly to the company or to the credit institution), and the remaining payments are collected by the credit institution. The credit institution usually takes responsibility for the loan and pays the complete price to the PV company (for the company it is like a cash sale). The end-user is the owner of the system and responsible for maintenance and repair, although most credit institutes will state in their credit terms that they remain owner till the last payment is made.

Lease / Hire Purchase

This model can be referred to as either lease or hire-purchase. Although there is a legal distinction between the two options, there are no real differences in their implementation. In this section, the term hire-purchase is used.

Again, this model shows many similarities with the user credit model. In this case, either the PV company or an intermediate financial institution offers the PV system on a hire-purchase basis. In both cases, the client (lessee) pays a regular fee for a limited period (typically 2 or 3 years). The company (lessor) remains owner of the system during the rental or lease term, and at the end of the term, the ownership is transferred to the lessee (with leasing, this is not obligatory; with hire-purchase it is). The installation and after-sales service is carried out by the PV company.


In the fee-for-service or fee-for-energy model, an energy company invests in PV hardware - usually decentralised individual systems on individual houses (solar home systems) - and starts selling an energy service for a fee. The energy service company (ESCO) remains the owner of the hardware and is responsible for installation, maintenance, repair, and replacement of the PV system and, in some cases, its components (controllers, batteries) at the end of their lifetime. The end-user pays a connection fee and a regular fee - usually monthly, though a fee per kWh is also possible. The end-user pays as long as the energy service is delivered and never becomes the owner of the system. However, the end-user usually owns the wiring, lamps, and appliances, which are covered by the connection fee. In some cases the end-user will also own the battery and charge controller.

Financing requirements to establish such a model are substantial. By selling energy for a reasonable price, it takes between 5 years and 10 years before the initial investment is recovered by the ESCO. This means that the ESCO must be creditworthy and willing to take such investment risks. A financial institution (bank, credit provider) can be involved to share the risk.

Several organisation such as Sunlabob and Stiftung Solarenergie are using fee-for-service approaches in the field of solar energy.

Advantages, Disadvantages and Risks

Model Advantages Disadvantages Risks
Cash Sales
  • Minimal number of stakeholders
  • Lowest transaction cost
  • Potentially the lowest demand for capital for the PV company
  • Initial implementation can be fast as local infrastructure for installation, maintenance, and after-sales services can be built as sales increase
  • No need for explicit government or programme support
  • Limited market as a result of the high up-front investment needed
  • Often no control on how the systems are installed
  • Low quality components and installation standards
  • Often minimal end-user training and therefore lack of on-going maintenance
  • Competition with cheap, low quality products is a problem
  • The market may be geographically limited by the installer infrastructure if the dealer installs the system
  • No risks for the PV company and dealers beyond the warranty and this is frequently difficult to enforce
  • Risk lies with the end-user
Dealer Credit
  • For the end-user, the main barrier of the high initial investment is lowered
  • In most cases, one institution handles both the financial and the technical work
  • In many countries formal or informal credits are widespread and understood
  • Little government or other external involvement is required
  • The payment facility scheme absorbs working capital for the PV supplier / dealer
  • High interest rates due to expensive capital through dealer re-finance
  • Lack of knowledge of consumer credit with the end-users in some countries
  • Excludes the poorest households due to high down payments and installments, and a credit track record is often required
  • PV companies are usually not experienced / equipped / capable of administering a credit scheme, as this requires extra skills and is time consuming
  • Depending on the credit provider, this model may be geographically restricted because of the extensive infrastructure needed for the collection of the payments and possible retrieval of the collateral
  • The main risk lies with the PV company / dealer from non-payment of the credit from the end-user. This can be mitigated by using the PV module as collateral, with retrieval of the module on non-payment
  • The dealer re-finance funding source / credit institution carries the risk of non-payment of credit from the dealer. The credit institutions will mitigate their risk by requiring detailed business plans and personal warranties from the dealers
  • The risk to the end-user is the loss of the PV system and down payment, if they are unable to keep up credit repayments.
End-user Credit
  • The main barrier of the high initial investment is lowered or removed
  • The PV company does not need to allocate budget to run the credit scheme, thereby avoiding financial risks and allowing it to concentrate on sales and after-sales services
  • The credit institutions - if available - are much better equipped to manage a credit scheme
  • The rural network of the credit institution may also be used for promotion and extension work
  • Little government or other external involvement required
  • This model is geographically restricted because of the infrastructure needed for the collection of the payments and possible retrieval of the collateral
  • Two separate structures may be needed to handle the financial and the technical work, resulting in additional costs, although it is possible for one structure to handle both financial and technical work
  • High interest rates and down-payments. In some cases the credit institutions have been supported by donors or government programmes to keep interest rates low. These credit schemes are characterised by more favourable terms than commercial consumer credits
  • The market is restricted to customers that the credit institution deems creditworthy – generally those with salaried incomes, those with a guarantor or those who have the required collateral
  • The majority of the risk is carried by the credit organisation from the non-payment of the credit repayments. This is mitigated through the use of the PV module as collateral;
  • The PV company / dealer risks are passed to the credit institution;
  • The end-user risks losing their PV system and their down payment if they are unable to keep up their repayments
Lease / Hire purchase
  • The main barrier of the high initial investment is removed, more so than with the other credit models, as the initial down payment is further reduced and the repayment period is prolonged. In general, the payment system can also be designed to fit the income cycle of the client.
  • One single structure can handle both the financial and the technical work: the fee collection as well as the maintenance, training, and other after-sales services
  • Maintenance can be kept at a high standard because of the professional care for the system
  • Good-quality products are selected because of the long repayment period
  • Leasing is not a well-known concept in most countries although hire / purchase is known in some
  • End-users may not treat the systems with care, as initially the maintenance and ownership do not lie with them
  • The hire-purchase model absorbs a lot of working capital
  • PV companies are usually not equipped / capable to run a hire-purchase programme as it requires additional financial administration skills and can be time consuming
  • This model can be geographically restrictive because of the extensive infrastructure needed for the collection of the payments and the maintenance and repair of the systems.
  • The hire-purchase provider takes the majority of the risk. However, if the end-user stops repayments, the hire-purchase provider owns the system and can retrieve it
Fee for service
  • End-user does not have to invest in a solar system (only connection fee), thereby facilitating access to electricity to more people
  • End-user is not responsible for maintenance and repair. By organising this centrally, the costs for maintenance and repair are lowered while high quality maintenance can be provided
  • High-quality systems, components and installation are encouraged because of the inevitable long-term agreements
  • Proper collection and recycling of components (e.g. batteries) is possible because of the centralised responsibility;
  • High risks and high transaction costs result in high monthly fees and reduce affordability for poor households
  • Low rate of return, long payback period, high financial risks
  • The end-user is not the owner of the system and may therefore not treat the system as carefully as they would otherwise.
  • As ‘serious’ companies like ESCOs or utilities provide the service, end-user expectations are often high, while the system may run out of energy under certain circumstances, even though the client paid a monthly fee. This may cause disappointment
  • The client is usually not allowed to miss a monthly payment (as is possible with the alternatives like kerosene and batteries)
  • Monthly collection of the fees is time consuming and expensive. Prepayment systems are an alternative. Also successful examples of sub-contracting fee collection to the local community exist
  • This model is geographically restricted because of the extensive infrastructure needed for the collection of the payments and the maintenance and repair of the systems.
  • The ESCO carries all the risk as owners of the systems and for collecting the fees
  • The credit institution providing the finance to the ESCO takes the risk on the success of the ESCO

For more information about SHS subsidies click here.

Further Information

The purpose of this Handbook is to introduce financial and development professionals to clean energy technologies, enterprises and the issues involved in assisting or evaluating such enterprises.

Experiences with sales models and service models, examples of micro-finance programmes, case studies