Financing Models for Solar Home Systems
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.
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.
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
|Lease / Hire purchase
|Fee for service
For more information about SHS subsidies click here.
- Report: Solar Development Capital: Lessons Learned in Financing Solar Home Systems IFC 2007
- Handbook for Financial and Development Professionals by AREED UNEP 2001
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.
- Financing Mechanisms for Solar Home Systems in Developing Countries: by IEA PVPS
- Innovative Business Models and Financing Mechanisms for PV Deployment in Emerging Regions: by IEA PVPS
Experiences with sales models and service models, examples of micro-finance programmes, case studies
- Solar portal on energypedia
- Examples of Legal Texts and Regulations to Lift Import Duties for PV Products
- International Energy Agency, PVPS: Summary of Models for the Implementation of Photovoltaic Solar Home Systems in Developing Countries, Part 1: Summary, 2003.