Solar Home Systems: Offering credit and ensuring recovery.
Numerous studies have concluded that provision of credit would contribute to widespread deployment of SHS among populations otherwise deprived of the access to modern electricity services. Paradoxically, offering credit also represents a significant source of risk to the creditors, given the nature of the product and the specifics of the market. Pre-payment systems could offer a way out of this impasse and programme designers could do well to pay greater attention to the development, testing and deployment of such systems. Sunderasan Srinivasan, Solar Energy Society of India reports
Governments and utilities have, over the years, recognized the potential role for off-grid/ decentralized rural electrification, such as with photovoltaic (PV) solar home systems (SHS), as a complement to grid-extension programs. Yet, the use of PV systems for decentralized electrification has been peripheral to most long term plans. Barriers to large scale delivery of solar home systems include: (i) high initial technology costs; (ii) delivery infrastructure (supplier-dealer chains, service arrangements) which lacks the volume to achieve economies of scale; and (iii) lack of credit to system users (as a consequence of the high first cost of the system).
Policy makers have been generally concerned with bringing down the upfront costs and making the systems more affordable and have often recommended upfront capital subsidies towards that end. Martinot and Reiche (2000) have reviewed implementation experiences in six developing countries and discussed bundling of services provided with telecommunications and financial services to optimize service delivery. Martinot et. al (2001) have surveyed twelve World Bank / GEF supported SHS projects implemented between 1993 and 2000 and have concluded that for SHS to make a meaningful contribution to rural energy service delivery, widespread access to credit would be a vital pre-requisite. A report from the International Energy Agency (IEA, 2002) Task 9 on financing mechanisms for SHS lists the irregular income patterns and low savings potential in the rural areas combined with the fact that SHS are a "non-productive" application as barriers to extending credit. The report also discusses the paradox of having to provide financing mechanisms as a prerequisite to making SHS more affordable and for widespread dissemination of SHS despite the huge uncertainty associated with recovering periodic payments.
Increasingly, rural electrification projects have encouraged private sector participation almost as a panacea. The World Bank/GEF-supported Indonesia SHS Project is to support the delivery of 200,000 systems via the provision of (i) financing through participating banks to private dealers/suppliers of solar home systems who would, in turn, enable the purchase of the systems by rural households and commercial establishments on an installment plan basis; and (ii) a GEF grant distributed to dealers/suppliers on an installed-unit basis.
Independent of whether supplied by private players, the utility or by government agencies, two common modes of dissemination of SHS have been outright sale (often with third party credit) followed by contracted post-installation service and 'fee-for-service' where the consumers pay for the power supplied while the ownership of the system itself is not transferred. In either arrangement, periodic payments need to be collected from the consumers, and ensuring such payments holds the key to the provision of credit and consequently the large scale deployment of SHS.
The financing scheme needs to include all product and service costs as well as the costs associated with managing the credit program and recovering the periodic payments. Yet another World Bank study (Cabraal et. al. 1996) on best practices for PV household electrification recommends that PV programs must be operated as businesses and should ensure total cost recovery while affordability can be increased by providing households with term credit through local dealers or the banking system or by leasing or energy service company (ESCO) arrangements. Irrespective of whether credit is offered by system vendors, retailers, energy service providers or third party intermediaries such as micro-credit agencies, ensuring timely recovery remains the greatest challenge. The situation in the case of SHS is different from centralized power supply systems or telecom networks, where the service may be discontinued in the event of default.
The ability and willingness to pay
The credit problem could be broken down into two components, one being the end-user's ability to repay, while the other and more difficult to handle, being the willingness to pay. The ability of the consumer to pay for the system is central to the credit-worthiness assessment performed by the prospective lender. Building-in flexibility to match the payment patterns to the revenue cycles of the rural customers makes it convenient for them to fulfill their obligations promptly. For instance, salaried employees such as postmen and school teachers could pay monthly installments while agriculturists could pay their dues at harvest time. An insurance cover for the duration of credit with the lender listed as the beneficiary could serve to compensate for the system's theft or unintentional damage, and in event of the customer's death.
Sustaining the willingness to pay is a greater challenge. The customer is encouraged to pay when the technical performance of the system is satisfactory. Encouraged by the Grameen philosophy, group lending has been undertaken to create peer pressure on borrowers to remain current on their payments. Collateral security in the form of mortgage of land and building and saving certificates have been sought but only a small segment of the potential market would be in a position to satisfy these requirements. Cooperative and Rural Banks typically require that borrowers be existing members/customers of the bank with known revenue patterns. Repossession, refurbishment and resale of the PV equipment in case of default, is often an assurance offered by the vendor, to provide comfort to the creditor. Such repossession may not be very practical or feasible in rural areas owing to social pressures or due to restricted access to the customers' premises.
The collection mechanism
In some cases, the customers would be advised to deposit periodic payments at the nearest bank or post office. Failing which, the simplest collection mechanism is door-to-door collection, when the payments are due. This works well when the installations are sufficiently dense and the total amount collected during a single visit is significant. Often, the monthly installments for SHS are in the range of US$10-15, and collection costs per customer could prove prohibitive if not thus aggregated. The need therefore is for a credit mechanism which ensures prompt payments without adding substantially to the cost of collection or to the cost of the system itself.
About twenty 150Wp SHS using the EnerKey (Royer, 1998) technology were installed in the Kitcisakik or Great Lake Victoria community, North of Montreal. It is one of the early attempts to provide electric energy to this nomadic community alongside other consumer products. The EnerKey technology, using a special monetic device, permits the user to pre-pay for a small amount of electricity, as and when the consumer needs it. By permitting such pre-payment of electricity, the risk of not getting paid by the customer is minimized. A small coin-like device the 'key-button', purchased by the user at a local outlet, prepays for a set amount of energy and allows him to electronically "unlock" current from the box. The pilot test has been quite successful and apparently the device is being field tested in parts of Africa.
The integrated pre-payment billing system from Conergy is based on the technology of telephone cards. Customers acquire prepaid cards at local outlets which enables them to utilize the energy from the PV system. This pre-payment system has been installed in the Ovitoto pilot project in Namibia, where more than a hundred households pay as they use. In this context, the pre-payment system is used in a fee-for-service model but could easily be used for collecting installments for systems whose ownership is transferred to the end-users. The SunCash system from Total Energie has also been applied to other settings such as for controlling water being pumped. Pre-payment cards have been piloted for customers of a solar PV power plant on a West Bengal island, in India. (Times of India, 2003).
Eskom (WBCSD, 2004) the South African electricity utility has extended the concept to conventional electricity as well. Eskom is an integrated service provider, generating, transmitting and distributing electricity in South Africa. In 1989 Eskom launched the "electrification for all by 2001" drive with the intention of bringing electricity to the large numbers of domestic consumers that did not have access to electricity. In order to be able to continue without major changes in staffing levels, and to avoid the hassles associated with connection and disconnection of supply, to minimize the possibility of payment default, and to circumvent other administrative constraints, Eskom developed the pre-payment system comprising pre-payment meters, vending machines to accept payments and dispense appropriate cards, and data collection tools. This technology is now extended to off-grid solar systems, (Conlog, 2004). The added advantage in this context being that the pre-paying customer does not encounter the risk of delivery default by the utility. The electric circuit is completed with the confirmation of payment and the system delivers electric energy equivalent to the payment. In all, two million prepayment meters have been deployed in the field, by far among the largest installed base in the world.
Discussion
Evidently, the solution to widespread implementation of SHS lies in imparting the characteristics of a network to stand-alone systems. While this appears like an anti-thesis, it is, simultaneously, essential to preserve the modularity and flexibility of stand alone PV systems, which have thus far justified their promotion. Study after study recommends lowering of upfront costs and provision of credit and yet a foolproof mechanism to ensure periodic payments is yet to be clearly defined. While social networks and peer pressure have had limited success, collateral security is not available with most potential consumers, and repossession of the system in the event of default remains in doubt, creditors need something far more reliable to take the next step. Just as prepaid cards for mobile telephones have eliminated the risk of default and thus the need for credit assessments, pre-payment systems could enhance comfort levels among bankers and thus could lead to the projected growth of the market. While this is not an exhaustive listing, it illustrates the point that there are several vendors with such pre-payment technology but field experience is limited and confidence levels not particularly high.
The technology thus developed needs to be robust, not adding to the cost of the system itself and be user-friendly. As with other applications, mainstreaming and ensuring affordability requires a critical mass of installations and professional service delivery. Also crucial is ensuring that the system is tamper proof and that electric energy cannot be drawn without making the payment. Existing infrastructures such as the post office network or even periodic fairs and market gatherings could be used to dispense the cards or codes.
Conclusion
Many thousands of people around the world now have the opportunity to receive electricity for the first time in their lives through SHS. Pre-payment eliminates the risk of default and thus should encourage banks and cooperatives to extend credit and contribute to rapid market growth. Progressively, with the increased production of such pre-payment systems, their unit costs would also reach affordable levels and their direct and indirect benefits would far exceed such costs. Program managers could provide for technology development, testing and deployment of such systems which would in-turn unlock credit for the SHS from mainstream sources, and represent a much better yield per subsidy Dollar.
Bibliography
Cabraal, Anil; Davies, Mac Cosgrove and Schaeffer, Loretta, "Best Practices for Photovoltaic Household Electrification Programs: Lessons From Experiences in Selected Countries", (1996), The World Bank, Washington D.C., USA. http://www.worldbank.org/astae/pvpdf/cover.htm
Conergy, 2004. website
Conlog, 2004. http://www.conlog.co.za/
IEA PVPS, "Financing Mechanisms for Solar Home Systems in Developing Countries: The Role of Financing in the Dissemination Process", International Energy Agency, September 2002.
Martinot, Eric and Reiche, Kilian "Regulatory Approaches to Rural Electrification and Renewable Energy: Case Studies from Six Developing Countries", Working paper, World Bank, Washington, DC, June 2000.
Martinot, Eric, Cabraal, Anil and Mathur, S., "World Bank / GEF Solar Home Systems Projects: Experiences and Lessons Learned 1993 - 2000", Renewable & Sustainable Energy Reviews 5(1): 39 - 57 (2001).
Royer, Jimmy (1998), Solenar Inc, Canada. http://www.clic.net/~solener/eng/index.htm
WBCSD, "Case Study, 2004: Eskom: Electrification for All", World Business Council for Sustainable Development.
World Bank, Indonesia: Website
Times of India, The, "Pre-paid cards to curb power theft", 11, March, 2003
About the author
Sunderasan Srinivasan is a Life Member of the Solar Energy Society of India and has been the Dy. Country Manager of the Photovoltaic Market Transformation Initiative (PVMTI) and an Investment Officer with the Solar Development Group (SDG) and with the Triodos Renewable Energy for Development Fund (TREDF), managing the South Asian portfolio. Contact: Tel: +43 1 4277 37408; Fax: +43 1 4277 37498; Sunderasan@yahoo.com
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