Approximately seven in ten rural households are still without access to electricity in India. These households continue to rely on less efficient and polluting energy sources, typically kerosene, to the detriment of their social and economic development as well as the environment. In Karnataka, even when grid electricity is available, problems of capacity shortages and inconsistent quality plague the power supply. This has led households to look to alternative power supply systems such as solar PV, inverters and diesel generators. Despite high initial costs, Solar Home Systems (SHS) emerge as an attractive option in the context of costly or unreliable alternatives and escalating grid power tariffs, and therefore a growing number of households are turning to SHS as a matter of necessity and convenience.
An initial barrier to this growth was the lack of wide spread service infrastructure for PV products and systems. This issue began to be addressed in the latter 1990s with the establishment of the first true solar rural electrification companies having extended service infrastructures in rural areas that allow them to act as mini-utilities.
With decentralized services starting to become available in rural and peri-urban areas, accessibility becomes less a question of location and more one of affordability. Only a small percentage of rural households and entrepreneurs can purchase solar systems on a cash basis. The rest need some access to credit that allows them to shift their existing energy expenditures into regular loan payments.
A survey of stakeholders revealed that there is a strong demand for Solar Home Systems (SHS) but that lack of availability of credit is a major barrier to meeting this demand. Banks do not yet have enough confidence in the technology to include SHSs in their standard lending portfolio. The survey indicated the need for a scheme to help banks begin providing consumer access to credit.
This inititiave has established, in partnership with the two Indian banking groups Canara Bank and Syndicate Bank, two loan programmes for solar home systems that use UN and Shell foundation Resources to buy down the initial financing costs of lending to this sector. The purpose is to establish this as one of the standard products in the lending portfolio of financial institutions.
The loans are accesible to customers of established solar rural electrification companies. The effort targets the electrification of twenty thousand homes and small businesses. This impact will increase as rural finance institutions build confidence and begin to increase retail and commercial lending to the solar energy sector. In the long-term, this will help bring modern and reliable electricity services to Indian households and enterprises in an environmentally sustainable manner.
A free market approach to market development
A number of market catalyst models were considered during project preparation, including providing capital cost subsidies to solar vendors, end-user subsidies directly to customers, or financing subsidies through one or two partner banks.
It was determined that direct links with vendors or customers was not needed or cost-effective and that working through the banks would be the most effective approach.
Since a number of experienced solar rural electrification companies already existed in Karnataka, it could be distorting to the market to choose, or tender for one vendor over the others. Furthermore, working with a single vendor would require the use of narrowly defined and monitored system specifications to ensure that the 'chosen' vendor actually delivered a quality product. This heavily regulated approach could restrict the vendor/customer relationship, leaving little room for the vendors to innovate in product/service offering and for consumers to choose their system most appropriate for their needs and budgets.
The market catalyst model that was assesed to be the most promising for South India was a finance subsidy (i.e. an interest rate buy-down) provided through two banks and multiple established vendors. The customer can therefore choose to purchase a SHS from one of a number of qualified vendors, and to finance the system from a branch of either Syndicate or Canara bank.
The 'two bank - multi vendor' approach is the most free-market oriented, making use of competitive forces to ensure quality products, competitive pricing and reliable after-sales support.