Solar Energy Perspectives - IEA

Solar Energy Perspectives: Policies
dimension for all solar technologies, which have high up-front investment costs but low
running costs.
Policy makers need to address all these issues. Apart from the policy considerations in earlier
chapters of this publication, various aspects were also considered in the IEA Technology
Roadmaps on solar PV and CSP (IEA, 2010c; IEA, 2010d), and more will be looked at in the
forthcoming IEA Technology Roadmap for solar heating and cooling.
Financing off-grid solar electrification
Small-scale solar electricity systems, most often PV, can bring considerable benefit to
“base of the pyramid” consumers, i.e. the poor in poor countries. These people earn
very small amounts of money on an irregular basis, and spend significant shares of it
on dry batteries, kerosene and other energy products. According to some estimates,
in rural areas those earning USD 1.25 per day may spend as much as USD 0.40 per
day for energy.
Solar electricity is actually competitive, but up-front costs, ranging from USD 30 for
pico PV systems to USD 75 000 for village mini-grids are usually too high. The
financing dimension of solar energy deployment is perhaps most acute in this case.
Access to finance to support the high up-front investment costs of solar systems for
rural electrification is scarce. Transactions costs are very high due to the disaggregated
nature of the projects. The risks for potential third-party investors are high, especially
given that financial institutions have little experience on rural electrification projects,
and are not compensated by high rates of return. The main risks are:
• commercial risks: overall uncertainty, very low experience and lack of specific
information on the present state of the market make it hard to plan and deal with
the future;
• customer behaviour: fraud, default on the payment of bills;
• operating risks: credit risk (default or protracted default on payment from end-user);
• economic risks: inflation risk (affecting end-user’s ability to pay), exchange rate
risk (affecting the distributor’s ability to correctly bill the end-user); and
• political risks: lack of political stability will affect the long-term assessment of
policies to support rural electrification projects and the trustworthiness of
investment contracts with states that might default on payments.
The key issue is for public authorities to develop and promote a clear political
support scheme to leverage the private sector and allow the development of a safe
business environment for the dissemination of solar systems and mini-grid installations.
Once the risk is alleviated, equity funds and debt financers from commercial banks
and private funds can be tapped in decentralised rural electrification projects.
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Two distinct business models can then be put in place, the retail model and the
energy service model.
© OECD/IEA, 2011