Innovative Solar Power Financing in Rural India

By Samyukta Balsubramani —

Bundei Hidreka, 31, (left) is sharing her electrical engineering skills with Rohim Miniaka, 20, teaching him how to make a solar lamp in Tinginaput, India. Source: DFID - UK Department for International Development's flickr photostream, used under a creative commons license.

Bundei Hidreka, 31, (left) is sharing her electrical engineering skills with Rohim Miniaka, 20, teaching him how to make a solar lamp in Tinginaput, India. Source: DFID – UK Department for International Development’s flickr photostream, used under a creative commons license.

India is one of the world’s fastest developers of solar energy and will be the largest driver of solar power expansion over the next 25 years. Moreover, there has been a rapid decline in the price of solar power, falling by nearly 75 percent, to a mere 6 cents per kilowatt-hour. While India faces massive challenges in meeting its broader electric power sector needs, there is one niche area where solar power could make a difference. Innovative financing mechanisms for sustained solar power provision could spur significant progress in rural electrification.

In India’s urban areas, which largely fall within the coverage area of power grids, consumers have greater access to cheaper, conventional sources of electricity. Because of this, the financial viability of setting up a new solar plant is uncertain.

Rural areas, however, present an opportunity to capitalize on solar power. Rural areas are typically treated by state electricity utilities as agricultural users. Electricity rates for agriculture tend to be particularly low; hence, when states face an electricity availability crunch, rural areas are the first to experience “load-shedding.” Because of this, even the rural residents that are technically connected to the grid are, in practice, virtually off the grid and remain reliant on alternative fuels for home use.

As of 2012, over 20 percent of the total Indian population had no access to any form of electricity. Small-scale solar power models offer channels to lower the developmental disparity between residents with access to grid-based power and residents with access to no power at all.

This makes rural India a great place to start distributing solar power, whether through home solar kits or solar-powered mini grids. But deploying solar power in India’s underserved rural areas presents a monumental policy challenge and opportunity. Although data suggests that solar power is a highly cost-effective energy solution when amortized over time, its uptake in rural India has remained slow. Solar power has only penetrated to 4-5 percent of off-grid households. Alternative sources of energy like kerosene and cow dung continue to dominate.

One explanation for the low penetration of solar is that in rural India, the upfront cost of any kind of solar technology often acts as a barrier to entry to using solar power. A basic household solar power kit of 20 watt peak capacity (kit capacities range from 20 watt peak to 130 watt peak) costs $140 – a prohibitive amount for most rural households, 75 percent of which have a primary wage-earner who earns less than 75 dollars a month. Even a solar lantern, with a 2-3 year lifespan, has an upfront cost of $18. This lump sum payment can account for a sizeable chunk of monthly income for several wage earners.

India will need innovative financing models that suit the needs of rural residents if it is to further its progress in rural electrification. Individual loans, (where consumers borrow money to pay for panels and repay in installments) are high-risk for lenders, because many Indians still lack collateral or credit history. Nearly 40 percent of the bank accounts opened under the government’s financial inclusion drive still have a zero credit balance. Only 56 percent of Indian households own land; a bank is unlikely to lend money with no collateral.

The most promising models offer a choice between a public-private partnership, in which consumers receive low-interest loans to enable them to buy the panels, and a private sector approach, in which they pay for what they need with no ongoing obligation.

An innovative program in Bangladesh aims to provide solar power to rural homes by organizing a partnership between multilateral organizations, a state-owned development corporation, and microfinance lenders to finance and sell solar home kits. Backed by a World Bank loan, Bangladesh’s Infrastructure Development Company Ltd (IDCOL), a state-owned development finance bank, provides grants to grassroots microfinance organizations like Grameen Shakti. These groups use the money to purchase solar kits from suppliers and offer consumers microcredit financing to cover the purchase cost. Grameen Shakti also installs the kits and trains households on how to use them to generate sufficient power. Households repay in installments, at interest rates between 6-10 percent, over a period of 5-10 years. This model is popularly known as the solar home system (SHS) model.

The pay-as-you-go method, in which a private company maintains ownership of a solar kit and leases it to consumers, charging them only for the power they use, is another feasible approach for rural India. Under this system, private sector enterprises sell consumers a solar kit, and customers pre-pay for small amounts of energy using their mobile phones – allowing them to light their homes after dark. Once the kit has been completely paid for, the technology ‘unlocks’ and provides unlimited, free energy.

Using mobile money as the mode of making and tracking regular payments has enormous potential, since there are over 1 billion mobile subscribers in India, and 306 million mobile internet subscribers (as of December 2015), with this number poised to grow to 371 million by June 2016.

Simpa Energy India Ltd, a for-profit firm, uses the pay-as-you-go model to distribute affordable solar power in rural India. The company has successfully capitalized on the growth of the mobile payment system, which consumers use to make their payments, and has avoided complex interactions — between state and central governments, public-sector banks, and NGOs — that could end up stalling the project for years.

Both these models could be viable in the Indian context. If Bangladesh’s rural poor have proved able to stick to a repayment schedule, Indian farmers can likely do the same — as long as payments are modest and over a long time period. The pay-as-you go method, on the other hand, directly capitalizes on India’s mobile potential and has extremely low buy-in costs.

These models are largely catered to rural areas that currently have limited or no access to power. But if successfully executed, progress in illuminating India’s future could become a very tangible reality.

Ms. Samyukta Balsubramani is a researcher with the Wadhwani Chair in U.S.-India Policy Studies at CSIS.

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