Marketing and Financing of Solar Home Systems in Bangladesh

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Marketing and Financing of Solar Home Systems in Bangladesh Powered By Docstoc
					     Marketing and Financing of Solar Home Systems in
            Bangladesh: Assessment of Success
                           Shakila Aziz1*, Shahriar A. Chowdhury2, Hirak Al-Hammad3
              Faculty of Business Administration, American International University, Banani, Bangladesh
        Department of Electrical and Electronic Engineering, United International University, Dhaka, Bangladesh
                      Infrastructure Development Company Limited (IDCOL), Dhaka, Bangladesh
                                          Corresponding author,

Abstract: The commercial success of solar home systems in       condition of Bangladesh do not allow immediate
Bangladesh depends on the extent to which it can fulfill the    solution of power crisis by imported fuels. These
needs of the end users, which will motivate users to invest
money in SHS systems. This paper has explored the factors       causes slow down the grid extension in rural areas.
that can make SHS commercially viable in Bangladesh, and        To fulfill the national plan set by the government
how far the SHS industry in the country has come to being       “Make electricity available for all by 2020” [6] alternate
commercially viable. The customers in Bangladesh have           off grid power solution should be sought.
found that the SHS have satisfactory technical performance,         This paper will attempt to identify the factors
an adequate financing infrastructure and good after sales
support. The commercial distributors of SHS units also
                                                                necessary for the commercial success of SHS technology
show increasing annual sales across Bangladesh, despite         in a developing country, and how successfully the SHS
declining subsidies and rising prices of SHS.                   industry of Bangladesh has been able to fulfill the
                                                                necessary conditions towards full commercialization.
Keywords: Solar Home System (SHS), technical                        The financial and distribution figures for SHS
performance, Micro financing, After sales service               dissemination are taken from the database of
                                                                Infrastructure Development Company Limited (IDCOL),
                      1. Introduction                           a non bank financial institution established by the
Access to electricity is one of the major factors that affect   Government of Bangladesh.
the socio-economic development of a population. This is
why electrification is one of the targets of any
                                                                       2. The Consumer Decision Process in
development or poverty alleviation drive. Availability of                        Adapting PV SHS
adequate electricity is also an indicator of the standard of    Research shows that the factors that influence the target
living of a population [1].                                     consumers to adapt and pay for renewable energy
    Bangladesh, an example of a developing nation,              technology based solutions are a concern for the
enjoys an electricity distribution of 42% [2], but large        environment, knowledge about the efficiency and role of
segments of the rural populations live in remote and off-       renewable energy in the environment and society, and a
grid areas, where the purchasing power of the consumer          belief that the adoption of such technologies will have a
population and the low density of habitation do not make        positive outcome for the environment [7].
it cost effective for the national grid to distribute grid          Moreover, the demographic segments that tend to
electricity to such locations.                                  adopt solar energy technologies tend to be younger, better
    The success of any new renewable energy technology          educated, having higher income and occupational status,
among the target market depends on the extent to which          and earlier in the family life cycle. The product quality,
the technology is able to fulfill the needs and demands of      efficiency and cost, the cost of alternatives, and the
the target market, while being financially affordable,          motivation of social responsibility are important factors
practically reliable and user friendly [3].                     that influence the decision making process for potential
    At present, a major portion (81.43%) of the power           adopters [8].
generation capacity of the country is gas based [2].
The reserves of gas in Bangladesh are decreasing                           3. Traditional Barriers to the
with time, while demand for energy is increasing.                         Dissemination of SHS in Developing
The gas reserve is expected to last until 2019 and                                    Countries
supply will start declining after 2011, if no new gas           A study shows that rural grid extension for electricity
field is discovered [4][5]. As of now Bangladesh is             on a small scale would cost in the range of 2 to 10
experiencing a shortage of power generation than                US$/kWh in some developing countries while stand alone
the demand, which causes load shedding, and this is             PV electricity might be in the range of only 1 to 3
more pronounced in rural areas. The economic                    US$/kWh [9]. This makes PV electricity an ideal
candidate to fill the energy void of rural areas in              Table 1 Sources and amounts of grants given to the SHS
developing countries. Furthermore at present the rural           project under RREDP up to June 2009.
population is using Kerosene, candles or dry cell batteries
for lightings, where the monthly average cost is
comparable to that of SHS [10], and also these fuels are                                 Grant                    Credit
health hazardous and accident prone. Therefore, what
stands in the way to the widespread commercialization of                       Number                     Number
                                                                                                 Amount                Amount
PV is not its intrinsic cost compared to conventional                          of SHS                     of SHS
energy, but rather the adequate financing and distribution
of SHS in rural areas.                                             IDA &                                                USD 54
                                                                               75,000        USD 7 m       246,000
    The distribution and financing mechanism of the SHS             GEF                                                   m
may be inadequate or unsuitable, making end users
unwilling to pay. Martinot, Cabraal and Mathur [11] cite                                     EUR 16.5
                                                                    KfW        372,000                        -            -
ten barriers to the adoption of SHS in the developing
countries, out of which four are financial barriers, namely
                                                                    GTZ        108,000       EUR 5 m          -            -
high transaction costs, high first cost and affordability,
lack of consumer financing and lack of business and                                                                     USD 33
financing skills.                                                   ADB           -                -       120,000
    Furthermore, according to Martinot et al [12], a highly
subsidized program to fund SHS will fail commercially in
the long run, because the subsidies destroy the                     IDB           -                -       50,000       USD 16
commercial markets.                                                                                                       m

                                                                                             USD 7 m
          4. SHS Financing and Marketing                            Sub-
                                                                               555,000        & EUR        416,000
              Mechanism in Bangladesh                               total                                               103 m
                                                                                              21.5 m
The loans to fund the purchase and distribution of solar
                                                                      Possible sources (Expected sources in the near future)
home systems comes from international donor agencies
like the World Bank, GTZ, KFW, and the Asian
Development Bank. The amount of grants and loans from             IDA &
                                                                               140,000       USD 7 m       320,000      USD 91
various donor agencies is given in table 1. This fund has         GPOBA
financed 320,000 solar home systems in Bangladesh up to
May 2009. Since then, further grants to finance an                  GTZ        50,000        EUR 2 m          -            -
additional 350,000 SHS were given or promised.
    The SHS program of IDCOL is being implemented                                            USD 14
through the Partner Organizations (POs). The role of the            Total      745,000       m & EUR       736,000
                                                                                                                        194 m
PO is to select the project areas and potential customers,                                   22.5 m
extend loans, install the systems and provide maintenance        system. IDCOL makes the disbursement within 21 days
support. IDCOL provides grants and refinance, sets               from the receipt of disbursement request.
technical specification for solar equipment, develops                The households can buy SHS either in cash or on
publicity materials, provides training, and monitors PO’s        credit. POs extend loans to the households for purchases
performance.                                                     of SHSs. Different POs extend credit on different terms
    IDCOL offers soft loans of 10-year maturity with 2-          and conditions. The loan duration varies from 1 to 5 years,
year grace period at 6% per annum interest to its partner        and the interest rate varies from 8% to 15% per annum on
organizations. Usually, IDCOL does not require any               a declining balance method, and from 10% to 15% per
collateral or security for the loan, except for a lien created   annum on an equal principal payment method. In all the
on the project accounts. Unless and until there is an event      instances, the repayment frequency is monthly.
of default, POs are authorized to operate the project
accounts of their own.                                                  5. The Commercial Success of SHS in
    Under the plan, the households are required to pay                        Rural Bangladesh: Findings
minimum ten percent of the system cost as down-payment.
On receipt of the down-payment, the POs enter into a             IDCOL achieved its first target i.e. installation of 50,000
sale/lease agreement (provisions of which are approved by        SHS in August 2005, three years ahead of the project
IDCOL), install the system (mostly on credit) and make           completion period and US$ 2 million below the estimated
electronic disbursement requests to IDCOL for refinancing        costs.
and grants, as applicable. After in-house checking, IDCOL            Figure 1 shows the price trend of various SHS
conducts physical verification of the SHSs installed.            packages whereas Figure 2 shows the trend of SHS sales
IDCOL releases grants and refinancing only if the                in Bangladesh. We can see that the price of the SHS
inspection result is satisfactory. The refinancing amount        packages increases gradually over the years and this
does not exceed US$285 equivalent in Taka per                    increase is due to the rising costs of the raw materials
                                                                 necessary to manufacture solar panels. IDCOL also
lowers the amount of grants to the POs in successive          EnDev, a donor organization, funds SHS distribution
stages, according to table 2.                                 projects in seven countries. According to a cost and
    Despite increasing prices and decreasing grant            subsidy share comparison of EnDev SHS projects in
amounts, the annual sales of SHS packages increases           seven countries, the SHS of Bangladesh is subsidized
consistently over the years.                                  between 15 and 34% by EnDev, the lowest of all seven
                                                              countries. This subsidy includes the direct cost of SHS
                                                              equipment and its installation, excluding operation and
                                                              maintenance [13]. An indirect subsidy and investment
                                                              cost is borne by the government and NGOs for public
                                                              education, infrastructure and market development and
                                                              creation of financing institutions. The subsidy cost is
                                                              lower in Bangladesh, due to the existing microfinance
                                                              infrastructure and the higher rural population density.
                                                              Consequently, of all the countries with EnDev SHS
                                                              projects, Bangladesh shows the highest cost efficiency
                                                                  The SHS sales in Bangladesh do not follow a
                                                              geographically centralized pattern. SHS units are sold in
Fig. 1 Price trend of IDCOL’s SHS packages.                   comparable numbers in all areas of Bangladesh (Figure 3)

                                                              Fig. 3 Division-wise sales of SHS up to July 2009.

                                                                       6. Consumer Satisfaction with SHS
Fig. 2 Annual sales of SHS in numbers.
                                                                         Financing and Marketing: Findings
                                                              A survey of 40 households or small businesses in
Table 2 Decreasing amount of Grant Available in (US$/€)       different villages of Bangladesh has revealed that the
per SHS.                                                      customers are largely satisfied with the availability and
                                Grant per SHS                 quality of the financing and sales services of the partner
                                                              organizations. The study has measured the satisfaction
       Item                                   Institutional   level of the consumers in eight areas of the SHS service.
                      Total                   Development     They are:
                                                 Grant             1. Number of appliances supported
                                                                   2. Stability of electricity
 First 20,000          $90         $70            $20
                                                                   3. Quality of electricity
                                                                   4. Frequency of breakdowns
 Next 20,000           $70         $55            $15
                                                                   5. Helpful information from the company
 Next 30,000           $50         $40            $10              6. Financing facilities of the company
                                                                   7. Troubleshooting services
 Next 88,160           €38         €30             €8             In the first seven measures, the satisfaction level of
                                                              the consumer was measured on a scale of very
 Next 35,000           €36         €30             €6         dissatisfied, a little dissatisfied, satisfied, highly satisfied
                                                              and not sure. The findings of the consumer levels of
 Next 185,000          €34         €30             €4         satisfaction are represented in figure 4.
                                                                  The responses indicate that most of the consumers are
                                                              either satisfied or highly satisfied with the SHS they use
 Next 100,000          €28         €25             €3
                                                              in their homes or rural small businesses. No respondent
                                                              reported a high level of dissatisfaction regarding any of
 Next 72,000           €22         €20             €2
                                                              the parameters, and overall dissatisfaction is low. The
                                                              consumers seem to have no dissatisfaction regarding the
helpfulness and financing facilities of the SHS                the energy solution of choice in large parts of Bangladesh
distributors.                                                  that are not yet reached by grid electricity.
    In assessing the frequency of malfunctions of SHS,
the customers were asked to report if their SHS had
malfunctioned never, once, twice, or three or more times.
These customers have been using the SHS for a duration
of six months to five years. The responses are
summarized in figure 5.

                                                               Fig. 5 Projected yearly unit sales of SHS up to 2012.

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               Industry in Bangladesh                          [10] The Solar Electric Light Fund,
The trends of the past seven years show that the SHS           [11] E. Martinot, A. Cabraal, & S. Mathur, “World Bank/GEF
market in Bangladesh is expanding across different                  solar home systems projects: experiences and lessons learned
regions of the country. The sales are increasing annually,          1993-2000.” Renewable & Sustainable Energy Reviews, vol.
despite price increases and subsidy decreases. IDCOL is             5(1), pp. 39-57, 2001.
optimistic of achieving its target of installing a             [12] E. Martinot, A. Chaurey, D. Lew, J. R. Moreira, & N.
cumulative of one million systems by 2012, according to           Wamukonya, “Renewable Energy Markets in Developing
                                                                  Countries,” The Annual Review of Energy and the
its following forecast in figure 5. Furthermore, the
                                                                  Environment, vol. 27, pp. 330-331, 2002.
customer opinion survey reveals that the end users are         [13] M. Gaul, C. Hellpap, & K. Reiche, “Dissemination Schemes
satisfied with the SHS and 33 out of 40 existing users are        for Solar Home Systems in Seven Developing Countries,”
willing to recommend them to other potential users.               Symposium on Small PV-Applications: Rural Electrification
    We can infer that the SHS industry in Bangladesh is           and Commercial Use, Ulm, Germany, pp. 254-255, 2009.
headed in a direction where it can eventually become a         [14] C. Hellpap, and F. Ziegler, “Outcome-Based Approach for
stand alone renewable energy solution industry. It is             the Dissemination of PV in Developing Countries: Lessons
gathering strength towards becoming viable without funds          Learned from the Energizing Development Program,”
and subsidies, and will become an easily affordable               Symposium on Small PV-Applications: Rural Electrification
                                                                  and Commercial Use, Ulm, Germany, pp. 256-261, 2009
alternative for off-grid locations. It is poised to becoming

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