27 May - 2 June 2016 #810

Kickstarting solar projects

Nepal’s energy crisis spares no one: every organisation, from businesses and farms to schools and health clinics, struggles with it.
Avishek Malla

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Nepal’s energy crisis spares no one: every organisation, from businesses and farms to schools and health clinics, struggles with it. Solar energy can be deployed more quickly than any other source to meet the country’s demand.

The Nepal government, in partnership with international donors, has made a commitment to diversify its energy mix, and provide incentives to kickstart the solar energy industry. Subsidy can be a very important tool for building a thriving solar industry, and has been used successfully in other countries. However, if not planned well, subsidies can potentially damage the market.

For example, in Spain and Italy highly subsidised solar programs were unsustainable due to high costs to taxpayers and were abruptly ended. But in Bangladesh 3.5 million solar home systems were deployed from 2002-2015 with a minimal subsidy of 10 per cent.

The California Solar Initiative led to the installation of over 2,500 MW of solar from 2007-2016. The majority of projects received financing, and did not require state-level subsidies.

In Nepal the urban financing program provides very low interest rates for commercial and residential solar in Kathmandu and other urban areas.

A commercial customer that gets a 4.5% interest on a Rs 100,000 loan would end up paying just Rs 1,865 per month over five years. This is in addition to traditional upfront subsidies, such as a flat Rs 20,000 payment for solar systems at urban households and a 60% subsidy (up to Rs 500,000) for urban public health clinics and schools.

But this financing scheme has not been adopted by commercial entities (including NGOs, hospitals, businesses) because of lack of awareness and the risky bank collateral of Rs 1 million.

In California, solar only started to take off when banks started providing financing for solar projects without requiring additional collateral from customers. The solar equipment itself serves as collateral. A similar program could be implemented in Nepal to encourage banks to provide financing for solar without harsh collateral requirements. There are several common themes for successful subsidy programs that have been deployed around the world:

Subsidies should scale down over time: While subsidies can kickstart a market, there will never be enough subsidy dollars to scale up to reach millions of customers. The goal should be to create a thriving solar market that doesn’t require subsidy.

Monitoring and after sales service is crucial: Customers need assurance that solar energy systems will work over the long term. Solar installers get financial incentive to make sure their systems produced maximum energy.

Financing is a key part of the solution: Nearly all of Bangladesh and California’s solar energy projects are completed with financing.

We are excited about the potential for solar energy in Nepal, and are impressed by the commitment of the government and donors to make solar a meaningful part of Nepal’s energy mix. Subsidies can kickstart the market, but too much subsidy can hamper markets by making customers reliant on artificially low prices and by removing the incentive for private companies to innovate and develop solar solutions that can scale.

The urban financing program in Nepal is an exciting example of a scheme that has the right incentives to help the commercial solar market grow.

Avishek Malla is the president of SunFarmer Nepal, a solar energy service company based in Kathmandu.

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