Despite high initial costs, Solar Home Systems (SHS) are emerging as an attractive option in the face of costly or unreliable alternatives and escalating grid power tariffs. A growing number of households are therefore turning to SHS as a matter of necessity and convenience in Karnataka, a southern state of India. An initial barrier to the growth of SHS was the lack of widespread service infrastructure for PV products and systems. This issue began to be addressed with the establishment of solar rural electrification companies, or mini utilities, in the 1990s starting with SELCO and then followed by Shell Solar and others. However, despite being competitive in the long term, the high up-front costs of SHS, coupled with the reluctance of banks to finance an unfamiliar product, has proved a major barrier to the adoption of this technology. Beginning in 2002 a UNEP programme was formulated to address these issues, with support from the UN Foundation and the Shell Foundation. A study carried out during the programme’s planning phase indicated the following cost profile for various decentralized options available to Karnataka households.

Note: 1 USD = Rupees 45 (approx.)

Although SHS costs are competitive over the long term, since most potential users lack access to credit, they cannot afford to pay up-front for the twenty years of electricity supply that a PV system can provide. It was thus clear that there was a real need to improve access to credit to finance this clean energy option, linking the repayment to their paying capacity and existing energy expenditures.

Although solar home systems can provide a reliable and cost-effective electricity service, they have yet to be established as a mainstream electrification technology, in part due to limited access to financing. India has a well-developed rural banking infrastructure, although its links to the renewable energy sector had yet to be consolidated. It was therefore concluded that a short-term intervention was needed — to address the issue of risk perception by banks, to increase consumer access to credit, and initially to lower the cost of this credit. Once these key barriers are addressed, it is expected that the market will begin to expand without further external support. Therefore, the objective of the programme is to help Indian banking partners develop lending portfolios specifically targeted at financing solar home systems in poorly served regions of South India. It was also decided to keep the focus of the programme on the poor in rural and semi-urban areas, who bear the brunt of power shortages and have limited access to expensive alternatives. It is expected that the long-term result of the programme will be improved
access to modern and clean electricity services for poorly served rural and peri-urban Indian households and small enterprises. The programme is also attempting to contribute to poverty alleviation efforts by the Government of India with a strategy to reach the poor through both local Grameen banks and group lending via Self Help Groups (SHGs). Increased confidence and lending for solar electrification services would mean the expansion of sustainable energy in South India.