Rural Electrification with Solar Energy
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Growing scientific consensus indicates that human activity, particularly the intensive use of carbon-based energy sources, is altering Earth's atmosphere in a way that could profoundly affect the global climatic system. In response, the nations that are party to the U.N. Climate Convention drafted the Kyoto Protocol in 1997. The protocol commits industrial countries to limit their greenhouse gas (GHG) emissions, assigning country-specific goals that will reduce overall industrial-country emissions to 5.2% below 1990 levels over five years beginning in 2008. Developing countries, where per capita GHG emissions have historically been far lower, are not subject to binding limits under the protocol. They can, however, benefit from investments in climate change mitigation projects by participating in the Clean Development Mechanism (CDM). Studies suggest that renewable energy may figure prominently in our energy future and play a critical role in strategies for greenhouse gas control.3 Large grid-tied renewable energy projects have the capacity to displace vast quantities of current GHG emissions. Off-grid applications of renewable energy in developing countries can also displace GHG emissions while providing a valuable near-term market niche for emerging technologies and significantly elevating living conditions; in the long term, rural applications could also potentially have substantial GHG avoidance benefits, given that an estimated 2 billion people in these areas still do not have access to grid electricity.4 Due to cost reductions in photovoltaic (PV) technology and the high cost of grid extension, stand-alone PV systems now represent the least-cost option for electrifying homes in many rural areas.5 These "solar home systems" (SHSs) are proving to be practical for providing small amounts of electricity to households beyond distribution networks. The systems typically consist of a 10- to 50-watts peak (Wp) PV module (which can easily be expanded by adding additional modules), a rechargeable battery sometimes coupled with a charge controller, wiring, lights, and connections to small appliances (such as a radio, television, or fan). Many household systems also electrify small businesses, and similar systems have agricultural and community applications (such as in schools and health clinics). Experience from countries such as Honduras, India, and Zimbabwe has shown that SHSs can contribute to the energy supply mix of rural communities while directly displacing GHG emissions.6 Since the carbon dioxide (CO2) reductions that result from replacing kerosene with electric lighting can be readily documented, the CDM potentially offers a great opportunity for developing-country businesses and consumers to receive cash compensation for their contribution to addressing the global problem of climate change. This report examines how solar-based rural electrification can contribute to climate change mitigation and improve living conditions in developing countries, and suggests ways to maximize these benefits. Part I examines how SHSs can contribute to climate change mitigation and calculates the potential PV commercialization benefits that could result if SHSs become more widespread. Part II summarizes the non-GHG environmental benefits and the social and economic benefits of SHS dissemination. Part III explores potential SHS project participation in the CDM. And Part IV presents conclusions and recommends policies to facilitate SHS dissemination within rural energy development and GHG control strategies. |
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Role of Solar Home Systems
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Each solar home system directly displaces a modest amount of greenhouse gas emissions by substituting for other energy sources in rural homes. Because of the very large number of homes still unelectrified and because SHSs are often the least-cost electrification option, they potentially can play a significant role in GHG control. In addition to directly displacing fossil fuel consumption, the SHS market can help build the international PV industry, leading to lower production costs and increased PV sales for a range of applications with substantial climate change mitigation benefits. Potential Size of the Solar Home System Market The magnitude of GHG benefits from SHSs will depend largely on how widely the systems are used. Although it is impossible to predict future penetration levels accurately, a sense of the potential size of the market can be gained by examining the number of unelectrified developing-country homes and the market niche and affordability of SHSs. Estimates of the world's unelectrified population during the 1990s fell generally in the range of 1.8-2.0 billion people occupying 300-400 million homes, mostly in rural areas. While many industrial countries are nearly 100% electrified, the World Bank estimates that in 1990 only 33% of rural developing-country homes were connected to electricity.7 By region, estimated rural electricity connection rates for 1990 were 45% for East Asia and the Pacific; 40% for Latin America and the Caribbean; 35% for North Africa and the Middle East; 25% for South Asia; and just 8% for sub-Saharan Africa.8 Table 1 presents an estimate of the unelectrified rural population in 1990 by region. SHSs are often the least-cost electrification option where population and load density are low.9 On a life-cycle basis, the systems frequently cost about what rural households would otherwise spend on lighting fuels, dry cells, and car batteries. Yet the convenience and quality of service provided by an SHS generally far exceeds that of traditional alternatives. For example, one 15-watt fluorescent lamp or one 60-watt incandescent lamp provides the luminosity of 18 kerosene wick lamps or 60 candles.10 Also, many households spend time, cash, and considerable effort transporting and charging car batteries so they can have access to television. Given their cost and convenience advantages, it is not surprising that SHSs are increasingly popular in many areas. While the price of an SHS can be made comparable with current household energy expenditures if systems are paid for over time, the high up-front cost is a substantial barrier to broader dissemination. At current prices (ranging roughly from $125 to $1,300 for systems of 10 to 50 Wp), a small percentage of rural households can and will pay cash to purchase SHSs, but many more will only acquire systems if given access to some form of financing. Consumer loans and "fee-for-service" arrangements (where households make periodic payments for the use of an SHS) can greatly increase affordability and market penetration. Estimates of the potential SHS market in developing countries vary widely, depending on assumptions about the cost and availability of financing. The potential cash market is estimated as roughly 5-10% of the rural households currently without an electricity connection.11 With access to loans and fee-for-service arrangements, however, the estimates suggest that the SHS market could reach up to 50% or more of unelectrified rural homes.12 Energy expenditures for displaceable items such as kerosene, candles, dry cells, and lead-acid battery charging provide an excellent indication of rural consumers' ability to pay for the energy services of an SHS. These expenditures differ greatly even within specific rural areas. One source estimates that as many as 80% of unelectrified rural households spend an average of at least $8 per month on such energy sources.13 Current SHS fee-for-service businesses, including Soluz Inc.'s operations in the Dominican Republic and Honduras as well as Shell-Eskom's in South Africa, are providing services starting at about $8-10 per month.14 Based on rural consumers' ability-to-pay and the present cost for PV service, a 50% average penetration rate may be a reasonable upper-end estimate of the potential SHS market. Although a number of rural areas would probably not have this level of activity, others appear to have the potential for even higher levels of penetration on a commercial basis. Table 2 estimates the market potential for SHS dissemination based on 1990 unelectrified population figures, assuming an average of 5 people per household and an average system size of 40 Wp. Obviously, growth in the unelectrified population would increase the potential SHS market. Although Table 2 indicates that the developing-country SHS market could become quite large, to date only a tiny fraction of this potential has been realized. Even in countries where SHS markets are most active, such as Kenya, Morocco, and the Dominican Republic, only about 1-2% of the potential SHS customer base has been reached.15 Still, the developing-country SHS market accounted for an estimated 13-15 megawatts of PV module sales in 1998, about 10% of the world's PV shipments.16 One prominent industry analyst predicts that the SHS market will experience sustained growth of 20-22% annually.17 Several factors constrain SHS market growth. In addition to the high up-front system costs mentioned earlier, the principal barriers to sustainable growth in SHS markets include:
Governments, multilateral and bilateral development assistance agencies, private foundations, nongovernmental groups, and businesses can do a great deal to facilitate SHS markets. The World Bank and other organizations have published detailed reports examining institutional and financing modalities for SHS dissemination that provide valuable insights regarding good practices for those seeking to structure sustainable SHS dissemination activities.18 Experience suggests that actions targeted at enabling and supporting private SHS markets will be most effective and sustainable. Governments can facilitate SHS markets by reducing import tariffs on SHS components, reducing subsidies for kerosene and grid extension (or providing commensurate ones for SHSs), clearly identifying grid expansion plans, and setting regulations conducive to private participation in off-grid markets. Government, multilateral, and foundation support for training and public education as well as the provision of seed capital for SHS businesses and financing programs for SHS buyers also clearly help catalyze SHS markets. SHS businesses should be trained to properly design and maintain systems. Ideally, homeowners should also be educated about proper maintenance. Substantial direct subsidies and system donations often have proved counterproductive because they enable people to obtain systems without making a substantial personal investment. Some of these individuals may lack the commitment or financial resources to maintain their systems adequately. Furthermore, unless subsidies are channeled through the private sector and embedded in a reliable long-term framework, they can undermine sustainable commercial markets. A cluster of Global Environment Facility (GEF) projects could substantially accelerate SHS markets. The GEF provides financial support for development projects that also address one of four global environmental priorities, including climate change. Removing barriers to renewable energy dissemination is part of the GEF's climate change strategy, under which it is now committed to supporting 20 SHS and rural energy service projects that could help to catalyze over 1 million new SHS installations.19 Included among these projects are the multi-country Photovoltaic Market Transformation Initiative (PVMTI) and the Solar Development Corporation, as well as numerous initiatives in individual countries. A recent document reviewing the GEF's energy efficiency and renewable energy projects includes a section summarizing GEF participation in SHS market development.20 Direct Carbon Displacement Nearly all SHSs substitute electric lights for kerosene lamps and other hydrocarbon-based lighting sources. Often, SHSs also directly displace CO2 emissions from the charging of lead-acid batteries with a grid connection or a diesel or gasoline generator. Since fossil fuel energy is generally used to produce and transport PV modules and other SHS system components, these activities generate some "upstream" GHG emissions. Yet a study prepared for the World Bank found that for solar lanterns (which are smaller than typical SHSs and provide just a single light but otherwise are substantially similar), the upstream emissions are offset by comparable upstream emissions savings associated with displaced kerosene refining and transportation.21 Based on another recent study that examined embedded energy in SHSs, it appears that upstream emissions for the kerosene displaced by SHSs will generally exceed those associated with the SHS components themselves (PV modules and lead-acid batteries) for a range of system sizes.22 Kerosene Displacement Since displacing kerosene usually represents the biggest direct carbon benefit, SHS projects that quantify their GHG benefits-including ones receiving GEF support or participating in the Activities Implemented Jointly (AIJ) pilot program of the Climate Convention-almost always use kerosene consumption figures to calculate the baseline emissions expected without the project. Table 3 shows kerosene use figures reported in the baseline for a geographically diverse sampling of GEF and AIJ projects. Higher-income rural families tend to burn more kerosene for lighting than lower-income families. The calculations presented here attempt to account for this variability and the likelihood that comparatively higher income homes will be the first to adopt SHSs. Most SHS projects structured for climate change mitigation anticipate that electric lights will displace nearly all kerosene lighting in homes, but the extent of actual kerosene displacement may vary. Where enough lights are installed and systems function properly, anecdotal reports suggest and at least one study confirms that kerosene displacement is nearly complete.23 Studies of some SHS activities, however, report continued kerosene use in the 20-45% range.24 In some cases, continued kerosene use has been attributed to system design and operational problems and to market distortions related to kerosene subsidies as well as for outdoor and supplemental lighting.25 Projects participating in formal GHG control programs such as the Clean Development Mechanism will generally need to confirm that projected emission reductions are actually achieved. The calculations in this section assume 90% kerosene lighting displacement. Battery Charging Displacement In many developing countries, car batteries are commonly used to provide household electricity. Limited data suggest that perhaps 10% of all unelectrified households regularly charge lead-acid car batteries. In Kenya, for example, about 5% of the unelectrified homes charge lead-acid batteries (in addition to homes using SHSs), while in Morocco 14% of rural homes use car batteries.26 Figures reported for a few other countries also fall within this general range. Households that use car batteries usually recharge them two to four times a month. Recharging 50- to 100-amp-hour 12-volt batteries produces CO2 emissions of roughly 15-30 kilograms a year for grid-based battery charging, and considerably more where small diesel and gasoline generators are used.27 Overall Direct Displacement Potential The first 10% of SHS adopters are expected to be higher-income rural households who are motivated to gain better access to electricity. For this group, SHSs are assumed to substitute for both kerosene lighting and battery charging, and baseline kerosene consumption is assumed to be relatively high, at 10 liters per month. Each SHS in this group directly displaces about 0.3 metric tons of CO2 per year or about 6 tons over 20 years.28 SHS use for the next incremental 40% of potential adopters is assumed to displace kerosene alone, using 8 liters per month as the baseline. Each SHS for this group would displace about 0.2 tons of CO2 per year on average or about 4 tons over 20 years. As illustrated in Figure 1, at a market penetration level of 10%, SHSs would directly displace roughly 10 million metric tons of CO2 per year, while at 50% penetration the figure would be nearly 40 million tons. At the lower-end penetration level, the annual CO2 emissions directly displaced would approximately equal CO2 emissions from fossil fuel use in Zimbabwe during 1995, while at the upper-end level they would equal those of Switzerland for that year. Compared with the world's 23 billion tons of CO2 emissions from fossil fuel use in 1995, however, the amount of direct CO2 displacement is still quite small.29 Although the total direct CO2 displacement per SHS is small, the rate, defined as CO2 displacement per kilowatt hour (kWh), is extremely high. Reports on AIJ and World Bank/GEF projects in Indonesia indicate that the rate of CO2 displacement per kilowatt-hour (kWh) from SHS was 10 times greater than for renewable energy applications displacing fossil-fuel-based power generation.30 Other studies have reached similar conclusions. The high rate of displacement is due to the tremendous inefficiency of kerosene lighting. Consider, for example, that a 40 Wp PV module connected to an electric grid in the United States would displace roughly 40 kilograms of CO2 per year, but the same module supplying electricity to a rural home in Kenya would displace about 350 kilograms of CO2 emissions a year by replacing inefficient kerosene lighting alone.31 In addition to displacing kerosene lamps and battery charging, SHSs also typically substitute for candles, dry cell batteries, and occasionally small generators, all of which have associated GHG emissions.32 While not quantified here, avoiding the GHG emissions associated with these energy sources will clearly add to the direct GHG benefits from SHSs. Well-designed SHS market development programs can help ensure that SHS installations result in sustained carbon benefits. For example, SHS marketing programs should target areas not likely to obtain grid electrification for some time. If the grid comes to an area where SHSs are installed, the direct GHG displacement benefits will be largely lost if households connect to the grid but keep their systems as backup. Secondary markets for used equipment would, however, encourage the recovery of systems investments and allow the direct GHG benefits to continue. Fee-for-service arrangements would also protect against such a loss of GHG benefits, since SHS rental companies would remove and reinstall any equipment made superfluous by the arrival of grid electricity. The periodic battery replacements essential for proper system functioning are also needed to ensure durable GHG benefits. Adequate technician training, end-user orientation, and dissemination based on the market as opposed to donations would encourage this and other essential maintenance steps. Avoided Grid Emissions While displacing kerosene lamps and battery charging will probably be the most direct carbon abatement mechanism, SHS use can also help to avoid emissions from new connections to electric grids. This is particularly applicable in countries like Argentina and South Africa, where the governments have decided to use SHS as an alternative to the grid in their aggressive rural electrification efforts.33 In the past, some analysts have considered SHS a form of pre-electrification due to the comparatively small amount of electricity typically provided. Given their comparative economic advantages for dispersed populations and the ease of deployment, however, governments, businesses, and consumers could increasingly favor SHS over grid extension to electrify rural homes, especially if PV prices continue their downward trend. To estimate the amount of grid electricity and GHG emissions avoided by an SHS, it is more instructive to use the level of electricity consumption typical in grid-connected rural homes as a benchmark rather than the amount supplied by an SHS. SHSs in the range of 10-50 Wp generate much less electricity than that consumed by average grid-connected rural households. SHS owners nonetheless often derive many of the functions that they would from grid connections because they generally couple their SHSs with highly efficient fluorescent lights and direct current appliances. Direct current fluorescent lamps, for example, are three to four times as efficient as standard incandescent bulbs, and black and white televisions that use 15 watts when connected to a direct current power source require about 35 watts when connected to alternating current. While the limited amount of electricity from an SHS necessitates careful and efficient energy use, if households were connected to a grid rather than an SHS, they would probably consume electricity at the same rate as other grid-connected households. Average electricity consumption for grid-connected rural households varies widely among and within developing countries, largely depending on income. World Bank reports showing a breakdown of household electricity consumption in developing countries indicate that lower-income households often consume on the order of 20 kWh per month, mostly for lighting.34 Middle-income households use on the order of 50 kWh per month for lighting and other applications, many of which have fairly small loads that can be reasonably satisfied by a typical SHS. High-income households can use up to 100 kWh or more per month and generally have at least some appliances with load requirements that exceed the capacity of a small SHS. Household electricity consumption also tends to increase over time.35 Table 4 presents various scenarios of the potential for SHS dissemination to avoid grid-based GHG emissions. While less direct than displacing kerosene and battery charging, the potential GHG benefits from grid avoidance could be significantly greater under moderate or higher levels of avoided consumption. Since PV modules can be added to augment system capacity, SHSs can accommodate growth in electricity demand without increasing GHG emissions. For long-range estimates of grid avoidance, this is plausible since average system size will probably increase if module prices continue to fall and average rural incomes in developing countries rise. Over time, the benefits of avoided grid-based CO2 emissions could grow substantially. PV Market Transformation Benefits Another indirect though possibly substantial GHG benefit comes from the ability of SHS purchases to help fuel growth in the PV industry. If the SHS market can substantially increase PV module sales, this could help increase PV production capacity, bring down cell and module costs, and contribute to tremendous GHG benefits as PVs become cost-effective for a broader range of applications. The relationship between cumulative production of a manufactured product and total cost per unit produced can be characterized by an experience curve. Empirical studies reveal a consistent pattern, generally attributable to the efficiency gains from learning-by-doing and economies of scale, whereby costs fall by an approximately fixed percentage with every doubling of cumulative production. Figure 2 demonstrates the tight empirical relationship between cumulative industry-wide production and the unit price for photovoltaics. This series from 1976 to 1992 indicates that inflation-adjusted prices drop by 18% with every doubling of cumulative production. Other analyses using different data sets and periods have indicated price declines as high as 32%, but most studies indicate that prices have historically fallen by about 20% with every doubling of cumulative PV output.36 By extrapolating from the historical PV experience curve, it is possible to estimate future PV prices as a function of projected sales growth. If all current segments of the PV market grow by 20% annually and prices decline by 20% for every doubling of cumulative PV sales, module costs would fall from a 1998 wholesale price of $3.65 per Wp to about $1.20 by 2018. If market transformation initiatives can successfully accelerate growth in the SHS market, experience curve theory suggests that the additional module sales would lead to more rapid PV cost reductions. Programs such as the GEF-supported PV Market Transformation Initiative and Solar Development Corporation have the potential to "jump-start" SHS sales early on and maximize the incremental price reduction associated with any given level of SHS sales. For example, adding 25 MWp of additional SHS sales in 2000 (that is, assuming year 2000 sales of 43 MWp rather than 18 MWp) and sustaining market support so future SHS sales match the 20% annual growth assumed for non-SHS sales yields an estimated 5% average annual PV price drop over a 20-year period attributable to SHSs alone. This is based on a static assessment that does not account for the positive effect of cost reductions on demand. In practice, markets respond to cost reductions with increased demand; the extent to which this happens is characterized by the "price elasticity of demand." While this demand elasticity is uncertain, the implication is that anything that boosts demand for PV may induce a price reduction via the experience curve, which in turn would induce an increase in future demand. This "virtuous cycle" could continue indefinitely but it will likely dampen over time. It is impossible to quantify precisely the importance of these dynamic effects, but one analysis suggests that for PVMTI they will likely exceed the static-experience-curve benefits from the program.37 PV manufacturers are continuously making decisions about whether and when to invest in more efficient larger-scale production facilities. The technology exists today to bring production costs down substantially by moving to larger-scale production facilities; manufacturers have yet to take on this risky investment, however.38 Recent PV market growth has been fueled in large part by highly subsidized grid-connected markets such as residential rooftop programs in Japan, Germany, and other industrial countries.39 These markets could evaporate quickly in the face of diminished government support. Manufacturers are understandably skittish about scaling up aggressively to meet such uncertain demand. In contrast with programs that rely on large subsidies to make PVs economically attractive, efforts to promote SHS markets have the advantage of greater inherent stability because in most cases where they are adopted, SHSs are cost-competitive. Consequently, modest subsidies can build durable markets. The credibility of the SHS demand niche for PVs can be further enhanced if subsidies are embedded in stable frameworks like the CDM or the off-grid fee-for-service concessions emerging in countries like South Africa and Argentina. Consequently, crediting SHSs for their contributions to climate change mitigation represents an important strategy for achieving PV market transformation, even if the per-system credit is small. Actions to transform PV markets for SHSs and other promising applications could have very important mid-term and long-term climate change mitigation benefits. Without encouraging the development of promising new technologies, the world may rely on mature but limited carbon mitigation strategies, such as displacing coal with natural gas. Investing in clean emerging technologies like PVs creates essential policy "option value" by ensuring that alternatives are ready if the international community decides it must take aggressive action to reduce carbon emissions at some point in the future. |
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Rural Electrification with Solar Energy |
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Message from REPP Staff Executive Summary |
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