Incentivizing Solar Energy Adoption in Nepal: The Government's Role

On October 18, 2015:

In recent years, policy makers have proposed solar energy as one of the most promising avenues to mitigating acute power shortage in Nepal. Despite a tremendous decline in the global cost of solar photo voltaic (PV) systems over the last few years, the percentage of Nepalese households adopting solar energy is abysmally low. While the government has implemented policies aimed at incentivizing substantial use of renewable energy sources, solar power still contributes a tiny share of the overall electricity generation. This underscores the need to assess the economic analyses of ongoing solar power usage in Nepal and further evaluate the underlying challenges ahead.

Figures from the Alternative Energy Promotion Center (AEPC) show that almost 300,000 household solar PV systems with a net capacity of 7.5 Mega Watts have been installed in 74 districts of Nepal since 2011. One of the recent policy interventions aimed at fostering solar adoption among rural households entails an ambitious subsidy scheme, namely Solar Energy Support Programme (SSP), across all the village development committees (VDCs) of Nepal. Under SSP, households are eligible to receive a subsidy, ranging from 5,000 NRs to 10,000 NRS for solar units of less than 18 watts or more. Similarly, the “Karnali Ujjyalo Programme” launched by the government across five remote districts of Karnali zone has subsidized ninety five percent of the cost of “Solar Tuki” for almost 30,000 low income groups since 2007.

Although such well-intentioned government steps are commendable, there remains a dearth of rigorous evidence on the linkage between subsidy-driven policy mechanism and household rate of solar adoption. What’s more unfortunate is that majority of people in rural areas still rely on traditional sources of energy. Recent estimates from Censure Bureau of Statistics suggest that only 56% of the households in the country have access to electricity, and 33% of the population still relies on kerosene for lighting purposes.

Strikingly, solar energy adoption rate across Nepal is mere 8%, in spite of the generous incentives provided by the government. One possible cause behind the low uptake of solar PV, according to economists, is the presence of uncertainty in the payoff over the lifetime of the system installation. Certainly, the decision to adopt solar PV entails large upfront costs with uncertain future benefits, causing potential households to wait and observe how government incentives and solar technology transform over time. While no concrete empirical evidence in Nepal exists that supports this hypothesis, there remains an emergent need to examine the impact of uncertainty on household preferences towards solar power investment.

Notably, recent financial budget announced in 2014-15 exhibits government’s ambitious goal of generating at least 25 MW of solar electricity. Despite strong commitment, project implementation appears to suffer from inadequate assessment of the market. For instance, the AEPC vigorously promoted 5 Watt solar systems five years ago, until it realized that 5 Watt system failed to meet the growing demand. Ever since, it has introduced 10 Watt systems with multiple bulbs and mobile charging devices, giving rise to major subsidy policy revisions. Anecdotal evidence suggests that the amended subsidy scheme has potentially reduced the average solar system prices by around 30%.

In addition, the government has implemented a three-year long credit financing scheme under the Energy Sector Assistance Program to further encourage solar adoption. Reports claim that almost sixty million rupees of wholesale loan were provided by urban partner banks and local financial institutions to install over ten thousand solar systems, with not even a single default case. That loans were fully repaid on time show promising signs of the long-term feasibility of such credit schemes aimed at expanding the volume of solar usage.

However, what’s not quite clear is the income distribution of solar adopters participating in the solar loan programs, and how it has changed over time. Existing studies in the U.S. show that it is not uncommon to find that solar adoption continues to be dominated by the heaviest electricity-consuming as well as affluent households, specifically in California. It is, therefore, necessary to study the social welfare repercussions and distributional well-being of households that have participated in credit solar financing schemes initiated by the government.

Under current circumstances, the government needs to make an arduous attempt to successfully mobilize the relevant stakeholders, including potential solar users, financial institutions, private retailers, certificate issuing institutes and donors. The introductory PV-related training workshop, conducted by Solar Electric Manufacturer’s Association in tandem with the AEPC, is a welcoming step. Subsequently, the Council for Technical Education and Vocational Training has certified more than 4000 trained solar technicians. More important, this has helped address the difficulty of retaining technical personnel, one of the major problems encountered in the recent past.

In conclusion, demand for solar energy among households in Nepal is more likely to escalate. It behooves the government to facilitate a more vibrant collaboration with the private sector. Unless the government rigorously evaluates overall social benefits and potential costs incurred for every policy intervention, uncertainty regarding solar adoption will most likely persist. More important, policy administrators need to design and implement incentives to further market penetration as well as disseminate the findings on a larger scale.