The Solar Home Systems initiative in Bangladesh
The Solar Home Systems (SHS) initiative began in January 2003 and was facilitated by the government-owned Infrastructure Development Company Limited (IDCOL). The aim was to “fulfil basic electricity requirement of the off-grid rural people of Bangladesh".
IDCOL was set up in 1997 to finance the development of medium- to large-scale infrastructure and renewable energy projects in Bangladesh. By June 2003, IDCOL's international partners, such as the World Bank and the International Development Association (IDA) had joined forces to support the SHS initiative via the first Rural Electrification and Renewable Energy Development Project (RERED). Initial funding from the World Bank was extended several times over the years via RERED.
The project was set up with selected local partner organisations (POs) as the main promoters of SHS. The POs select private customers, extend loans, install the systems, and provide after-sales services, while IDCOL provides grants and soft loans as well as the necessary technical assistance.
These POs are microfinance institutions which are already active in rural areas and are able to involve local private vendors in importing and installing SHS after being granted a loan. This allows private firms to offer poor Bangladeshi families low down-payments of up to three years in exchange for SHS.
In 2000, 68 percent of the Bangladeshi population had no permanent access to electricity. As part of its response to the UN's Millennium Development Goals (MDGs), the Bangladeshi government set a target of providing electricity to all its citizens by 2020.
However, a combination of limited access to infrastructure and the dispersed nature of rural settlements has provided significant obstacles to achieving universal electrification. Therefore, the Bangladeshi government considered off-grid renewable energy technology to be one of the best options for bringing electricity to rural areas, where more than 70 percent of the population live.
The public impact
The SHS project has had a significant positive impact, reaching roughly 12 percent of the entire Bangladeshi population.
When the project was initiated in 2003, roughly 12,000 SHS had already been installed in Bangladesh and the target was to install 50,000 systems by 2008. This target was achieved three years ahead of schedule in 2005 and for USD2 million below the estimated cost. By May 2017, 4.12 million SHS systems had been installed, with a focus on areas where electrification and grid expansion were particularly challenging.
Before SHS, kerosene lamps were commonly used for domestic lighting in rural Bangladesh. However, these are expensive, provide only poor illumination, and produce emissions that affect health, particularly of the respiratory organs. In that respect, “the programme has so far saved consumption of 1.14 million tons of kerosene worth USD411 million approximately.”
When the project was introduced, the goal of the government was to bring electricity to its poorest regions. In this regard, it has been proved that having reliable electricity in homes creates ripple effects that improve several aspects of living. It was estimated that “household access to [SHS] increases per capita food expenditure by 9.3 percent, per capita non-food expenditure by 4.7 percent, and total per capita expenditure by 5.1 percent, because of savings derived from the SHS or time freed up for productive activity”.
The project also generated a positive impact on the local manufacturing industry. Initially, batteries were the only component produced in Bangladesh and sold as part of an SHS. However, gradually all components (including solar panels) began to be produced locally. This contributed to the growth of the renewable energy market in Bangladesh as a whole, which employed 114,000 people in 2013 alone.
The project started off with five POs who participated in the distribution and sale of SHS, and has grown to include 49 POs by 2017. POs strengthen financial sustainability through their strong presence in the rural regions of Bangladesh. They report an average loan-collection efficiency of more than 90 percent, while they service their debts with IDCOL on time. This reduces the dependency on subsidies overall.
While other SHS programmes had existed in Bangladesh prior to 2003, it was the cooperation between IDCOL and international stakeholders via the World Bank's RERED project which gave the SHS initiative in Bangladesh the necessary funding impetus. The RERED project was aimed at supporting Bangladesh in its efforts to improve access to electricity and was extended twice before the creation of RERED II in 2012. It funded an initial USD16 million from the IDA and a further USD 8.2 million from the Global Environment Facility in 2002.
IDCOL was given enough time to test and design the right approach for Bangladesh's specific needs, which improved the likelihood that the project would succeed. Prestigious international partners began to support SHS after its launch via the World Bank, including among others: the Asian Development Bank, the German development bank (KfW), the German Agency for International Cooperation (GIZ), the Islamic Development Bank, and Japan's International Cooperation Agency. “The strong partnerships created under RERED helped to make the SHS programme extremely successful.”
Furthermore, the programme managed to make use of the vibrant pre-existing local microfinance system to connect international stakeholders by engaging local institutions as POs within their model. “A pre-existing network of competitive microfinance institutions had well-established relationships with clients in rural areas to whom they could offer an additional service. The historical presence of these organisations allowed for cost-effective and efficient outreach, while their familiarity to rural consumers led to greater trust in the project POs and resulted in a larger uptake of SHS.”
Before and during the SHS project, the Bangladesh government has demonstrated its commitment to universal electrification. This encompassed a broad range of policies, not just the SHS initiative. Prior to the start of the SHS project, IDCOL and other actors were already involved with initiatives to provide electricity throughout Bangladesh. In addition, the government prepared the market for the SHS project by eliminating import duties on SHS in April 2000.
As part of the 2020 UN MDGs, the Bangladeshi government had set the long-term vision of providing universal access to electricity, as well as producing 10 percent of renewable energy by 2020. Through IDCOL, it funded other projects, apart from SHS, to generate electricity and renewable energy on a much broader scale. “IDCOL is also involved in the financing of renewable energy applications such as biomass installations, commercial and domestic biogas-based power plants, solar irrigation pumps, solar minigrids, wind energy, and small hydropower projects, which are developed by the private sector, NGOs, and various communities.” All these projects, taken together, indicate a much broader commitment to green energy as a whole. "'We are very much in the process of creating a green Bangladesh,' said Mahmood Malik, head of IDCOL."
Although the government removed import duties on solar panels, local Bangladeshi solar panel manufacturers have flourished under the SHS scheme and have received additional support from the government. Improvements in the local market led to a dispute about the quality of cheap solar panel imports that did not adhere to the country's robust technical standards and, in response, the government decided to evaluate the introduction of a 10 percent import duty on solar panels for the fiscal budget of 2017/2018. The draft aims to protect its local manufacturers as well as consumers from substandard products.
Public confidenceThe public was initially sceptical of the initiative, but became supportive as soon as the project was put in place and proved its worth. The grassroots engagement with local organisations was key to making the rural Bangladeshi population feel engaged. “Early on it was difficult to convince customers that the solar panels worked. But [POs'] history of working in the area, and IDCOL’s emphasis on quality and after-sales maintenance, earned people’s trust.”
Clarity of objectives
IDCOL's overall objective for the SHS programme was to improve basic energy services in Bangladesh by making them more accessible to rural areas and low-income demographics. This was part of a broader commitment to the UN MDGs and the government strategy to “meet 10 percent of its total power demand from renewable energy sources by 2020”.
More specifically, the SHS initiative had a number of targets succeeding each other over time:
- In 2003, IDCOL had an initial target of financing 50,000 SHS in 5 years; after reaching that target sooner than expected, it was increased to 200,000 SHS by 2009.
- In 2009 “a new target of 1 million SHS installations by 2012 was set”.
- In 2014, after total installations reached 3 million, IDCOL set a new target of another 3 million SHS for 2016/2017.
Strength of evidence
Previous projects and experiences led to an accurate, evidence-based evaluation before the project, which managed to take into account Bangladesh's unique microfinance sector.
In 1997, the state-owned Bangladesh Rural Electrification Board had run a pilot project for the electrification of 850 households through SHS in the remote Narsingdi District. While the project setup was different, it provided important socioeconomic evidence on the acceptability of solar electricity. In addition, the first commercial SHS programmes were developed as early as 1996 by Grameen Shakti, which created an important local SHS vendor network and became one of the biggest PO partners of the 2003 SHS programme.
The World Bank was considering which project design to support under RERED and agreed to trial a system that involved Bangladesh's local microfinance institutions instead of relying on previous experience from Sir Lanka. In 2002, in preparation for the SHS launch, “IDCOL bought 250 solar home systems and provided 50 systems each to 5 selected partner organisations. The performance of these partner organisations in installation, loan collection, and other challenges was tracked to hone the project design and selection criteria for partner organisations.”
IDCOL received continuous funding, subsidies and technical support over the years from the World Bank. The World Bank and IDA funding rounds alone, excluding additional partners, amounted to over USD573 million. “Funding has been used to provide (i) a credit line to IDCOL to refinance microfinance loans made by partner organisations; (ii) an output-based subsidy, and (iii) technical assistance, including for training and implementation of a consumer-awareness campaign.”
The subsidies were phased out later on to adjust the market. “When the SHS programme started, the average subsidy was USD90 per system. By 2006 it had been halved and by 2013 eliminated, except for the smallest systems.”
Additionally, local grassroots POs were able to supply technical support and finance options. This helped the local population to install and maintain SHS in a sustainable manner and create a "sense of ownership". Local partner organisations provide maintenance training during the loan-repayment period to the end consumer, and “there are various packages on offer suited to different income groups of people in the rural areas. The very poor can own an SHS, paying as little as 10 percent of the total cost with the rest payable in 36 equal instalments.”
IDCOL put in place a multilayered monitoring and quality control process, which aimed to ensure high standards of installed SHS. They also set up regional offices after the SHS initiative became successful, to ensure the cost-effectiveness of their inspections:
- “Prior to installation, the technical standards committee approves the suppliers and SHS equipment used. Once the systems are installed, IDCOL conducts a physical verification. It also conducts a technical audit to ensure that only equipment approved by the technical standards committee has been used.”
- IDCOL's PO selection committee screens the POs, applying clear eligibility criteria for inclusion in the IDCOL programme.
- The operations committee is responsible for programme oversight and providing the POs with operational solutions.
In addition, IDCOL provides awareness-raising activities and training for its staff members, POs and consumers. “Training covers SHS installation, maintenance and troubleshooting, and market development. Awareness-raising activities include development and distribution of publicity materials to popularise SHS use among rural households throughout the country.”
Not only IDCOL but also the NGOs involved play a part in managing the initiative. “Maintaining and monitoring the purchased systems is also carried out by [them], while customers themselves are responsible for operating [SHS]. During installation, users are trained in how to operate them and subsequently receive support locally.”
IDCOL publishes annual reports that inform stakeholders about the number of SHS installed. This information is collected “based on a 100 percent survey of all the households [having an SHS installed]”.
To measure the success of the implementation of SHS, POs have to prepare a monthly programme report which is submitted to IDCOL. Information is recorded and fed into IDCOL's own installation database to provide data for periodic process reports. Data on instalment payments is also recorded, which provides information on credit repayment.
In 2012, the Bangladesh Institute of Development Studies submitted an impact evaluation to the World Bank to assess the success of the project. The 120-page document creates a high-level impact assessment to move forward with the project and solve upcoming issues of providing affordable SHS to citizens, while also creating the right market environment to keep local producers and vendors in business. Generally, it remains hard to measure the use of electricity when it is not connected to the overall grid, and the assessment relied mainly on survey data it had gathered from rural villages.
Cooperation between international and local partners was a key success factor in the SHS initiative. “The programme's final design is a good example of how international experience and local know-how can come together to yield an innovative [project] design that suits the country's circumstances.”
When the World Bank approached IDCOL with the proposal for RERED, they initially insisted on replicating a project design which had been successful in Sri Lanka. “In [Sri Lanka], private dealers in SHS would make agreements with [microfinance institutions] to extend financing to eligible customers.”
Concerns were raised about how private dealers would gain the necessary trust of the local population under this model. Instead, IDCOL was given the flexibility to trial an approach that took account of Bangladesh's unique infrastructure of microfinance institutions. “The project's design was flexible (with a range of subsidies and system sizes, for example), allowing for quick adaptation to evolving technology and market conditions - and to consumer feedback.”
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