Renewable Energy 35 (2010) 11251129

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Renewable Energy
journal homepage: www.elsevier.com/locate/renene

Economic viability of solar home systems: Case study of Bangladesh

Md. Alam Hossain Mondal
Center for Development Research (ZEF), University of Bonn, Walter-Flex-Str. 3, 53113 Bonn, Germany

a r t i c l e i n f o
Article history: Received 31 December 2007 Accepted 9 October 2009 Available online 24 December 2009 Keywords: Solar home system Financial viability Household Micro-enterprise Net present value Internal rate of return

a b s t r a c t
Bangladesh is richly endowed with solar energy. Solar Photovoltaic (PV) system seems to be an appropriate form of renewable energy despite the monsoon type of climate in Bangladesh. The most attractive use of solar home system (SHS) in Bangladesh is the lighting system. People in rural Bangladesh predominantly use kerosene oil based lamps for illuminating their homes at night. Dry cell batteries are used for radio and gradually car batteries are becoming popular for running TV near grid areas where the charging facilities are available. The cost of kerosene and charging cost of battery are quite high and solar home system can compete with them in this particular eld. Six cases were analyzed to nd out the economic sustainability of the solar home systems at selected villages in Gazipur district, Bangladesh during October 2004December 2004 and also questionnaire survey method was followed to collect data. This study reveals that the solar home system is nancially attractive for small rural business and household lighting with entertainment. Only for household lighting purpose the system is not nancially and economically viable without considering social benets. 2009 Elsevier Ltd. All rights reserved.

1. Introduction It is indeed a major challenge to make energy services available worldwide and minimize the discrepancy in consumption between the two economic classes as the World Bank report of 2004 reveals the fact that bringing modern energy services to the 1.6 billion people who lack access to electricity and the 2.4 billion who rely on traditional biomass for cooking and heating is a major challenge. The richest 20% of the worlds population consume 58% of total energy, whereas the poorest 20% consume less than 4% and the majority of those underserved are the poor in Sub-Saharan Africa and South Asia [1]. Such is the case of Bangladesh, a South Asian country, electrication level was 31% in 2000 [2] and 31.5% in 2001[3]. Per capita electricity consumption was 96 kWh in 2002 [2] and 122.43 kWh in 2003 [4]. The above gure of electrication level for Bangladesh however does not represent the actual situation, which is even worse. Out of about 25 million households in the country, only around 4.2 million had been brought under the network of conventional electricity till to-date [5]. Since the rural network is characterized by a comparatively lower consumer density, it often becomes difcult and uneconomic to extend lines to certain remote locations. Renewable energy technologies are considered as viable technical options for such remote areas, especially for ensuring equitable development of all areas and different cross-sections of

socio-economic groups. The solar home system (SHS) has been in use by various institutions for several years. The problem is that there is as yet not that much research has been carried out to determine the real niche for SHS in Bangladesh. Lack of technical know how, awareness, nancial constrain and insufcient information are the barriers for sustainability of SHS in the rural areas of Bangladesh. Therefore, this study was focused to nd out the economic sustainability of SHS in selected villages in Gazipur district, Bangladesh. 1.1. Study area Three villages, Niz Mawna, Barabo and Dhonua, from two different upazilas, Sreepur and Kapasia, under Gazipur district were selected in order to carry out the entire research work. Niz Mawna, the largest village of Sreepur upazila with respect to area and population, is situated approximately 52 km North-west far away from Gazipur district head quarter. Barabo, also a large one, is 45 km North-east far away from the same head quarter. While only a small rural market was surveyed in case of Dhonua. These villages were considered as they were true representation of different parameters such as landscape, population, resources etc. were similar to the most other rural areas of Bangladesh. In addition, two main Non-Government Ofces (NGOs), namely Grameen Shakti (GS) and Bangladesh Rural Development Committee (BRAC) were already into the act of providing SHS in the study area that might be helpful to compare nancial issues with the oldest systems installed in these villages.

E-mail addresses: alam_90119@yahoo.com, alam-hossain@uni-bonn.de 0960-1481/$ see front matter 2009 Elsevier Ltd. All rights reserved. doi:10.1016/j.renene.2009.10.038

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2. Methodology 56 households and 10 micro-enterprises operated by SHSs were surveyed in this study. 3 focus group discussions were also held during the survey. Out of 66 cases, 6 were analyzed to nd the nancial viability in a manner so that it could cover all different applications for the whole survey. The secondary data was collected mainly by reviewing the relevant organizations annual reports, publications, literature, internet searching and discussion with focal people. The primary data was collected through questionnaire survey, interview, focus group discussions and eld observation. Standard nancial analysis method was followed to analyze the data with excel software. Different nancial indicators such as Net Present Value (NPV), Simple PayBack Period and Internal Rate of Return (IRR) were calculated to determine the nancial viability of SHS. 3. Solar home system A typical SHS includes a 20- to 100-Wp photovoltaic (PV) array ; a rechargeable battery for energy storage, a battery charge controller, one or more lights (generally uorescent), an outlet for a television (TV), radio/cassette player, or other low powerconsuming appliances, switches, interconnecting wires, and mounting hardware. A typical SHS is given in the following Fig. 1. Both the array size and the sunlight availability will determine the amount of electricity available for daily use. 4. Financial analysis 4.1. Investment analysis It is important to note that rural customers obviously neither go for formal investment analysis before buying the systems nor have the skill to do so. They normally take buying decisions based on the perceived benets of the systems, experience of the other users of the systems and their ability to pay the installments for the systems when they buy on credit. Some of the customers who invest to earn money do some intelligent guess, especially regarding annual income that the system can generate. But there is no way to go for the sophisticated analysis like NPV method before making investment decision. Then a question arise as to who would be the target group of this paper? Currently, NGOs and government agencies are mainly promoting solar PV applications in rural areas. Private companies are not directly taking them to the rural customers; instead they concentrate on supplying hardware to the NGOs and other installers only. In this context the promoters must know what they are promoting to the relatively low income households. If SHS is an appropriate investment it would denitely help the promoters to market systems by indicating not only the social benets but also nancial benets. 4.2. Methods of investment analysis The rst step of nancial appraisal is to determine all of the benets and costs in monetary terms. For the nancial analysis it is excluded the benets like environmental impacts, long term benets of children education due to having good quality of light at home, social benets of having trained technicians in rural areas or creation of new business opportunities due to SHS. The cost of the systems are obviously the initial investment to purchase the
1

Fig. 1. Typical solar home system components [6].

system, repair and maintenance expenses, replacement of components like battery, the charge controller, lamps etc. in future within the life time of the module. On the other hand, the nancial benet is the revenue from the system applications. The fundamental principle of appraisal methods is to compare costs against benets. Although the principle sounds simple but the analysis become somewhat difcult because of the fact that the costs and benets are spread over a very long period (over 20 years) of time for SHS. The cost of the system has to be made up front. But the cost of replacement will be made some time in the distant future, which makes the estimation difcult. But the more controversial issue is to estimate benet or cost savings over a period of 20 years. The following three indicators were considered for nancial analysis of this study. 1) Simple PayBack Period 2) Net Present Value 3) Internal Rate of Return The following equations were used:

Pay Back Period I=R E NPV C0 PV Present Value X Cn=1 r n

(1) (2) (3) (4)

IRR i1 NPV1*i2 i1=NPV2 NPV1

Where I: Investment, R: Return, E: Expenses, C0: initial investment at period 0 which is a negative gure, Cn: total cash ow, r: discount rate, NPV1 and NPV2 for two different interest rates and NPV1 is positive and NPV2 is negative. 5. Case studies and ndings The respondents used different types of conventional energy sources before getting the SHSs. Grid charged car battery was very popular for using black and white TV for entertainment and to get news in the study villages. Monthly average expenditure for car battery to run TV was 80 Taka (1 USD 60 Taka). Monthly average kerosene expenditure for lighting purpose was 92 Taka where the average consumption was 4 L per household (cost of kerosene 23 Taka/litre). On the other hand, the average kerosene consumption was 12 L/month/shop for the micro-enterprises. This high consumption of kerosene was mainly due to the use of kerosene pressure lamps. It had already been mentioned that GS and BRAC

1 Array: An assembly of several modules on a support structure together with associated wiring.

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were delivering and servicing SHSs in the study villages. The system prices were almost same for both NGOs. The maximum loan periods were 2 and 3 years for BRAC and GS respectively. The interest rate for BRAC was 15%, and for GS, rates were 12% for 3 years and 8% for 2 years. 66 respondents in the study area had been using SHSs for various purposes. Of them, 56 were using the system for household applications (lighting or lighting and operating TV) and the remaining for business purposes. Overall using hours of the SHS for household users were 34 h a day and micro-enterprises normally used it 23 h a day. Again out of 56 households, 3 respondents were directly related to income generating activities. 6 cases were analyzed here to nd out whether the SHS was nancially viable or not in the study villages considering the previous expenditure for kerosene, automobile battery and present activities as well. Three discount rates were used for NPV calculation. These were 6%, the interest rate of savings deposit paid by commercial bank, 9% interest paid by commercial bank and 12% lending rate of commercial bank [7]. 5.1. Case 1: two kerosene lamps and one black and white TV system replaced by a SHS with 2 lamps and a plug point for TV Name of the respondent: Md. Belal Hossain Address: Village- Niz Mawna, Post Ofce- Gazipur, UpazilaSreepur, District- Gazipur Age: 36, Education: Class IX, Occupation: Agriculture, Monthly income: 7000 Taka Family members: 6, Previous kerosene consumption per month: 5 Litres Mr. Belal replaced two hurricane lamps and one car battery (operating TV) with SHS. He would charge the car battery 2 times in a month and it cost 20 Taka for charge and 20 Taka for transport each time he did it. Initial investment cost of the battery was 2800 Taka. For this analysis, all expenses from hurricane lamps and car battery were considered as revenue from the SHS. Following major assumptions were made for the analysis purpose:

5.2. Case 2: micro-utility and own grocery shop lighting

Name: Md. Mobarak Hossain Address: Village- Dhonua, Upazila- Sreepur, District- Gazipur Age: 24 Education: Class V Occupation: Business Monthly more income: 450 Taka Monthly bill from another lamp: 150 Taka Mr. Mobarak Hossain installed 40 W SHS with 2X6 W uorescent lamps to run his business with 1 lamp and to sell power to neighbouring shop by another lamp. The system comprised of 71 Ah deep cycle battery, 12 V and 10 W charge controller. He said that he earned 1520 more Taka per day after the installation of SHS, because working time was extended to 2 more hours and also many people preferred to come at night for the better quality of light. He got revenue at the rate of 5 Taka/day by selling power to neighbouring shop for 2 h by a 6 W lamp. The ndings of the nancial analysis presented in the following table:
Indicators Simple Payback Period (year) NPV (6%) [Taka] NPV (9%) [Taka] NPV (12%) [Taka] IRR (%) Values 2.13 72 850 54 769 41 973 47.5

Option: SHS 40 W 71 AH (deep cycle battery); 12 V Lamps 2 lamps (6 W) Charge controller 10 A Life of solar panel 20 years Battery replacement 5 years Controller replacement 6 years Tube replacement 3 years Lamp shade 7 years Switch/cable 5 years Panel capacity Battery

Option: Kerosene lamps and grid charging battery No. of Hurricane Hurricane replacement Chimney replacement Kerosene cost Battery (automotive) Battery Replacement 2 4 years Every 6 months 115 Taka/month One 3 years

5.3. Case 3: 2 kerosene lamps replaced by a SHS for household lighting Name of the user: Md. Sor Uddin Address: Village- Niz Mawna, Post Ofce- Gazipur, UpazilaSreepur, District- Gazipur Age: 26 Years, Education: Higher Secondary Certicate (HSC), Occupation: Agriculture Family members: 5, Monthly income : 5000 Taka Monthly kerosene consumption was: 4 Litres Mr. Sor Uddin replaced two hurricane lamps by a PV system of 30 W, which supports 2 uorescent lamps for about 4 h. For this analysis, expenditure from hurricane lamps was considered as

Financial analysis results for kerosene lamp and grid charging for battery to operate TV versus SHS for lighting and operating TV presented in the following table:

Indicators Simple Payback Period (year) NPV (6%) [Taka] NPV (9%) [Taka] NPV (12%) [Taka] IRR (%)

Values 6.34 11 125 6268 2845 15.6

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revenue from the system. Major assumptions were made for the analysis given in the following table:
Option: SHS Panel capacity Battery Lamps Charge controller Life of solar panel Battery replacement Controller replacement Tube replacement Lamp shade Switch/cable 30 W 47 Ah (deep cycle battery); 12 V 2 lamps (6 W) 10 A 20 years 5 years 6 years 3 years 7 years 5 years Option: Kerosene lamps No. of Hurricane Hurricane replacement Chimney replacement Kerosene consumption 2 4 years Every 6 months 2 L/lamp/month

Mrs. Rahima Sultana started her income generation activity after acquiring the SHS. According to her statement, she earned average 800 Taka/month from tailoring. Normally she worked at night after nishing household works. Maximum 20 Taka/year was needed for repairing and maintenance of the machine. Findings of the analysis given in the table below:
Indicators Simple Payback Period (year) NPV (6%) [Taka] NPV (9%) [Taka] NPV (12%) [Taka] IRR (%) Values 2.45 81 048 60 727 46 351 45.7

5.5. Case 5: one kerosene pressure lamp replaced by a SHS with 2 lamps Name of the participant: Md. Nazrul Islam Address: Village- Dhonua, Upazila- Sreepur, District- Gazipur Age: 28, Education: Class VIII, Occupation: Business, Monthly income: 9000 Taka Monthly kerosene consumption was: 15 Litres Mr Nazrul Islam owner of a grocery shop was using kerosene pressure lamp for lighting his shop before installation of SHS. Findings of the analysis for kerosene pressure lamp versus SHS with 2 lamps furnished in the following table:

For this case it was calculated that monthly expenses for kerosene and SHS were 102 Taka and 187 Taka respectively. Findings of the analysis given in the table below:

Indicators Simple Payback Period (year) NPV (6%) [Taka] NPV (9%) [Taka] NPV (12%) [Taka]

Values 41 7697 8122 8422

5.4. Case 4: household lighting, entertainment and income generation

Indicators Simple Payback Period (year) NPV (6%) [Taka] NPV (9%) [Taka] NPV (12%) [Taka] IRR (%)

Values 2.79 33 944 24 335 18 253 39

5.6. Case 6: Mobile phone service by PV system as the source of energy

Name: Mrs. Rahima Sultana Address: Village- Barabo, Upazila- Kapasia, District- Gazipur Age: 24, Family members: 5 Education: Secondary School Certicate (SSC) Occupation: Household work and income generation

Name: Md. Torikul Islam Address: Village- Niz Mawna, Upazila- Kapasia, District- Gazipur Age: 24, Education: SSC Occupation: Business Mr. Islam had been running a cell phone business 3 years from the time the survey was made. To nd out the nancial benet of this case study some assumptions were considered and given below:

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Option: SHS Panel capacity Battery Lamp Charge controller Life of solar panel Battery replacement Controller replacement Lamp shade 25 W 47 Ah; 12 V 1 lamp (6 W) 10 A 20 years 5 years 6 years 7 years

Option: Cell Phone Monthly salary Maintenance cost yearly Other cost Phone set & line cost Room decoration Room rent 5000 Taka 300 Taka 10 Taka/day 42 000 Taka 5000 Taka 150 Taka/month

the society is directly beneted from reduction in kerosene usage and protection of environment by reduction in level of carbon dioxide. One kerosene hurricane lamp produces 103.2 g CO2 per hour [8]. Two kerosene hurricanes produce 292 kg CO2 per year considering 4 h use per night. Per ton CO2 reduction cost is about 240 Taka (US$ 4) in Bangladesh [9]. This yields an annual saving of 70 Taka for the society. Based on the above saving, the following economic parameters were found for this system:

Indicators

Values 31.78 6761 7384 7821

Financial analysis results for mobile phone service using PV system presented in the following table:

Simple Payback Period (year) NPV (6%) [Taka] NPV (9%) [Taka] NPV (12%) [Taka]

Indicators Simple Payback Period (year) NPV (6%) [Taka] NPV (9%) [Taka] NPV (12%) [Taka] IRR (%)

Values 2 279 706 210 921 162 181 51

It is clear that 30 W systems for household lighting is not nancially and economically viable option compared to kerosene without considering social benets.

6. Conclusion Summary of the ndings for all case studies in the following table2:
Case Study Simple Net Present Internal Payback Value (12%) Rate of Period (year) [Taka] Return (%) 2845 15.6

1) 2 kerosene lamps and one black 6.34 and white TV replaced by PV system 2) Micro-utility and own grocery shop 2.13 3) 2 kerosene lamps replaced by SHS 41 4) Household lighting, entertainment 2.45 and income generation 5) One kerosene pressure lamp 2.79 replaced by a PV System with 2 lamps 6) Mobile phone service 2

41 973 8422 46 351 18 253

47.5 45.7 39

To be popular, SHS must be made affordable to households by covering high investment costs. Regarding nance of SHS, customers need more exible nancing to reach any sizable number of households. The most ideal condition would be to have a nancing scheme where the monthly installment is more or less equals the monthly energy expenditure of the households. Only commercial sources of fund may become sustainable in the long term and they may join with Government Organizations or NGOs to promote the technology in the rural areas. A local source of fund is essential for sustainability of SHS program. This study reveals that the SHS is nancially attractive and sustainable for small rural businesses and household lighting with entertainment. But if used only for household lighting purposes, the system is not nancially and economically viable without considering social benets.

162 181

51

In four cases out of six, it was found that simple payback periods were less than 3 years, positive NPVs and signicantly large and IRR over 39%, which clearly indicated the attractiveness of the investments. But these cases were only for commercial or income generating purposes. Only for household lighting purpose, the SHS of 30 W was not nancially viable option. For the case of two lamps and one black and white TV option the NPV was found positive and internal rate of return was 15.6. For 30 W system (only household lighting purpose), economic analysis can be done. Because only nancial analysis is not adequate to fully appreciate energy investments, the analysis is needed to take into account the social and environmental benets as well. For example, nancial analysis takes into account neither the long term impact on child education due to good light nor the impact having a TV in the house using solar power which is not otherwise possible. It is difcult to quantify the social and environmental benets. On the other hand, rural households have ability and willingness to make equity investment and borrow loan from micro nance institutes to nance the purchase of SHS. Also,

References
[1] Word Bank. Renewable energy for rural development. Washington: The Role of the World Bank Group; May 2004. [2] UNEP. Global network on Energy for Sustainable Development (GNESD), energy access theme results, summary for policy makers; April 2004. p. 17. [3] BBS. Preliminary report. Population census 2001. Dhaka: Bangladesh Bureau of Statistics; 2001. p. XVII. [4] BPDB. Annual report. Dhaka: Bangladesh Power Development Board; 20022003. p. 63. [5] Mondal Md. Alam Hossain. Technical and Socio-economical aspects of selected village based solar home system in Gazipur district, Bangladesh, Master Thesis: University of Flensburg, Germany; 2005. [6] World Bank. Technical paper, No. 24, p. 8, http://www.worldbank.org/astae/ pvpdf/pvbest.pdfprintedon09.06.04; 1997. [7] Alamgir, Dewam A.H. 2001: Economic analysis and appropriate nancing. Photovoltaic technology for Bangladesh. Editors: Islam A.K.M. Sadrul & Ineld D.G. (March 2001): Dhaka, p. 155, 167 [8] World Bank. Ofce memorandum, http://www.gefweb.org/Documents/Council_ Documents/GEF_C18/Bangladesh_Rural_Electrication.pdfprintedon10.02.05; 2001. [9] Sohel S A K Rahat Jaman. Economic sustainability of solar home system in rural Bangladesh. In: Islam A.K.M. Sadrul & Ineld D.G, Editors. Proceedings of the international conference on renewable energy for rural development. Dhaka, Bangladesh; 1921 January, 2002. p. 266

2 12% which is the lending rate of commercial bank as well as the rate charged by GS (one of the major SHS installer in the rural areas).