"

Social Business as Strategy for Providing Solar Energy for Rural Areas in
Peru: A Proposal

Abel Canchari de la Cruz
1
, Jack Wu
2

1. College of Commerce, National Chengchi University, 2. Department of Public Finance,
National Chengchi University

ABSTRACT
This social business proposal aims to set a framework for enabling access to affordable and
sustainable solar energy for poor families, as a means for social inclusion and development in
the rural highlands of Peru.
The proposed model takes advantage of the high annual average daily solar irradiation in the
Peruvian rural highlands that is key for developing photovoltaic projects, also the fact that
rural households in Peru have a significant desire, willingness, and ability to pay for
electricity.
The social business has governments and large businesses as clients. The product is called
solar home system that comprises the following main components: a solar module of
100Wp, a charge controller of 12V 10A, and a battery of 65Ah 12V. The end users are rural
households that are not considered in any national rural electrification plan; therefore they
might not have electricity in the following seven years or more.
In the pricing scheme families will enjoy a subsidy, however they will pay a fee for the
operation and maintenance and cooperate with their labour force, small accessories, and local
materials. A certain level of subsidy is sine qua non for electricity projects.
Having institutional clients that are not price sensitive, and having a large unsatisfied demand
for electricity are the main factors for making this social business viable from the economic
and social perspective.

Key words: Photovoltaic, Peru, Solar Home System, Social Business



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Introduction
While for many people, electrical power is available at the flick of a switch, for some 1.6
billion people around the world without access to grid electricity this remains a dream.
Peru is a developing country with 29 million inhabitants. According to statistics, by 2012
approximately 3.8 million people cannot access to electricity, that is 771,000 households,
or 12.8% of the total country population (INEI, 2014) (OSINERGMIN, 2013). See the
Figure below that shows the access to electricity by regions. Those regions located in the
Andean highlands and in the amazon are likely to have a low percentage of access to
electricity.

Figure 1. Access to Electricity by Regions
Families with no access to electricity, opt to use candles, dry cell batteries, and sometimes
kerosene or diesel oil that are dangerous, dirty and dim. According to a survey sponsored
by the Word Bank, among these kerosene users, about 83 percent use it exclusively for
lighting. Further dry cell batteries are used extensively in rural households, despite a
very high cost per equivalent kWh. (Meier, Tuntivate, Barnes, Bogach, & Farchy, 2010)
The lack of access to affordable electricity is caused by the low and varying amount of
electricity consumption between inhabitants of the same village, the majority of
households consume small amounts, and the houses are spread out in remote areas. Thus,
making grid electricity projects unfeasible when evaluated from the economic
perspective.
On the other hand there are opportunities for this kind of business. A report of the
Peruvian National Environment Fund FONAM, estimates that Peru has advantageous
conditions for the development of solar energy projects. The report argues that, the
countrys solar potential has not been exploited yet. In the mountain ranges located in the
South and throughout the central belt of the highlands, solar irradiation reaches average
levels above 5-6 kWh/m2/day, which are among the highest worldwide (FONAM, 2014).
See the irradiation map below.

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Figure 2. Annual average daily solar irradiation kWh/m2
Also, a nationwide survey of rural household energy use has revealed that rural
households in Peru have a significant desire, willingness, and ability to pay for electricity.
Households without electricity from the grid frequently pay more for energy of lesser
quality from kerosene lamps or batteries than they would pay for electricity service.
(Meier, Tuntivate, Barnes, Bogach, & Farchy, 2010). The same survey states that the use
of car batteries by 18% of rural households without electricity is a strong indication of
unsatisfied demand for electricity in areas near to the grid. However, the upfront payment
for purchasing the solar energy components for a household remains as the main barrier to
be overcame.
The Market
Rural areas of Peru where live households without electricity.
Clients
The social enterprise may have four kinds of clients: district and province municipalities,
regional governments, and businesses. Operations could start after securing a
partnership/contract agreement with them.
District and Province Municipalities: they are local governments comprising a defined
territory and their population. Their mandate is to promote local development. To do so
they manage a budget transferred from the national government. The mayor and the
council members are the decision makers, and they are elected every 4 years. It is a
common pattern to have large underspent budget. A review of the budget expenditure for
each region shows that they underspent considerable amount of budget. For instance, in
the last five years an average of US$ 140 million per year were not spent in every region,
that is a third of their total annual budget (Ministry of Economy and Finance, 2014).

%
Regional Governments: Are public institutions that enjoy political, economic and
administrative autonomy in matters within their competence. They manage a budget
transferred from the national government. They promote development region-wide. It is
composed of two bodies: a regional council and a Regional President. There is a similar
budget under-spending pattern. As for last five years, an average of US$ 30 million were
not spent by each Regional Government. That figure accounts for 10% of the annual
budget (Ministry of Economy and Finance, 2014).
Businesses: Especially businesses involved in the extraction of raw materials. In Peru
there are high profile mining and gas extraction projects.
The rationale for selecting clients are the mainly the scale of the profit margins. They are
high when products are sold to this kind of clients (institutional sales). Selling directly to
them in high volumes reaches fewer customers, and higher prices might be charged, since
most of these types of customers command larger budgets.
End users: households
The actual end users of the solar home systems are households. They will have to pay a
reasonable fee and contribute with labour force, and accessories for installing the solar
home systems. Products cannot have a full subsidy from the government or any other
organization. They are families living in rural areas without access to electricity. Most of
them are in relative poverty conditions. Their daily income range varies from US$1 to 3
US$. Illiteracy is common among them; some have completed primary or secondary
education. They are subsistence farmers living above 2500 meters above sea level. The
villages where they live must not be included in the National Rural Electrification Plan,
nor in any other project undertaken by the government, NGOs or international
cooperation agencies. Therefore they are unlikely to have electricity in the following
seven years or so. According to the Master Plan Study for Rural Electrification by
Renewable Energy in the Republic of Peru, a typical rural family has an average monthly
current energy expense of US$ 6.1, and their willingness to pay is US$ 4.3 (JICA, Electric
Power Development Co, Nippon Koei Co., 2008). Generally they are price sensitive and
do not have enough knowledge about solar home systems. See in the table below the
information of typical rural home energy consumption.
Table 1. Estimated Daily Energy Requirement of a Rural Household
Energy load Quantity Nominal Power (W) Hours
working
Watts
Consumed
Bulbs 3 9 4 108
Radio 1 40 5 200
Mobile charger 1 5 3 15
Other 2 30 2 120
Total 443
Calculation based on data from the National Survey
The Product
The product is the solar home system. Its main components are:

&
Table 2. Solar Home System
Components Details Function
A solar PV module 100Wp Generates electricity.
A charge controller 12V 10A Regulates the Voltage and Current.
Battery 65Ah 12V Stores the surplus electricity for using during
the night or rainy days.

See the figure below for a layout. The system is stand-alone, meaning this is not
connected to other electrical infrastructure. It is designed to be modular, which means that
it can be adapted and changed over time as demand for electricity changes.

Figure 3. A Solar Home System
The solar module will be installed over a pole outside the house. The control board will
have a controller. The PV module of 100Wp will generate a nominal power of 450W/day
(considering 5.5 hours of light, and working at 90% of its capacity, to be conservative in
our calculation). The household demand as shown above in Table 1 is 443W/day. The
product design follows the frugal engineering approach, while maintaining quality,
longevity and functionality.
Distribution
Clients must be approached directly, and partnership agreements must be signed. Before
approaching the potential client a screening process must be conducted in order to assess
the likelihood of signing a partnership agreement. The variables to consider are: i)
quantity of households without electricity, not to be covered by the national rural
electrification plan, ii) political will of decision makers towards renewable energy, iii)
budget availability, and iv) governments not involved in corruption scandals.
Price Strategy
Research into purchasing behavior of local and regional governments suggest that they

'
are not price sensitive. In terms of distribution channels, partnership agreements offer the
greatest room for higher profitability given that purchasers are willing to pay extra for the
convenience of having the product installed in the home of the end users. However, this
advantage is offset by the lower disposable income of the end users. Price sensitivity of
households runs high for solar home systems. The pricing strategy for this product must
reflects the following considerations: competitors price which according to the survey
conducted is US$ 950, the fixed cost or overhead, and the unit variable cost, see figure
below.
Table 3. Unit Variable Cost Solar Home System (US$)
Items Total
Cost
Cost
to
Client
Cost to end
Users
(contribution)
PV Module 100wp polycrystalline 40 cells 150 150
Charge controller 12v 10A 50 50
Battery 12v 65Ah 110 110
Shipping to Peru & customs (PV Module, controller) 80 80
Angle and screw for fixing PV module 6 6
Connection part & 30 m wiring (fuse and 2 switches) 12 12
LED DC Light bulbs (2 units) 20 20
Pole 10 10
Wooden control board and battery 4 4
Assistant - family (Installation) 3 hours 7 7
Technician (Installation) 3 hours 10 10
Transportation to site 25 25
Label for signalling the project 5 5
Social engineering activities 70 70
Operation & maintenance fee 50 50
Total cost 609 506 103
Mark up 194
Price 700

The cost to family is estimated based on their market value. Since the products are sold
to corporate clients, and then installed in the houses of end users, they need a subsidy that
is justified on the grounds that electricity projects to be viable need certain amount of
subsidy.
Promotion
Without an organized promotion strategy, clients will not automatically become conscious
of the products, and of the benefits they offer. Since money in social enterprise programs
is always limited, the promotion strategy could be developed with care and creativity. The
message to motivate clients to purchase the products and service must attempt to trigger a
customer emotions, self-image and political aspirations. Below are the core messages to
be used when we address clients. Actually the following may become the titles of the
projects: i) Creating the first solar district / province / region, ii) Reaching the families
in the last kilometers via solar energy, and iii) Solar energy for social inclusion.
Furthermore the five Fs formula might be used as a way to remember advantages of
the product:

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Table 4. Five Fs
Five Fs For Clients: When deciding to reach
an agreement with us
For End User/Consumers: When deciding
to partake in the project
Function The adequate solution for a key problem
in the district/province or region.
The solar home system is what they need for
lighting in the night, listening to the radio,
charging the cell phone or watching TV.
Financial Affordable and high quality solar home
systems.
It will help them to avoid wasting money in
fuels and candles that damage their health.
Freedom The social business will implement the
project on behalf of the client
acknowledging the source of the
funding.
Having electricity at home! No need to buy
fuel or candles every time.
Feeling Fosters the idea of: good governance,
concerned leaders taking action against
a serious problem or companies taking
care of communities welfare
The entire family can have light when
flipping the switch. They can see themselves
as having a key public service.
Future The decision maker is likely to win the
support from population if they run for
another period. Or companies image
will improve.
Increase their sense of security. If the grid
does not reach their house, they will have the
service available for at least 25 years.

Concluding Remarks
A social business is one of the responses to a market failure in the energy and electricity
sector. It aims to address this issue with a sustainable and innovative approach.
The Peruvian context has both: the problems and the opportunities for developing a large-
scale social business for providing solar energy electricity to families in rural areas by
using a basic kit called the solar home system.
The daily energy requirement of a rural household is 443 Watts. The solar home system
proposed on this paper is able to generate 450 Watts that covers the basic demand of
energy.
Given the relative high price of the solar home system, this paper suggests that a certain
level of subsidy to end-users is required. That subsidy could be provided by the
institutional clients that are district and province municipalities, regional governments or
large businesses, which enjoy of available economic resources. End users, however,
contribute with sweat equity and locally available resources.


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References
FONAM. (2014). Promoting public and private participation in renewable energy
projects and strengthening the capacity of FONAM. Lima: National Environment
Fund - Peru.
INEI. (2014). Main Indicators. National Institute of Statistics and Information
Technology. Lima: INEI.
JICA, Electric Power Development Co, Nippon Koei Co. (2008). Master Plan Study for
Rural Electrification by Renewable Energy in the Republic of Peru . Lima:
MINAM.
Meier, P., Tuntivate, V., Barnes, D., Bogach, S., & Farchy, D. (2010). Peru: National
Survey of Rural Household Energy Use. Washington DC: World Bank.
Ministry of Economy and Finance. (2014). Economic Transparency. Retrieved May 22,
2014, from http://apps5.mineco.gob.pe/transparencia/
OSINERGMIN. (2013, May 30). Access to Energy in Peru: Assessment and Policy
Options. Retrieved May 23, 2014, from Osinergmin:
http://www.osinergmin.gob.pe/newweb/pages/Publico/CongresoInternacional/p_30
may.html?391