India: Financing Solar Water Heaters

Unreliable electricity and rising costs of electricity have forced numerous households and commercial establishments in India to look for reliable and cheaper ways to acquire hot water. Solar water heaters seem to be the best available option in a country where sunlight is abundant throughout the year.

Solar water heaters in India are now being installed in thousands of homes, thanks to the low-cost financing provided by many of the commercial banks in the urban and rural parts of the country. But the difference in market perception between interest and capital subsidy warrants discussion. The regular interest rates are being subsidized by Ministry of Non-Conventional Energy Sources (MNES), Government of India. For example, Canara Bank, headquartered in Bangalore, offers loans for solar water heaters at 2% for individuals, 3% for institutions and at 5% to commercial entities. Typically the bank finances 85% of the project cost, for a loan period of five years. On top of the reduced interest rates, private enterprises could gain a benefit of accelerated depreciation of 80% (more details on “Major Programmes of Renewable Energy Sources” are available from the MNES website; use link below). Till the early 1990s, there existed a capital subsidy on the solar water heaters. These subsidies were monitored by the nodal agencies of MNES in the different states of the country. The bureaucracies of the processes of availing capital subsidies, with the lack of appropriate financing deterred the growth of the market. For example, in the State of Karnataka, India, there were less than six manufacturers of solar waters in the early 1990s. Even a 30% capital subsidy on the solar water heaters did not entice either new manufacturers or potential clients. The policy change in the mid-nineties, from capital subsidy to interest subsidy completely changed the scenario. The interest subsidy enticed the numerous banks to finance solar water heating systems and that in turn led to the growth of a number of manufacturers from less than six to more than 60 in 2005 in the State of Karnataka alone. The involvement of banks (both commercial and rural) ensured the sustainability of the program — as now solar water heaters are being viewed as any other consumer product. The manufacturers have to collaborate with the financial institutions in order for their systems to be qualified under the solar water heater program. This has ensured quality and service to the end-users. Non-performance of the system would lead to non-payment of the loan — thus leading to the disqualification of the supplier. The financing program has led to installations of solar water heater in households, hotels, hospitals, small scale businesses, medium enterprises, sugar mills, milk processing plants, food processing units; all places where there is a requirement for hot water. Similar changes (of shifting from capital to interest subsidy) should be brought about in areas of solar photovoltaic, biogas and other renewable technologies. The key to success of similar technologies is flexible and site-specific financing. The vast networks of banks in India provide a fantastic foundation for the diffusion of renewable energy technologies. We hope – somebody listens soon. H. Harish Hande is Managing Director of SELCO Solar Light, based in Bangalore. His company has overseen the implementation of thousands of installations, whose success are due largely to local involvement. SELCO also oversaw the Tsunami Solar Light Fund, which raised the funds to bring solar installations to assist some of the people who were displaced by the tsunami.
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