Energy Governance Case Study #06

Contents Executive Summary 2 Introduction 4 Research Methods 5 China’s Renewable Energy Promotion Programmes 7 REDP Background and Organisation 8 Research Findings 12 Lessons Learned 18 Conclusion 20 References 22 Acknowledgements 24 About the Authors 25

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From 2002–2007, more than 400,000 solar home systems (SHS) benefitting two million individuals were sold in northwestern China under the Renewable Energy Development Project (REDP). REDP has been hailed as a best practice example in SHS deployment for its unprecedented scale and the combination of technology improvement and market development support components to strengthen the country’s renewable energy industry. While the World Bank has itself conducted post-project evaluations, our report presents REDP’s first independent evaluation with the intent of determining the extent that its successes have been sustained. This report utilises a case study format supported by in-depth interviews with the project’s relevant stakeholder groups and finds that SHS ownership provides monetary and non-monetary benefits to users and that their portability complements the lifestyle of the region’s nomadic herders. Figure 1, for example, shows a vendor using batteries charged by solar panels to power a compact fluorescent lightbulb which illuminates his road-side shop.

However, we also find that purchasing decisions are still based more on price than quality, and after-sales service networks remain weak, despite pre-project documents emphasising the objective of strengthening these networks.

Furthermore, households in REDP’s coverage area are gradually gaining access to hydropower-based grid electricity, obviating the need to purchase SHS units.

Notwithstanding these challenges, we note several lessons the REDP offers other rural energy development projects and programmes. The provision of direct credit access to consumers can greatly minimise the first-cost hurdle in purchasing a SHS. REDP-sponsored studies assessing the effects of SHS ownership on income and development indicators, though imperfect, directed marketing and programme activities. Improving the quality and availability of after-sales service at the township and provincial level is incredibly important so that SHS are maintained. Rather than view SHS ownership as an end in and of itself, policymakers should instead consider them a transition technology towards eventual grid electrification. REDP successfully executed a “start to finish” quality process in that it established a “whole-cycle quality improvement” through manufacturing standards and practices, which strengthened the quality of SHS at multiple ends of the supply chain.

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Figure 1: A vendor utilising solar electricity to light a road-side shop selling snacks and beverages in Tangde, Qinghai

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China has made impressive strides towards achieving universal electrification over the last 60 years. In 1978, 63% of the population had access to electricity, rising to 99% in 1998 and now to a present level exceeding 99%.1 However, eight million people located primarily in rural areas where low population densities and energy demand render grid connection costprohibitive still lack electricity access.2 In such areas, renewable energy technologies (RETs) like wind and solar have been identified as least-cost options3 and therefore the technologies of choice for many rural applications. The uptake of RETs of choice also reflects China’s broader ambition of strengthening its renewable energy (RE) sector. The passage of the Renewable Energy Law in 2005 catalysed national support for RE with concomitant environmental and energy security benefits. Medium- and long-term RE targets were established two years later, including a cumulative solar capacity goal of 1.8GW by 2020.4 By comparison, China installed 120MW of solar capacity in 2009. The technical potential for photovoltaics (PV), an estimated 180TW according to Cherni and Kentish,5 therefore far outstrips current production levels. Western and northern China receive 5–7.2kWh/m2/day of solar radiation with an average of more than 3,000 hours of sunlight per year. Additional policies at the provincial level have been introduced to spur local development, both in manufacturing and installation.6

Our interest in researching the Renewable Energy Development Project (REDP) is to explore post-project effectiveness and to acquire qualitative feedback from the various stakeholders about their current circumstances.

Though similar efforts were commissioned by the World Bank upon project completion, no studies have yet undertaken to meet all stakeholder groups to gain a comprehensive view of the project’s longer-term implications. REDP aimed to expedite both PV and wind energy growth, but our work focuses on the PV components which encompassed a greater number of stakeholders and offered more direct benefits to the rural poor. To answer the relevant questions regarding the duration of project impacts and the effects of RE subsidy withdrawal, we adopt a case study format using qualitative research methods.

China’s status as a key manufacturer of wind and solar power equipment is a recent development. In 1997, the country’s production capacity for PV was only 5.5MW in comparison to 3,850MW of output in 2009.7 China has now secured a sizable lead ahead of erstwhile production leaders like Germany and Japan and in 2009 invested more than US$33 billion in clean energy, edging out the United States for top position for the first time ever, with 10% of that sum directed towards solar energy.8 A significant amount of the solar electricity utilised in China occurs in rural households. Solar home systems (SHS) like the one in Figure 2 have been one RE application that enables households without grid access to use electrical devices for both productive and leisure purposes. With sizes ranging from 10Wp to more than 150Wp, SHS can be an affordable solution for low-income users and hence have become a key component of development aid projects addressing energy poverty.

Figure 2: A SHS in rural China near Henan, Qinghai

The REDP was selected for investigation for several reasons. First, even up through the time of the project’s start, REDP was the largest household PV programme the World Bank had ever supported9 and as such offers insights into the role of scale in programme design. At a projected sales volume in excess of 350,000 SHS, the project was anticipated to simultaneously create administrative difficulties while also offering potential economies of scale to push down production costs. Second, even in the absence of consumer credit availability the REDP was able to achieve its targets, therefore presenting possible lessons to other contexts where credit is tight or non-existent. Third, REDP is a well-regarded success story in PV deployment as evidenced by winning a prestigious Ashden Award for Sustainable Energy in 2008.

Our research relied on a literature review of both publicly available reports and unpublished documents forwarded to us by programme staff, as well as fieldwork and semi-structured research interviews undertaken in May and June 2010. To ensure we received comprehensive inputs about the program, we conducted 30 semi-structured, in-person interviews with stakeholders involved in all capacities of the project: staff involved in implementation, employees at renewable energy com-

panies, retailers in direct contact with the end-users, and end-users themselves. Stakeholder groups were given separate sets of questions and interviews typically lasted one hour, addressing issues pertinent to REDP as well as broader questions on renewable energy in China and households’ energy use patterns, as summarised in D’Agostino et al.10 Interviews in Beijing were primarily in English whereas we relied on a translator in Xining for both Tibetan and Mandarin language support. To adhere to the wishes of participants we present specific data from these interviews as anonymous below. Figures 3–6 show various site visits and interviews made by the research team.

REDP was implemented throughout western China, but resource constraints prevented us from traveling to all coverage areas to interview project stakeholders. Instead, we concentrated our visit in Beijing (where most of the former project staff are based), Xining (the capital of Qinghai province where the top four participating PV companies by sales revenue are located), and Shanghai (the location of the two windfarm projects that were completed). A majority of the SHS units sold during REDP came from Xining-based companies and between 2002 and 2007, 12 such companies were responsible for close to 70% of the total capacity in Wp sold.11 PV retailers in Xining are primarily located in the Tibetan market and we met with more than three-quarters of the stores in operation. At the time of our visit, only one retailer re-

Figure 3: The research team interviews an engineer at TÜV SÜD about Chinese PV equipment standards

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Figure 4: The research team at Beijing Jike Energy, a PV manufacturing company

Figure 5: Researcher Anthony L. D’Agostino interviews nomadic herders in rural Qinghai about SHS

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Figure 6: The research team speaks with the owner of the Tianyu Two Shop in Qinghai, which sells SHS and accessories mained in Rebkong, 170km south of Xining, as her two competitors had gone out of business. Interviewed endusers were selected on a non-randomised basis since no agency maintains centralised information on household locations or which households are currently using SHSs.

To understand REDP’s effectiveness and support from government requires exploring the Chinese renewable energy legal and regulatory environment. The Chinese government initiated several renewable energy promotion programmes over the last two decades, with support from bilateral and multilateral agencies. The programmes arose from poverty reduction measures and focused on coverage territory outside the scope of immediate grid extension efforts. Programs were implemented only after the initial design of REDP, which began in the mid-1990s and received final governmental approval in 1998. One such program, the Brightness Rural Electrification Program, originated in 1998 and aimed to bring electricity to 23 million people by 2010 through

distributing RETs at both household- and village-levels.12 The Song Dian Dao Xiang (SDDX), or Township Electrification Program was implemented across a different coverage area than REDP and employed small-hydro, wind, and PV technologies to expand electricity to nearly one million people living in 1,000 townships in Western China.13 The Song Dian Dao Cun (SDDC) programme arose from SDDX as the second round of village electrification with a goal of electrifying 20,000 villages by 2010.14 Table 1 lists other major programmes in operation between 1998 and 2010. While there was some overlap in target areas through ‘parallel initiatives,’ many projects were implemented in relatively more accessible areas than REDP’s targeted coverage, and consequently created less scope for overlap. This also makes it difficult to compare programmes given differences in household incomes and market access. For programmes initiated after REDP, companies who participated in REDP were often contracted and had already benefited from production cost reductions through their REDP participation.

Just as programmes supported a variety of technologies, operating at both household and township scales, their financial incentives for participant companies also varied. The Dutch Silk Road program, for example, offered

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

8 NEDO PV Program Brightness Program Pilot Project IM Electrify Township Electrification Program (SDDX) SERE Silk Road Brightness Program REDP

GTZ

KfW

Table 1: Anticipated duration of PV programmes at introduction

producer subsidies of up to 62% of production costs, in comparison to REDP’s 20–25%.15 Companies expectedly selectively exercised programme participation, and would sometimes forego an existing programme for an imminent one with more lucrative support. This was especially the case for programmes that included aftersales support opportunities that would offer revenue streams post-initial SHS sales.16

The World Bank/GEF designed REDP to address prevailing concerns over the country’s rural energy sector in line with the “New and Renewable Energy Development Program, 1996–2010,” developed by the Ministry of Science and Technology and the erstwhile State Development Planning Commission. The paramount drivers were inadequate electricity access among rural households, barriers to private investment in renewable energy manufacturing, and excessive reliance on coal-based power generation.17 With initial targets of installing 10MW of solar home systems (approximately 350,000 units) and 190MW of wind power across several farms, REDP

would address those drivers and provide environmental benefits through avoided emissions of SOX, NOX, and total suspended particulates. GEF assistance supported the Global Environment Objective (GEO) of avoiding an estimated 56 million tons of CO2 emissions by 2007, primarily through the wind component. Aside from environmental motivations, support for renewable energy also stemmed from air pollution’s economic toll. A 1997 World Bank study, using willingness-to-pay valuations, estimated the total costs of urban pollution, indoor air pollution, and impacts from acid rain at 6.9% of GDP.18 The State Economic and Trade Commission established the Project Management Office (PMO) to coordinate REDP, which as a result of government restructuring was transferred to the National Development and Reform Commission (NDRC) in 2003.19 Consisting of ten full-time employees, the PMO was responsible for making all management decisions at the central government level, including the selection of participating companies, authorising grant payments, and designating certification procedures for sub-components.20 Over the course of the programme they engaged in promotion efforts, like the production of TV and movie content to raise awareness of renewable energy, as well as initiated capacity-building training courses and conferences for PV companies.21

Photovoltaic component

Wind component

Technology improvement component

Project management

REDP PMO, under State Economic and Trade Commission (later NDRC)

Shanghai Municipal Electric Power Company

REDP PMO, under State Economic and Trade Commission (later NDRC)

Key objectives

• 10MW of installed SHS capacity, reaching 350,000 households

• 190MW of wind capacity, downgraded to 21MW during 2001 project restructuring

• To improve quality and reduce manufacturing costs of PV equipment

• Avoided emissions • Reduction in capital costs, measured by $/Wp

• Avoided emissions • Reduction in capital costs, measured by $/kW

Project costs

$96.6 million

$27.08 million

$191.95 million

Key stakeholders

World Bank, NDRC, PMO, PV companies, retailers, endusers

World Bank, NDRC, Shanghai Municipal Electric

World Bank, NDRC, PMO, component manufacturers

Table 2: Overview of Renewable Energy Development Project (REDP)

The PMO was an independent body, but still required authorisation from NDRC and the World Bank for major decisions22 with whom they had regular contact. Table 2 summarises REDP’s programmatic structure.

Project developers from the Bank’s side were experienced in designing renewable energy programmes in the region including India’s Renewable Resources Development Project and Indonesia’s Solar Home Systems Project. As a result, safeguards were instituted in REDP to avoid similar threats to project effectiveness as experienced in earlier programmes, including poor SHS performance, premature equipment lifetimes (with systems often lacking load controllers), and inadequate credit access. The REDP was structured into three components — Solar Photovoltaic (PV), Commercial Wind Energy, and Technology Improvement (TI) — with PMO staff tasked to oversee both the PV and TI portions.* The initial target areas for the PV component included Inner Mongolia, Gansu, Qinghai, Western Sichuan, Tibet, and Xinjiang, but was later extended to Shanxi, Ningxia, and Yunnan provinces. As of 1995, more than nine million people were without electricity across these ten provinces and autonomous regions which range in population density from 0.2–2.3 households per km2.

Data from Table 3 indicates that western provinces have trailed behind national averages in rural electricity *Due to this report’s focus on energy poverty, we analyse only the PV and TI components of the REDP, and not its commercial wind component.”

access rates by several percentage points over the described period. According to the World Bank’s Project Appraisal Document, per capita incomes in the six provinces of initial implementation were 15–43% lower than the national average in 1997.23 REDP did not have an explicit poverty alleviation objective aside from satisfying the energy needs of populations “that would otherwise not receive services,” though government-led anti-poverty programmes operated in the area.24 Photovoltaic (PV) Component The PV component’s central priorities were to improve product quality, lower production costs, and install a total of 10MWp of SHS capacity over the course of 2002 to 2007. In actuality, the 28 participating companies surpassed the target and sold 11.1MWp of SHS units.

While companies claimed some 500,000 SHS were sold during REDP’s implementation, the PMO verified a sales volume of at least 400,000.25 SHS units 10Wp and larger were eligible for sub-grant support and the average size of sold units gradually climbed from 18Wp in 2002 to 45Wp in 2007.26,27 Annual sales data by unit volume and capacity (kWp) are plotted in Figure 7.

Initially, participating companies received a $1.50/Wp rebate for each SHS sold that passed certification standards, revised to $2/Wp to compensate for compliance costs in satisfying stricter quality standards in 2005.28 By the completion of the program, an average sub-grant of $1.22/Wp was distributed for the $10 million in verified

9

Northeast

10

North

Northwest

East

SouthCentral

Southwest

1991

National average 80.00%

1992 1993

99.40%

96.36%

80.96%

92.83%

88.75%

79.49%

89.61%

1994

99.56%

96.67%

83.46%

95.09%

90.82%

82.95%

91.33%

1995

99.68%

97.26%

85.58%

97.10%

93.22%

84.76%

93.30%

1996

99.68%

97.26%

85.58%

97.10%

93.22%

84.76%

93.30%

1997

99.81%

98.04%

89.36%

98.91%

96.07%

89.90%

95.86%

1998

95.86%

2000

98.03%

2001

98.40%

Table 3: Percentage of rural households with electricity access

Figure 7: REDP’s reported and verified SHS Sales for 2002–2007

sales.29 Non-compliance penalties for improper documentation, restrictions implemented after 2005 on grants for high-capacity systems, and the exhaustion of funds led to an average grant size below the nominal rate. The PMO managed the disbursement of sales grants through several verification procedures and a claims tracking database.

Penalties for failing to comply with quality standards amounted to more than $1.1 million of sales grant deductions from 2004–2007.30 Companies failing quality inspections three times were permanently removed from the approved supplier list.31 The PMO also penalised companies not in compliance with established financial verification measures. Starting in 2004, random, on-site spot checks were conducted at manufacturing facilities and companies who failed were removed from the approved product list. This was carried out for modules, controllers, inverters, and batteries. Sales grant penalties of 10% were levied on companies whose products failed quality testing at sales outlets.32 A Market Development Support Facility (MDSF) was introduced in June 2003. Activities supported under the facility were grouped under the three categories of market development, business development, and product development and included functions like product promotion, financial management system improvement, and ISO certification.33 Eligible companies were expected to pay at least 50% of project costs and submitted proposals through a competitive process evaluated by an expert team. By its closing, 30 companies benefited through participation in 190 MDSF-supported projects that released more than $880,000 in grants.34 Support was provided in small amounts, averaging less than $5,000 per activity across all categories.

Technology Improvement Component The Technology Improvement (TI) component was modeled on initiatives in Western countries35 and designed to “accelerate technology innovation, with the aim of reducing costs of equipment available in China, while providing high-quality products and performance.”36 The TI component encompassed both investment and institutional strengthening, the former consisting of a Competitive Grant Facility (CGF) and a Quick Response Facility (QRF). The PAD explicitly outlined which activities would be supported, such as the production of prototypes and the field testing of new equipment, and the “standard business transactions” that would not be covered, including basic R&D and license purchasing.37 Like the MDSF, the TI projects operated on a cost-sharing basis through a Competitive Grant Facility (CGF) with

companies responsible for at least 50% of activity costs.

Total CGF funding of $2.8 million was awarded and 133 projects were successfully completed. Since CGF applications were reviewed only annually, the QRF was established as an alternative vehicle to provide faster turnaround for TI proposals that were smaller than those submitted through the CGF. With 55 successful projects and $454,000 in grant awards, the QRF was significantly smaller and less successful than the CGF. According to the Bank’s project evaluation, the QRF’s cumbersome approval process compromised the urgent disbursement of awards and the projects funded were too similar to CGF awardees to merit a separate facility.38 Improving the quality of SHS products on the market was a core REDP objective. To qualify for REDP support, PV companies were required to demonstrate that all system components complied with prevailing standards. With support from an international expert, the PMO created a PV Technical Standards Committee which outlined all technical specifications for sub-components, such as the solar module, inverter, controller, battery, DC lights, and even accessories like those shown in Figure 8. The PMO then acted as the intermediary to connect qualified suppliers with PV companies39 and circulated technical guidelines to national and international companies. Along with an Arizona State University laboratory, four Chinese testing centers were selected — Tianjin Institute of Power Sources (TIPS), Post and Telecommunications Industry Products Quality Surveillance and Inspection Center (PTPIC), National Center for Quality Supervision and Testing of Electric Light Sources (NCQSTL), and Shanghai Institute of Space Power Sources (SISP) — and funding made available to manufacturing companies for product testing. In addition to lab-based tests, engineers would travel to the western provinces to obtain products for quality inspection and stage spot checks at manufacturers.40 One of the hallmarks of REDP was the Golden Sun label which initial project documents did not feature. In response to companies pasting unapproved REDP labels on their panels, the PMO developed the Golden Sun label which certified compliance with REDP’s standards which were gradually tightened across the project’s duration in response to manufacturers attaining higher quality levels. The first to be implemented was the “Photovoltaic/Wind Hybrid System Specifications and Qualifying Requirements” standard, developed in 1998 by the standards committee. The following year, revised procedures addressed minimum requirements for each system subcomponent. The REDP PMO observed that many subcomponents out-performed the minimum requirements and in 2003 issued a new national standard.41

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Figure 8: SHS equipment at a Qinghai retailer

These were again replaced, and in December 2005 the “Solar Home Systems Implementation Standard” took effect and was modeled on the international standard for SHS quality, the IEC 62124, and its local adaptation, GB 9535-1998. One TÜV SÜD employee explained that the Chinese government will adopt a Mandarin translation of the IEC’s third version.

Even before REDP’s introduction, China’s domestic SHS market was active and competitive. By 1999, at the time of the Project Appraisal Document’s preparation, approx-

imately 90,000 PV systems were in use. According to preimplementation data, the top four companies jointly held a 36% market share and most of these companies had been in existence than two years. In the target areas, 25 public and private companies were selling SHS and the 17 companies responsible for 90% of SHS sales were invited to participate in REDP.42 One PMO member stated that “pre-project growth in the PV market was strong, but the companies in operation before the project started were at risk of collapse.” Another PMO staff elaborated that “in the six year period before REDP, companies heard about the programme and ramped up business or set up shop.

This explains some of the rapid growth before the project began.” Insufficient access to enterprise capital was seen as a significant barrier for the PV companies and hence why the MDSF and TI components were widely welcomed by participating companies.43 A different marketplace has emerged with the completion of the technical assistance and the PV sub-grant program.

In our interviews, several companies claimed an overall increase in sales despite low annual growth rates and contracting profit margins. Firms near-universally stated that the market for SHS has already reached its saturation point and that their domestic sales volumes have been declining. Company representatives link this to current market conditions where households lack the liquidity to upsize their existing systems and the increasing number of communities that are receiving, or anticipate receiving, grid connections. Another explanation is that household load requirements have not increased enough to justify the purchase of new equipment. While demand for SHS units from herder households will persist, this has been insufficient to draw SHS sales upwards. Additionally, the Bank identified competing donor PV projects and subsidy-laden government programmes as contributing factors to the decreased SHS sales of 2006 and 2007.44 As a result of their REDP experience, several companies have won contracts for efforts similar to the REDP such as the Qinghai-based Three Rivers Project.45 Considering the shrinkage of the domestic SHS market, the government contract market for large volumes of units for traffic lights, streetlamps, communications systems, and groundwater pumping for irrigation has provided an alternative growth direction. Exports have provided another, with some participating companies bidding for World Bank-supported PV programmes outside China.

While the World Bank evaluation team states that the contracts would have been awarded even in the absence of TI support, but that their REDP experience instilled a culture of quality that increased the likelihood of success.46 PV companies are also independently expanding

their exports and looking to international markets to compensate for slackening domestic sales. Interviewed companies indicated existing or proposed inroads to countries such as Kazakhstan, Myanmar, and Nepal.

SHS Retailers In addition to hearing firsthand from end users how they use and do not use SHS, we interviewed five Xining dealers and the sole operating dealer in Rebkong, Qinghai Province, two of them shown in Figures 9 and 10.

No shop was exclusively dedicated to selling SHS equipment, with each shop featuring a variety of electronics, Buddha statues, hygiene products, and apparel among other merchandise. Their primary customers are nomadic herders and dealers rely on word of mouth and repeat customers instead of advertising. Still, customers may ask for specific SHS brands like NIDA or NIMA who advertise on the radio, or have become trusted brands among neighbors. As many nomads have been using solar for more than a decade, customers often do not need information about systems or assistance in their installation and care. Several shops operate on concession agreements with the local PV companies, sometimes through exclusive arrangements. One owner stated that he keeps no sales records, only delivery records, and weekly payments are made to the supplier based on inventory levels. Consequently, dealers claimed to not be able to provide average sales data, but did still remark that sales dropped during the summer season when herders are away. At least one shop has recently begun selling 2.5W solar lanterns at RMB 100 apiece.

When asked whether customers choose systems based on quality or price, shop owners provided views contradicting feedback from end users, and claimed that quality was the more important criterion. Store-owners had at best heard about Golden Sun, but none actively promoted certified products on the basis of proven quality.

Retailers informed us that they effectively followed the warranty guidelines extended by the company, typically ten years for the panel and one year for the battery. Dealers themselves provide after-sales support which in itself is sufficient reason for the sole shop-owner in Rebkong to maintain her business, saying “I cannot stop selling solar products because I am the only one in this area who is. I must provide a guarantee for the warranty of these products. Otherwise people know where I live and would find me.” The same shop-owner who has been selling solar for 15 years cites growing access to country hydropower as contributing to a recent dip in SHS sales.

As part of the project evaluation process, local consultants conducted face-to-face interviews in 2007 with 1,203

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Figure 9: The manager of the Xiangao solar dealer in Xining in front of an SHS panel, enclosed in bubble wrap

Figure 10: Workers at Top Solar in Xining assemble SHS components

households in the Tibetan Autonomous Region and Gansu Province. Of this sample, 69% were PV system users and 31% were without electricity access. Survey questions addressed usage patterns of the SHS and time-use behavior of various household members. The consultants encountered accessibility challenges when attempting to visit selected locations as well as language difficulties. The survey intended to highlight differences between SHS adopting households and others, but suffers from several shortcomings. For example, the study states that interviewees were selected randomly without offering further information about how this randomisation was performed. Their analysis did not control for non-SHS factors that could contribute to observed changes, such as uneven development, education programmes, or the effects of poverty alleviation programmes referred to in REDP documents.

Despite these factors, the evaluation team concluded that SHS use has had a positive effect on household income for more than 53% of respondents. Among other benefits, they estimated improvements in family communication levels, increased workable hours, and improved access to information through radio and television. Use of alternative lighting sources, such as ghee and kerosene lamps, declined as a result of SHS penetration.47 Conversely, Meier48 uses the same dataset and finds no difference in per capita income between households with and without SHS, as well as overall increased demand for dry cells among SHS adopters, as depicted in Figure 11. With the same survey data, the World Bank concludes that “there are strong indications that poverty impacts have been achieved among a considerable number of people.�49

Figure 11: Percent change in monthly energy consumption among SHS users after SHS purchase, by quintile Source: Meier 2008.

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The REDP survey featured a contingent valuation study across a smaller respondent pool of 372 non-SHS users including those who have never owned an SHS and those who are former users. Almost 90% of surveyed non-users indicated willingness to pay ceilings of RMB 1,000 or lower for PV products in excess of RMB 10,000.50 Respondents stated that government subsidies were a necessary but still insufficient condition for system purchase. When the same question was asked about products exceeding RMB 1,000, 97% of the 182 respondents stated a WTP of RMB 500 or lower. This contrasts with the average REDP sale of an 18–25Wp SHS to either an animal herder or farmer at RMB 700– 1,000.51 Figure 12 depicts the average selling price of an SHS over time, with the 40Wp and 50Wp systems seeing the largest 2002–2007 price reductions, at 35% and 24% respectively.

To supplement the Bank’s own evaluation, we interviewed end users in selected areas of Qinghai province, including Dulan County, Henan County, and Zekog County. They are primarily nomadic herders with at least one household member spending summer months in the hills. More often than not they had never heard of REDP since the retailers themselves did not advertise the sys-

tems as part of the REDP scheme. Compared with results from the 2007 survey, responses we received by interviewing end users were consistent for some questions and divergent for others. For example, our interviewees expressed significantly lower interest in listening to the radio and stated greater benefits of SHS ownership through lighting and electricity for mechanical milk separators like those in Figure 13. In contrast, the ICR states that butter separators were present in only 1% of households surveyed in 2007, or 15% as per a similar survey conducted in Qinghai, Tibet, and Xinjiang. Endusers would typically not carry out maintenance on their panels which were by and large positioned near the entrance of their house at an angle. We saw no units using azimuthal tracking nor did herders discuss changing the panel’s orientation to increase its ouput efficiency. In the site areas we visited, PV adoption was near universal though not all units were operational.

Households with SHSs in poor condition cited various reasons for postponing maintenance and repair. One user told us that wind had blown away and broken his household’s panel which had powered their TV and lighting for the previous seven years. Because Xining was the nearest location for repairs (yet still a day’s journey by

Figure 12: Average SHS prices across time, in real RMB (2002) Source: World Bank 2010.

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Figure 13: A solar-powered milk separator in rural Qinghai

bus), they had not been able to get it fixed. One shopkeeper we interviewed in Henan County had received an SHS from the government four years earlier. She said the battery was not fully charging, but had not replaced it because of prior experiences purchasing batteries that also performed poorly. We cannot determine to what degree improper usage has reduced the equipment lifetime of interviewed households, but the several stories of dissatisfaction with SHS performance demonstrated fixed beliefs about equipment unreliability and risk aversion to new purchases.

As per other purchasing habits, the interviews indicated a mismatch between consumer demand and the PV certification program. Former PMO staff have stated that end-users are making decisions based on price alone, a belief confirmed by end users who expressed no preference for, let alone awareness of, particular brands or models. Only one interviewed end user had heard of REDP and recalled a neighbor who purchased an REDPaffiliated SHS, indicating that the quality improvement benefits of REDP and Golden Sun-approved systems were not a key selling point for Qinghai end users. This may be idiosyncratic to Qinghai Province where retailers may commit fewer resources to advertising than retailers in the other targeted areas, or because repeat

customers have grown to expect systems whose performance is imperfect and therefore trust less in the benefits of a certified SHS. We asked SHS users their preference between an SHS and grid electricity, a timely question since the areas in Qinghai we visited are becoming increasingly connected to electricity generated from mini-hydropower. Maintenance requirements, “system replacement every 10–15 years,� and overall unreliability are downsides that interviewees associate with using SHS. Others stated that both are necessary, a grid connection for their winter homes and an SHS for their nomadic needs. As discussed in several of the REDP documents, nomadic herders bring SHS to provide lighting for when they summer in the mountains. There they collect Cordyceps Sinensis, an ingredient in traditional Chinese medicine also known as caterpillar fungus and frequently priced higher than RMB 100,000 per kilogram, as well as other herbs. Since they may travel to the mountains for weeks at a time, the SHS provides mobile services that a fixed grid connection cannot. We also visited brickconstructed winter homes that were grid-connected to local micro-hydropower projects and in some cases an SHS would provide supplemental power. Xining SHS dealers told us that beekeepers also purchase SHS units, usually under 50W, and use them only for lighting.

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What, then, can we learn from the REDP experience?

Provide Credit Access The PMO was originally tasked with investigating, recommending, and supporting mechanisms that would encourage consumer credit access for purchasing SHS. Various intermediaries were to be considered, including consumer banks, rural credit cooperatives, and the PV companies themselves. However, the credit pilot was dropped in September 2005. Despite this fact, the project successfully achieved its numerical targets of cumulative PV capacity installed, production cost per Wp, and number of SHS units sold. Onlookers not involved in REDP’s implementation might then ask if the targets were ambitious enough, or if raising them would not have also resulted in even greater sales. As Bank evaluations have indicated that approximately two million people have directly benefited from SHS access through REDP, that means some six million people, according to IEA figures, still are without electricity access (albeit not necessarily in the targeted provinces). Had consumer credit access been made available, perhaps the number of beneficiaries would have increased.

While some interviewees claimed that rural Chinese, both Han and ethnic minorities, are averse to borrowing, recent studies indicate that micro-finance and rural finance channels have been effective instruments for economic empowerment.

Just as retailers and PV companies stated that end users are gradually upsizing their SHS units as household incomes allow, PV companies also plan on increasing the size of their products. Several interviewees identified 3kW and larger grid-connected systems as the future of their businesses, not SHS units. They also expressed interest in receiving technical assistance to promote product development in new ventures like solar pumping systems, solar lanterns for parks, and building-integrated photovoltaics, which paid consultants could provide. Getting to that point requires financial assistance and companies said they would like to see enterprise credit facilities that would lend on the scale of RMB 3–5 million with repayment terms stretching beyond five years. Consequently, assuming the companies in question are indeed credit-worthy, constraints have impeded both end user and corporate investments in capital stock. It is worth speculating what the current state of formal credit availability would be for such lenders had a stronger push for rural

financial services been made during the early stages of REDP. This is especially pertinent given the aversion commercial banks in other countries have had in lending to RE projects or R&D activities, because of asymmetric information about project risk and regulatory uncertainty. Were these channels to have been established earlier, lenders would have had a longer period of time to gain familiarity with the RE industry and increase their lending willingness.

Study the Effects of SHS Ownership on Poverty As discussed, REDP-supported studies on the effects of SHS ownership on income and development indicators were compromised by research designs with weak predictive power. More robust results would require using methods like randomised controlled trials (RCTs) that control for sample-specific factors biasing the results.

While RCTs encounter ethical criticisms for withholding intervention from the control group, any SHS deployment project likewise is selective in geographic area or income level and therefore this is not a valid concern. A shift towards RCTs would provide evaluators greater certainty about the transferability of impacts, positive and negative, from SHS ownership.

Ensure Reliable After-Sales Service Improving the quality and availability of after-sales service at the township and provincial level was another core objective of project developers, but our interview responses with end users indicated that service channels were weak. Damaged or partially operating systems were common among the households we visited and end users appeared to possess inadequate knowledge about proper system maintenance, like the household in Figure 14, which used a rock to prop up his SHS. Because retailers in these areas were the primary service centers, operating at the county-level and therefore oftentimes remote from rural nomads, to repair a damaged SHS would incur transportation costs and time. Further research is therefore needed to investigate what after-sales service models are most pragmatic, given low incomes and dispersed populations. Instead of end users outright owning SHS, and therefore devising subsidy schemes to make their capital costs affordable, rural energy service companies (RESCOs) and other leasing or fee-for-service models may be more palatable and increase the number of SHS users. Advocates of fee-for-service arrangements would argue that end users ultimately only need the energy services an SHS provides, not the physical equipment. As a result, such business models include aftersales care as part of the service agreement, potentially solving the issue of barriers to service access.

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Figure 14: A nomadic herder and his dismounted SHS in rural Qinghai

View SHS as a Transition Technology The SHS usage habits of REDP beneficiaries highlight the nuanced relationship between off-grid households and the electricity grid. For some, SHS provides a temporary solution en route to higher wattage power sources such as grid-fed electricity. However, this is not necessarily a linear progression; many, if not all, households in the surveyed area will eventually be connected to the grid through small-scale, local hydropower, though some interviewees expressed skepticism about the reliability, cost, and timeframe for receiving a connection.

One household in Henan County explained that she was awaiting the installation of a meter and fuse and had not been informed by the power company when this would be completed. In the meantime, she expressed satisfaction with her SHS, though believes that her “life will change when the grid is connected,” reflecting a sentiment shared among other end users that grid connectivity will enable them to power multiple appliances that were not possible with SHS alone. Even when that happens, SHSs will not be entirely phased out, but will instead complement grid electricity. Nomadic herders demonstrate this through their SHS usage while in the highlands and grid use when living in their winter homes. In this regard, SHSs cannot be interpreted as

a transition technology since they are not phased out with the advent of grid electrification. On the other hand, non-nomadic rural users who gain grid access may no longer need their SHSs. For these users, SHS deployment projects provide a stream of benefits up until that point. As evidenced by the REDP surveys, the broader literature on SHS impacts, and our interviews, SHS provision enables immediate access to lighting and other energy services, such as milk separation, with potential increases in household income. SHSs that become redundant before the end of their operating life because of grid connectivity have a shorter window of accrued savings from avoided kerosene or candle purchases, decreasing their cost-effectiveness. At the same time, forgoing the implementation of SHS programmes on the grounds that SHS use will eventually yield to grid electricity keeps households reliant on primitive fuels and subject to the uncertainty of when infrastructure will actually be installed.

Focus on Whole-Cycle Quality Improvement REDP successfully executed a “start to finish” quality process in that it established manufacturing standards and practices, facilitated access to product certification, and introduced a randomised testing regime which

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penalised companies at the production-line and retail stages for non-compliance with system performance requirements. These efforts strengthened the quality of SHS at multiple ends of the supply chain. This start to finish aspect is a key contribution of REDP, without which SHS sales may have accelerated anyway (since a growing market already existed and numerous other rural electrification projects were ramping up operations in neighboring areas), but might have stagnated in later years without lasting product quality improvements.

It is also likely that participating companies would not have as quickly entered export markets had the quality standards not been imposed, especially those markets where IEC compliance is a threshold requirement.

The Renewable Energy Development Project exceeded its targets of installed PV capacity and contributed to renewable energy suppliers manufacturing products in compliance with international standards, enabling them to enter export markets. While some of its two million SHS beneficiaries would have ultimately received SHS units from other programmes, or gained grid connections, the project expedited the process in areas where energy poverty had become chronic and widespread.

The relative contribution of REDP to China’s evolving RE policy landscape is difficult to measure, but likely played a significant role in highlighting RE’s merits in combating air pollution, offering energy amenities to households reliant on less modern energy carriers, and supporting the development of the country’s growing RE industries.

At the same time, the SHS experience of beneficiaries is far from convergent, with some end users very satisfied with their systems and others holding onto damaged units with no expectation of undertaking repairs.

As with other SHS deployment programmes, the aftersales service component of the REDP was one of the more neglected aspects of project execution, most likely because profit margins on servicing are low and project designers were preoccupied with the marketing and delivery aspects of the project, dedicating less attention to what follows after the SHS units have been installed. Though the evidence we gathered in Qinghai Province is anecdotal, it seems unlikely that the challenges of equipment maintenance and repair access there are unique. Towards that end, SHS users would benefit from greater information about system care and

maintenance to reduce the incidence rates of damaged systems. As some herders have relied on solar energy for more than a decade, retailers may falsely assume that all customers have familiarity with the technology (or at least have neighbors who do), and therefore consider such information irrelevant. Still, interviewed end users demonstrated imperfect knowledge about how the system functions as well as how they can derive the greatest benefit from an SHS, hence we believe providing this information in the local language would not be superfluous. We also see scope for expanding the number of local outlets or mobile service workers who possess the necessary skills and access to spare parts to fix damaged SHS units. Further research is merited to investigate the barriers preventing this from naturally occurring and exploring interventions that might improve the affordability of procuring spare parts and training such individuals.

Given that REDP surpassed its PV targets, exhausted its TI and MDSF funding, and contributed to China’s evolving RE policy environment, the weak after-sales support component seems anomalous. REDP was highly successful in demonstrating the value of SHS ownership and strengthening the fledgling PV market to improve their business operations and technical capacity through product development, testing, and certification. As evidenced by our interviews with PV companies, they are becoming internationally competitive with exports comprising a growing share of their revenue, made possible by the introduction of quality standards and adherence to international certification criteria. Companies benefited from knock-on effects, not only by transferring technology advancements from the TI component to nonSHS product lines and improving their competitiveness, but also leveraging these gains to win SHS contracts both inside and outside of China. Though an un-testable hypothesis, the words of one interviewee are likely to hold true; the synergy of simultaneously focusing on industry strengthening, tightening quality standards, incentivising sales into remote areas through PV sub-grants, and showcasing the value of SHS through roadshows and videos was responsible for REDP’s success. As such, a key takeaway for PV deployment design consists of identifying each stage of the project life-cycle, from product design to after-sales care, and devising components that target the stakeholder’s immediate needs without fostering long-term dependence.

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The authors are appreciative to the Centre on Asia and Globalisation and the Lee Kuan Yew School of Public Policy for some of the financial assistance needed to conduct the research interviews, field research, and travel for this project. The authors are also extremely grateful to the National University of Singapore for Faculty Start-up Grant 09-273 as well as the MacArthur Foundation for Asia Security Initiative Grant 08-92777-000-GSS, which have supported elements of the work reported here. Any opinions, findings, and conclusions or recommendations expressed in this material are those of the authors and do not necessarily reflect the views of the Centre on Asia and Globalisation, Lee Kuan Yew School of Public Policy, National University of Singapore, or MacArthur Foundation. Also, the views of the author(s) expressed in this study do not necessarily reflect the views of the United States Agency for International Development or the United States Government.

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Benjamin K. Sovacool is an Assistant Professor at the Lee Kuan Yew School of Public Policy.

Dr Sovacool has worked as a researcher, professor and consultant on issues pertaining to energy policy, the environment and science and technology policy.

He has served in advisory and research capacities at the U.S. National Science Foundation’s Electric Power Networks Efficiency and Security Programme, Virginia Tech Consortium on Energy Restructuring, Virginia Centre for Coal and Energy Research, New York State Energy Research and Development Authority, Oak Ridge National Laboratory, Semiconductor Materials and Equipment International, U.S. Department of Energy’s Climate Change Technology Programme and the International Institute for Applied Systems and Analysis near Vienna, Austria.

Dr Sovacool has published or edited six books, more than 100 academic articles and presented at more than 60 international conferences and symposia in the past few years. His email is bsovacool@nus.edu.sg Anthony D’Agostino is a research associate at the Centre on Asia and Globalisation (CAG) with research interests in energy policy, climate change adaptation, and environmental decision analysis.

Prior to joining CAG, Anthony worked with the Institute of Water Policy at the Lee Kuan Yew School of Public Policy, using system dynamics to address public policy and water policy challenges. He has worked with the Greenhouse Gas Protocol at the World Resources Institute and at UNEP-ROAP, respectively focusing on corporate GHG emissions and sustainable buildings. In addition to consultation work on transportation and corporate environmental reporting, Anthony has worked for organisations in India, Australia, New Zealand, and the US on rural development and sustainable agriculture issues.

His email is sppald@nus.edu.sg and you can follow his work on the Southeast Asian energy sector on Twitter, @seasiaenergy.

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Energy Governance Case Studies Series 1. Lighting Laos: The governance implications of the Laos rural electrification program 2. Gers just want to have fun: Evaluating the renewable energy and rural electricity access project (REAP) in Mongolia 3. Living up to energy governance benchmarks: The Xeketam hydropower project in Laos 4. Settling the score: The implications of the Sarawak Corridor of Renewable Energy (SCORE) in Malaysia 5. What went wrong? Examining the Teacher’s Solar Lighting Project in Papua New Guinea 6. Summoning the sun: Evaluating China’s Renewable Energy Development Project (REDP)

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Strategic partners

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