Modelling the impact of market imperfections on farm household investment in stand-alone solar PV systems

Abstract

Access to electricity in rural Sub-Saharan Africa, where livelihoods are predominantly based on small scale farming, is significantly low. Extending centralised national electricity grids to these rural areas faces significant technical and financial constraints. As a result, many see household-financed decentralised technologies such as small standalone solar photovoltaic (PV) systems as being important for achieving greater electricity access. However, rural farm households typically face a range of market imperfections including lack of access to credit, investment irreversibility (or absence of second-hand markets) and farm production/income risk which act as barriers to their ability and/or willingness to invest. This paper examines how these market imperfections impact on the adoption of standalone solar PV systems for small scale farm households in Uganda. We consider how temporary or permanent these barriers to adoption are when farm production/income is uncertain. We do so by using a dynamic programming model which captures household investment in small scale solar PV systems where significant positive benefits arise through assumed improved farm productivity or income effects, while allowing for credit constraints, investment irreversibility and income risk. Although strong positive incentives exist in the model to adopt a solar PV system, the results show that adoption rates are substantially lower for credit constrained households, with only 40% of these households adopting immediately, compared with over 70% of credit unconstrained households. While these adoption rates do increase over time, only 60% of credit constrained households have adopted within 5 years compared with nearly all credit unconstrained households adopting within the same time period. In the longer term for almost 30% of households the credit constraints act as a permanent barrier to adoption. The presence of a well-functioning second-hand market does increase household consumption and welfare but the impacts on overall adoption rates are rather small.