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

Yakubu Abdul-Salam (Corresponding Author), Euan Phimister

Research output: Contribution to journalArticle

2 Citations (Scopus)

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.
Original languageEnglish
Pages (from-to)66-76
Number of pages11
JournalWorld Development
Volume116
Early online date27 Dec 2018
DOIs
Publication statusPublished - Apr 2019

Fingerprint

photovoltaic system
credit
farm
market
modeling
electricity
income
income effect
Uganda
household
Household
Market imperfections
Farm households
Modeling
livelihood
rural area
programming
productivity
welfare
incentive

Keywords

  • Africa
  • Market imperfections
  • Farm households
  • Solar PVs
  • Credit
  • Irreversibility
  • COUNTRIES
  • PROJECTS
  • INFORMATION
  • ADOPTION
  • RANDOMIZED CONTROLLED-TRIAL
  • EXPERIENCES
  • HOME SYSTEMS
  • CONSTRAINTS
  • TECHNOLOGY
  • CONSUMPTION

Cite this

@article{418178ec7bb94f55bc7b283ad64155e8,
title = "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.",
keywords = "Africa, Market imperfections, Farm households, Solar PVs, Credit, Irreversibility, COUNTRIES, PROJECTS, INFORMATION, ADOPTION, RANDOMIZED CONTROLLED-TRIAL, EXPERIENCES, HOME SYSTEMS, CONSTRAINTS, TECHNOLOGY, CONSUMPTION",
author = "Yakubu Abdul-Salam and Euan Phimister",
note = "The first author would like to acknowledge the Macaulay Development Trust which funded his postdoctoral fellowship with The James Hutton Institute, Aberdeen, UK in the period 2015-2018. Both authors would acknowledge the support from British Academy Grant PM150128 which helped enable the development of this paper.",
year = "2019",
month = "4",
doi = "10.1016/j.worlddev.2018.12.007",
language = "English",
volume = "116",
pages = "66--76",
journal = "World Development",
issn = "0305-750X",
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TY - JOUR

T1 - Modelling the impact of market imperfections on farm household investment in stand-alone solar PV systems

AU - Abdul-Salam, Yakubu

AU - Phimister, Euan

N1 - The first author would like to acknowledge the Macaulay Development Trust which funded his postdoctoral fellowship with The James Hutton Institute, Aberdeen, UK in the period 2015-2018. Both authors would acknowledge the support from British Academy Grant PM150128 which helped enable the development of this paper.

PY - 2019/4

Y1 - 2019/4

N2 - 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.

AB - 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.

KW - Africa

KW - Market imperfections

KW - Farm households

KW - Solar PVs

KW - Credit

KW - Irreversibility

KW - COUNTRIES

KW - PROJECTS

KW - INFORMATION

KW - ADOPTION

KW - RANDOMIZED CONTROLLED-TRIAL

KW - EXPERIENCES

KW - HOME SYSTEMS

KW - CONSTRAINTS

KW - TECHNOLOGY

KW - CONSUMPTION

UR - http://www.mendeley.com/research/modelling-impact-market-imperfections-farm-household-investment-standalone-solar-pv-systems

U2 - 10.1016/j.worlddev.2018.12.007

DO - 10.1016/j.worlddev.2018.12.007

M3 - Article

VL - 116

SP - 66

EP - 76

JO - World Development

JF - World Development

SN - 0305-750X

ER -