Scaling Up Distributed Solar in Emerging Markets

Abstract

Like many emerging markets, the Arab Republic of Egypt is keen to promote distributed solar, defined here as systems below 500 kilowatts, but has struggled to create conditions for growth in the sector. The aim of this paper is to identify policy actions to unlock the distributed solar market for on-grid and off-grid applications, using Egypt as a case study. The paper calculates the rate of return on investment for different distributed solar applications, identifies nonfinancial barriers to scaling up distributed solar, and derives policy implications. For on-grid applications, the analysis finds that neither net metering nor the feed-in tariff makes distributed solar financially attractive, despite recent reductions in electricity subsidies and adjustments of feed-in tariff levels in October 2016. For off-grid applications, the profitability of distributed solar depends highly on the local price of diesel: distributed solar is viable only in areas where diesel is not available at the official (subsidized) price. In addition, several nonfinancial barriers limit the scalability of the distributed solar market. These findings indicate that the distributed solar market in Egypt will remain a niche market in the next few years without strengthened government support. First, for on-grid applications, the net metering scheme should be kept in place until a bankable feed-in tariff has been established. Second, for off-grid applications, the government should explore interventions to unlock opportunities in the agriculture and tourism sectors. Third, the government should strengthen private-sector activity in the sector, including by addressing nonfinancial barriers, such as transaction costs and gaps in the availability of data, and by building capacity among users, suppliers, and financial institutions.