According to the 2014 World Energy Outlook, a lack of electricity access persists in many developing countries. More than one billion people, most of whom live in rural areas, still do not have even a basic electricity connection. With rapidly decreasing prices of solar panels, however, interesting in off-grid electrification has grown rapidly.

In an off-grid electricity system, power is generated locally and then distributed to households. Available systems range from simple solar lanterns to solar home systems and community micro-grids that power entire villages. From Bangladesh to Kenya and Tanzania, sales of solar technology are growing rapidly.

In a recent paper (published version; ungated pre-publication version) published in Clean Technologies and Environmental Policies, paper Semee Yoon (Yonsei University) and I explore the challenges to the business model.

In a project funded by the Earth Institute at Columbia University, we partner with an Indian solar technology business, Boond Engineering and Development, to set up an “energy center” in rural Uttar Pradesh. The energy center serves as a hub for sales and maintenance of solar home systems sold to families with bank loans provided by India’s public rural banks. The bank loans came with a 40% capital subsidy for solar home systems provided by the Government of India.

During the first six months of the project, the center sold 99 systems worth approximately 35,000 dollars — 7 times the initial cost of setting up the center. With the exception of the election month of May 2014, when campaigning by politicians disrupted operations, the center was continuously profitable. In this regard, the project was clearly a success.

At the same time, the project revealed some challenges. First, most of the systems sold were 100-watt systems that cost about 400 dollars. These are not the kinds of systems that the very poorest would purchase to alleviate their energy poverty; rather they are systems for the rural middle class living in non-electrified or poorly electrified areas. Indeed, some of the customers had a grid electricity connection but found a solar home system a useful secondary source during blackouts and other problems.

Second, the success of the scheme relied heavily on the combination of bank loans and subsidies. When the Modi government came into power, rural banks stopped providing the loan-subsidy packages, as the new government’s focus was on large-scale solar projects for the electric grid. The unpredictability of government policy is a major obstacle to the growth of distributed solar markets in India.

In our view, the primary policy lessons from the project are the following. First, the government should focus on improving access to credit for solar home system purchasers, as this constraint appears to slow down the growth of business. Second, the government should channel resources into ensuring that off-grid electricity projects also reach the poorest. Based on our field experiences, off-grid electrification can play an important role in filling the gaps left by India’s massive grid extension drive, but the current policy environment is ideal neither for business growth nor for reaching the people who need improved energy access the most.