This paper analyzes the current market conditions that influence the adoption and maintenance of solar electricity systems in developing countries. Renewable solar power may offer a different route to higher living standards for developing countries than does the path followed by industrialized countries. If so, then accelerating use of energy in developing countries need not be accompanied by accelerating releases of carbon dioxide, the major greenhouse gas. Similarly, solar energy would reduce growth in regional ozone, carbon monoxide, acid deposition, and particulates, as well as reducing reliance on imported oil.
The analysis here focuses on household PV (photovoltaic) systems for several reasons. Of course, other solar technologies are in use today, including household hot water systems and central station thermal systems (see Johansson et al., 1993, for a summary). In addition, one may broadly define solar energy as renewable energy, in the sense that biomass energy and hydro and wind power originate with solar-driven atmospheric forces. However, household PV electricity is a leading renewable technology both in research and application (Caldwell, 1994; Huacuz and Martinez, 1993; Hankins, 1993). Currently and in the past, PVs have claimed the largest share of U.S. federal appropriations for renewable energy activities (Golub and Brus, 1993). In the United States as well as in developing countries, PVs are beginning to penetrate markets accessible to PV's major competing technology, portable generators (Caldwell, 1994). U.S. capacity for remote household PV installations now is about 20 MW (megawatts), equal to approximately 7 percent of the small generator capacity (U.S. EPA, 1991; U.S. GAO, 1993). For a comparative perspective, consider that utility generating capacity in the U.S. is 700,000 MW (Electric Power Monthly, August 1993).
Caldwell (1994) defines several market segments and emphasizes solar competitive grid-connected electricity. In contrast, the analysis here examines rural markets not served by central grids.
II. SCALE ECONOMY AND TECHNOLOGICAL INNOVATION
In terms of optimal public policy, economic logic implies that implementing solar PV technology should be promoted when the declining social cost of PV energy passes below the rising social cost of conventional energy generation. (Social cost here is the sum of market and externality costs.) Assuming that the externality cost of gasoline production and use is significantly greater than that for PV use, one should expect that private market outcomes would defer solar implementation to later periods than would be socially optimal.
With respect to producer costs for PV installation, analysts widely believe that significant scale economies reduce marginal and average cost as installations and capacity increase.
Figure 1 shows a highly simplified static representation of these assumptions. Demand for solar increases with a lower price; the arrow also shows solar demand shifting up as conventional energy prices and taxation rise over time. The marginal market cost curve for solar (MMCs) shows scale economy, with marginal cost declining as volume increases; the arrow represents two dynamic factors that shift the MMCs curve downward. These two factors are (i) the learning curve effect, over time, and (ii) the beneficial results of public investment in solar research.
Figure 1 represents the marginal social cost of solar (MSCs) as a constant distance below MMCs. This constant distance is a simplified assumption: the marginal non-market environmental cost of conventional electricity (MNCc) is constant, and each solar kilowatt hour displaces a conventional kilowatt hour. Therefore, under this representation, the social cost of solar electricity is less than the market cost by the value of the non-market environmental cost of the displaced conventional electricity.
The market outcome [Mathematical Expression Omitted] shows high price and cost and low sales for household PV. However, the social optimum is a much larger quantity, [Mathematical Expression Omitted]. In order to attain this social optimum quantity, government must subsidize the market price at [Mathematical Expression Omitted]. The total financial subsidy in dollars is equal to the box with length [Mathematical Expression Omitted] and width [Mathematical Expression Omitted]. Figure 1 shows that this amount is a substantial portion of the producer's …