Assessing markets for renewable energy in rural areas of Northwestern China

WORLD BANK TECHNICAL PAPER NO. 492 Work in progress WTP492 for public discussion December 2000 Assessing Markets for Renewable Energy in Rural Areas of Northwestern China '. 4 " 1, va'',a fr \~~~~~A ;-.-kA ,c.,In f V~~~~~~ 5 ,j A twa2 IhwMvate Voravate Douzg/las E Bar-nes V Sutsane Bogach  Recent World Bank Technical Papers No. 413 Langford, Forster, and Malcolm, Toward a Financially Sutstainable Irrigation System: Lessonsfrom the State of Victoria, Auistralia, 1984-1994 No. 414 Salman and Boisson de Chazoumes, International Watercouirses: Enhancing Cooperation and Managing Conflict, Proceedings of a World Bank Seminar No. 415 Feitelson and Haddad, Identification of Joint Management Strscturesfor Shared Aqutifers: A Cooperative Palestinian-Israeli Effort No. 416 Miller and Reidinger, eds., Comprehensive River Basin Development: The Tennessee Valley Authority No. 417 Rutkowski, Welfare and the Labor Market in Poland: Social Policy dutring Economic Transition No. 418 Okidegbe and Associates, Agricuiltutre Sector Programs: Soturcebook No. 420 Francis and others, Hard Lessons: Primary Schools, Community, and Social Capital in Nigeria No. 421 Gert Jan Bom, Robert Foster, Ebel Dijkstra, and Marja Tummers, Evaporative Air-Conditioning: Applications for Environmentally Friendly Cooling No. 422 Peter Quaak, Harrie Knoef, and Huber Stassen, Energyfrom Biomass: A Review of Combuistion and Gasifica- tion Technologies No. 423 Energy Sector Unit, Europe and Central Asia Region, World Bank, Non-Payment in the Electricity Sector in Eastern Euirope and the Former Soviet Union No. 424 Jaffee, ed., Soutthern African Agribusiness: Gaining throutgh Regional Collaboration No. 425 Mohan, ed., Bibliograplhy of Publications: Africa Region, 1993-98 No. 426 Rushbrook and Pugh, Solid Waste Landfills in Middle- and Lower-Income Countries: A Technical Guide to Planning, Design, and Operation No. 427 Marinio and Kemper, Institutional Frameworks in Suiccessfiid Water Markets: Brazil, Spain, and Colorado, USA No. 428 C. 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All rights reserved Manufactured in the United States of America First printing December 2000 1 2 3 4 04 03 02 0100 Technical Papers are published to communicate the results of the Banks work to the development community with the least possible delay The typescript of this paper therefore has not been prepared in accordance with the procedures appropriate to formal printed texts, and the World Bank accepts no responsibility for errors. Some sources cited in this paper may be informal documents that are not readily available. The findings, interpretations, and conclusions expressed in this paper are entirely those of the author(s) and should not be attributed in any manner to the World Bank, to its affiliated organizations, or to members of its Board of Executive Directors or the countries they represent. The World Bank does not guarantee the accuracy of the data included in this publication and accepts no responsibility for any consequence of their use. The boundaries, colors, denominations, and other information shown on any map in this volume do not imply on the part of the World Bank Group any judgment on the legal status of any territory or the endorsement or acceptance of such boundaries. The material in this publication is copyrighted. The World Bank encourages dissemination of its work and will normally grant permission promptly. Permission to photocopy iteis for internal or personal use, for the internal or personal use of specific clients, or for educational classroom use, is granted by the World Bank, provided that the appropriate fee is paid directly to Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, U.S.A., telephone 978-750-8400, fax 978-750-4470. Please contact the Copyright Clearance Center before photocopying items. For permission to reprint individual articles or chapters, please fax your request with complete information to the Republication Department, Copyright Clearance Center, fax 978-750-4470. All other queries on rights and licenses should be addressed to the World Bank at the address above or faxed to 202-522-2422. ISBN: 0-8213-4890-6 ISSN: 0253-7494 Tuntivate Voravate is a consultant for the Asia Alternative Energy Program for the World Bank. Douglas F. Barnes is an energy specialist for the South Asia Energy Sector Unit of the World Bank. V. Susan Bogach is an energy economist for the Asia Alternative Energy Program for the World Bank. Library of Congress Cataloging-in-Publication Data Voravate, Tuntivate, 1952- Assessing markets for renewable energy in rural areas of Northwestern China / Tuntivate Voravate, Douglas F. Barnes, V. Susan Bogach. p. cm. - (World Bank technical paper; no. 492) Includes bibliographical references. ISBN 0-8213-4890-6 1. Solar energy industries-China, Northwest. 2. Renewable energy sources-China, Northwest. 3. Market surveys-China, Northwest. I. Barnes, Douglas F. II. Bogach, V. Susan. III. Title. IV. Series. HD9681.C63 C478 2000 333.792'3-dc2l 00-065028  - iii - CONTENTS Foreword ........................................................... vii Abstract ........................................................... viii Acknowledgments ........................................................... ix Acronyns and Abbreviations ............................................................x Currency Equivalents ............................................................x Units of Measure ............................................................x EXECUTIVE SUMMARY ........................................................... xi 1. Background ............................................................1 Electricity in China ............................................................1 Purpose of the Study ............................................................2 2. Background on Areas Targeted by the Survey ...........................................................5 Background on Provinces in Study ............................................................5 Current Photovoltaic System Business ............................................................ 6 Description of Typical Photovoltaic Systems Used in Rural Areas in China ..........7 Brief Description of the Study Design ............................................................ 8 Conclusion ............................................................9 3. Survey Results: Socioeconomic Characteristics of Households without Electricity ........................................................... 11 Income, Occupation, and Education ........................................................... 11 Value of Rural Household Assets ........................................... 13 Experience with Banking and Credit ........................................... 15 Current Energy Use and Expenditure for Household Lighting .............................. 17 Attitudes and Preference toward Energy Services ........................................... 22 Knowledge of and Access to Photovoltaic Systems ........................................... 25 Conclusion ........................................... 26 4. Profile of Households with Photovoltaic Systems ................................................ 27 Profile of Photovoltaic System Owners ................................................. 27 The Type of Photovoltaic System Purchased by Households ............................... 31 System Performance and Quality of Service ................................................. 33 Conclusion ................................................ 34  - iv - 5. Potential Market for Photovoltaic Systems in Four Provinces . . 37 Ability to Pay Cash for Photovoltaic Systems ....................................................... 37 Potential Demand for Larger Systems ........................................................ 39 Attitudes and Preferences for Types of System and Payment Methods ................ 40 Conclusion ........................................................ 41 6. Conclusions and Recommendations ........................................................ 43 The Market for Photovoltaic Systems Exists and Is Growing ............................... 43 Households Appear to Have Little Interest in Using Credit to Purchase Photovoltaic Systems ........................................................ 45 Sales and After-Sales Networks Need to Be Expanded ......................................... 45 Standards and Specifications May Be Important for Market Development .......... 45 Conclusion ........................................................ 46 Appendix A: Descriptive Statistics from the Northwest China Rural Energy Survey ........................................................ 47 Appendix B: Data and Sampling Methods .......................................... 65 Appendix C: Questionnaire ........................................................ 75 Bibliography ........................................................ 115 Map IBRD 30439  - v - LIST OF TABLES 2.1 Socioeconomic Characteristics of Four Provinces in the Survey 1999 .....................6 2.2 Households without Electricity in Counties and Provinces ......................................9 3.1 Household Monthly Income by Type of Occupation of Household Head .............. 12 3.2 Average Value of Livestock Classified by Occupation of Head of Household and Type of Asset ............................................................ 14 3.3 Household Borrowing Patterns in Villages without Electricity in Four Provinces.15 3.4 Household Use of Loans in Villages without Electricity in Four Provinces ........... 16 3.5 Comparison of Income and Value of Livestock between Households that Have Not and Have Taken a Loan Before ........................................................ 17 3.6 Household Energy Use for Lighting by Income Class ............................................ 18 3.7 Household Monthly Spending for Lighting Energy ................................................ 21 3.8 Monthly Spending on Lighting for Households Using Renewable Energy Systems ............................................................ 22 3.9 Household Energy Attitudes and Lighting Preferences .......................................... 23 3.10 Satisfaction with Lighting Source According to Electricity Source ....................... 24 3.11 Household Knowledge of Renewable Energy Systems .......................................... 25 4.1 Owners of Photovoltaic Systems Whose Household Monthly Income Falls within Each Income Category for All Households ............................ 29 4.2 The Nature of Photovoltaic System Purchases in Four Provinces .32 4.3 Experiences with Repairs and Services .35 5.1 Households That Could Afford Small Photovoltaic Systems .38 5.2 Households That Could Afford to Purchase Large Photovoltaic Systems .39 5.3 Households Interested in Buying a Different Size Photovoltaic System Using Cash or Credit .40 A-1 Socioeconomic Indicators ............................................................ 48 A-2 Households' Experience with Credit ............................................................ 49 A-3 Household Energy Use for Lighting ............................................................ 50 A-4 Households' Energy Expenditure ............................................................ 51 A-5 Household Energy Attitude and Lighting Preferences ............................................ 52 A-6 Households That Have Heard About or Have Seen 20-Watt Photovoltaic Systems ............................................................ 55 A-7 Households That Are Interested in Buying 20-Watt Photovoltaic Systems ............ 55 A-8 Reason for Not Being Interested in Purchasing 20-Watt Photovoltaic Systems ..... 56 A-9 Households That Have Heard about or Have Seen 50-Watt Photovoltaic Systems57 A-10 Households That Are Interested in Buying 50-Watt Photovoltaic Systems ............ 57 A-i1 Reason for Not Being Interested in Purchasing 50-Watt Photovoltaic Systems ..... 58 A-12 Households That Have Heard about or Have Seen Small Hybrid Photovoltaic-Wind Systems ............................................................ 59 A- 13 Reason for Not Being Interested in Purchasing Hybrid Photovoltaic-Wind Systems ............................................................ 60 A- 14 Photovoltaic Systems Owned by Households ......................................................... 61 A- 15 Attitude toward Photovoltaic Systems among System Owners .............................. 61 A- 16 Reasons for Photovoltaic System Owners to Obtain Systems ................................ 62  - vi- A- 17 Perceived Benefits of Photovoltaic Systems among System Owners .. 63 A- 18 Attitude of Photovoltaic System Owners toward System Performance .. 64 A-19 Changes in Lifestyles of Photovoltaic System Owners . .......................................... 64 B-1 Rural Households and Unelectrified Households .................................................... 66 B-2 Targeted Households in Villages without Grid Electricity in Four Selected Provinces ............................................................. 67 B-3 Households in Villages without Grid Electricity in Sampled Counties and All Other Counties ............................................................. 68 B-4 Sample Selection for Photovoltaic Market Survey in Four Selected Provinces in China ............................................................. 69 B-5 Sample Size Broken Down by Random and Purposive Selection of Households ..70 B-6 Weight Adjustment for County ............................................................. 71 B-7 Weight Adjustment for Province ............................................................. 71 B-8 Final Weight Adjustment Procedure ............................................................. 72 B-9 Estimated Variance and Standard Errors of Household Monthly Income in Gansu ............................................................. 72 B-10 Summary of Standard Error and Confidence Interval ............................................. 73 LIST OF FIGURES Figure 3.1: Total Monthly Spending on Lighting Fuel in Energy and Electricity ............. 20 Figure 3.2: Total Monthly Spending on Lighting Energy and Electricity ......................... 20 Figure 4.1: Distribution of Owners of Photovoltaic Systems Based on Income Deciles ..28 Figure 4.2: Distribution of Photovoltaic Owners Based on Income and Assets Owned ... 30 Figure 4.3: Average Size of Photovoltaic System Owned by Income ............................... 32  - vii - FOREWORD There is a growing consensus that renewable energy will play a significant role in future development programs. In spite of this acceptance, surprisingly few detailed studies have been made on the emerging markets for renewable energy in most countries. This is especially challenging because these systems are used in remote areas where even national surveys rarely reach and even the most basic statistical data is lacking. The main purpose of this study was to obtain basic socioeconomic data on households with and without PV systems in remote areas of northwestern China, and to use these data to determine the market potential for photovoltaic systems in villages without access to grid electricity. While a number of photovoltaic systems have been sold in the remote provinces, the size and nature of this market was not well understood. In order to gain a better understanding of the markets for renewable energy in China, the Asia Alternative Energy Program (ASTAE) completed a detailed market study for the rural areas without access to electricity from the local or national grid system in Gansu, Inner Mongolia, Qinghai, and Xinjiang Provinces built upon a random sample survey. Questionnaires were used to gauge the market potential for photovoltaic home systems among rural households in these remote areas. The study produced information that addresses several needs. It estimated the size of the potential market for photovoltaic systems in four Chinese provinces. It provided important information on the household characteristics, ability to pay, and preferences of potential customers. It detailed positive and negative experiences with existing photovoltaic systems, and it developed recommendations to increase the penetration of photovoltaic systems in rural China as part of the upcoming China Renewable Energy Development Project. The main conclusion of the report is that households in remote areas have a significant desire for electricity, and that a significant potential market exists for photovoltaic systems in many regions. ASTAE was created by the World Bank, with support from the Netherlands Ministry of Development Cooperation, the United States Department of Energy, and other donors. ASTAE's goal is to scale up alternative energy development, which can create a direct and immediate link to the World Bank's overall mission of poverty alleviation and growing emphasis on environmental protection. It is my belief that this report will assist in achieving our goal by increasing interest in the market for off-grid renewable energy systems, reducing poverty and improving quality of life for rural families while increasing environmental protection. Yoshihiko Sumi Program Manager Asia Alternative Energy Program (ASTAE)  - viii - ABSTRACT The main objective of this study was to determine the market potential for photovoltaic systems in the remote areas of China, especially in villages without access to grid electricity. A number of photovoltaic systems have been sold in the remote provinces, but the size and nature of this market was not well understood. The study produced data that addresses several needs. It yielded an estimate of the size of the potential market for photovoltaic systems in four Chinese provinces; provided important information on the characteristics, ability to pay, and preferences of potential customers; detailed positive and negative experiences with existing photovoltaic systems; and developed recommendations to increase the penetration of photovoltaic systems in rural China as part of the upcoming China Renewable Energy Development Project. The main conclusion of the report is that there is significant desire by households in remote areas for electricity, and that there is significant potential market demand for photovoltaic systems.  - lx- ACKNOWLEDGMENTS We gratefully acknowledge the support of the Japanese Grants for Preparation of the Renewable Energy Development Project and assistance from the Netherlands Alternative Energy Policy and Project Development Trust Fund in support of the Asia Alternative Energy Program (ASTAE), which provided funding to carry out the survey in China and supported analysis of the data by local and international experts. The efforts of the staff of the Center for Renewable Energy Development (CRED) deserve special mention for organizing and supervising the field survey work under very difficult conditions, for entering and verifying the data, and for drafting a report on the findings of the survey. CRED's team was led by Ms. Li Jingjing in the early stages of the survey work and by Mr. Li Junfeng throughout most of the work. Many other CRED staff members made substantial contributions to this project. The authors would like to acknowledge the guidance provided throughout the course of the project by Mr. Noureddine Berrah, the Task Team Leader, who supervised, reviewed, and provided extensive support for the completion of the work. Mr. Liu Hongpeng, of the State Economic and Trade Commission, also provided extensive guidance, support, and comments during the survey. The report owes much to their guidance and support. We would like to thank Jeremy Levin, who wrote the executive summary and abstract and assisted in the report's preparation, as well as Rebecca Kary of Alpha- Omega Services, Inc., who edited the report. We would also like to thank several reviewers of the report, who made useful contributions. The reviewers included Messrs. Richard Spencer, Anil Cabraal, and Enno Heijndermans (World Bank); and Mr. Jim Finucane and Ms. Miao Hong (consultants).  ACRONYMS AND ABBREVIATIONS ASTAE Asia Alternative Energy Program CRED Center for Renewable Energy Development ESMAP Energy Sector Management Assistance Program GEF Global Environment Facility PV Photovoltaic TVE Township and village enterprise CURRENCY EQUIVALENTS (1998) U.S. dollars ($) = currency equivalent $1.00 = 8.3 yuan UNITS OF MEASURE GW Gigawatt kW Kilowatt kWh Kilowatt-hour Mu Chinese unit of land measurement MW Megawatt W Watt  EXECUTIVE SUMMARY There is a growing consensus that renewable energy will play a significant role in future development programs. This consensus has grown out of such reports as the United Nations Development Programme's "Energy after Rio," Shell Petroleum's "Energy for Development," and the World Bank's recent papers on "Fuel for Thought" and "Rural Energy and Development." In spite of this acceptance, surprisingly few studies have been made on the emerging markets for renewable energy in most countries. The main purpose of this study was to determine the market potential for photovoltaic systems in the remote areas of China, especially in villages without access to grid electricity. A number of photovoltaic systems have been sold in the remote provinces, but the size and nature of this market is not well understood. The study produced information that addresses several needs. It estimated the size of the potential market for photovoltaic systems in four Chinese provinces. It provided important information on the characteristics, ability to pay, and preferences of potential customers. It detailed positive and negative experiences with existing photovoltaic systems, and it developed recommendations to increase the penetration of photovoltaic systems in rural China as part of the upcoming China Renewable Energy Development Project. The main conclusion of the report is that households in remote areas have a significant desire for electricity, and that a significant potential market exists for photovoltaic systems in many regions. BACKGROUND During the last 40 years, the Chinese program to provide electricity to rural populations achieved remarkable success. Today the percentage of households with access to electricity from large and small grid systems is approximately 93 percent, representing more than 96 percent of the villages in China. Despite this success, a great many people still have no access to electricity in the remote areas of China. Approximately 75 million people do not have access to electricity from a local or regional grid system. In these remote provinces, the people are relatively poor, and the population density is low. Compared with other areas of China, little business or commercial activity exists. The low demand and sparse populations make it very expensive to reach these areas through grid extension. Hence, they are unlikely to be connected to the national grid for many years. Retailers have been very active in selling renewable energy systems in the northwestern provinces of China, both wind and photovoltaic. Based on reports from  xii Executive Summary photovoltaic companies, an estimated 45,000 photovoltaic systems were sold in 1997 alone, primarily on a cash basis. Little is known, however, about the potential size of the market for photovoltaic systems in these remote areas. None of the photovoltaic system retailers and distributors servicing these areas has conducted any type of formal survey to determine the size of the market for renewable energy systems. The World Bank has recently approved a loan and Global Environment Facility (GEF) grant to China for the Renewable Energy Development Project (Loan 4488-CHA, 1999), which includes a large photovoltaic component. This component will provide assistance to photovoltaic system companies to market, sell, and maintain an estimated 300,000-400,000 systems in the remote areas of China's northwestern provinces. The results of this study are intended to help guide the implementation of the photovoltaic component. THE SURVEY REGION The survey was conducted in four remote provinces in China-Gansu, Inner Mongolia, Qinghai, and Xinjiang. All these provinces will be served by the recently approved Bank project. The target population (also known as the "population frame") within these provinces for the photovoltaic market survey consisted of all rural households living in villages without access to grid electricity in counties where more than 15 percent of households did not have electricity.' The main reason that the market survey concentrated on such counties was that the villages without electricity in these counties have less chance of gaining access to electricity in the near future. The photovoltaic market survey in the rural areas in Gansu, Inner Mongolia, Qinghai, and Xinjiang Provinces was conducted using a multistage random sampling design. Responses to detailed questionnaires were gathered from 2,286 households between August 1998 and April 1999. RESULTS AND RECOMMENDATIONS The survey yielded important information on the characteristics of the target population, their famniliarity with the use of credit, their energy preferences, their use of remote renewable energy technologies, the characteristics of existing owners of photovoltaic systems, and observed experiences with solar home systems. Recommendations for increasing the acceptance of photovoltaic systems were developed based upon these observed results, and they are highlighted below. The 15 percent cutoff point was arbitrarily chosen based on the average 17 percent unelectrified rate in the combined four provinces.  Executive Summary xiii TARGET POPULATION CHARACTERISTICS The provinces differ significantly in income, occupation, and education. The average monthly household incomes of the target population in the provinces range from a low of about Y 200 in Gansu to more than Y 1,300 in Inner Mongolia. Significant variations also exist in the occupations of the respondents: more than 90 percent of the households in unelectrified areas of Gansu are farmers, while more than 60 percent of the households in comparable areas of Inner Mongolia are herders. Qinghai has an even higher percentage of herders than Inner Mongolia, although they do not earn as much income as the Inner Mongolian herders. Xinjiang is predominantly a farming area. Its high average income level (Y 713) is probably attributable to its greater share of high- value cash crop production. The education levels in the provinces are very high for such remote areas. Only one out of the four provinces has very low levels of education: Qinghai-where the rural households in the areas without electricity have the lowest educational levels. These variations in income, occupation, and education will lead to differing markets for photovoltaic systems in each of the provinces. In addition to collecting data on yearly household income, the study estimated the assets of the rural households. Comparing the assets of farmers to those of herders revealed a pattern similar to that of yearly household income. In general, herders have higher incomes and greater total assets than farmers, making them more likely to be able to afford renewable energy systems. The conclusion is that a significant number of households in the target population can afford to purchase photovoltaic systems, even on a cash basis. FAMILIARITY WITH CREDIT Many people in these provinces are familiar with credit. Between 30 and 40 percent of the households in three of the provinces already have experience with obtaining credit from rural banks, credit unions, or other sources. Although households are very likely to borrow money for productive uses (such as agricultural inputs), there is no indication that they would borrow money for photovoltaic systems that improve the quality of life. The household predisposition to borrow for photovoltaic systems should be investigated further to ensure that all potential approaches to increasing the affordability of photovoltaic systems are fully pursued. AWARENESS OF BENEFITS OF ELECTRICITY The findings of the study verify that most households are aware of the benefits of electricity, and would like to have access to the better lighting, entertainment, and  xiv Executive Summary information made possible by electricity. Higher-income households are more dependent on electric lighting than others, and are willing to pay a very high price for electricity. The results of the study clearly demonstrate that the benefits of electricity are widely recognized by rural households. This represents a key factor in the demand for photovoltaic systems in areas with no immediate prospects for grid access and high costs of alternative sources of electricity. EXISTING USE OF RENEWABLE ENERGY TECHNOLOGIES Interestingly, a significant number of households in remote areas without electricity are already using renewable energy sources, such as wind and, to a limited degree, photovoltaic systems. Even the households with photovoltaic and wind energy systems, however, are not totally satisfied with the service they are receiving. The survey noted that customers were dissatisfied with the seasonal variation from wind system power output. Furthermore, there is some evidence of discontent with the quality and quantity of lighting received from renewable energy, which includes solar and wind. Close to 40 percent of surveyed owners of photovoltaic systems reported that the photovoltaic systems they owned were too small and do not provide enough electricity for their families' needs. Despite the presence of a developing photovoltaic market, not all households in the sample areas of this study were aware of photovoltaic systems. About one-third of the households in the provinces had never heard about photovoltaic systems. An emerging market for photovoltaic systems is developing in the northwestern provinces of China, even on a cash-only basis. At present, this market is at an early stage of development, as commercial retailers have only begun to service these provinces during the last three years. There is a need to increase both the awareness and availability of photovoltaic systems. Finally, given the intermittent nature of electricity from wind systems, the possibility of developing small and inexpensive hybrid systems should be explored. CHARACTERISTICS OF EXISTING OWNERS OF PHOTOVOLTAIC SYSTEMS Existing photovoltaic system owners tend to have higher incomes, greater assets, and more education than those who do not own systems. Income and the total value of assets owned, particularly livestock, are complementary indicators of whether households can afford to purchase a photovoltaic system. The measured ability to pay is a fairly good indicator of potential photovoltaic purchasers, as is education level. The relatively large numbers of better-educated households and higher income and asset levels indicate that there is a large potential market for photovoltaic systems.  Executive Summary xv EXPERIENCE WITH PHOTOVOLTAIC SYSTEMS Most households that have purchased photovoltaic systems have chosen systems that were affordable, but which did not give the level of electricity service they desired, for example, enough lighting. Most systems in the region surveyed are less than two years of age and are relatively small in size, 20 watts or less. Although the majority of systems seem to be performing well, several problems have been observed with lamp and battery performance. Additionally, when systems do need repairs, few convenient facilities are available. The average wait time for repairs is about one month. In spite of the problems, almost all photovoltaic system owners across all four provinces are satisfied with the performance of their systems and would recommend them to relatives or friends. Therefore, a significant market may exist to upgrade the existing typical 20-watt systems. A modular approach may be warranted, in which a household has a choice of different types of systems that offer an easy upgrade path to larger systems. Rather than concentrating on one-time sales, the market should be viewed as a continuing source of sales of equipment and upgrades. Most households in the remote areas have no access to the retailers that sell networks. Even in areas where photovoltaic systems have been sold, there is very little in the way of after-sales support. Assistance needs to be provided to accelerate the growth in sales of photovoltaic systems and after-sales support networks to increase access to photovoltaic systems and reduce waiting time for repairs. The adoption of mandatory standards, certification of photovoltaic products, and perhaps a modular approach to sales will help address the quality and performance problems identified in the study. POTENTIAL MARKETS FOR PHOTOVOLTAIC SYSTEMS The results of the survey allow for an estimation of the potential market size for sales of photovoltaic systems by using the observed income and asset levels of the respondents. This analysis is based on a comparison of characteristics of rural households living in villages without grid electricity services and a profile of current photovoltaic system owners. Forty-one percent of rural households in the four provinces have levels of income and assets similar to those who have already purchased small photovoltaic systems with cash, representing 562,573 households that can afford to purchase small photovoltaic systems in the four provinces. Furthermore, it is estimated that approximately 264,515 of these households can afford to buy larger photovoltaic systems (greater than 50 watts) with cash. Based on the observed dissatisfaction with the limited capacity of smaller systems, it is conceivable that the demand for larger photovoltaic systems will increase in the near future.  xvi Executive Summary CONCLUSION A market for photovoltaic systems is emerging in the northwestern provinces of China, even on a cash basis. At present this market is in an early stage of development, because commercial retailers have only begun to service these provinces during the last three years. Several obstacles must be overcome to expand this market: the lack of interest in credit for photovoltaic system purchases by households, which limits their ability to pay for photovoltaic systems, and the weak existing sales and after-sales networks in the region. Other obstacles include competition from alternative sources of electricity, such as diesel or gas generators and wind systems, and potential quality concerns with existing photovoltaic systems. Despite these obstacles, this study revealed that significant opportunities exist for introducing photovoltaic systems in the rural areas of China. Many households can already afford to purchase small systems on a cash basis. This number could be significantly expanded if the use of credit to purchase systems was widely available and accepted. Furthermore, there appears to be a market for photovoltaic system expansion, beyond the initial purchase of smaller, more affordable systems. This market includes both upgrades to existing small photovoltaic systems and possible hybridization with existing wind systems. Overall, the market for photovoltaic products is likely to expand quickly. Households in the areas seem to appreciate the benefits of electricity service from the systems, and many have the necessary income to pay for systems.  1. BACKGROUND The potential for renewable energy in developing countries has been a topic of great interest among international development specialists in recent years. Several recent reports have highlighted renewable energy as a long-term contribution to global energy supplies, such as the United Nations Development Programme's "Energy after Rio," Shell Petroleum's "Energy for Development," and the World Bank's recent papers on "Fuel for Thought" and "Rural Energy and Development." All these reports endorse the development of renewable energy, as well as the relevance for future energy strategies in developing countries. Despite the growing acceptance that renewable energy will play a greater role in future development programs, surprisingly few good studies have been made on the markets for renewable energy in most countries. Without an understanding of the unique niche or market for renewable energy systems, programs can be misguided and waste valuable resources in attempting to develop markets where little potential exists for systems sales. In fact, many programs involving household photovoltaic systems have experienced implementation problems. This survey on the potential market for household photovoltaic systems in the northwest part of China, carried out as part of a World Bank project, demonstrates the value of proper market assessments. The results of the study are being utilized to guide the strategies to promote the sales of household photovoltaic systems under the project. In addition, the study should provide a useful benchmark or good-practice model for future studies on how to identify and assess market segments in the development of rural and renewable energy programs. To this end, appendixes to this report include a descriptive list of tables from the survey (Appendix A); a description of the methodology and the sample design (Appendix B); and the questionnaire (Appendix C) used in the market study. ELECTRICITY IN CHINA China is one of the handful of developing countries in which a high percentage of people have access to electricity. During the last 40 years, programs to provide electricity to rural populations have achieved remarkable success. Today the percentage of households in China with electricity from large and small grid systems is about 93 percent, including more than 96 percent of the country's villages. The rural electrification program has also been very different from those in other countries. In China, the responsibility of providing electricity service to rural areas was delegated to local power  2 Chapter 1. Background companies. At first, most of the companies were very small, and coverage was limited to the main cities and towns. The companies had the responsibility of both local generation and distribution of electricity. This was often accomplished through local networks connected to small coal-generating stations and mini- and microhydropower systems. Today the national grid also reaches many of these small regional power companies, complementing and sometimes replacing the original power plants. More recently, a small amount of China's electricity supply has been provided by renewable energy resources, such as wind, solar, and geothermal energy. The wide availability of electricity in both urban and rural areas in China is a major accomplishment. Despite this success in reaching hundreds of millions of people in the countryside, though, many people are still without electricity in the remote areas of China. About 75 million people do not have access to electricity from a local or regional grid system. In these remote provinces, the populations are relatively poor and can be very sparsely distributed. Many of the people make their living by farming and herding. The grid is unlikely to reach them for many years to come. Compared with other areas of China, there is little business or commercial activity. As a consequence, most of the demand for electricity comes from rural households. The low demand and sparse populations make it very expensive to reach these areas by extending the electricity grid. Despite the remoteness of these areas, retailers have recently dramatically stepped up sales of renewable energy systems-particularly wind (starting in the early 1 980s) and photovoltaic home systems (during the last three years). Based on the sales information, about 45,000 photovoltaic systems alone are reported to have been sold in 1997. Almost all the systems were sold on a cash basis. Because the market is still in the early stage of development, little is known about the potential and size of the market for renewable energy systems in general and photovoltaic systems in particular in such remote areas. Although some photovoltaic system distributors are already servicing these areas, none of them has conducted a formal survey to determine the size of the market for renewable energy systems. PURPOSE OF THE STUDY The overall purpose of this study was to determine the size of the potential market for renewable energy systems in the remote areas of northwest China by focusing mainly on household photovoltaic systems. Very few reliable government statistics exist for these remote areas. The number of systems being sold suggests that there is a market, but the size and nature of the market is not well understood. One could question whether the market is big enough to justify the increased sales that would result from a World Bank lending operation. To answer this question, several different types of information on the market for photovoltaic systems were required.  Chapter 1. Background 3 One important question that was answered by the market survey is what size systems should be developed for rural markets. The traditional view has been that households would not want systems below 50 watts, because they would not supply sufficient power. However, recent studies have indicated that because of the cost, many people are purchasing the smaller rather than the larger systems. Thus, it is important to characterize the market for different sizes of photovoltaic systems and to profile the groups of people who already own such systems. A second issue involved the willingness or ability of rural households to pay for photovoltaic systems. This study was fortunate to have access to many households in the remote provinces that already own photovoltaic systems. As a consequence, the income and attitudes of these households could be compared with those that do not yet have them. This provided a firm basis for estimating or understanding the willingness to pay for household systems. Another goal of the study was to examine the role that credit might play in expanding the sales of household photovoltaic systems in the rural areas without access to electricity. Credit is an obvious way to make the purchase of photovoltaic systems more affordable to people with low incomes. We know that today most of the purchases of renewable energy systems are on a cash basis, and previous work in these areas has not dealt with credit issues. Therefore, the study documented the household experience with credit, and whether households are predisposed to borrow money for the purchase of a household photovoltaic system. Finally, the market survey also addressed the issue of whether adequate after-sales support is available for photovoltaic systems in the areas where systems are being sold. Much has been written concerning the role of after-sales service in the promotion of and market development for household photovoltaic systems. This study examined the reliability of existing systems and people's perception of after-sales service. The results of the study confirm that a significant market exists in the remote provinces of China for electricity. The details are provided in the following chapters. In chapter 2, the provinces and the methods used to conduct the market study are described. Following that, chapter 3 describes the survey population, along with their awareness and use of renewable energy. Chapter 4 presents an analysis of a special sample of households that currently use renewable energy, mainly to determine the characteristics of those that have adopted the technology. Chapter 5 discusses the implications of this study for the development of the renewable energy in the four provinces.   2. BACKGROUND ON AREAS TARGETED BY THE SURVEY This chapter provides a description of the local conditions in rural areas where many people have no access to grid electricity services in the provinces of Gansu, Inner Mongolia, Qinghai, and Xinjiang. A World Bank/GEF project for photovoltaic systems will be undertaken in these remote provinces of China.' BACKGROUND ON PROVINCES IN STUDY The provinces covered in this report are located in some of the most remote areas of China, mainly in the north and northwestern part of the country. The provinces include Gansu, Inner Mongolia, Qinghai, and Xinjiang (see map IBRD 30439 at the back of this report). These four provinces cover an area of 4 million square kilometers, with a total of 18 million households (70.4 million people) living in the rural areas. The vast majority (approximately 83 percent) of these people already have access to some form of grid electricity.2 The remaining 17 percent of the rural population in these four provinces live in the more remote, isolated rural areas where extending grid electricity is both difficult and expensive. The four provinces or autonomous regions are characterized by large land areas relative to population (see Table 2. 1). Density of rural households and rural income levels are much lower than the national average. Three of the four areas also have large minority populations, especially target areas of the survey. Two of the provinces are autonomous regions, which means that a significant share of the population is of non-Han nationality. In Inner Mongolia, the largest single ethnic minority is Mongolian, while in Xinjiang it is Uigur. In Qinghai, the majority ethnic population is Tibetan, since much of the territory was once part of Tibet. The areas covered by the survey are also characterized by different geographic conditions-mainly mountains, basins, and plateaus. At the western edge of Xinjiang, the targeted area contains huge differences in elevation, from 4,000 to 5,000 meters at the western edge, to the Tarim Basin area, much of which is desert. The Qinghai-Tibet Plateau, known as the roof of the world, towers in the southwest at more than 4,000 meters. The Gansu corridor, a narrow 1,000-kilometer corridor where the Qinghai-Tibet, Loess, and Inner Mongolian Plateaus join, was part of the ancient Silk Road leading to The project area was later expanded to include Tibet and western Sichuan. 2 These households have access to either national-regional or mini and isolated grid electricity.  6 Chapter 2. Background on Areas Targeted by the Survey TABLE 2.1: SOCIOECONOMIC CHARACTERISTICS OF THE FOUR PROVINCES IN THE SURVEY, 1997 National Gansu Inner Mongolia Qinghai Xinjiang Land area (thousands of 9,600 450 1,100 720 1,600 square kilometers) Population (millions) 1,236 24.9 22.6 5.0 17.2 Density (persons per 129 55 21 7 1 1 square kilometer) income (yuan) 2,090 1,185 1,602 1,320.63 1,500 Han nationality (%) 94 43.5 79.6 41.6 38.4 Minority (%) 6 56.5 20.4 58.4 61.6 Main agricultural Grain, cotton, oil- Grain, oil-bearing Grain, oil-bearing Grain, oil-bearing products bearing plants, plants, sugar beets, plants, sugar beets, plants, sugar beets, pigs, sheep wool, pigs, cattle, sheep, pigs, cattle, yaks, pigs, cattle, sheep, poultry, and eggs goats, wool, and sheep, goats, wool, goats, horses, cashmere and cashmere camels, wool, cashmere, and milk products Source: China State Statistical Bureau 1998. Xinjiang and areas to the west. In the east, the terrain of Inner Mongolia ranges from mountains with dense forests in the northeast to the vast Hulunbuer Plateau for grazing in the center, with the rest of the area containing numerous deserts, sands, salt and alkali lakes, and scattered highlands. CURRENT PHOTOVOLTAIC SYSTEM BUSINESS Despite the remoteness of these areas, photovoltaic businesses have been growing in the provinces. During the last five years, several different types of companies have been selling photovoltaic systems mainly centered in Qinghai. These companies are those that have grown from research institutes, larger ones that assemble photovoltaic systems for many applications (including telecommunications) and that may also produce photovoltaic modules, and other commercial companies like television manufacturers and small wind turbine manufacturers. The companies selling photovoltaic systems typically involve three different types of operations. The businesses include urban-based distributors that procure major components from manufacturers and purchase locally minor components themselves, small assembly shops that sell systems and components of systems to system installers, and retailers that sell systems directly to end users. Some companies have their own retail networks, selling mainly through these established channels. There are also a few  Chapter 2. Background on Areas Targeted by the Survey 7 vertically integrated suppliers that have their own manufacturing facilities for key components, including modules and controllers. Although sales of photovoltaic home systems have increased steadily in recent years, none of these companies has a well- developed retail network. During the past five years, photovoltaic system sales in these provinces have increased dramatically. The businesses in some provinces started out as partially owned by the state, and sold systems with significant subsidies. Recently, however, many of the subsidies have been reduced or eliminated, and many new smaller companies have emerged that are dedicated to selling renewable energy systems on a commercial basis. These smaller, privately owned companies have entered the market focusing on the smaller systems that are more affordable to their customers. Although such companies have a comparative cost disadvantage because of small-scale operations and low-volume production, they have been cutting costs to compete. The emphasis on smaller systems and cutting costs is a common strategy employed by photovoltaic companies to make systems more affordable and marketable to a larger segment of the population. The photovoltaic market is increasingly competitive. Sales data collected from photovoltaic companies indicate that in 1997, the largest four companies held 51 percent of the market in unit sales, 31 percent of market in watt power sales, and 36 percent of the market in sales revenue. In 1997, the top four ranked companies in terms of photovoltaic system sales revenue all were registered during the past three years. The company with the largest market share increased the number of photovoltaic units sold from 3,500 in 1995 to about 7,500 units in 1997. Most of the units were the 20-watt systems, and were sold to customers in Gansu, Qinghai, Sichuan, and Tibet. The photovoltaic market is likely to remain competitive in the near future because the startup capital requirements are small, with little investment required in equipment, buildings, and vehicles. Also, the technology required to put systems together is also relatively simple and widely available. Presently, there are no dominant brands, and the companies compete based on their product presentation and promises of quality, performance, and customer convenience. DESCRIPTION OF TYPICAL PHOTOVOLTAIC SYSTEMS USED IN RURAL AREAS IN CHINA Photovoltaic systems are typically used by individual households, and commercial and small industrial establishments to provide electricity in areas where there is no grid electricity. A typical photovoltaic system is made up of a photovoltaic panel, battery, and a battery or load controller. For individual home usage, a photovoltaic system is typically used to power two to four indoor lights, an outdoor security light, and a television set or a radio-cassette player. The most common systems used in the four targeted provinces and elsewhere in the country are 10- and 20-watt photovoltaic systems. The systems can power two lights and a radio-cassette player for four hours. A small number of larger photovoltaic systems are also being sold. They include a 50- and 75-watt photovoltaic  8 Chapter 2. Background on Areas Targeted by the Survey array. A photovoltaic system can be upgraded by adding additional panels. With an upgrade to 75 watts, the photovoltaic system will enable users to operate a color television. In China, the panel and the other components are usually packaged in two self- contained wooden boxes. Two lights are usually included in the box, and the system wiring is complete. The user simply needs to set the panel in place and connect the battery to the panel in order to be ready to start operation. BRIEF DESCRIPTION OF THE STUDY DESIGN The findings presented in this report are based on a field survey and interviews of 2,886 rural households who live in villages without access to grid electricity in the provinces of Gansu, Inner Mongolia, Qinghai, and Xinjiang (see Appendix B for the details of the methods and sample design). The surveys were conducted during August and September 1998.3 Out of 2,886 cases selected through the random sampling process, 111 homeowners had photovoltaic systems, and 439 had small wind systems. A supplemental sample also was collected for households that use photovoltaic systems. The rationale for purposely selecting households that use photovoltaic systems was to help the study develop a profile of households using these systems in the region of the study. For this purpose, an additional 27 households that own photovoltaic household systems were interviewed during the course of the project. The goal of the study, as discussed earlier, was to profile the potential market for photovoltaic systems that can provide electricity to rural households. Because so many households had electricity or were near electricity distribution systems, it made little sense to draw the sample from the provincial population. More than 80 percent of households in the selected provinces already have electricity service from grid systems. Households in counties with extensive rates of household electrification are less likely to adopt photovoltaic systems. The grid systems in China provide higher levels of electricity service, and the price for electricity is very low. The few consumers without electricity in these counties may opt to wait for grid electricity, instead of buying a photovoltaic system. As a consequence, the target population or population frame for the market survey consists of those households living in villages without grid electricity, and in the counties in which at least 15 percent of villages are without electricity.4 The population frame and the sample population are illustrated in Map IBRD 30439 at the end of this report. For the 3 The only exception is the survey in Abagaqi County in Inner Mongolia (a total of 90 cases), which was conducted in April 1999. 4 The 15 percent cutoff point was chosen based on the average 17 percent of households without electricity in the combined four provinces.  Chapter 2. Background on Areas Targeted by the Survey 9 four provinces, about 1.4 million households are in such counties with an electrification rate of less than 85 percent (see Tables 2.2 and B-2 for details). Only 270,000 households without electricity are in the counties that are not in the sample frame of this study. Thus, the population universe in the study-the households in villages without electricity-is well represented by the counties that have the lowest penetration rate for grid electricity systems. TABLE 2.2: HOUSEHOLDS WITHOUT ELECTRICITY IN COUNTIES AND PROVINCES Gansu M lia Xinjiang Qinghai Total Total number ofrural households in 4,169,218 2,753,990 2,248,512 493,414 9,665,134 counties with: Electricity rate greater than 85% 2,301,491 1,963,192 504,265 318,916 5,087,864 Electricity rate less than 85% 1,867,727 790,798 1,744,247 174,498 4,577,270 Total number of rural households 693,542 383,367 459,956 104,052 1,640,917 without electricity in counties with: Electricity rate greater than 85% 121,637 87,011 43,735 19,348 271,731 Electricity rate less than 85% 571,905 296,356 416,221 84,704 1,369,186 Source: CRED 1998. CONCLUSION The sample of households in the region without electricity should be representative of the possible market for household photovoltaic systems. For the four provinces, the population universe of the sample covers more than 90 percent of the households without electricity in the provinces. The sample covers some of the most isolated and poorest areas of China. In the chapters that follow, details of the socioeconomic characteristics of the households without electricity access are described in detail.   Chapter 3. Survey Results I1 3. SURVEY RESULTS: SOCIOECONOMIC CHARACTERISTICS OF HOUSEHOLDS WITHOUT ELECTRICITY The purpose of this chapter is to understand the characteristics of the households in the areas without electricity in the four provinces. This provides a background for identifying the characteristics of households that would be most likely to purchase or lease household photovoltaic systems. For instance, one goal of the study was to ascertain whether incomes in such areas are high enough to make such systems affordable. Another issue is whether households are familiar with or have access to credit to purchase photovoltaic systems. These and other issues are the topic of this chapter. INCOME, OCCUPATION, AND EDUCATION The income and occupations in the four provinces are quite diverse. For instance, Gansu is an extremely poor province composed of poor farmers. This province has long been considered one of the poorest in China. More than 90 percent of the households without electricity in Gansu earn their living as farmers (see Table 3. 1), but they produce very little income. The incomes in areas of Gansu that were in the survey are about Y 200 or about $25 per family per month, which is close to six times lower than in Inner Mongolia. In the year before the survey, a severe drought in Gansu may have affected incomes. Because of the drought, it may be possible that farmers consumed most, if not all, of the food they grew during this period, with very few cash sales of crops. Even without the drought, however, Gansu is a very poor area. The rural households in Inner Mongolia have the highest income of the four provinces (see Table 3.1). Just over 60 percent of the households living in areas without electricity in Inner Mongolia are herders. The income of the herders is close to 10 times higher compared to farmers in this same province, illustrating that herding is a good occupation for people in the area. The average income of the herders is more than Y 2,000 per household or $250 per month. Within China, the demand for the meat products produced by herders has been increasing, especially in urban areas. Qinghai has an even higher percentage of herders than Inner Mongolia. More than three-quarters of the population living in areas without access to electricity in Qinghai are herders, and only 10 percent of the populations are farners. The herders in Qinghai, however, do not earn as much income as those in Inner Mongolia. They earn about Y 675 per household per month.  12 Chapter 3. Survey Results TABLE 3.1: HOUSEHOLD MONTHLY INCOME BY TYPE OF OCCUPATION OF HOUSEHOLD HEAD Gansu Inner Mongolia Xinjiang Qinghai Total Fanner (yuan) 200 167 759 300 365 Population represented 515,829 96,651 266,604 9,255 890,338 Percent within province 90 33 64 11 65 Herdsman (yuan) - 2,121 610 673 1410 Population represented - 180,319 98,732 66,724 345,778 Percent within province - 61 24 79 25 Mixed herding farming (yuan) 288 230 645 326 428 Population represented 26,592 10,995 31,300 8,520 77,407 Percent within province 5 4 7 10 6 Local TVE worker (yuan) 298 - 836 - 493 Population represented 5,418 - 3,078 - 8,496 Percent within province 0.9 - 0.7 - 0.6 Outside TVE worker (yuan) 183 198 - - 183 Population represented 10,753 192 - - 10,945 Percent within province 2 0.1 - - 0.8 Local manager (yuan) 345 390 594 - 423 Population represented 2,591 1,844 1,539 - 5,974 Percent within province 0.5 0.6 0.4 - 0.4 Retired (yuan) 500 1,711 1,064 - 1,157 Population represented 184 603 2,300 - 3,086 Percent within province - 0.2 0.6 - 0.2 Other (yuan) 378 575 642 866 529 Population represented 10,539 3,018 12,180 205 25,943 Percent within province 2 1 3 0.2 2 All households (yuan) 208 1,370 713 598 637 Population represented 571,905 295,622 415,733 84,704 1,367,964 Percent within province 100 100 100 100 100 Note: This table presents the weighted results of the sample survey. The average income of all households classified by type of occupation of household is slightly different from the average income of all households because there are a few cases with missing values for type of occupation. The "-" indicates zero income. TVE stands for township and village enterprise. Source: China Market Survey 1998. Xinjiang is predominately composed of farming areas. As opposed to Gansu, the average farmer in Xinjiang has a higher income than the average herding family in the same province. Their income is about two and a half to almost five times higher than farmers in three other provinces. The distribution of household income among different occupations within the province is more homogeneous than in three other provinces. The reason for this is probably that the farming in Xinjiang is very different than in Gansu. Xinjiang produces high-value cash crops, such as grapes and melons, as opposed to the grain, cotton, and oil-bearing plants grown in Gansu. The education levels in the provinces are very high for such remote areas. Only one out of the four provinces has very low levels of education. Among the four provinces, the rural households in the areas without electricity in Qinghai have the lowest  Chapter 3. Survey Results 13 educational levels. More than half of the heads of households surveyed cannot read or have never attended school, and most of the people who had attended school have only a primary school level of education. Furthermore, in about a third of rural households without electricity in Qinghai, they are illiterate or they have never attended school, or both. In the other three provinces, only 7-12 percent of the heads of households are illiterate or have never attended school. Only 1-4 percent of the households in the three provinces are illiterate. The conclusion is that the provinces differ significantly in terms of both income and occupation. The average incomes in the provinces range from a low of about Y 200 in Gansu to more than Y 1,300 in Inner Mongolia. The percentage of herders ranges from almost none in Gansu to more than three-quarters of the population in Qinghai. This clearly illustrates that there are likely to be very differing markets in each of the provinces, based on relative incomes and quite different occupations. VALUE OF RURAL HOUSEHOLD ASSETS In provinces with large herding populations, income could be a misleading indicator of ability to pay for renewable energy systems. Herders may or may not have income, depending on when they sell their livestock. As opposed to agricultural crops that are harvested on an annual basis, livestock can be sold over a period of years. Herds are a very liquid asset, and can be considered a form of savings. As a consequence, this study has also estimated the assets of the rural households, in order to supplement the information on family income (see Table 3.2). The value of all livestock owned determines the total assets for the rural households in this study.' The idea for computing this value was to see whether the income of farmers and herders was an adequate measure of the ability to purchase renewable energy systems. Although this is not a true measure of total assets, realistically herders or farmers can sell livestock to raise money to purchase consumer goods.2 Hence, it is an appropriate measure for the purposes of this study. In general, farm households are much poorer than herders in the region of the study. It should be remembered that these are farms in very remote areas, where The value of livestock is calculated from the amount of livestock owned at the time of survey and the price at which the household sold livestock the year before the survey. 2 In China, land is still considered property of the state, although people have the right to use it, and these rights can be bought or sold. Because of the remoteness of these counties, however, land is not bought or sold as often or, when land is bought or sold, it is typically for agricultural uses and not for commercial or other uses. As a result, the price of the land is generally deternined by an amount of money that can be derived or generated from agricultural activities.  14 Chapter 3. Survey Results agricultural land is poor. The only exception is in Xinjiang, where farmland is more productive than in the other three provinces.3 TABLE 3.2: AVERAGE VALUE OF LIVESTOCK CLASSIFIED BY OCCUPATION OF HEAD OF HOUSEHOLD AND TYPE OF ASSET Gansu Inner Xinjiang Qinghai Total Mongolia Occupation Farmer (yuan) 3,002 4,361 5,421 1,727 3,865 Population represented 513,373 98,651 266,109 9,255 887,378 Herdsman (yuan) .. 80,792 28,416 63,664 62,583 Population represented .. 180,319 98,211 66,681 345,212 Herdsman and farmer (yuan) 7,092 5,065 14,063 22,792 11,329 Population represented 26,592 10,995 30,681 8,520 76,788 Local TVE worker (yuan) 565 .. 5,712 .. 2,429 Population represented 5,418 .. 3078 .. 8,496 Outside TVE worker (yuan) 643 1529 .. .. 659 Population represented 10,753 192 .. .. 10,945 Local manager (yuan) 859 21,032 10,510 .. 9,572 Population represented 2,591 1,844 1,539 .. 5,974 Retired (yuan) 553 59,549 10,707 .. 19,648 Population represented 184 603 2,300 .. 3,086 Other (yuan) 3,536 11,921 2,137 72,996 4,404 Population represented 10,539 3,018 12,180 205 25,943 Total Average value of all livestock 3,124 51,382 11,458 52,802 19,213 All households (population 569,449 296,356 414,586 84,662 1,365,053 represented) Negligible. Note: Because of the missing values of variables representing type of occupation, there are slight differences in total number of population represented and the summation of population represented by types of occupation. TVE stands for township and village enterprise. Source: China Market Survey 1998. Most farmers in these areas are very poor. Both the evidence based on income and the proxy evidence based on assets confirm that the herders in the region are wealthier than farmers. Thus, the herders have an advantage of both income and assets over the 3 Farmland in Xinjiang is used to grow higher-priced fruit, such as melons and grapes.  Chapter 3. Survey Results 15 poor farmers in these areas, which is relevant in terms of their ability to pay for renewable energy systems. EXPERIENCE WITH BANKING AND CREDIT The availability of credit in remote areas is often very poor. The purchase of photovoltaic systems without credit requires households to have Y 1,000-2,000 in hand, and most agree that this can be a major stumbling block to the promotion of systems. The availability of credit for the purchase of photovoltaic systems can expand the mar4ket by lowering the initial cash outlays for the systems. Because availability of credit is often considered a major barrier to the adoption of photovoltaic systems, one goal of the survey was to determine the experience of rural households with making purchases on credit. Today most purchases of renewable energy systems are on a cash basis. This chapter explores the extent of households' credit experience, along with their attitude toward and preference for using credit to purchase photovoltaic systems. Many people in these areas are familiar with credit. Between 30 and 40 percent of the households in three of the provinces already have experience with taking credit from rural banks, credit unions, or other sources (Table 3.3). The province with the lowest participation in credit markets is Qinghai, where slightly less than 10 percent of rural households reported taking a loan. TABLE 3.3: HOUSEHOLD BORROWING PATTERNS IN VILLAGES WITHOUT ELECTRICITY IN FOUR PROVINCES Gansu Inner Xinjiang Qinghai Mongolia Credit experience (% of households) 30 29 43 10 Average loan amount (yuan) 1,253 4,210 2,388 1,858 Average length of loan (months) 15 12 13 22 Year of last loan taken (% of households with loan) 1998 46 15 57 25 1997 34 76 26 53 1996 8 4 8 19 Before 1996 11 5 9 3 Source of loan (% of households with loan Bank 28 13 38 7 Credit union 70 58 47 51 Relatives 2 18 8 26 Neighbor .. 5 2 1 Others .. 6 5 15 Negligible. Source: China Market Survey 1998. As will be seen later in this chapter, most of the loans are taken for business purposes. Thus, to a certain degree, the length and the type of the loan conform to what might be expected of a small business loan for purchasing seasonal inputs for farming or  16 Chapter 3. Survey Results herding. The average length of a loan is about one year for the three provinces with the highest percentage of borrowers. As the survey reveals, about 80 to 90 percent of borrowing households took their loans in 1997 and 1998. The amount of the loan is relatively small, ranging from Y 1,000 to Y 4,000 ($125-500). Most of the money was borrowed either from a bank or a credit union. In fact, credit unions are the most common source of loans in the area of the study. The main exception to this trend was in Inner Mongolia and Qinghai, where more people are dependent on informal credit. For Inner Mongolia and Qinghai, neighbors and relatives account for about a quarter of all loans taken by rural households in these two provinces. Most of the borrowing in rural areas is for business activities, which include farming and herding. Many of these loans are for purchasing inputs necessary for these activities. Farmers have seasonal needs for credit, and herders sometimes need to purchase fodder for their livestock. The loans taken out for such purposes range from one-half to two-thirds of all loans (Table 3.4). The remainder of the loans is spread evenly among a wide variety of purposes, including purchasing food, health care, house repairs, and others. Very few households have borrowed money to buy appliances. This may be because banks or credit unions in rural areas do not typically finance this type of loan. Consumers may also be somewhat conservative in taking out loans that do not generate income for them. The reason for this is that productive activities produce income that will enable the household to repay the loan. TABLE 3.4: HOUSEHOLD USE OF LOANS IN VILLAGES WITHOUT ELECTRICITY IN FOUR PROVINCES (percent) Use of loan Gansu Inner Mongolia Xinjiang Qinghai Total Buy food 4.9 2.0 10.9 23.7 7.1 Build, expand, or repair house 7.4 4.1 3.5 4.7 5.1 Health care 14.9 12.1 9.6 5.6 12.0 Business' 63.6 64.6 64.4 52.4 64.0 Buy equipment or appliances 2.0 3.6 4.3 5.2 3.3 Important family activities, for 5.5 4.1 3.4 3.6 4.3 example, marriages and funerals Others 1.8 9.4 3.8 4.8 4.2 Total 100 100 100 100 100 *Includes buying fodder and grass. Source: China Market Survey 1998. Another issue relevant to market development for renewable energy is the income of households that typically borrow money in rural areas. Households that have borrowed money have lower incomes than households who have not borrowed money (see Table 3.5). The only exception to this pattern is in Xinjiang, where people who borrow money have higher incomes compared with those who do not borrow money.  Chapter 3. Survey Results 17 Rural lending institutions lend money for productive uses, such as inputs to farming or for raising livestock. Although households are very likely to borrow money for such purposes, there is no certainty that they will borrow money for photovoltaic systems that result mainly in improving the quality of life for rural households. TABLE 3.5: COMPARISON OF INCOME AND VALUE OF LIVESTOCK BETWEEN HOUSEHOLDS THAT HAVE NOT AND HAVE TAKEN A LOAN BEFORE Whether households have taken any Inner loan before Gansu Mongolia Xinjiang Qinghai Total No Income 199 1,610 574 644 667 Livestock value 3,411 62,807 13,201 55,310 23,966 Percent of household) 70 71 57 90 67 Yes Income 157 514 950 337 556 Livestock value 2,829 20,758 10,063 21,594 9,619 Percent of household) 30 29 43 10 32 Total income 186 1296 735 614 631 Total livestock value 3,233 50,760 11,857 52,025 19,251 Households represented (valid N) 490,425 270,408 381,514 64,249 1,206,596 Source: China Market Survey 1998. CURRENT ENERGY USE AND EXPENDITURE FOR HOUSEHOLD LIGHTING An understanding of existing energy use and expenditure patterns for lighting is very important for determining the potential willingness or ability to pay for better lighting services. Generally, surveys of rural households reveal that all households use some form of lighting during the evening hours. Although the lighting may be used for short periods, and it may be of poor quality, all households use it. Given the poor light given off by most nonelectric forms of lighting, the expenditures on lighting can often be considered a minimum willingness or ability to pay. Similar to elsewhere in the developing world, the major sources of energy for lighting for rural households living in villages with no access to grid electricity are kerosene lamps for general use, flashlights for task-specific and mobile purposes, and to some extent candles (see Table 3.6). Although present in all households, kerosene, diesel, and gasoline lamps are the most common in lower-income rural households. In the lowest income groups, more than 90 percent of households rely on petroleum lamps. For the higher-income groups, this figure declines modestly until the highest income group, in which only about one-fifth of the population use these lamps. A high percentage of households in Inner Mongolia area are getting light from electricity produced by renewable energy sources. Approximately 57 percent of rural  18 Chapter 3. Survey Results households in villages with no access to grid electricity in Inner Mongolia are using small wind systems. Such systems are an especially important option for herders. Wind systems were introduced with strong government support during the last two decades. The herders actually fold up these systems and take them when they move from one grazing area to another. Outside Inner Mongolia, there is not much use of wind systems. As might be expected, the higher-income groups in the province are the primary purchasers of wind generators. TABLE 3.6: HOUSEHOLD ENERGY USE FOR LIGHTING BY INCOME CLASS (PERCENT OF HOUSEHOLDS WITHIN GROUP) Candles Kerosene, Dry cell Small Small Small PV home Households or butter diesel, or batteries generator wind hybrid systems represented gasoline sets systems systems by sample Income deciles (yuan per month) < 51.67 34.3 96.0 62.2 0.4 3.4 . 0.0 139,141 51.67-103.33 24.8 90.5 74.4 0.5 7.3 .. 0.2 133,970 103.34-155.83 19.4 93.4 80.1 0.2 4.7 .. 0.0 136,474 155.84-208.33 33.4 93.9 85.0 0.4 3.6 0.2 0.5 135,461 208.34-275.00 27.3 93.6 78.5 2.0 4.2 0.0 0.8 141,926 275.01-378.33 26.7 82.5 80.4 1.3 7.5 0.1 1.5 133,824 378.34-500.00 40.3 84.8 79.0 2.2 4.8 0.1 0.8 137,781 500.01-716.66 52.6 71.1 87.9 5.3 10.6 .. 1.8 137,922 716.67-1,275.00 62.1 56.2 89.8 10.2 23.7 .. 2.7 135,790 >1,275.01 81.4 18.9 95.5 20.5 62.4 0.5 2.2 136,898 Province Gansu 18.5 98.5 84.6 0.4 0.3 .0 .0 571,905 Inner Mongolia 75.7 35.8 87.2 11.3 57.3 0.2 2.0 296,356 Xinjiang 39.8 87.2 72.8 5.4 2.2 .. 0.1 416,221 Qinghai 64.8 44.0 80.3 0.5 0.1 0.3 9.1 84,704 Occupation Farmer 27.3 93.6 77.4 2.4 1.9 .. 0.1 890,338 Herdsman 75.7 35.1 95.3 9.9 45.5 0.2 3.5 345,775 Herdsman & farmer 34.7 93.5 75.3 2.4 3.2 0.3 1.0 77,407 Local TVE worker 23.7 86.7 51.7 3.0 .. .. .. 8,496 Outside TVE worker 2.7 100.0 9.5 .. .. .. .. 10,945 Local manager 45.5 34.3 100.0 .. 18.6 .. .. 5,974 Retired 86.9 89.2 100.0 .. 10.8 .. .. 3,086 Other 42.0 71.6 74.0 3.1 9.0 .. 0.4 25,943 All households 40.2 78.1 81.3 4.3 13.2 0.1 1.1 1,367,964 .. Negligible. Note: TVE stands for township and village enterprise. Source: China Market Survey 1998. During the past few years photovoltaic home systems have been introduced to rural households in these four provinces. Considerable success has been achieved in reaching remote rural populations in Qinghai, where about 9 percent of rural households in survey areas own small photovoltaic home systems. Also, rapidly increasing sales of  Chapter 3. Survey Results 19 photovoltaic systems are also reported in Tibet and Sichuan, which border Qinghai and share its cultural characteristics in these border areas. Qinghai is a province in which retailers have been most active in promoting photovoltaic home systems. Only a limited number of households in the other three provinces still use photovoltaic systems. The source of lighting for rural households also varies according to income class. Electricity tends to be used among higher-income households. Only a small percentage of lower-income households use electricity from small electric generators, but about 10-20 percent of households in the ninth and tenth income deciles use these sources of energy for electricity. Similarly, the percentage of households using small wind systems rises from only a few percent among the lowest income groups to more than half the population in the highest income group, which involves mainly households in Inner Mongolia. For small photovoltaic home systems, only 2 percent of the highest income group use photovoltaic systems for lighting. Although dry cell batteries are widely used by most households, the number of households that use them also increases among higher-income classes. This suggests that higher-income households are more dependent on electric lighting than others, and they are willing to pay a very high price for electricity from dry cell batteries. The comparison of total monthly spending for lighting energy and electricity also reveals that households in Gansu, which is the poorest of all four provinces, spend the least on lighting. The total monthly spending for lighting of households in three other provinces, which also have higher income levels, is about three times more than households in Gansu Province (Figure 3.1). It should be noted that the relatively high monthly spending among households in Qinghai reflects the high market value of butter. In Qinghai, in spite of its high commercial value, butter produced from yak milk is used within the family for lighting and religious purposes, and only the butter that is left over is sold. Higher-income households spend much more than lower-income households on lighting services, and yet the amount they spend accounts for a smaller proportion of their income than lower-income counterparts. This is a pattern that is found in most developing countries (Figure 3.2). For these areas, the total amount of money spent for lighting energy and electricity is relatively low, ranging from only about Y 5-6 per month among the poorest households and reaching about Y 25 per month among the highest income groups. The poorest households in the region spend between 5 and 13 percent of their cash income on purchased energy for lighting. As indicated, this is mainly because of low incomes rather than because of significant cash outlays for energy. The higher-income group spends more on energy, but spend only about 1-3 percent of their income on it (see Table 3.7). It is interesting that these higher-income groups continue to spend similar levels of money on candles and kerosene, but in addition they spend more on batteries, and in the highest group on small generator sets. Renewable energy systems are purchased for cash, and do not account for any monthly expenses for fuel.  20 Chapter 3. Survey Results FIGURE 3.1: TOTAL MONTHLY SPENDING ON LIGHTING FUEL IN ENERGY AND ELECTRICITY 35 - 31.8 8 30 - E C 25- 0. o 20- @ 15- ~~~ ~~14.7 1. 15 10 ' 10- C 5.6_ 0 Gansu Inner Mongolia Xinjiang QingHai Note: High monthly expenses for households in Qinghai reflect the high opportunity cost of using butter for lighting. These figures do not contain the amortized costs of lighting equipment or generators. Source: China Market Survey 1998. FIGURE 3.2: TOTAL MONTHLY SPENDING ON LIGHTING ENERGY AND ELECTRICITY (energy expenses in yuan and expenses as percentage of income) w 16 E 14 , 128 j 10 - c 0 '8 6 5 4 1 2 3 4 5 6 7 8 9 10 30 30 25]- 20 E. 20I 115 -0, 1 2 3 4 5 6 7 8 9 1 0 Income class iNote: Income groups are the same as in Table 3.6. Source: China Market Survey 1998.  Chapter 3. Survey Results 21 TABLE 3.7: HOUSEHOLD MONTHLY SPENDING FOR LIGHTING ENERGY Candle or Kerosene, Dry cell Small Total As % of butter diesel, or batteries generator spending income gasoline set Income (yuan per month) <51.67 0.67 3.12 1.20 0.06 5.06 13.7 51.67-103.33 0.65 3.28 1.40 0.03 5.38 6.8 103.34-155.83 0.68 3.53 1.47 0.02 5.69 4.4 155.84-208.33 1.00 4.06 2.35 0.05 7.48 4.1 208.34-275.00 1.50 3.88 2.29 0.76 8.46 3.3 275.01-378.33 2.69 4.43 2.74 0.21 10.07 2.9 378.34-500.00 4.15 5.05 2.79 0.53 12.64 2.8 500.01-716.66 7.58 4.88 4.82 1.51 18.78 3.0 716.67-1,275.00 5.94 5.26 5.69 4.21 21.13 2.2 >1,275.01 5.97 2.39 9.00 7.31 24.69 1.0 Province Gansu 0.34 3.56 1.67 0.08 5.66 5.5 Inner Mongolia 3.57 1.69 4.6 4.62 14.71 3.0 Xinjiang 2.09 6.5 4.65 1.39 14.65 3.7 Qinghai 24.8 2.39 4.38 0.17 31.79 5.5 Occupation Farmer 1.00 3.84 2.14 0.53 7.53 4.9 Herdsman 8.77 4.23 6.90 4.09 24.02 3.6 Herdsman and farmer 2.58 5.44 2.68 1.02 11.72 4.1 Local TVE worker 1.33 5.87 2.56 2.10 11.85 2.8 Outside TVE worker 0.01 2.17 0.25 .. 2.43 2.2 Local manager 3.33 1.64 2.61 .. 7.58 4.6 Retired 2.57 4.01 4.01 .. 10.60 1.0 Other 2.22 2.01 2.44 1.18 7.91 1.4 Spending per month 3.09 3.99 3.37 1.47 11.96 4.4 All households 1,367,177 1,359,783 1,367,753 1,369,186 1,357,172 1,357,172 .. Negligible. Note: TVE stands for township and village enterprise. Source: China Market Survey 1998. The expenditure patterns for lighting services also vary significantly among herders and farmer households. About 45 percent of all herders use small wind systems compared with only 2 percent of farming households (see Table 3.6). Also, about one- tenth of all herdsman households get electricity for lighting from a small electric generator or from a community grid. Almost 4 percent of all herdsman households own photovoltaic home systems, while almost no farmer households own them. Herders also spend more for lighting energy and electricity than farmer households. Households that have renewable energy devices, such as small wind, hybrid, or photovoltaic systems, are still spending more than households without any renewable energy devices. In general, households with renewable energy systems have higher incomes and spend more on all different types of lighting services (Table 3.8). The use of renewable energy for lighting, however, appears to be a significant substitute for  22 Chapter 3. Survey Results petroleum-based fuels. It is interesting that the use of butter for lighting does not decline when households use renewable energy, further reinforcing the notion that it is used for religious and ceremonial purposes. The use of dry cell batteries also does not decline, but rather actually increases in households using renewable energy systems. This challenges the notion that renewable energy is a substitute for all batteries used by rural households; dry cell battery usage is determined largely by income, and the batteries are generally used for mobile forms of lighting. TABLE 3.8: MONTHLY SPENDING ON LIGHTING FOR HOUSEHOLDS USING RENEWABLE ENERGY SYSTEMS Candles Kerosene, Dry cell Small As % of Income per or diesel, or batteries generator All energy income month (Yuan) butter gasoline sets P V home systems Nonusers 3.05 4.02 3.36 1.48 11.96 4.5 632.59 Users 6.35 0.97 4.42 0.49 12.34 1.7 1,122.53 Small wind systems Nonusers 2.91 4.38 2.93 1.00 11.26 4.7 456.11 Users 4.27 1.42 6.31 4.56 16.61 2.3 1,832.51 All users of P V/wind/hybrid/systems Nonusers 2.87 4.42 2.92 1.00 11.25 4.8 451.05 Users 4.41 1.40 6.13 4.29 16.29 2.3 1,770.52 Total 3.09 3.99 3.37 1.47 11.96 4.4 637.76 Note: The percentage of households using renewable energy systems is presented in Table 3.6. Source: China Market Survey 1998. Finally, another interesting finding from this study is that the households using small wind systems also spend more on small generators. The amount of monthly spending on small generating systems-which includes private or neighbor-owned small generator sets or community-village grids-indicates that a significant number of wind system users also use small generator systems. One reason for this might be that during the summer months, there is not enough wind for electricity every day, and households without a source of electricity may have to do without lighting and television during these periods. In addition, about 37 percent of small wind system users reported that their systems broke down at least once during the previous 12 months. Perhaps because of such reliability problems, about 14 percent of all households that use small wind systems also get electricity from a generator or small grid electricity system. Another significant finding is that the households that have wind systems have monthly incomes of greater than Y 1,800, while households with photovoltaic systems have incomes of Y 1,100 per month. ATTITUDES AND PREFERENCE TOWARD ENERGY SERVICES The attitude toward lighting services is important for understanding whether households would be inclined to purchase photovoltaic systems. In general, the survey  Chapter 3. Survey Results 23 indicated that people in rural areas who do not have access to grid electricity have a very favorable attitude toward electric lighting. The results in this chapter are based on attitude questions in which households were asked to agree or disagree with a list of statements. The households perceive that having electricity is important for both reading and studying. Virtually all households agree that it is easier to read with electric light compared with kerosene lamps, and children are more likely to study in the evening (Table 3.9). Almost all members of households in areas without electricity understand that electricity can provide a higher quality of lighting that makes it possible to read and complete close work in the evenings. The only province in which the favorable rating was less than 90 percent was Qinghai. TABLE 3.9: HOUSEHOLD ENERGY ATTITUDES AND LIGHTING PREFERENCES (percent of households agreeing with statement) Provinces Allprovinces Inner No With Gansu Mongolia Xinjiang Qinghai electricity electricity Total Lighting Reading is easier with electric light 99 99 94 82 96 98 96 compared to kerosene. Because of good light, children study 99 99 95 78 95 99 96 more at night. PV systems are a good source of 70 31 38 42 56 27 51 electricity for lighting. My family is extremely happy with the 12 19 17 11 14 25 15 light we get from our current fuel. I complete work in my house after it is 81 77 64 72 72 77 74 dark outside. Television, News, and Entertainment Television takes study time away from 63 64 26 35 48 79 55 children. Watching television would provide my 98 98 79 63 88 96 90 family with great entertainment. It is difficult for my family to get news 85 80 67 50 76 71 75 and information. Security My family feels secure in the evening. 88 88 84 65 83 90 86 Light at night is useful to keep the herd 69 71 59 60 64 71 65 together. Health Lighting with kerosene or diesel can 68 71 68 39 64 72 66 cause health problems. Source: China Market Survey 1998. Most of the households in these areas without electricity are unhappy with the light they get from their current fuels or energy sources. More than three-quarters of the households in the survey disagree with the statement that they are extremely happy with their current lighting fuel, and this includes a large number of households with renewable energy systems. Households with access to some form of electricity for lighting, including photovoltaic systems, small wind systems, photovoltaic-wind hybrid systems, small  24 Chapter 3. Survey Results generators, and community-village grids, are happier with their lighting source compared to those without electricity. However, a significant number of these households are still unhappy with their lighting situation. The households with some form of electricity are happier with their lighting source, but the number is still somewhat low, involving only one-quarter of the households with systems. In the provinces of Inner Mongolia and Qinghai, where a great enough number of households have photovoltaic systems, it was found that between 33 and 46 percent of the households with some form of electricity were satisfied with their lighting services (Table 3. 10). TABLE 3.10: SATISFACTION WITH LIGHTING SOURCE ACCORDING TO ELECTRICITY SOURCE (percent of households agreeing with statement) Percentage agreeing with statement "my family is happy with the light we getfrom our currentfuel" Gansu Inner Xinjiang Qinghai Total Mongolia No electricity 14 1 5 2 1 6 14 Generate their own electricity (all systems) 17 34 13 47 34 PV system n.a. 33 n.a. 46 44 Wind system n.a. 35 13 n.a. 33 Note: n.a. means that there are not enough households that own systems to be relevant to question. Source: China Market Survey 1998. The low satisfaction level for the households with some form. of electricity may be because of several factors. First, close to 40 percent of owners of photovoltaic systems reported that the photovoltaic systems they own are too small and do not provide enough electricity for their family needs. Second, a large number of owners of photovoltaic systems in Qinghai are experiencing problems with their electric lamps (a detailed discussion is provided in Chapter 4). Finally, the wind systems do not provide electricity for the entire year, because of insufficient winds. The relatively large number of unsatisfied customers suggests a need for further research into the opportunities of photovoltaic systems for this market segment. Households, especially those who have access to electricity, are aware of the utilities and benefits of electricity services for education and entertainment. An overwhelming majority of surveyed households-and an even larger proportion of those with some form of electricity-believe that electricity is very useful for their productive activities, such as keeping herds together. Also, most households, and especially those who have access to electricity, reported that they complete their work in the evening after it was dark outside. Concerning entertainment, 9 out of 10 households agree that watching television would provide their family with great entertainment, but there is a concern among many  Chapter 3. Survey Results 25 households, especially those with electricity, that television takes study time away from children. On the issue of access to news and information, many households in Gansu and Inner Mongolia (85 and 75 percent, respectively) feel that it is difficult for them to get news and information, but fewer households in Qinghai and Xinjiang feel the same. About 50 and 67 percent of households in Qinghai and Xinjiang, respectively, agree that it is difficult for them to get news and information (see Table 3.9). Interestingly, households with access to electricity feel that it is easier for them to get news compared to those without electricity. This finding suggests that having electricity may reduce the feeling of isolation among those who live in very remote areas of the country. The rural households also recognize that using electricity is a cleaner form of lighting compared to kerosene. Two-thirds of the surveyed households in three provinces feel that lighting with kerosene or diesel can cause health problems. One possible reason for the lower number of households in Qinghai that believe that kerosene causes indoor air pollution is that most households in Qinghai are used to intense smoke in their homes. Typically, herders in Qinghai use dried dung, which emits an intense level of smoke when used for cooking. In sum, the findings verify that most households would like to have access to the better lighting, entertainment, and information available with access to electricity. They are very knowledgeable about the benefits of electricity. In addition, once households have directly experienced the benefits of electricity, they become dissatisfied with the service limitations of smaller systems. KNOWLEDGE OF AND ACCESS TO PHOTOVOLTAIC SYSTEMS Because electricity is so extensive in China, most households are aware of the benefits of electricity. Not all households in the remote sample areas of this study, however, have heard about photovoltaic systems. About one-third of the households in the provinces have never heard about photovoltaic systems, and about two-thirds of them have not heard about wind-photovoltaic hybrid systems (see Table 3.11). The households that have heard about systems have either seen a system at their neighbor's or have heard about them from a neighbor. TABLE 3.11: HOUSEHOLD KNOWLEDGE OF RENEWABLE ENERGY SYSTEMS (percent of households who have never heard of systems) System Gansu Inner Xinjiang Qinghai Total Mongolia PV systems of 20 watts 37 32 31 32 34 Small wind-PV hybrid systems 71 56 70 74 67 Source: China Market Survey 1998.  26 Chapter 3. Survey Results Thus, word of mouth has played a very important role in disseminating information about photovoltaic systems. Opinion leaders appear to be a significant source of information with regard to the spread of such systems. Many people, however, still have not heard about the renewable energy systems. More than one-third of households have never heard about these systems, which illustrates that the retailers still are not reaching a significant proportion of the potential market. There is still scope for programs that raise awareness of these systems, an issue that will be addressed in the concluding chapter of this report. CONCLUSION A fairly large population in the remote areas of China has no access to electricity. Interestingly, many of these households are already using renewable energy sources, such as wind and to limited degree photovoltaic systems. Even the households with photovoltaic and wind energy systems, however, are not totally satisfied with the service they are receiving from them. There is discontent over the quality and quantity of lighting received from such systems. Also, there are still large proportions of these populations that do not have knowledge of the availability of these systems or the wider technical options that are available to them. Finally, there is some degree of dissatisfaction with the existing systems. Many of these issues are addressed in the next chapter, which involves a more detailed analysis of households with photovoltaic energy systems.  4. PROFILE OF HOUSEHOLDS WITH PHOTOVOLTAIC SYSTEMS In this chapter, a profile is developed for the households that have purchased photovoltaic systems. An understanding of the existing customer base for photovoltaic systems is essential for any program that has the goal of expanding the market for these systems. The characteristics of photovoltaic system owners that are examined include level of income, assets, credit experience, education, type of photovoltaic system owned, methods of purchase, system performance, and quality of services. The study was designed to survey households with photovoltaic systems, even if they were not selected as part of the random sample (see Appendix B for details). It was fortunate that enough households were selected as part of the random sample in Inner Mongolia and Qinghai so that a special sample did not have to be drawn. In other words, the owners of photovoltaic systems in these two provinces are representative of the region. There were not enough sampled owners of systems in Gansu and Xinjiang Provinces, however, so in the course of conducting the survey, a purposive sample of photovoltaic system owners was selected. Although these households cannot be considered representative for the provinces, they provide valuable insight into the markets for renewable energy in the region of the survey. PROFILE OF PHOTOVOLTAIC SYSTEM OWNERS Most owners of photovoltaic systems in the four provinces are herders. More than 90 percent of photovoltaic system owners in Inner Mongolia are herder households. About 84 and 63 percent of photovoltaic system owners in Qinghai and Xinjiang, respectively, are herders, and many of the remaining households have mixed occupations of farming and herding. Only in Gansu do farmer households own photovoltaic systems, mainly because almost all the households in this province are farmers. Also, in this province the households with photovoltaic systems were not part of the random sample, and systems were probably distributed or subsidized as part of a government program. Photovoltaic system owners also tend to have higher incomes, greater assets, and more education than those who do not own systems. The income categories used in Table 4.1 are based on the income deciles for the entire population of the study. This gives a view of where households owning photovoltaic systems fall within the income distribution of the provinces. It should be remembered that because of differing income distributions for the provinces, there are more households in the lower half of income  28 Chapter 4. Profile of Households with Photovoltaic Systems distribution for Gansu (75 percent) and a greater number of households in the higher half for the other provinces (65-85 percent). The households with photovoltaic systems all have incomes in the highest half of the income distribution for the four provinces (see Figure 4.1). Households with monthly incomes below Y 300 or close to $40 cannot readily afford to purchase households systems. Below this level only 10 percent of the households own systems. As mentioned, owners of photovoltaic systems in Gansu are poorer than in the other provinces. The main reason that some of the low-income households in Gansu own photovoltaic systems is that they have received them as part of a poverty reduction program. FIGURE 4.1: DISTRIBUTION OF OWNERS OF PHOTOVOLTAIC SYSTEMS BASED ON INCOME DECILES 100% Highest income group decile El *2 * ~ 80% __ _ _ _ __ _ _ _ 03 04 60%- ;0 _ *5 06 40%- 0~~~~~~~~~~70 6. *Z 20% 0%~~~~~~~~~~~~~~~ Lowest income decile Source: China Market Survey 1998. Given these results, as expected, the average income of households that own a photovoltaic system is higher than the average incomes for the provinces. The average income for all the 143 photovoltaic system owners is about Y 966 (just over $100), which is about Y 300 higher than the average income for the general population in this study.' Thus, the typical owner of a household photovoltaic system has greater income than the general population but the threshold for purchasing such systems is below the average income for the areas in the study. As indicated in Table 4. 1, the threshold for households The smaller average income could result from that fact that data used to describe solar photovoltaic system owners for the province were not randomly selected, and very few cases showed up in the data.  Chapter 4. Profile of Households with Photovoltaic Systems 29 that have purchased the systems with cash is Y 275 per month or close to $35, and they are likely to have a significant number of livestock as well. TABLE 4.1: OWNERS OF PHOTOVOLTAIC SYSTEMS WHOSE HOUSEHOLD MONTHLY INCOME FALLS WITHIN EACH INCOME CATEGORY FOR ALL HOUSEHOLDS (percent) Household monthly income deciles for all Gansu Inner Xinjiang Qinghai Total provinces Mongolia < 51.67 13 .. .. 1 2 51.67-103.33 .. .. .. 3 2 103.34-155.83 155.84-208.33 19 .. 6 3 5 208.34-275.00 12 7 6 3 5 275.01-378.33 19 .. 12 22 18 378.34-500.00 .. .. 19 12 11 500.01-716.66 .. 13 25 15 14 716.67-1275.00 .. 27 19 27 23 >1275.01 37 53 13 14 20 Income per household per month (PV 1,241 2,131 644 791 966 households Income per household per month (general 208 1,370 713 597 636 population) Asset value (PV households) 49,994 69,351 33,396 74,891 66,825 Asset value (general population) 5,311 51,910 18,505 52,802 22,406 Number of sample households with 16 15 16 96 143 systems .. Negligible. Note: Households in Gansu and Qinghai Provinces were not selected at random for interview, but households in Inner Mongolia and Qinghai were randomly selected for interview. Source: China Market Survey 1998. Similar to income, the average value of livestock owned by owners of photovoltaic systems is significantly higher than the provincial average. Based on the combined income and asset profile of owners of photovoltaic systems, owners can be classified into four groups. Households in the first group have income and assets that are within the highest half of the general population. This group accounts for about 82 percent of owners of photovoltaic systems selected for interview (Figure 4.2). The second group is interesting because it involves households with low income, but with high assets. This group accounts for 9 percent of owners of photovoltaic systems, in spite of their low incomes. The remaining two groups account for only about 9 percent of total system owners. This confinns that income and the total value of assets owned, particularly livestock, are complementary indicators of whether households can afford to purchase a photovoltaic system. Almost all owners of photovoltaic systems in the third and fourth groups-high-income and low-asset, and low-income and low-asset-are from Gansu  30 Chapter 4. Profile of Households with Photovoltaic Systems Province. As indicated, these households may have acquired their photovoltaic systems through the government-sponsored poverty alleviation program with significant subsidies from the government or other sources. FIGuRE 4.2: DISTRIBUTION OF PHOTOVOLTAIC OWNERS BASED ON INCOME AND ASSETS OWNED Low income, Lowest low assets income and 6% assets Low income, high assets 9% Hig~~Hih income, 82% Source: China Market Survey 1998. The households that own photovoltaic systems generally have higher educational levels compared with households without photovoltaic systems. In households that own photovoltaic systems, more than 94 percent of the heads of households in Xinjiang and Gansu Provinces and all the heads of households in Inner Mongolia could read. In Qinghai about two-thirds of households with photovoltaic systems could read. Furtherrnore, the heads of households with photovoltaic system owners in Gansu and Xinjiang Province generally have higher levels of education compared with the provincial averages. Educational levels of owners of photovoltaic systems in Qinghai are higher than the provincial average. Clearly, there is a strong link between education and ownership of households photovoltaic systems. The reasons for households to purchase a photovoltaic system included better lighting and the ability to watch television, among others. As expected, virtually all the owners of photovoltaic systems cited that they bought their systems to obtain better lighting. Television viewing was also a primary reason for more than 80 percent of households owning systems in Gansu. Some households also indicated that the systems  Chapter 4. Profile of Households with Photovoltaic Systems 31 were cheaper to use for lighting compared to kerosene or other fuels. Finally, many families with systems felt that they were important for their children's education. THE TYPE OF PHOTOVOLTAIC SYSTEM PURCHASED BY HOUSEHOLDS All households that owned photovoltaic systems had only one system, and these systems were purchased with cash. The households with photovoltaic systems rank in the highest half of the income distribution for the provinces, and most are in the top 30 percent. Generally, households do not perceive that the systems are overly expensive. Although about two-thirds of owners of photovoltaic systems in Xinjiang and Qinghai thought that the systems were expensive, in Inner Mongolia and Gansu most households thought that that the systems were priced fairly. Although credit is available for other purposes in the provinces, it has not been used for the purchase of household photovoltaic systems. As a consequence, it is not surprising that the households with photovoltaic systems have limited experience with credit, and that few distinctions exist regarding the use of credit between households with and without photovoltaic systems. Among the four provinces, the proportion of owners of photovoltaic systems in Gansu and Qinghai who have taken loans before is almost the same as the general population, but this does not hold for Inner Mongolia and Xinjiang (Table 4. 1). Only about a third of owners of photovoltaic systems in Gansu and a tenth in Qinghai have taken a loan before, but the figures are higher for Inner Mongolia and Xinjiang. About half the owners of photovoltaic systems in Inner Mongolia and a third in Xinjiang have taken loans before. Furthermore, there is no difference in the amount, term, and purpose of the loans between owners of photovoltaic systems and other households in the provinces. The typical size of photovoltaic systems owned by rural households tends to be small, at about 20 watts (see Table 4.2). This finding is consistent with other recent international studies of photovoltaic system sales and ownership patterns. About 76 percent of owners of photovoltaic systems reported that they own 20-watt systems; 14 percent own system of 30-50 watts; and the rest are divided between very small (less than 20 watts) and very large systems (larger than 50 watts). As expected, the larger systems are more expensive, and are purchased by households whose incomes fall in the upper 20 percent of the income distribution (see Figure 4.3). Although photovoltaic home systems have been in use in these four provinces for some time, about 80 percent of the owners of photovoltaic systems have purchased their systems during the past three years. This indicates that the market for photovoltaic systems is relatively new. The only exception is in Inner Mongolia where the average photovoltaic system owned by households is larger and less expensive than in the other  32 Chapter 4. Profile of Households with Photovoltaic Systems TABLE 4.2: THE NATURE OF PHOTOVOLTAIC SYSTEM PURCHASES IN FOUR PROVINCES Household monthly income deciles Gansu Inner Xinjiang Qinghai Total or all provinces Mongolia Size of systems (watts for modules) 19 43 24 22 24 Average price of systems 1,644 1,244 1,493 1,740 1,661 Number of years with system (% of households) One year 33 13 27 29 28 Two years 47 34 40 35 Three years 13 .. 33 20 18 Four years .. .. .. I I Five years 6 7 .. 8 7 More than five years .. 80 6 2 11 Total 100 100 100 100 100 Experience with credit (% of households) PV system owners 36 50 31 8 18 General population 30 29 43 10 33 Number of systems surveyed 16 15 16 96 143 .. Negligible. Source: China Market Survey 1998. FIGURE 4.3: AVERAGE SIZE OF PHOTOVOLTAIC SYSTEM OWNED BY INCOME 35 a 30 25. 20 - * 15 Elo a)6 1 2 3 4 5 6 7 8 9 10 Income class Note: There were no systems owned in income class 3. Source: China Market Survey 1998.  Chapter 4. Profile of Households with Photovoltaic Systems 33 provinces. The reason for this is that households in Inner Mongolia have been using photovoltaic systems for about a decade. At the time of purchase, the prices were lower than they are today.2 Also, the systems that were available at that time were subsidized through a government program. Fewer recent purchases of systems have been reported in Inner Mongolia, however, where wind systems are prevalent. Recently, the subsidies for wind systems were reduced; it is now a commercial program. By contrast, the program for photovoltaic systems has been mainly on a demonstration basis. Recently, the subsidies for photovoltaic systems have been largely phased out. In spite of this, the sales of photovoltaic systems have been increasing, but it is from a very small base. Typically, households purchase photovoltaic systems for better lighting and for watching television. The people benefit from these uses by being able to read and write, work, watch news and entertainment programs on television, and enjoy social visits in the evening. On average, households use electricity from photovoltaic systems for lighting for about two hours per evening in Inner Mongolia and for up to five hours in Xinjiang. With respect to the adequacy of photovoltaic systems, about 40 percent of system owners in Gansu and Inner Mongolia reported that the electricity from their systems is just enough for household use, compared to about 50 percent and 67 percent of households in Qinghai and Xinjiang, respectively. In general, close to 40 percent of the owners of photovoltaic systems reported that electricity generated from their photovoltaic system is not enough for household use. This finding appears to confirm that households in these four provinces settled on smaller systems because of the cost, so there may be a market for upgrading systems through the addition of system components in the future. SYSTEM PERFORMANCE AND QUALITY OF SERVICE Most of the photovoltaic systems in the provinces have performed relatively well so far. As indicated in the previous chapter, however, more than 60 percent of owners of photovoltaic systems have had their systems for less than two years. Most of the systems and system components are designed to last three years or longer. For instance, photovoltaic panels are designed to last 20 years, the system controllers can last 10 years, and the batteries generally can continue working about 3 years. Because of this, more than 60 percent of system owners in Gansu, Inner Mongolia, and Xinjiang reported that their systems have never broken down. Among those in Gansu, Inner Mongolia, and Xinjiang who reported to have system problems, the majority indicated that their systems have had problems only once or twice since they bought them. The main problem with the systems has been with the compact fluorescent lamps and the batteries (see Table 4.3). In Qinghai, the lamp failures 2 A significant number of photovoltaic system owners in Inner Mongolia have had their systems for a long time, and the reported prices paid by the households were relatively low, reflecting the subsidized prices at the time.  34 Chapter 4. Profile of Households with Photovoltaic Systems have been much higher than in the other provinces. The high rate of problems with compact fluorescent lamps, fluorescent tubes, and even the batteries in Qinghai may suggest that the quality of these parts may be below standard, or they may have been installed in poorly designed systems. For instance, many systems are sold without battery controllers. Also, compact fluorescent lamps and fluorescent tubes should last more than two years, given that these light bulbs or tubes are used only a few hours a day. Furthermore, the average ownership of the systems is only 22 months, and during this time the compact fluorescent lamps or fluorescent tube should not have to be replaced.3 The reason for the short period of ownership is that most systems have been purchased during the last five years. For photovoltaic systems in need of repair, the average number of days that the systems were out of service during the last year ranged from 21 to 64 days (see Table 4.3). The reasons for the delays in repairs were mainly because of the difficulty getting parts and the relatively long distances to repair facilities. With the exception of Gansu, the majority of owners of photovoltaic systems take their systems to a repair shop when they have problems with them. Because there are no repair shops in the township or county, photovoltaic system owners have difficulty getting their systems repaired. For instance, owners of photovoltaic systems in Qinghai and Xinjiang often take combined modes of transportation, including bus, truck, horse, or yak. The average distance owners of photovoltaic systems have to travel to reach a repair shop ranges from 118 kilometers in Xinjiang to 455 kilometers in Qinghai. By contrast, owners of photovoltaic systems in Gansu and Inner Mongolia can have their systems repaired closer to their villages. Thus, the after-sales service is very poor, and repair shops tend to be located in larger cities. This raises the question as to whether the shortage of these parts and the long waits for system repairs is adversely effecting the expansion of the markets in these provinces. CONCLUSION At present, the main market for photovoltaic systems in the four provinces is the households in the highest half of the income distribution. Such households also have fairly high levels of education. Most households buy systems that are affordable to them, but perhaps which do not give the level of electricity service that they desire. Most systems in the region are less than two years of age and are relatively small-about 20- watt systems. 3 For example, a 7-watt or I 1-watt, 12-volt DC compact fluorescent lamps, Solsum brand name made in China and available in the US market, has a life expectancy of approximately 6,000 hours, which means the lamps should last three to six years depending on usage.  Chapter 4. Profile of Households with Photovoltaic Systems 35 TABLE 4.3: EXPERIENCES WITH REPAIRS AND SERVICES Gansu Inner Xinjiang Qinghai Total Mongolia Number of times P V system has broken down since it was purchased (% of households) None 63 77 67 49 55 One time 13 15 27 5 9 Two times 6 .. .. 9 8 Three times or more 18 7 6 36 28 Average number of days PV system was out of service (days) 38 64 28 21 27 Average distance to repair shop (kilometers) 50 41 118 455 353 Part ofP V system that was out of order (% of households) Battery 33 67 43 33 35 Light bulb or tube 42 33 67 96 81 Charge or discharge controller 36 .. .. 12 15 AC/DC adapter .. 33 20 .. 3 Average total cost of repair (yuan per repair) 26 n.a. 173 26 41 Mode of transportation to repair shop (% of households) Car, bus, truck, or motorcycle 100 100 50 53 59 Horse, yak, or cart .. 33 3 7 Combination of above .. 17 44 34 Number of systems surveyed 16 15 16 96 143 .. Negligible. n.a. Not available. Source: China Market Survey 1998. Currently, the market is for cash sales only, and credit is not used for the purchase of systems. Although the majority of systems seem to be performing well, the main problems are with the lamps and batteries. When systems do need repairs, few convenient facilities are available, and the average wait time for repairs is about one month. In spite of the problems, almost all photovoltaic system owners across all four provinces are satisfied with the performance of their systems and would recommend them to relatives or friends. The general characteristics of the households in remote areas without access to grid electricity were described in a previous chapter. This chapter has provided a profile of typical owners of photovoltaic systems, with systems and without systems have been detailed. In the next chapter, insights from both of these groups-the adapters of photovoltaic systems and the general population-are used to develop a profile of the potential market for systems in the four provinces.   5. POTENTIAL MARKET FOR PHOTOVOLTAIC SYSTEMS IN FOUR PROVINCES This chapter provides an analysis of the affordability of photovoltaic systems, and includes an estimate of the size of market based on different ways for people to pay for the systems. The analysis is based on a comparison of the characteristics of rural households in villages without grid electricity services and a profile of current photovoltaic system owners. In two provinces, the random sample contained a significant number of households with renewable energy systems. Because these households are representative of the households without access to grid electricity in these two provinces, the estimate the size of the potential market in these areas is more precise. The main criteria that have been used to determine the potential market for renewable energy systems are income, assets, education, and the attitude toward credit of the owners of photovoltaic systems and the surveyed rural households. In the case of China, the existing expenditures on energy are very low, so this is not a useful indicator for estimating the market for renewable energy systems. In addition, the households with renewable energy systems seem to continue to spend close to the same amount of money on lighting services provided by kerosene, diesel, candles and other sources of energy. As a consequence, the purchase of a renewable system does not appear to be a replacement for current fuels, but rather it involves additional or new uses of the services made possible by the availability of electricity. ABILITY TO PAY CASH FOR PHOTOVOLTAIC SYSTEMS In the previous chapter, it was found that households with high incomes and with fairly great assets could afford to purchase photovoltaic systems. In terms of income, about 90 percent of all owners of photovoltaic systems in Inner Mongolia, Qinghai, and Xinjiang are concentrated in the upper 50 percent of the income distribution for the provinces. The main exception is Gansu, a very poor province where photovoltaic systems have been distributed through a government subsidy program. Assets may also be an important factor in making photovoltaic systems affordable. Virtually all households in Inner Mongolia and Xinjiang, and more than 98 percent of households in Qinghai possess the asset value classified in the upper 50 percent of asset distribution for the provinces. The main exception to this pattern is Gansu, which is a very poor province with both low income and low assets. Combining the results of the survey of photovoltaic system owners with the general survey, about 41 percent of rural households in the four provinces appear to have  38 Chapter 5. Potential Marketfor Photovoltaic Systems in Four Provinces similar levels of income and assets as those who have already purchased photovoltaic system with cash. The typical system purchased was small-20 watts or less-so these findings apply mainly to small systems. Assuming that a functioning retail market exists in these remote provinces, such households definitely could afford to purchase photovoltaic systems. These households have higher incomes, as well as greater assets, with monthly incomes that are greater than Y 275, and the total value of assets starts at about Y 7,163 per household. In this group are about 562,573 households in the four provinces. This includes 171,154 households in Inner Mongolia, 237,329 households in Xinjiang, and 62,425 in Qinghai (see Table 5.1). For Inner Mongolia, it should be cautioned that about half the households have small wind systems, which provide a service similar to that of a photovoltaic system. Thus, the marketing of photovoltaic systems may have to compete with, or in the case of a market for hybrid systems, complement wind systems. Because there is not as much wind during the summer months when solar radiation is the greatest, photovoltaic systems may be the perfect complement to wind systems. TABLE 5.1: HOUSEHOLDS THAT COULD AFFORD SMALL PHOTOVOLTAIC SYSTEMS Gansu Inner Xinjiang Qinghai Total Mongolia Small systems are affordable High-income and high-asset households 43,838 180,186 196,991 62,026 483,040 Percentage of households 8 61 47 73 35 Small systems may be affordable Low-income and high-asset households 93,775 56,064 35,596 13,471 198,906 Percentage of households 16 19 9 16 15 High-income and low-asset households 98,988 3,962 91,708 4,473 199,131 Percentage of households 17 1 22 5 15 Small systems are probably not affordable Low-income and low-asset households 332,849 56,144 90,291 4,691 383,975 Percentage of households 59 19 22 6 35 All households 569,449 296,356 414,586 84,662 1,365,053 Note: High refers to upper 50 percent brackets and low refers to lower 50 percent brackets. Source: China Market Survey 1998. The households in the poorest group are located mostly in Gansu Province. In Gansu about two-thirds of the households have both low income and few assets. As might be expected, the number of households that can afford to purchase systems on a cash basis in Gansu is 8 percent of the total population, which is very small compared with the other provinces. The people in the areas without electricity in this province are very poor, and they have little ability to pay for the systems. These estimates are for all households in the region, whether or not they presently own an alternative energy source, such as a generator set or a wind system. The reason for not excluding the households that already have some other way to generate electricity is that the survey indicated that it is quite common to have multiple means of electricity generation, espucially in the higher-income groups. It could even be speculated that the  Chapter 5. Potential Marketfor Photovoltaic Systems in Four Provinces 39 adoption of some form of electrical lighting, along with the new awareness of the benefits of electricity that is associated with the lighting, actually increases the demand for alternative sources of electricity. Therefore, it is assumed in Table 5.1 that demand for photovoltaic systems exists even in households with some other form of electrical lighting. The reason for this is that the households with renewable energy systems have expressed dissatisfaction with the level of service. POTENTIAL DEMAND FOR LARGER SYSTEMS More than 50 percent of households reported that they were not satisfied with their level of lighting service. Many households also supplement the service from their renewable energy systems by purchasing energy devices, such as kerosene, candles, and even generator sets. Many households in the upper three income deciles own the larger photovoltaic systems, at a cost of between Y 3,800 and Y 6,000 each. From this, one can infer that the target group for the larger systems is in the top two income deciles. As a result, it is estimated that approximately 264,515 households in all four provinces could afford to buy larger photovoltaic systems with cash. This accounts for 47 percent of the estimated total number of households that could afford to buy a small 20-watt photovoltaic system with cash (see Table 4.2). As a result, it is quite possible that a demand for larger systems or system upgrades will emerge. It is also conceivable that the larger photovoltaic systems will be in greater demand in the foreseeable future (see Table 5.2). TABLE 5.2: HOUSEHOLDS THAT COULD AFFORD TO PURCHASE LARGE PHOTOVOLTAIC SYSTEMS Estimated number of households Gansu Inner Xinjiang Qinghai Total that: Mongolia Could afford a larger system with cash 3,613 133,348 84,421 23,226 244,607 May be able to afford a larger system with cash and credit 8,125 17,377 50,882 3,259 79,643 Probably could not afford to buy a larger system 32,100 29,461 61,688 35,541 158,790 Total number of households in the upper 5 income and asset brackets 43,838 180,186 196,991 62,026 483,040 Source: China Market Survey 1998. The availability of credit may make it possible for the households below the highest income groups to be able to afford larger systems. Many of these households have access to credit and have used different types of credit. Assuming that the credit could be made available to this middle group of households, close to 80,000 additional households might be able to purchase systems. It should be cautioned, however, that the use of credit for major household purchases is not common in these provinces.  40 Chapter 5. Potential Market for Photovoltaic Systems in Four Provinces ATTITUDES AND PREFERENCES FOR TYPES OF SYSTEM AND PAYMENT METHODS The analysis of affordability showed that about half the households in all four surveyed provinces can afford to buy at least a small 20-watt photovoltaic system with cash. Only 20 percent of all surveyed households across four provinces, however, indicate that they are interested in buying a 20-watt photovoltaic system with cash (Table 5.3). For Inner Mongolia, which has the high penetration of small wind systems, the figure is even lower-at about II percent. The situation does not improve much with the possibility of purchasing a system on credit for one or two years. TABLE 5.3: HOUSEHOLDS INTERESTED IN BUYING A DIFFERENT SIZE PHOTOVOLTAIC SYSTEM USING CASH OR CREDIT (percent) Gansu Inner Xinjiang Qinghai Total Mongolia Households interested in buying 20-watt PV systems with: Cash 26 11 13 18 19 One year credit 4 2 5 4 4 Two years' credit 1 0.5 4 11 2 Households interested in buying 50-watt PV systems with: Cash 25 19 31 19 24 One year credit 3 4 8 6 4 Two years' credit 3 0.6 19 17 6 Households interested in buying 70-watt PV systems with: Cash 18 33 33 32 24 Oneyearcredit 15 7 16 .. 13 Two years' credit 2 1 22 2 5 Negligible. Note: The survey results presented in this table are based on a series of hypothetical questions designed to gauge the interest and knowledge of respondents about 20-, 50-, and 70-watt PV systems. See Appendix Tables A-6 through A- Il for details. Source: China Market Survey 1998. Although many households expressed interest in purchasing systems, some families lacked interest. It should be cautioned that the indication of interest among respondents is measured by several hypothetical questions concerning interest in buying photovoltaic systems of three sizes (20, 50, and 70 watts). There are several reasons that households might not be interested in purchasing systems. First, many households know nothing about photovoltaic systems. Second, some households are not comfortable with the idea of buying major appliances with credit. Of those who have been exposed to credit, the majority borrowed money for business purposes. Furthermore, their exposure to credit is still very limited. Third, some households are simply not interested in photovoltaic home systems. Fourth, the majority-about 55 percent-indicated that their  Chapter 5. Potential Marketfor Photovoltaic Systems in Four Provinces 41 main reason for not buying the systems was that they believe that photovoltaic home systems are very expensive. Other reasons were given by households for not being interested in purchasing. They feel that there is "no convenient location to buy them," "they can't get credit," "they worry about the quality," "the system capacity is not enough," or "they will get connected to the grid soon or will purchase a small diesel generator set soon." Given the hypothetical nature of the questions that were asked of respondents, the results cannot be considered a definitive indication of the market for photovoltaic systems. For instance, significant numbers of respondents who are interested in buying systems, particularly the larger sizes, do not have enough income to afford them. On the other hand, a significant number of respondents who are interested in buying systems with a capacity of less than 20 watts have enough income and assets to purchase such systems either with cash or credit. In any event, the results clearly indicate some of the major hurdles to expanding the market for these products. CONCLUSION This chapter outlined the potential market for photovoltaic systems in remote provinces of China. Many households in these remote areas can afford photovoltaic systems, and in fact, many have already purchased them. The main reason households in these provinces can afford them is that many of them are herders who own many animals. With a significant and growing demand for meat in China, they are able to sell their animals at very attractive prices and earn a high income. In addition to high income, households with higher education levels are more likely to purchase systems than those with lower levels of education. Affordability does not always translate into the purchase of systems, however. As indicated in this study, in spite of the continuing development of retail markets in these provinces, many problems remain. When systems have problems, households have great difficulties in getting spare parts or repairs. The credit system in the provinces is geared toward seasonal credit for agriculture and not toward the purchase of items for household use. At present, people in the region seem resistant to using credit for large purchases of household appliances. Given the remote locations of these areas and the lack of access to grid electricity, development of any type of market will be challenging. There are reasons for optimism as well, though. Incomes turned out to be higher than expected at the beginning of the study. In one province, about half the households without electricity already have purchased inexpensive wind systems, and close to one-tenth of households in Qinghai have purchased photovoltaic systems for lighting. In the next chapter, policy recommendations based on this study are discussed.   6. CONCLUSIONS AND RECOMMENDATIONS In many countries, households without access to electricity spend a significant amount of their income on petroleum fuels and batteries for household lighting. In the survey areas covered in this study, people without electricity spend very little of their monthly income on energy, although many households have purchased wind energy systems or electricity generator sets with cash to get improved lighting and communication services. About half the households in the areas surveyed in Inner Mongolia have wind generation systems, and 11 percent of the households have generator sets that run on petroleum fuels. From the survey, it is clear that people value electricity for lighting, communications, entertainment, and other services. The provinces covered by the study include Gansu, Inner Mongolia, Qinghai, and Xinjiang. The areas within these provinces covered by the survey are limited to the counties with more than 15 percent of households that do not have electricity service from a grid system. Further, only communities without access to grid electricity were included in the survey. Within this study area, there are wide variations in occupations, incomes, and levels education. In general, herders are much wealthier than farmers in the provinces. With herders concentrated in Inner Mongolia and Qinghai, as expected, Inner Mongolia has the highest income for the study areas involving only villages without electricity. Many people in the provinces have extensive experience with credit, but the credit is used mostly for productive activities and not for household consumer goods. THE MARKET FOR PHOTOVOLTAIC SYSTEMS EXISTS AND Is GROWING The market for photovoltaic systems in the provinces is small, but growing. In two out of the four provinces, a significant number of households that own photovoltaic systems even show up in our random sample. The existing sales figures for the photovoltaic industry are considerably higher than the numbers indicated by the survey, which is consistent with the companies' reports that they are selling to other areas, especially western Sichuan and Tibet. The systems that people have purchased are mostly small and inexpensive, and have been purchased on a cash basis. People in the households with systems definitely would recommend them to their friends. They value highly the benefits of having electricity, including lighting, entertainment, and information, but the inexpensive systems also can result in maintenance difficulties, such as problems with lights and batteries. People also are not totally satisfied with the level of service they get from such small systems. They want more service from their systems.  44 Chapter 6.Conclusions and Recommendations In these remote provinces in China, many households are now able to afford to pay for small photovoltaic systems with cash. The study found that about 500,000 households can afford to pay cash for systems that are less than 20-watt photovoltaic. Most of these households are in Inner Mongolia, Qinghai, and Xinjiang. This estimate includes many households that already own some form of electricity generation, such as a wind generator or a generator set. For instance, in Inner Mongolia about half the households in the study area already have wind systems. We have not excluded these households from the estimated market, because a significant number of households own multiple systems to generate electricity.' In Gansu, the household incomes are generally below the threshold level for the purchase of a system. In this province, a viable commercial market for systems sold on a cash basis appears unlikely. In Gansu, some form of subsidy or credit, or combination of the two, would be necessary to encourage broad adoption of photovoltaic systems. As might be expected, the households that are purchasing photovoltaic systems generally are literate, and it appears that both education and income are key factors in predicting whether a household will purchase a system. Most of the existing systems are in households that are in the upper half of the income distribution for the areas without electricity, and most of them have higher education levels than average for the population. Most people in the provinces are not happy with their source of lighting. This includes households with and without renewable energy systems. Households with photovoltaic systems are happy with their performance and would recommend their purchase to a neighbor, but many feel that the systems do not provide enough lighting or other electricity services. Therefore, a significant market may exist to upgrade the existing typical 20-watt systems that people are using today. One note of caution concerning these results is warranted. The dissatisfaction with the service of renewable systems may be the result of comparisons with grid service levels. Given the extensive reach of the grid service in rural areas of China, unrealistic anticipation or expectations of grid service coming soon to an area would likely be very detrimental to the expansion of the market for renewable systems. Although we have not attempted to estimate markets outside the four provinces covered by the survey, an additional 500,000 households without electricity in Tibet and Sichuan are part of the potential market for photovoltaic systems.  Chapter 6. Conclusions and Recommendations 45 HOUSEHOLDS APPEAR TO HAVE LITTLE INTEREST IN USING CREDIT TO PURCHASE PHOTOVOLTAIC SYSTEMS Many households in the survey are utilizing credit for their commercial activities, including farming. They borrow money from rural banks and cooperatives to purchase agricultural inputs and other items. Loans are often of very short duration, with the most common loan being repaid in one year. Presently, credit appears not to be used to purchase consumer durable goods in these areas. In addition, households in the region appeared uninterested in purchasing a photovoltaic system on credit, preferring instead to pay with cash. For wealthy herders, paying with cash would not be much of a problem, because they would only have to sell off a few animals. To deepen the market by reaching the middle- and lower-income groups, and perhaps to allow higher-income households to purchase larger systems, some form of credit or installment payment is necessary. The lack of interest shown by households toward purchasing consumer durable goods with credit, along with the importance of credit toward deepening the potential market for systems, indicates a need for further work in this area. Therefore, it is recommended that this topic be investigated through focus group interviews that seek the reasons for the lack of interest and explore all potential approaches to increasing the affordability of the systems. SALES AND AFTER-SALES NETWORKS NEED TO BE EXPANDED Most households in the areas without access to electricity in the remote provinces have no access to retailers that sell photovoltaic systems. Even where systems are sold, there is very little after-sales support for systems. Customers often wait about one month for systems repairs. The average distance to a repair shop varies from 50 kilometers to more than 400 kilometers. Simple parts for common problems with systems, such as lamp failures, are not available locally. STANDARDS AND SPECIFICATIONS MAY BE IMPORTANT FOR MARKET DEVELOPMENT The systems that are being sold in the study area are mainly small systems of less than 20 watts. The practice of selling inexpensive systems makes systems affordable to a wider segment of the population. Less expensive systems are affordable, but there is a higher incidence of repairs and system component failures in areas with many small systems. This can be very costly in terms of product acceptance. If the systems have operational problems in some households-especially those of the early adopters-others may postpone or not purchase systems. The adoption of mandatory standards and certification of products is one important way to reduce the quality and after-sales service problems found through the survey. Such standards and certification procedures have already been introduced in preparation for the China Renewable Energy Development Project.  46 Chapter 6. Conclusions and Recommendations CONCLUSION With the exception of Gansu, all the other provinces in the study area have significant potential markets for photovoltaic systems, even on a cash basis. At present, the development of these markets in its infancy. Commercial retailers have begun to service the three provinces only during the last three years, and they are often in competition with more established firms that have been involved in previous government programs. There will be many problems that are faced in expanding the market beyond the richest households in the provinces. They include the lack of interest in credit for photovoltaic system purchases by households, the weak existing sales and after-sales networks in the region, and the need to replace system components as the systems begin to age. Also, the high number of wind systems in Inner Mongolia may affect sales in that province. In spite of the problems, there are significant opportunities. In three of the provinces, a significant number of households can afford to purchase small systems on a cash basis. This number could be expanded greatly if issues are resolved concerning the availability of credit and resistance to using credit. There appears to be a market for system expansion, after the initial purchase of small, affordable systems. The only exception is Gansu where households do not have the requisite income to purchase systems without some type of assistance from the government. Clearly, a different strategy would be necessary for the promotion of household photovoltaic systems in this province. Markets for photovoltaic products in the other provinces are likely to expand quickly, however, as households in the areas seem to appreciate the benefits of electricity from the systems, and many have the necessary income to pay for systems.  Appendix A: Descriptive Statisticsfrom the Survey 47 APPENDIX A: DESCRIPTIVE STATISTICS FROM THE NORTHWEST CHINA RURAL ENERGY SURVEY  48 Appendix A: Descriptive Statistics from the Survey TABLE A-1: SOCIOECONOMIC INDICATORS Gansu Inner Xinjiang Qinghai Allfour Mongolia provinces Age of head of household Mean 40 42 43 45 43 Valid N 715 723 721 719 2,878 Number ofpersons in the household Mean 5 4 6 5 5 Valid N 704 724 717 720 2865 Total monthly income Mean 195 1,580 737 624 785 Valid N 720 724 722 720 2,886 Total value of livestock owned Mean 3,558 57,576 20,699 55,445 34,371 Valid N 718 724 719 719 2,880 Education of head of household (YO) Illiterate 17 6 10 51 21 Primary school 36 44 47 40 42 Junior high school 35 41 33 9 29 Senior high school 11 8 8 0 7 High vocational school I I I 0 1 College and university education I 0 1 I Postgraduate education Valid N 719 722 722 720 2,883 Highest education of household member (%) Illiterate 6 1 1 26 9 Primary school 17 14 17 38 22 Junior high school 42 46 40 24 38 Senior high school 28 27 24 9 22 High vocational school 4 6 10 1 5 College and university education 3 5 7 2 4 Post graduate education Valid N 706 700 715 712 2,833 Occupation of head of household (lO) Farmer 90 34 57 8 47 Herdsman .. 62 30 77 42 Mixed herding and farming 5 3 9 15 8 Local TVE worker I .. I .. 0.3 Outside TVE worker 2 .. .. .. 0.4 Local manager 0.4 0.3 0.4 .. 0.3 Retired 0.1 0.3 0.4 .. 0.2 Other 2 1 2 0.4 I Valid N 720 722 721 720 2,883 Negligible. Note: TVE stands for township and village enterprise. Source: China Market Survey 1998.  Appendix A: Descriptive Statistics from the Survey 49 TABLE A-2: HOUSEHOLDS' EXPERIENCE WITH CREDIT Gansu Inner Xinjiang Qinghai Allfour Mongolia provinces Credit experience (%l of households) No (%) 68 76 59 89 73 Yes (%) 32 24 41 11 28 Total (valid N) 637 641 682 596 2,556 Average loan amount (yuan) 1,173 3,242 4,802 2,449 3,201 Valid N 200 147 279 63 689 Average length of loan (months) 16 12 11 26 14 Valid N 202 146 270 64 682 Year of last loan taken (% of households with loan) 1998 (%) 37 25 60 22 43 1997 (%) 42 63 26 50 41 1996 (%) 10 5 7 23 9 Before 1996 (%) 11 7 7 5 8 Total (valid N) 201 147 280 64 692 Source of loan (% of households with loan) Bank (%) 23 17 35 7 25 Credit union (%) 73 58 52 47 59 Relatives (%/6) 3 18 8 21 10 Neighbor(