“The more you know, the more you know you don’t know”-Aristotle
Information asymmetry closely follows the quote albeit in a different way. It reflects upon the unknowns in any market over a transaction. The information asymmetry in electricity market is subtle but is turning to be prominent. The stakeholders in this sector include the electricity market regulators, the utilities, power generating companies, project installers and the end consumer. The information asymmetry at the national level between the government agencies and top power companies is well documented which allows me to look at the domestic scale.
Lets look at the market for residential solar projects in a country like India. A consumer with a requirement of a 1-2kWp rooftop unit for his house approaches a bank for financial assistance. It is unlikely that the consumer gets a loan, let alone walking away with funds straight away. Under current circumstances in a nascent market for solar rooftops in India, the banks are sceptical due to a lack of information.
- No expertise in evaluating the solar rooftop project proposals
- No reliable guarantee from the system installer on the project performance
- Multiple components in the system with individual warranties ranging from 5 years to 25 years
- If at all a Power Purchase Agreement (PPA) executed with a local utility is presented the chances of securing a loan increases but again depends on the reliability of the utility. Not every utility is reliable for the financial commitment.
At the consumer’s end the information asymmetry stems from multiple sources.
- First, there is no guarantee on securing a financial assistance from the bank.
- Unless technically qualified or inquisitive, there will be lack of knowledge in understanding and comparing various solar solutions.
- Lack of policy clarity. The issue with policy is not an isolated case in India. Residential rooftop projects across the globe have been subjected to this through Feed in Tariffs (FiT) and metering regulations. Its hard for residential consumers to invest in a technology without being sure of the payback.
Like in all cases of information asymmetry there will be someone who could leverage on the uncertainties and in this case it turns out to be the system installers. The system installers are solution providers who integrate the various components of solar Photo Voltaic (PV) system and offer it as a package to the consumer, like the residential consumer.
- They are better off because they know the technical nuances of solar PV.
- Wouldn’t read good, but they are capable of identifying the gullible consumers under any policy and tariff contexts. Of course it is business.
- It is good to see the prices of solar modules and other components drop significantly in the last few years but it has also opened up the market to the problem of lemons. In order to offer a net low price for the product, components with below par performance end up on the roofs of consumers inadvertently (or otherwise?).
It doesn’t justify to blame the system installers for leveraging this situation. Its a perfect market and companies like SolarCity have proved that it is possible to build business models under these circumstances. Taking the complete risk of project including capital cost and allowing consumers to benefit from solar power at a discount of retail tariffs is proving to be a success. System installers in India have taken cue and have started offering third party investment-energy sale model for residential scale solar PV rooftop projects. Utilities and regulators who often look up to system installers to evaluate the policy effectiveness have taken note of this initiative from Indian system installers and now offer PPA agreements with third party investors. Overall, information asymmetry is a natural phenomenon in any free market and its only a matter of time before all stakeholders are brought on level terms.
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