Adoption, incidence and welfare impacts of interest-free loans: evidence from solar PV

Steep declines in solar PV costs raise questions about whether, and how, to continue support. This paper analyses Scotland’s interest-free Home Energy Scotland (HES) Loan, which encourages household PV adoption by lowering borrowing costs and extending repayment periods, reducing upfront capital barriers. This type of instrument has a low fiscal cost but has been relatively under-examined in previous research on solar subsidies. Using a database of more than one million household PV installations in the UK over the period 2010–2021, the authors compare Scottish localities that have access to loans with similar English localities that are ineligible, before and after 2017, when the HES Loan was introduced. The results show clearly that the HES Loan increased household adoption of rooftop solar panels in Scotland, even though the country has relatively low solar potential, and shifted take-up towards smaller systems suitable for smaller properties. In terms of the distributional impacts across wealth groups, unlike previously examined policies including upfront rebates and Feed-in-Tariffs (FiTs), there were broad gains and relatively larger effects in lower-wealth areas and across urban and accessible-rural locations, yielding a less skewed wealth and geographical distribution of installations. The paper also examines the value-for-money for the government. The results consistently indicate positive welfare gains from the loan at modest fiscal cost. Overall, the paper provides robust evidence that interest-free loans can cost-effectively expand the uptake of household solar PV while promoting equitable access, complementing (and in some contexts outperforming) production-based support policies (i.e. those that subsidise households per unit of electricity produced by their solar panels).