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).

Key points for decision-makers

• Financing works for household solar – even where the sun shines less. An interest-free loan increased household PV adoption in Scotland despite lower solar potential, offsetting the post-FiT decline observed in England. The policy channel is straightforward: it relaxes liquidity constraints and allows households to spread costs over time.
• The instrument shapes the systems people buy. With a capped, zero-interest loan (not scaled to generation), take-up shifts towards smaller systems and average output per new system falls, consistent with moving away from production-linked support towards upfront financing.
• Equity improves, not worsens. Unlike many FiT or rebate programmes that are found to be regressive (disproportionately burdening low-income groups), the loan’s incidence is non-regressive and in several dimensions modestly progressive: gains are broad and relatively larger in lower-wealth areas. Installation inequality declined in Scotland while it increased in England over the same period.
• Public money goes further with loans. A loan-specific marginal value of public funds (MVPF) – distinguishing the household NPV benefit from the fiscal NPV cost – exceeds one in baseline and across sensitivities, reflecting that government can often transfer £1 of value to households at less than £1 of budget cost when it can wait for repayment.
• Targeting without means-testing. Because the mechanism addresses upfront cost and credit issues directly, broad eligibility delivers larger proportional gains at the bottom of the property-value distribution without explicit means testing. Urban and accessible-rural areas respond particularly strongly.
• Portfolio design matters. Loans can complement rather than replace other instruments. In settings where production-based support becomes less generous (e.g. where FiTs are being wound down), well-designed zero-interest loans can sustain adoption, broaden participation and support objectives (e.g. equity; learning-by-doing) not fully captured by static cost-per-ton metrics.