Access to Energy: Why Smart Subsidies Present an Opportunity to Leave No One Behind

Published on 10th March 2020

To reflect, one should perhaps take a lone walk. On a recent six-kilometre walk, snaking village paths from Nyeibingo Parish to Kabingo Parish; Ikuniro village remains a stray into the far rural, a place where you find real people discerned from urbanites and peri-urbanites. Ikuniro village is from far submerged at footsteps of Itemba mountain (tallest point in Rukungiri district). On the walk, rusty rooftops of densified villages have a bit of rectangular shine that on closer look materialises as small solar panels that have come to define this place – not yet universally because of mostly inhibitive solar system upfront cost.

Taking grid electricity to Itemba villages is not only a fat public spend but can also be logistically challenging because of the terrain. Besides, folks, solar enabled off-grid electrification is becoming a reality in Uganda. In these households’, kids can now read, safe from pungent and unsafe kerosene fumes. Small businesses can extend working hours with some light. I marvelled at this progress and got reminded of passionate access to energy conversations we had in Nairobi three weeks ago.

From 18th to 20th February 2020, more than 1,250 off-grid solar professionals and stakeholders from 75 countries gathered in Nairobi for Off-grid energy conference and expo under the auspices of Global Off-Grid Lighting Association (GOGLA). Participating firms have for the past 9 years electrified 420 million people and sold more than 180 million off-grid solar units worldwide with over $1.5 billion in investments (GOGLA). According to a 2019 report from the World Bank, the off-grid solar industry has grown into a $1.75 billion annual market.

At the Conference, President Uhuru Kenyatta said, “Evidence is abound that to realise sustained social economic development, provision of sufficient and clean electricity is a critical enabler. In 2019, we achieved 2 million sales of solar products. This tremendous growth in the uptake of off-grid solar solutions is an integral part of my administration’s strategy towards the realization of universal access to electricity.”

Mr. Yoven Devaragen Moorooven, CEO of ENGIE Africa who gave a keynote speech said, “We strongly believe in the huge potential of the off-grid electrification sector and that it will be instrumental in rapidly and cost-effectively bridging energy gaps across Africa. We will build upon our successes to sustain and meet our long-term ambition of impacting tens of millions of lives across Africa. ENGIE has an important role to play in industrializing and scaling up the off-grid solar business. We are keen to offer the lowest cost and best quality Access to Energy solution that addresses our customers’ needs.”

The foregoing high-level thoughts from President Uhuru Kenyatta and ENGIE Africa CEO Mr. Yoven Moorooven, set the tone for the two-day conference packed with themed discussions, expert panels, informal talks and cross stakeholder conversations with the central question gravitating on – affordability! How will the consequential and surging industry profitably accelerate to leave no one behind and serve the poorest households living on less than a dollar a day?

Positively, world poverty is de-accelerating, but sadly at a slow pace. Data scientists at World Data Lab estimated that on New Year’s Day 2019, just under 600 million people across the world (excluding Syria) lived in extreme poverty. By 2030, this figure is expected to fall to some 436 million. In the midst of the foregoing, 840 million people globally are un-electrified, with attendant energy poverty challenges like pollution, disease, illiteracy, insecurity among others.

Can the global clean energy access gab be filled? According to latest GOGLA report, the sector would need an additional boost of up to $11 billion in financing. More specifically, the sector would need to grow at an accelerated rate of 13 percent, with up to $7.7 billion in external investment to companies and up to $3.4 billion of public funding to bridge the affordability gap. I share the view that filling global clean energy access gap requires not a particular re-invention of new ideas but rather re-imagination and tweak of conventional and old ideas.

One particular idea, a not so heavily contested one these days, is deployment of subsidies – yet we need not just “subsidies” but rather “smart subsidies”. A smart off-grid subsidy is only smart if executed in a time-limited, rule-bound (fair competition space and aligned standards) and deployed with a laser focus to produce demonstrable social and economic impacts and such impacts should be measured using rigorous statistical analyses.  A smart subsidy is only smart if it's inclusive and offsets immediate costs by participating firms through e.g. equity replacement and have savings passed on directly to the end consumer in proportionate lower pricing of energy product (e.g. Solar Home System). A smart subsidy is an affordability accelerator which facilitates scale and drives affordability in the long term.

A smart subsidy execution model must therefore combine supply side subsidies and demand side subsidies. The purpose of supply side subsidy is to reduce cost/risk for the company (e.g. tax exemptions, concessional grants, results-based financing). Indeed, at the Conference, President Uhuru Kenyatta emphasised “We have given import duty exemptions on a range of solar products to ensure both profitability for investors as well as affordability and high-quality products on the part of consumers”. The purpose for demand side subsidy is to reduce price for end user (e.g.  Cash transfers, results-based financing). For cash transfers, consumer uses benefit to purchase product from company. For results-based financing, government /donor gives benefit to business with expectation of business to reduce price for the consumer.

Broadly, these smart subsidies enable market creation through for example injecting public sector funding to overcome early structural challenges in the market, incentivizing early-stage start-up and medium-term scale-up needs of Energy Service Providers and creating conditions for long term sustainability and commercial investment.

Mr. Brian Warshawsky, CEO of Fenix International (a company of ENGIE) told the conference that the Beyond the Grid fund worth $3 million USD grant injected in biannual instalments helped Fenix International to de-risk market entry into Zambia by providing a replacement for equity, liquidity for capital investment in market launch and further de-risking growth prospects for scaling ability to fine tune operational efficiency, respond to, tailor and optimize operations market. Indeed, Fenix’s commercial success in Zambia proves the viability of equity replacement injections for market creation as Fenix is now profitable in Zambia with 150,000 customers, 750,000 beneficiaries and reaching 4% of Zambia’s population with life changing off-grid solutions.

Mr. Warshawsky argued that “our cost of goods is decreasing year on year and we work tirelessly to innovate our operational and commercial practices to reduce our pricing, but our products are still out of reach for the majority of Zambians (A daily PayGo rate of $0.17USD is out of range for 50-75% of Zambians)”. How then will the sector reach the 840 million un-electrified people? Governments, multi-lateral financial institutions, granting agencies and investors will require to double –down, do more to deploy supply side and demand side smart subsidies as central enablers for the Off-grid private sector to deliver on the triple bottom line of people, profit and planet.

By Morrison Rwakakamba,

The author Global Senior Director of Policy, Fenix International, a Company of ENGIE

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