Smart Subsidy Scheme for Off-Grid Clean Energy to Combat Climate Change

Published on 9th February 2021

Implement a global smart subsidy scheme for off-grid clean energy to combat climate Change: A pointer for the Biden Administration. 

On day one of his Administration, President Joseph R. Biden signed executive actions to tackle climate crisis at home and abroad. The most watched executive action was the return of  United States to the Paris Agreement on Climate Change. By appointing Secretary John Kelly as his Special Envoy on Climate Change, President Biden located Climate change at the centre of US national security, clean energy future, economic recovery, jobs, restoration of scientific integrity, environmental justice; and an entry into renewing of global alliances battered under the ‘America First’ agenda of the Trump Administration. 

According to a White House statement, President Biden’s order affirms that, in implementing – and building on – the Paris Agreement’s objectives, the United States will exercise its leadership to promote a significant increase in global ambition. It makes clear that both significant short-term global emission reductions and net zero global emissions by mid-century – or before – are required to avoid setting the world on a dangerous, potentially catastrophic, climate trajectory.

To succeed on this ambitious agenda, President Biden will require to cast (a) a broader green net that brings together big and small actors, a network of change in the global private sector, civic society, universities, indigenous communities, farmers and governments. (b) Curate an adaptive approach that creates a livelihoods balance for millions in Africa, the Caribbean and Asia whose energy security is mostly dependent on extractive resources  - and a market approach that accentuates innovations and make renewable energy interventions and products affordable and self-effecting for millions of poor people across the world. 

This is why a deliberate transition to smart subsidy for off grid clean energy is urgent. This transition will lower last mile energy price points and expand affordability and energy coverage for the millions and set the world on path of accelerated zero global emissions trajectory — and United States leadership is very critical here.
 
Off-grid clean energy transition begins with affordability – Smart Subsidy 

World poverty is de-accelerating, but 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.  However, on October 7, 2020, The World Bank stated that the COVID-19 pandemic is estimated to push an additional 88 million to 115 million people into extreme poverty in 2020, with the total rising to as many as 150 million by 2021, depending on the severity of the economic contraction.

At the centre of energy poverty is distance (number of people in the rural and peri-urban townships living off grid and under the grid), price (more than 600 million people live below poverty line with cash flow challenges), infrastructure (prohibitive transport costs, readiness of intermediaries for ease of payments - for especially PayGo and logistical challenges to reach last mile customer), technology (improvements positively affecting pricing and access), dirty alternatives (kerosene, firewood, charcoal, candles) and political complexity (cost of unfriendly and un-harmonised off-grid regulations and policies e.g. regressive tax codes, absence of harmonised codes for e.g Solar Home systems etc). 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. To this extent, what is clear and apparent is that increased access to energy begins with affordability. 

At the Agency for Transformation, we strongly believe 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 though contested in some quarters, is targeted subsidies.  The tweak and logic of our approach is that we need not to just subsidize but rather subsidize smartly. A smart off-grid clean energy subsidy is only smart if executed in a time-limited (approximately 4 years), 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 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 in our approach is therefore a price concession to end user (customer) which facilitates scale and drives affordability in the long term. The foregoing provides a counterpoint to dominant tendencies and narratives around market distortions and sustainability challenges in the long history of subsidy markets – especially for Solar Home Systems. 

Recasting the  global off-grid clean energy gap crisis

The Global Off-grid Lighting Association (GOGLA) argues that solar products and services are a solution for the estimated 1 billion people with weak grid connections globally . 

The 2019 Energy Progress report tracking Sustainable Development Goal 7 argues that the world is making progress but will fall short of meeting the targets by 2030 at the current rate of ambition. The Report documents that the global population without access to electricity decreased to about 840 million in 2017 from 1.2 billion in 2010. Sub-Saharan Africa remains the region with the largest access deficit: here, 573 million people—more than one in two—lack access to electricity. The region is also home to the 20 countries with the lowest electrification rates (figure ES3). Burundi, Chad, Malawi, the Democratic Republic of Congo, and Niger were the four countries with the lowest electrification rates in 2017.   The deficit is even more pronounced in rural areas. In fact, the unserved rural population of 732 million represented 87% of the global access deficit in 2017. In Sub-Saharan Africa, there was greater attention to urban electrification. Here, the incremental rural electrification of 16 million people a year was two-thirds that of the urban rate in 2015-2017.  

Uganda:  Off-grid clean energy gap and case for stimulating private sector solutions

In Uganda, 35% of the population relies on kerosene for their lighting needs. Kerosene is a frequent cause of burns and poisoning among children, and the indoor air pollution created by burning kerosene is a significant health risk. But without lighting, children cannot study and businesses cannot remain open after the sun sets and darkens reigns. 

According to World Bank (2016), 7 million households, or approximately 35 million people in Uganda are living off-grid — with no access to any form of electricity. The 2020 pronouncement by the Ministry of Energy says approximately 6.5 million households lack access to electricity. 

Uganda’s Solar Energy Association reported that over the last 5 years, the private sector has demonstrated its ability to reach over 1 million families through Solar PayGo sales. Between the year 2016 to 2018, the average monthly solar uptake grew by 16%. The pilot for the smart subsidy was deployed in Uganda, where only 30% of the population have access to electricity (Urban 82 %, Rural 18%).

These are families that no longer have to turn to kerosene or candles to keep their lights on after dark and can go about their days more safely than ever before. These are families who among others are now benefiting from the life changing benefits of phone charging, radio and television in the home, connecting them with loved ones and the wider world in a whole new way. With over 22% of the population living below the poverty line, Uganda is an extremely price sensitive market. A global Smart Subsidy Scheme channelled through the private sector is therefore an urgent measure to scale solutions and help reach more families  in Uganda and around the world. Like most of Sub-Saharan Africa, an enabling infrastructure  that includes a network of banks (agency banking stretches to grassroots), mobile money penetration and savings and credit cooperatives exists in Uganda to make deployment of smart clean energy subsidy seamless.

Off-Grid energy smart subsidy experiment in Uganda

Our grassroots research finds that low-income Ugandan households pay on average $0.05 - $0.15 (200 – 550 UGX) per day for their energy needs, which are often unsustainable and environmentally-unfriendly solutions. A 2019 pilot experiment tested whether a subsidy of as low as $0.027 cents would make a difference in driving energy access in Uganda. 

This Public Policy Memo presents  hypotheses, methodology, observations and conclusions of the experiment with the view of providing insights and pointers for a global action on clean energy smart subsidy.

The experiment:  

Based on more than a dozen pricing tests and insights from pricing changes over the years, a few hypotheses about how price subsidies could further expand energy access were developed:

  • Price subsidies may enable PAYGo energy companies to reach proportionately more customers who fall into “low income” categories;
  • Price subsidies may enable PAYGo energy companies to reach customers who are even of lower income than customers generally served by the sector today;
  • Low income customers (across a broad range) will be able to experience more days of lighting and less days in the dark with a more affordable price plan;
  • Low income customers will have a higher likelihood of finalizing their payment plan and achieving outright ownership of their energy product; and
  • When PAYGo energy companies price in a way that optimizes for affordability among lower income customers, it can enable the sector to profitably and sustainably serve a customer base with typically lower repayment rates and high losses due to default.

The experiment sought to figure out best way to structure a subsidised price plan to ensure greater affordability over time for a low income customer.  The experiment also aimed to find out best way to pass along a 20% subsidy — should  the reduction of daily rate by 20%, or reduce the length of the payment plan by 20%?  The pilot experiment maintained the deposit, as lowering the deposit below the current level has had a historically adverse impact on repayment, and raising the deposit further could put the product out of reach of lower income customers.

The experiment  was run with 2 treatment and 2 control groups, each with 5,000 new customers from a random nationwide sample and within a sales period that is historically representative of overall repayment trends. 

Observations.

1.Overall Fewer Days in the Dark for the subsidised group.  At 60 days in, customers with the price subsidy had a higher overall average number of days of access to light (in other words, better repayment and fewer days “locked” from accessing their Solar Home Systems due to nonpayment), compared to those in the non subsidised group.

  • Those with the normal price plan were on average locked out close to 5 days (roughly 8% of the time)
  • Those with the subsidized price plan were on average locked out fewer than 4 days (under 7% of the time)

Across the payment term, those with subsidised pricing were in the dark for up to 18 days fewer than those without subsidies, and had a lower likelihood of default (and therefore higher likelihood of owning the product outright).

2.Particularly Better Results for Lower income Groups.  This difference is especially significant for the lowest income customers, which are lighting considerably more often with the subsidized pricing. At 60 days into the loan, the lowest income PPI group  had – on average – been locked slightly over 1 day, around 2% of the time (The PPI score of these customers correlates to 88% of these customers living on less than $3.10/day and 55% on less than $1.90 per day) compared to almost 5 days (around 8% of the time) for their PPI counterparts with non-subsidized prices.

3.Positive trends for sustainability / viability of the customer segment.  The  test of a lower daily rate showed indications of financial viability:

  • Collection rates (amounts paid vs. amounts due as per the financial agreement) are significantly higher for subsidized customers vs. non-subsidized customers
  • Percentage locked was significantly lower for subsidized customers vs. non-subsidized customers.
  • Fewer customers in the treatment group were late to their first payment
  •  Implied probability of default was significantly lower for subsidized customers vs. non-subsidized customers.

4.Indications of changes to customer demographics.  Several demographic changes have been noted based on follow-on customer surveys (though not all are statistically significant):

  •  Lower income levels indicated by PPI scores for the treatment group
  •  Change in distribution of customers towards generally lower income regions of Uganda (North and East)
  • Slightly higher household sizes overall for customers with the price subsidy, pointing to a higher overall impact

Conclusion. 

Across the board, the experiment deduce that subsidised customers light more often at 60 days into their loan. The difference is biggest for the lowest income PPI group at 4 less days locked, followed by the two highest groups with 2 days less locked (60-64) and (65-69). 

The Biden Administration working with a global network of change and key industry stakeholders — especially so governments and investors will benefit from interrogating this further and taking action. Importantly, the foregoing shows that smart subsidies are a linchpin to reach more people with clean energy services. By facilitating scale, smart subsidies not only makes off-grid markets smooth and sailable, but also sustainable. Universal energy access is likely – and mostly so, dependent on bold actions. Smart subsidies provide a major pathway for governments to quickly deliver on Sustainable Development goal 7, and for Off-grid clean energy companies to accomplish the ultimate triple bottom line of People, Profit and Planet.

By Morrison Rwakakamba, 
Chief Executive Officer at Agency for Transformation, a think tank based in Kampala


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