Powering the poorest of the poor through end-user subsidy schemes (Course blog)

With mature technologies and validated business models bringing down the technological cost, off-grid solar power is expected to bring the least-cost energy access solution to 55% of the 733 million people without access to electricity. Yet, research has shown that given the current off-grid power options, over 230 million people would still be too poor to gain basic electricity access. Market-based consumer financing models, such as the Pay-as-you-go (PAYG) model, is designed to allow low-income populations with no credit record or little savings to access energy. This is made possible by lowering the up-front cost of solar energy kits through an initial down payment and subsequent recurrent installments.

However, even with PAYGo, there are at least 100 million households that cannot afford a Tier 1 off-grid solar system. PAYGo is good, but still not enough. When aimed at low-income households, PAYG models are often facing a group of customers with insufficient knowledge about loans, credits and legal liabilities. In a pure market environment where commercial loans take place instead of grants or soft loans, firms have a higher pressure upon sales and commercial growth, leading to a shift from a social drive to commercially oriented business. Given the additional cost and uncertainty from low-income customers, the focus of firms is prone to move towards customers with higher energy demand and credibility, mainly in the urban to sub-urban areas. In practice, such options are still not widely available for low-access areas, mainly in the rural communities.

The private sector cannot solve this problem alone. To understand this issue, we can separate the customer segments by their accessibility to the market. Private sector is efficient in accessing customers that are geologically and financially available to the commercial market. For customers in remote areas, there would be additional cost to reach them. For those who cannot pay, PAYGo offers a solution to dilute the payment into a long-term package, yet remain high for the poorest. To fully bridge the affordability gap, end-user subsidies (Or sometimes called demand-side subsidies) are needed to reduce the energy cost for low-income households.

End-user subsidies give the money for energy access to households who cannot afford products or services with their current income directly or indirectly. The design of an end-user subsidy scheme is significantly context-specific. The fundamental logic is to determine the electrification goal for a certain group of households, identify the affordability gap, and seek a way to fill it. The fundamental component of a scheme includes (i) a product, (ii) a level of targeting, (iii) private sectors to partner with, (iv) a subsidy level, (v) a verification system, (vi) a delivery channel, (vii) a subsidy administration system, and (viii) an exit-strategy.

While other components can be very context-specific, end-user subsidy schemes can be categorized based on delivery channel. According to the direct receiver, end-user subsidies can be either delivered to private companies or to the households. When subjected to the producers, the subsidy is reflected on the end-user prices, which creates a quasi-market condition that relieves administration burdens. However, households may not be aware of the fact that prices are subsidized. This is usually called result-based financing (RBF) for end-user prices. On the other hand, subsidy can be aligned directly to the poor households though cash transfer or voucher transfer. While this raises the administration cost, it may boost the awareness of poor households on the subsidy program and the overall electrification goal. For direct delivery, the channel should be carefully designed to restrict subsidy usage to energy access. This can be achieved either through providing compensations after payment, or through coupons that can be inclusively used by project targets.

Essentially, energy access is reached when supply meets demand. Both under-provision and low willingness to pay caused by imposing an end-user subsidy can lead to market distortion that precedes universal electricity access. When poorly communicated, an end-user subsidy scheme may erroneously signal the consumers who could have been accessed through commercial market that they are paying at an unfair price. For producers, a clear vision of business strategy cannot be formed under the uncertainty of exit policies. And when the market is segmented, there is a risk of leakage that energy products can be cross-sold to commercially available consumers by the subsidized targets.

Despite the fact that current experience of end-user subsidy is largely limited to date, countries are taking bolder steps to implement existing knowledge in to project adaptation. A 20 million Euro end-user subsidy project coordinated by GIZ and RVO aims to provide direct energy access for up to 1 million poorest people in the Sub-Saharan Africa by 2025, and with a close cooperation with knowledge hubs in end-user subsidy, the program strictly follows the lessons learnt in previous projects: A careful design, development and implementation in accordance with the local context to minimize market distortion.

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