BLOG: Public Funding for Off-Grid Solar
As energy access has risen up the agenda, so has the off-grid solar sector. More and more governments are exploring how public funding can be deployed to achieve energy access through off-grid solar solutions. Countries across Africa and Asia such as Bangladesh, Myanmar, Kenya and Rwanda have launched ambitious, integrated electrification plans targeting universal access by 2030 or before, using a combination of grid extension, mini-grids and off-grid solar. Geospatial mapping and least-cost planning tools have been used to determine the most efficient and cost-effective way to achieve universal access. For nearly all countries with an access deficit, off-grid solar represents the fastest and most cost-effective way to reach a significant proportion of the population.
In many countries, off-grid solar is playing a vital role in providing a basic level of service. For example in Ethiopia, 25% of those with access – around 12 million people – are connected through off-grid solar. These solutions provide backup for unreliable grid connections and access to those unlikely to be served by the grid any time soon. A solar home system capable of delivering a Tier 1 level of service can cost as little as $100, with the costs borne by the end-user over time through pay-as-you-go consumer financing. As a ‘plug & play’ product, it can be quickly distributed and installed by the customer. Grid connections delivering Tier 3-5 access, in contrast, cost governments anywhere from $370 to $1500 or more per connection, take years to complete, and require professional installation. Recent Multi-Tier Framework (MTF) surveys suggest off-grid solutions also help to address equity issues, since they mostly benefit lower income consumers, whilst grid extension mostly benefits those with higher incomes.
Government attitudes towards off-grid solar are changing. Grid infrastructure is highly visible, and the opening of a new power plant or transmission line offers governments a tremendous opportunity to show results. Off-grid solutions in contrast, delivered by the private sector rather than by state-run utilities, can be less visible. Off-grid solar is proving capable of meeting demand at lower cost in rural areas, and of reaching large numbers of people in relatively short timeframes, which is helping to build its credibility. Innovative projects like IDCOL in Bangladesh are creating opportunities for governments to showcase and celebrate off-grid access achievements.
Public funding is needed, both on and off-grid, in order to achieve universal access. On grid, it is widely accepted that public funding is needed to support generation, transmission, distribution, or tariffs. Off-grid in contrast, there is often an expectation that the private sector can achieve electrification on its own. Despite impressive growth and investment, profitability has proven elusive for many companies and overall market growth rates are falling short of the trajectory required to achieve universal access. The IRENA Tracking SDG7 report estimates that, on current trends, as many as 674 million people could remain without access by 2030. Furthermore, affordability may also be more of a barrier than previously thought. MTF surveys suggest that 45% of people in Rwanda, and 41% in Cambodia, would be unwilling to pay full retail price for a Tier 1 solar home system, even with a 24-month financing plan. These findings have led to calls for an increase in public funding for the off-grid solar sector.
A range of public funding mechanisms is available to governments seeking to accelerate the growth of the off-grid solar sector. These mechanisms – their advantages, disadvantages and preconditions for success – will be further explored in a working paper to be published in early 2020.
- Enabling environment interventions such as building consumer awareness, developing quality standards or producing market intelligence set the foundations for off-grid market development, but are insufficient on their own to achieve the required growth rates.
- Tax exemptions are popular with the private sector because they benefit all companies equally, but can be difficult to implement and harder than more targeted support mechanisms for cash-strapped governments to justify.
- Grantmaking is a proven approach in early-stage markets but involves ‘picking winners’ and can distort the market in favor of a handful of larger, more established players.
- Results-based financing, whereby companies receive subsidies based on sales achieved or other milestones, has the advantage that the risk of failure is borne by the company rather than the funder, and is proven to be effective at incentivizing companies to enter hard-to-serve geographical areas. However, it can be relatively expensive, and has limited impact if companies remain working capital constrained.
- Credit Guarantees can enable companies to access finance from local or international investors, but this kind of support often has low visibility, making it difficult for governments to take credit for their role in the companies’ achievements.
- Concessional financing is a relatively low-cost solution that can address major market barriers such as the lack of local currency financing for on-lending to end-users, and the lack of working capital to buy stock. However, governments may struggle with attribution of impact and financing facilities may have low visibility, if concerted efforts are not made to measure and communicate impact.
- Demand side subsidies, which reduce end-user prices,are needed to reach the poorest customers or most remote areas that cannot be reached through more commercial approaches. Whilst likely to be highly visible, these largely untested approaches carry a high risk of market distortion if customers stop paying or decide not to make purchases in the expectation that they will soon receive a system at reduced cost or for free. Strong targeting mechanisms and public awareness activities are needed to ensure people know who is eligible for support and who is not, so that such schemes do not negatively affect consumer behaviour.
Lighting Global recommends that governments first put in place an enabling environment, through building consumer awareness, developing quality standards, and producing market intelligence to monitor trends. A mix of supply side mechanisms can then be deployed to help companies extend their reach. Once the market is being supported to sustainably serve as many people as possible, governments can introduce demand side subsidies to reach the poorest or most remote communities, whilst carefully monitoring and mitigating the risk of market distortion. Through smart deployment of public funding, market growth can be accelerated whilst also ensuring no one gets left behind.
The complete report will be published at www.lightingglobal.org in early 2020. If you would like to be informed when it is released, please drop us a line at firstname.lastname@example.org and we will let you know when it is available.