Public Funding is Needed to Maximize the Impact of Off-Grid Solar- Learn How to Select the Right Instrument(s) for Success

By Charlie Miller

Off-grid solar (OGS) has already enabled hundreds of millions of people around the globe to meet their energy needs and has a key role to play in the achievement of Sustainable Development Goal 7 (SDG 7): universal access to affordable, reliable, sustainable, and modern energy for all by 2030. OGS represents the fastest and most cost-effective way to reach a significant proportion of the population lacking access, particularly lower-income households, and more remote communities. Still, on current trends, 230 million people are projected to be left behind in the drive towards SDG 7, as they simply can’t afford, or can’t access, on or off-grid energy options. Further interventions are needed to ensure that the poorest and most vulnerable aren’t left behind in the drive towards SDG7.

While the sector has grown rapidly, helping governments to achieve their energy access objectives, it is yet to achieve its full potential. Governments can use public funding to leverage private sector capacity and co-investment to build sustainable markets at scale and at speed, whilst promoting quality and protecting consumers. Well-designed public funding mechanisms – such as upfront grants, results-based financing, tax exemptions, credit lines, risk mitigation instruments, demand-side subsidies, and public procurement – are needed to deliver household energy access through OGS, to help close the gap. By leveraging pay-as-you-go (PAYGo) technologies, which have already enabled more than 25million end-users to pay for products over time, governments and companies can help overcome affordability barriers and enable end-users to access higher levels of energy service.

Lighting Global’s latest report, Designing Public Funding Mechanisms in the Off-Grid Solar Sector, provides a global overview of how public funding has been used in the sector to date, and identifies key lessons learnt. It considers the advantages and disadvantages of a range of funding mechanisms, the conditions in which they are likely to be suitable, as well as how they can be combined. A holistic approach that combines more than one public funding mechanism with other interventions, such as capacity building for government, private sector or financial sector stakeholders, is usually needed. For example, if the objective is to support nascent markets or expand into underserved areas, a combination of upfront grants and results-based financing can work well. If companies lack access to working capital financing, credit lines and risk mitigation instruments can be considered. In settings where risks are high and affordability is low, the provision of supply-side and demand-side support in parallel can work well. In situations where market-based solutions are not viable in the long-term, a public procurement approach might be considered.

Deciding which public funding mechanisms to use, and how best to design them, can be challenging. Developing an in-depth understanding of the current state of the market is a prerequisite. Multi-tier framework surveys and market assessments looking at a market’s financing needs and its broader context can build a strong foundation. Stakeholder mapping and capacity assessments can also help to ensure the effectiveness of the selected implementing agencies.

Whilst there is no ‘one-size-fits-all’ public funding solution, the following key principles can help to ensure success:

  • Flexibility: Off-grid solar markets are complex, dynamic, and constantly evolving. Public funding mechanisms need to be flexible so that they can adapt to changes in the market, and rapidly apply lessons learned from implementation experience.
  • Targeting: Targeting is needed to ensure public funding is used as efficiently as possible in pursuit of energy access objectives. It can also help to achieve inclusivity and ensure no-one is left behind. Digital platforms can help with the segmentation of end users according to location, income levels, and other metrics.
  • Proportionality: The level of public funding should be aligned with the costs and risks that companies will face, to ensure sufficient company participation in a public funding scheme without compromising efficiency in the use of public funds.
  • Efficient fund management using digital technology: Disbursement delays pose a major challenge for capital-constrained companies, preventing them from growing and in some cases leading to disruptive stock shortages. Automation and digitalization of fund management systems and processes can enhance management information and transparency, while streamlining verification and disbursement, reducing transaction costs and risks of delay.
  • Verification: Verification of results is essential to managing fiduciary risks, ensuring programs achieve their objectives and public funding is being used appropriately.
  • Sustainability: All projects need to carefully consider what will happen when they come to an end. It may be possible to exit entirely, leaving behind a sustainable, commercially funded market that will continue to sell, maintain, and replace systems as needed. In non-commercial settings, long-term sources of public funding need to be found to ensure continued delivery of energy services through OGS.

With just eight years to go until 2030, we need to redouble our efforts to work together to design effective public funding mechanisms for the OGS sector, delivering household energy access at scale and at speed. We hope this report helps governments, development partners and other stakeholders to consider which public funding mechanisms are most likely to be effective in their context, and how best to design them.

Read the report

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