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How end-user subsidies can help achieve universal energy access

GOGLA, the global association for the off-grid solar energy industry, released an off-grid solar discussion paper on Jan. 15 highlighting the possible interventions solar industry players can adopt to increase energy access and affordability.

GOGLA interviewed 25 off-grid solar companies active in the underserved African and South Asian markets, and compiled their views in the paper.

Companies that took part in the interview include those selling multi-light kits, solar lanterns, irrigation systems, home systems, and off-grid appliances. The paper aims to further the discussion on how end-user subsidies (as one of the possible interventions) could fit within the framework of public financing solutions to accelerate energy access.

We’ve compiled a summary report on what the discussion paper entails, adding our own commentary.

Energy Access Interventions

The paper introduces three ways in which industry players can make the off-grid solar products more affordable for the less fortunate in the energy-poor markets and reduce the cost of reaching and servicing these customers.

1. Enabling environment interventions: For example, working closely with government bodies to ensure favorable policies for off-grid solar, e.g., providing tax exemptions and consumer protection using quality standards.

2. Supply-Side Subsidies: Use of grants and financing facilities such as results-based financing (RBF) to lower the cost or risk of reaching customers in the most remote and challenging markets.

3. End User Subsidies: These are ways meant to reduce the cost of off-grid products or services by directly targeting the poorest customers. Voucher schemes and cash-transfers were identified under this category.

Choosing the Right Energy Access Intervention Schemes for the Deserving Markets

Off-grid solar companies should use the right energy access intervention schemes to target energy-poor homes and businesses at scale.

According to the discussion paper, the type of subsidy to be used depends largely on: the target population, the state of the market, and the specific barrier to energy access that the subsidy schemes aim to address.

For industry players to choose the right intervention, the market should be segmented into the following categories:

1. Commercial markets: These are businesses, large and small, using off-grid solar products, e.g., shops that use solar refrigerators.

2. Non-commercial markets: These are customers using off-grid products in their households without a direct economic benefit, e.g., families using solar lanterns to light their homes.

The above market segments can be classified further into two categories:

3. Financially challenged markets: Here, the customers are unable to pay for off-grid solar products.

4. Logistically challenged markets: Businesses or households that are not within the commercial geographical reach fall under this category.

Mixing and matching the categories above gives four market types. The paper further identifies the most suitable tools to use to ensure universal energy access. The table below, as presented in the discussion paper, provides a market segmentation summary.

From the classification above, and according to the discussion paper, supply-side subsidies are effectively used to reach customers in logistically challenged markets. This scheme allows companies to operate in remote areas that are otherwise inaccessible without a subsidy.

Examples highlighted include:

(i) KOSAP scheme in Kenya (a US$150 million results-based financing, or RBF, and debt facility – supported by the World Bank – that targets 14 of the 47 counties in Kenya).

(ii) Beyond the Grid Fund in Zambia (a €20 million multi-year RBF aiming to increase energy access, improve livelihoods and catalyze economic activity in rural and peri-urban areas).

End-user subsidies were recommended in markets that are easily accessible but where the customers cannot afford the off-grid solar products. A combination of supply-side and end-user subsidies was also shown to be more effective for poorer customers in the non-commercial markets.

A case study highlighted in the paper is Rwanda’s Energising Development (EnDev), where supply-side subsidies through an RBF proved to be inefficient, hence the need to introduce an end-user subsidy. This combination has then provided off-grid solar products to 31,000 households that were initially locked out by the one-sided subsidy scheme.

Possible Risks Created by End-User Subsidies

Several companies that took part in the interview pointed out some key concerns that could arise if end-user subsidies were not planned and appropriately administered. One major problem is the potential to introduce market distortions, which, in a worst-case scenario, could slow down or even reverse the efforts put in place to drive universal energy access.
The following two examples were cited as the possible causes of market distortions, as far as end-user subsidies are concerned:

1. A case where the reasons for and benefits of running end-user subsidy schemes are not well communicated to the off-grid population leading to misinformation and change in customer behaviors. A further example is when there’s a risk of existing customers who paid the full price defaulting on off-grid products due to perceived price discrimination.

2. Subsidy scheme that lack a clear exit strategy make it difficult for companies to ensure market sustainability. In other words, it’s a question of whether the customers will continue to embrace the particular off-grid solar solutions once the subsidy is withdrawn.

Mitigating the Market Distortion Risks Caused by End-User Subsidies

To address the possible challenges caused by end-user subsidies, the discussion paper approaches the solutions in four ways:

• Building business certainty and clarity
• Ensuring a holistic and flexible implementation
• Forging a path to stakeholder alignment and engagement
• Working on market sustainability

We’ve further discussed each of the solutions below.

Business Certainty and Clarity

Business clarity and certainty are vital to ensuring that the off-grid solar industry effectively reaches more energy-poor households.

As one c-suite leader from an unidentified company that participated in the interview put it: “The greater clarity and certainty a program can provide, the more chance we have to build effective and sustainable business models that can create impact.”

To help create certainty and clarity, five actions are proposed:

1. Expanding the program size and duration

Several companies suggested that large subsidies in the range of US$50-300 million would allow them to create long-term business models and distribution infrastructure to reach lower-income customer groups. A three-to-five-year duration for running the program was also shown to be more impactful than a one-to-two-year subsidy program.

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2. Working with simple, efficient, and precise administrative processes

The need for an efficient administration is discussed, where companies cited that too much administration and strict rules increases overheads and would make the program unattractive.

3. Ensuring strong fund management and timely disbursements

Delayed disbursements have been cited in the discussion paper, with one company quoting that they often can’t count on such funds. Most companies also stressed the need for a trusted third-party fund manager or implementation partner to be involved in the scheme to ensure funds are administered effectively.

4. Adopting a clear and appropriate approach to targeting

Each of the three techniques: geographic, demographic, and economic status-based targeting was discussed. Two unidentified companies suggested a non-targeted end-user subsidy scheme citing that donors and governments would see maximum ROI in terms of impact per dollar spent.

However, most interviewees were convinced that targeting has worked in the energy sector in different economies; hence it should work for the off-grid solar industry. As one company cited in the paper noted: “Subsidies have been instrumental in scaling energy technologies all over the world. The conversation is not new; it is a tried a tested method in many different areas. As the off-grid solar sector, we can learn from that; we shouldn’t reinvent the wheel.”

5. Creating a simple and streamlined verification process

Digital platforms were identified as low-cost and effective options for tracking and verifying where the subsidies are going and their impact. However, it was noted that some of these technologies are not applicable for use with all products, and this could limit the participation of individual companies.

Holistic and Flexible Implementation

To ensure appropriate and optimal use of public funding, companies recommended the adoption of the following three initiatives:

Evaluation of key market dynamics

Several factors affecting the off-grid solar market should be considered before settling for any end-user subsidy scheme.

The paper highlighted a possible disconnect rising from the two main objectives for deploying end-user subsidy – the need to establish a sustainable market and that of rapidly reaching the poorest customers. As one company stated:

“It can be dangerous to implement an end-user subsidy in markets that are not mature. It can attract companies that are only interested in benefiting from the subsidy, not in creating a sustainable market. I feel that it takes at least five years for a market to get to the point where end-user subsidies make sense.”

Other schemes should be considered alongside end-user subsidies.

Instead of focusing only on end-user subsidy as a way to boost universal energy access, off-grid industry players should pay keen attention to the other intervention schemes to fully address market barriers.

An example is the KOSAP end-user subsidy program, which was all good until the Kenyan government reinstated 16% VAT. The company had to pass the cost of taxation back to the customer — again making the products less affordable.

Having In-build Flexibility in an End-User Subsidy Program

For end-user programs running for several years, the scheme should be agile enough to respond to the changing market conditions.

One company illustrated this with an example of an end-user subsidy scheme that aimed to supply solar fridges, but just before the program launched, the product had already been commoditized, and the whole project was compromised.

Stakeholder Alignment

Off-grid solar companies agreed that to help design favorable subsidy criteria for all the parties involved, the following four measures should be put into place:

Maximize engagement to ensure effective program design

All the stakeholders involved in a subsidy program should work closely to ensure commitment to roles and responsibilities and effectively develop long-term partnerships.

Like the other challenges discussed, one company cited an example of conflicting goals and views among the stakeholders: “Governments have a short-term focus. Ministries often need to show progress in one year, and donors do not fully understand that. We sometimes see that a donor country lead never even met the minster of energy, and the private sector can get stuck in between. We also see that large donors can be quite territorial; they only support schemes they designed themselves, even if they have big flaws. This needs to change.”

Ensure transparency and accountability

Several companies recommended having an independent third-party fund manager to avoid misappropriation of funds or people taking advantage of weak systems for personal gains.

Kenya’s KOSAP scheme was a cited case study where Kenya’s Ministry of Energy contracted SNV, a non-profit based in the Netherlands, to manage the second phase of the program. SNV managed the RBF component but subcontracted SunFunder, a leading fund manager for solar energy investment in Sub Saharan Africa, to oversee the debt fund.
Digital tools cited earlier would also blend in to help increase transparency. For example, they can be used to monitor disbursements and track and show the project’s progress.

Recognizing tension in subsidy design

One company highlighted the need to have a win-win strategy when allocating subsidy schemes to ensure that the smaller companies aren’t sidelined.

“Subsidies are often given to larger companies who don’t need it that much. I understand that we try to maximize impact by giving money to established companies, but in the end, this creates monopolies. It should be possible for smaller and local companies to participate; these schemes are also an opportunity to develop the local economy.”

Clear Communication with Customers

Companies stressed the importance of educating the off-grid population on the importance of subsidy programs to avoid misinformation and change in customer behavior.

Information on eligibility criteria, the available products, and even the program’s duration will ensure that everyone understands the scheme’s objectives and what to expect during and after the subsidy.

Market Sustainability

As highlighted earlier, a solid exit strategy is key to building a sustainable market. Several companies also noted that besides all the great efforts, off-grid solar products sold should be long-lasting and high-quality to build customer trust and ensure sustainability. Another solution is to focus on connections as well as after-sales.

“I feel uncomfortable with just focusing on the connection,” one company representative added. “We also need to focus on after-sales, and make sure customers are happy with their product two, three, four years later.”

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Source: pv magazine