Subsidies

Normally subsidies would not be necessary in a perfect world. There is a lot of momentum to not subsidize infrastructure expansion but make this the responsibility of the private sector, and let it be the outcome of market development. However, to realize this in the presence of prevailing market failures, non conducive policy frameworks and lack of supportive concessional financing, and generally low disposable incomes for the target population, much more capacity development and institutional reforms are required than is realistically possible. It is nearly impossible to address all these shortcomings simultaneously and expect markets to take care of public service delivery. Hence, progress and achievements are greatly facilitated when subsidies can be used to provide smart incentives.

Introduction

Indeed, subsidies were considered taboo by the international development community for a long time, but momentum is slowly gaining in favour of newly applying limited subsidies. Such subsidies should be designed to stimulate and initiate markets, avoid supporting the costs of operation and/or consumption in the long-run, and have a credible and transparent exit strategy. EnDev incorporated subsidies as an efficient and transparent mechanism to accelerate access to modern energy in rural and peri-urban areas.

We should not forget that the infrastructure in industrialized countries was built with a high level of subsidies and public support! Electricity has been around for more than 100 years now, but the bulk of the SSA population still does not have access and remains in the dark. This in itself could be sufficient reason to develop an emergency program to correct this and apply subsidies accordingly.

Sometimes pure logic or economic analysis fails to indicate that subsidies should be awarded after all: modern technologies are often cheaper in terms of life cycle costs / levelized energy costs compared to prevailing traditional technologies and services; data clearly shows that 4-7 month payback times exist for investing in modern lighting services. Yet, people are not investing on a large scale as could be expected. An explanation is that poor households already spend one third of their income on traditional energy like candles, kerosene and fuel wood and have no means to invest in modern technology, however urgently they are willing to do so. Subsidies really do make a difference, for households to invest in the modern technology and for the private sector to develop the infrastructure to deliver such technology. It is important to face and accept the basic trade-off: speed vs. sustainability. Access is long overdue and the focus should be on realizing this first, but in a sustainable manner and using minimum levels of subsidy.

It helps to make the subsidy support transparent; in most countries today, it is impossible to indicate the contribution of subsidies in the supply of grid electricity. Most likely these subsidies are huge, compounded throughout the supply chain: the generation capacity is subsidized, the fuel is subsidized or detaxed, the expansion of the transmission and distribution network is subsidized, connection fees and tariffs are subsidized, etc. Revenues from consumers do not cover the full costs of generation, transmission, distribution and bill collection.

In Rwanda[1] the electricity Roll-out program intends to connect 250,000 new customers over the next few years and applies a beneficiary contribution of less than 10% of the real cost of connection. It is not phrased as a subsidy, but effectively it is; imagine what could have been done with this amount of money in support of finding modern energy solutions for all rural households! In Senegal[2] several concessions have been awarded for increasing access to electricity; the average subsidy for a new connection in concession areas is about $350; alternatively, one could hand out for 5-7 free PV lanterns for the same amount.

Only a transparent cost and price structure lays the basis for continued discussion and optimization of the support given, the more so since subsidies always remain the outcome of a political process. Although this process cannot or should not be stopped, the subsidies it awards should be made transparent so that beneficiaries and non-beneficiaries alike understand where the support went.

Source: Robert vd Plas, Florian Ziegler in "EnDev Discussion Paper April 2010: Electricity Access for All - Illussions and Solutions"

[1] Lighting Africa Country Study (work in progress)

[2] Lighting Africa Country Study (work in progress)

Euro symbol.pngSubsidies Wiki-Articles Overview

New study on energy access subsidies conducted by EnDev and SV PPI available. Link to abstract, download and discussion group. EnDev subsidies Overview Detailed article on Subsidies for Solar Home Systems in various countries Mirco Gaul's (SiNERGi) study on Subsidy schemes for the dissemination of improved stoves gives a brief overview of the current state of approaches and strategies for the promotion of improved stoves as implemented by EnDev projects in Bolivia, Burkina Faso, Ethiopia and Mali paper by Kenneth P. Thomas: Assessing Sustainable Development Impacts of Investment Incentives: A Checklist, IISD, 2009

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