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Lack of electricity reinforces the poverty trap: Report

Poorest people are paying among the world’s highest prices for energy 

Africa’s poor typically pay higher unit costs for energy than the rich. This is partly because the rich are subsidized, but also because the poor use inefficient energy sources including batteries, candles, and charcoal. If the poor could use more efficient energy sources they could reduce the share of income that they spend on energy and free up resources for other priority areas. It could also reduce the amount of time that women and girls spend collecting firewood and cooking. 

Households across Africa, including very poor households, spend a significant share of their income on energy. Data from 30 countries showed that the average share of household spending directed to energy was 13 per cent. The poorest households typically spend a larger share of their income on energy than richer households. In Uganda, the poorest one-fifth allocated 16 per cent of their income to energy, three times the share of their richest counterparts. 

Women and girls spend a lot of time collecting firewood and cooking with inefficient stoves. Factoring in the costs of this unpaid labour greatly inflates the economic costs that come with Africa’s energy deficits. Estimates by the World Bank put the losses for 2010 at US$38 billion or 3 per cent of GDP. 

Denied access to electricity, households are forced to turn to other sources of energy. One survey found that rural households were on average spending around US$57 a year (2008 prices) on lighting alone. Kerosene is the most common source of lighting but it is also one of the least efficient. On a unit-of-energy equivalent basis, kerosene is 150 times more expensive than even the least efficient incandescent bulb. 

Some of Africa’s poorest households are bearing the brunt of the losses associated with energy inefficiency. Consider the case of rural Ethiopia, where more than 85 per cent of households rely on fuel-based sources for light, principally kerosene supplemented by dry-cell batteries. On average, these households spend US$2 a month to secure three hours lighting a day. Scaled up to the national level, total annual spending based on retail prices is around US$331 million. Halving these costs would release funds for investment in education, health and other priorities. 

 

Grid is not the solution, but it subsidized for the rich

Most poor households cannot afford access to the grid. The region’s utilities charge connection fees relative to household income that are among the highest in the world. Charges range from over US$50 in Ethiopia to US$200 in Uganda and US$300-400 in Tanzania and Kenya. Moreover, the connection fee does not take into account either the additional associated charges such as value-added tax (VAT), security deposits and inspection fees or the cost-escalation associated with distance from grid connection points.  In Tanzania, increasing the distance from an existing power-distribution line from less than 30 metres to 70 metres would increase the connection charge from US$297 to US$871. 

Utilities around the world lower the connection barrier by reducing up-front costs through subsidies and low-cost credit, or by incorporating connection costs into tariffs that are paid over the long-term. Unfortunately, the most common practice in Africa is to require up-front payment in full, effectively excluding all but the wealthiest households. This is a “lose-lose” scenario: utilities lose customers and poor households lose access to affordable energy. 

 

Beyond the grid – innovative technologies and business models

New technologies and innovative business models are transforming the potential for off-grid provision. Prices for renewable mini-grid and stand-alone technologies are falling. Meanwhile, progressive investors are developing innovative payment systems to reduce the initial cost of market entry for poor households. Like other regions around the world, Africa is participating in the early stages of an off-grid revolution. 

That revolution is driven by economics. Renewable energy providers are increasingly competitive off-grid, mirroring the situation for on-grid provision. While hydropower, geothermal and most biomass-combustion technologies are mature, with limited potential to reduce costs further, solar and wind generation is likely to see rapid price declines as technological developments in mature emerging markets and developed countries penetrate developing countries. So steep are the prospective price declines that they call into question the current utility-based centralized provision model. Perceptions are still widespread that technologies to generate renewable power are expensive or uncompetitive. Those perceptions are at best outdated and at worst a dangerous fallacy. 

IRENA estimates that almost 26 million households, an estimated 100 million people, are served through off-grid renewable energy systems. Some 20 million of these households are supplied through solar home systems, 5 million through mini-grids based on renewable sources of energy and 0.8 million through small wind turbines. There is growing evidence to suggest that renewables are now competitive with alternatives. Oil-price volatility and the high costs of small-scale diesel-fired electricity generation are exacerbated in remote locations, where transport costs increase the cost of diesel by 10 per cent to 100 per cent compared with prices in major cities. 

Solar lighting illustrates the power of technological change. In 2015 the cost of delivering a single watt of solar power fell to one-quarter of the level in 2008. More efficient light bulbs have contributed to the steep decline in price. The efficiency of storage batteries has also improved. 

Financing for off-grid provision remains limited, but it is rising fast. In 2014, earlystage investments in off-grid solar companies operating in developing countries stood at a record US$63.9 million. This was led by two large deals: US$20 million in debt and grants to Kenya’s M-KOPA Solar and US$23 million in venture funding for Tanzania-based Off-Grid Electric. In the first half of 2015, private-equity firms, venture investors and development banks invested US$42 million in off-grid solar companies working in developing countries, mostly in Africa. 

Innovative business models can lower the cost barriers. One example comes from Kenya. M-KOPA has brought together solar and mobile technology to bring affordable solar technologies to off-grid villages. Customers pay a small deposit for a solar home system that would usually retail for US$200, including a solar panel, three ceiling lights, a radio and charging outlets for mobile phones. The balance is repaid in small instalments on a payas- you-use basis through M-PESA, a widely available mobile payment platform that is used by a third of the population. The payments are cheaper than the equivalent cost of using alternative fuels. After several months, customers own their systems outright. 

Other companies are building on this model. The Groupe Speciale Mobile Association (GSMA association of mobile operators) estimates that 60,000 pay-as-you-go solar devices were sold in Sub-Saharan Africa in 2013. The combination of pre-payment and mobilepayment technologies make revenue collection less costly and more efficient. Mini-grids can also use technical means, such as load limiters, to ensure that household consumption does not rise above a pre-determined maximum. 

Innovative companies have evolved a suite of credit and payment systems for stand-alone systems sold to households. In Kenya, Azuri Technologies has emerged as one of Africa’s most dynamic stand-alone solar providers for low-income households. In Uganda, SolarNow, a company established in 2011, has sold 5,000 off-grid systems. A customized business model allows 80 per cent of the invoice value to be spread over 18 monthly instalments. This arrangement lowers the up-front capital costs that might otherwise exclude poor households. The company has done market projections for rural Uganda and Tanzania and suggests potential markets could be US$630 million and US$975 million respectively. 

One of the most striking examples of off-grid renewable provision comes from Bangladesh. As in much of Africa, Bangladesh’s grid has limited reach and is both inaccessible and unaffordable for millions of households. However, a combination of upward pressure of demand from poor households and downward pressure from public policy reform has enabled many of these households to leapfrog the grid into decentralized solar power. 

Reaching people and communities beyond the grid requires more than innovation on the part of companies. A widespread lack of bank accounts can make it difficult for households to enter into contracts with energy providers. 

Financial exclusion represents another barrier to energy access because it is the poor and particularly those in rural areas that face the greatest difficulty in meeting up-front payment costs. Financing is not the only barrier to off-grid renewable energy provision. Reaching critical mass in market development will require public-private partnerships to provide training and capacity building, foster the growth of local enterprises through business incubation and access to enterprise and consumer financing, quality assurance provisions, and enabling regulations for tariff setting, collection (for example, through the use of mobile payment platforms) and innovative financing mechanisms. 

 

 

Excerpt of: Africa Progress report 2015, edited by Africa Progress Panel, Geneve (Switzerland)

 

Download full report here.