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What’s the Problem With Subsidizing Private-Sector Rural Electrification?

We’re not quite sure when this idea became controversial. But it did.

The United Nations' Sustainable Development Goal 7 calls for universal electrification by 2030. We are going to start this article by saying something controversial about it.

Here we go.

Achieving universal electrification requires subsidy.

We’re not quite sure when this became controversial. But it did. And the history of electrification shows it must have been very recently.

It wasn’t controversial in 1935 when President Roosevelt implemented the world’s first rural electrification program, spending roughly 0.3 percent of U.S. GDP annually — or $18 billion in 2018 dollars — on government-subsidized loans for rural electrification. Within two decades, the proportion of electrified farms in the U.S. increased from 10 percent to over 90 percent.

It wasn’t controversial in 1973 when the government of Thailand adopted its National Plan for Thai Accelerated Rural Electrification, establishing an agency to deal with rural electrification and implementing a tariff subsidy that guaranteed the financial viability of the plan. In 1972, only around 10 percent of people living outside the Bangkok metropolitan area had access to electricity. Thirty years later, more than 99 percent of Thailand's villages had electricity service.

It wasn’t controversial in 2001, when the government of South Africa decided to fund the entire capital cost of the electrification program entirely from the tax base through its National Electrification Fund. Rural electrification rates have risen from 47 percent in 2001 to 71 percent to 2014.

And it wasn’t controversial in 2010 when a World Bank report, Addressing the Electricity Access Gap, summarized the need for subsidies throughout the history of electrification. “[A]lthough universal access makes sense from economic and equity perspectives…the financial viability of electrification for those without access usually requires subsidies to cover part of its capital and/or operating costs," it states.

Why is the World Bank right in saying that universal electrification requires subsidy? Because universal electrification requires rural electrification. And rural electrification implies two things: 1) remote, spread-out customers with higher costs to connect, and 2) rural households and businesses with lower incomes than their counterparts in cities. We couldn’t put it better than this 1926 U.S. Congress research report: “Chief among the financial obstacles are the farmer’s small cash income, coupled with the large unit investment required in distribution systems to serve only a few farms per mile of line."

So what is controversial about the subsidization of electrification? As we’ve previously established, we know we can electrify Africa most cost-effectively through the deployment of new and cost-effective off-grid technology such as mini-grids and solar home systems. So perhaps the real controversy is the subsidization of new forms of rural electrification.

 

Off-grid electrification?

Let’s add to our opening statement.

Achieving universal electrification requires subsidy, including off-grid electrification.

Is this what is controversial? The addition of "off-grid"?

It’s not controversial in Kenya, where public utility Kenya Power is one of the largest mini-grid operators in Africa, with a portfolio of 19 mini-grids totaling 21 megawatts of generating capacity. These mini-grids provide much-needed power to Kenyans living too far from the grid to be cost-effectively connected through grid extension. The capital cost of the mini-grids was 100 percent subsidized by the government of Kenya, and the cost of fuel used in power generation is fully transferred to all Kenya Power customers through the Fuel Cost Adjustment, which is in practice a cross-subsidy mechanism.

Again, the World Bank report finds this to be uncontroversially true across different markets and throughout history, stating, “Like grid electrification programs, off-grid programs typically require subsidies."

So, we are left once again with the question of what could possibly be controversial about the subsidization of electrification. In past articles we’ve argued that electrification could be accelerated by greater involvement from the private sector. Perhaps this is where the controversy lies.

 

Involvement from the private sector?

Let’s add to our opening statement again.

Achieving universal electrification requires subsidy, including off-grid electrification delivered by the private sector.

Is this where the controversy lies? In the contention that the private sector requires subsidy?

Let’s look at the most successful privately run mini-grid sector in the world: Cambodia. Cambodia has more than 250 formerly isolated private mini-grids that are now connected to the national grid as small power distributors. These private mini-grids provide power to more than 4 million people, around 30 percent of the total population. They charge a regulated uniform fee to their customers, in return for an ongoing operational subsidy. The subsidy, calculated annually by the regulator, is designed to close the gap between the mandated standardized retail rates and each project’s actual costs.

And again, the World Bank 2010 report doesn’t find this controversial, either. It notes that “countries with private distribution companies have been able to address their rural electrification needs…[but] this has required creative subsidy programs… to encourage private companies to serve rural areas.”

So what happened between 2010 and today? Why has "subsidy" become a controversial word for an off-grid company in Africa to use?

 

Victim of its own promise

Ironically, it's because private-sector-led off-grid electrification is a victim of its own promise. Cheaper solar, storage and appliances, combined with increased connectivity and mobile money, have driven a radical transformation in the economics of delivering energy to remote rural customers.

Many believe this transformation alone is enough to eliminate the need for subsidies to achieve rural electrification. Unfortunately, based on the numbers, they are wrong. It’s not — or not yet.

It is true that achieving universal electrification in Africa is going to require much less subsidization. It’s also true that the amount of subsidies required will further decline as off-grid technology costs decrease with scale. But today, subsidies are required. Nobody is delivering rural electrification at scale without it. Solar home system companies such as M-Kopa Solar, Mobisol, Bboxx and Fenix have had incredible success in delivering energy access through standalone solar systems. And they will continue to act as trailblazers, demonstrating how effective the private sector can be in helping achieve universal electrification.

But the reality is that the majority of their customers are not the poorest and hardest-to-reach consumers. Payment plans for systems that support a basic set of appliances like lights, TVs and fridges are typically over $1 a day. The World Bank defines affordable energy expenditure as making up less than 5 percent of household income. Without subsidies, it will be a long time until the 437 million people in Africa who earn less than $1.90 a day can afford lights, TV and a fridge at that price.

Today, no long-term, fully integrated structural subsidy scheme exists to support the private sector in reaching the majority of the people living off-grid in Africa — the rural poor. To achieve the U.N.'s Sustainable Development Goal 7, this must change. We must make efficient, results-based subsidies available to private off-grid companies to connect the rural poor. The amount of public funding required to deliver universal electrification may be lower than ever before, and that need can be reduced even further. But right now, as always, rural electrification requires subsidy.

 

Republished with permission from Greentech Media. 

 

Source: https://www.greentechmedia.com/articles/read/subsidizing-private-sector-rural-electrification#gs.NEPg9lIT