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01.05.2019, IISD

Switching subsidies from kerosene to solar - lessons from India

India has almost reached the historic goal of universal electrification. But the challenge of supplying 24x7 Power for All remains. Millions of households still rely on kerosene for lighting, including those who cannot afford electricity or with unreliable electricity supplies.

Delivering uninterrupted and high-quality power to every household will take time, given the challenges of low and dispersed electricity demand in rural areas and affordability for the poorest. Allowing continued reliance on kerosene is not a socially or economically responsible option. Kerosene can lead to levels of particulate matter and other pollutants that exceed World Health Organization guidelines. It gives low levels of light, limiting education and income-generating opportunities. And the subsidy cost of kerosene to government can soar when international oil prices rise, as occurred in 2018. Finally, kerosene was responsible for around a quarter of all energy-related residential greenhouse gas emissions in 2013.

Shifting subsidies from kerosene to off-grid solar photovoltaic products is one way to fund the energy transition for marginalized households. Solar products such as lanterns, home systems and mini-grids are currently providing economical connections and backup power in remote regions. However, most households still rely on kerosene as their primary source of lighting (if unelectrified) or as a coping strategy during outages. But this is not by preference. Surveys indicate a strong preference for off-grid solar compared to kerosene, even if this means a reduction in the kerosene subsidy.

Kerosene is used for more than lighting, but this is not a reason to maintain the subsidy. Census data from 2011 indicates that kerosene was used for cooking in 1 per cent of rural households and 11 per cent of urban households. These numbers are likely to have declined significantly with the expansion of clean cooking programs. Kerosene is also used to ignite biomass for cooking, and an estimated 45 per cent is diverted to the black market for use in irrigation or transport. Existing programs for clean cooking and solar-powered pumps should be augmented rather than continuing to incentivize kerosene, a second-best fuel in all cases.

Making the switch to solar would significantly reduce fiscal and household expenditure. A range of off-grid solar products is now cheaper than kerosene over the lifespan of the technology. Table ES1 shows that, once the upfront costs of solar products are spread over two years and government subsidies for kerosene are taken into account, solar products result in savings compared to kerosene lamps. The net cost of the swap is the amount the government could save by switching support to these technologies. In addition, the government would save the losses from fuel diversion and budget blowouts caused by volatile oil prices.

Due to their high upfront cost, low-income households need assistance to purchase off-grid solar products. This could be achieved in three ways:

  1. Subsidy programs for households to help them buy solar products.
  2. Subsidy programs for manufacturers to reduce the final price of products for eligible consumers.
  3. Subsidy programs for banks and microfinance institutions to make borrowing for solar products more affordable.

This report presents the pros and cons of these options, along with a broad implementation plan. It is not intended to be prescriptive but rather suggests several viable pathways. Information and policy options are presented for each subsidy pathway along with options for funding and administrative arrangements, identifying and targeting beneficiaries and determining eligible products.

The choice of pathway will depend on government preferences and further consultation among decision makers, relevant national departments, state governments, businesses and consumers. The end goal for each pathway is the same: to assist India’s transition to clean and reliable power for all.

 

Excerpt of: Policy Approaches for a Kerosene to Solar Subsidy Swap in India (IISD, 2019)

 


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