Electricity access remains a significant global challenge, with only incremental progress made to date towards achieving Sustainable Development Goal 7 (SDG7) – access to affordable, reliable, sustainable and modern energy for all by 2030.

The affordability of electricity plays an important role in determining whether households gain and maintain access to electricity. Closing electricity access gaps therefore requires special attention to supporting affordability.

New research published by Sustainable Energy for All in partnership with Climate Policy Initiative examines this issue in-depth, particularly how subsidies can support affordability. The Role of End-User Subsidies in Closing the Affordability Gap assesses three end-user subsidy programmes – in Ghana, Uganda and Togo – and builds on existing literature regarding the development and implementation of end-user subsidies for solar home systems.

Based on analysis of the three subsidy programmes, the brief outlines a set of attributes key to end-user subsidy design – financing structure; delivery modality and implementers; technology targeted; market targeting mechanism; verification system; and target market – and identifies the various methods available to build each component.

Ghana

The Ghana Energy Development Access Project launched the Improving Rural Energy Access through Solar Home Systems programme in 2010. The programme is widely seen as a success – likely the result of accurately calculating the subsidy thresholds for different regions in the country and targeting those populations that needed the subsidy the most. The programme also demonstrates the benefits of working with reliable third parties; the inclusion of both the Association of Ghana Solar Industries and rural banks were programme strengths.

Uganda

The Energy for Rural Transformation (ERT) Subsidy programme has been implemented jointly by the Ugandan Government and the World Bank since 2002. The programme has suffered from structural challenges, although the lack of transparency around it has made specific identification of these challenges difficult. Given the information publicly available on the programme, it appears likely the programme’s challenges may have been due to a more complicated subsidy value than the Ghana programme and more stringent verification requirements that led to delayed payments. Furthermore, high prices and private companies’ capacity limitations to deliver high-quality products of high quality led to consumer distrust.

Togo

The Togo government launched the CIZO project to enact enabling environment supply-side and demand-side interventions. Various multilateral institutions such as the European Union and African Development Bank have provided financing for the initiative (EUR 10 million and EUR 12 million, respectively). Implementation of the programme has been slow despite the use of digital technology to verify installations and beneficiaries and provide the monthly subsidy payments. The programme is relatively new so drawing conclusions at this stage is challenging, but early indications are that accurately calculating the affordability gap for SHS products could be a key factor in determining the correct subsidy threshold for increased uptake.

Key takeaways from existing subsidy programmes

The assessment of these programmes suggests effectively employing the menu of design attributes available to policymakers is critical to effectively target and verify beneficiaries while also determining the right threshold of the subsidy being provided.

The brief highlights crucial ongoing data and information issues that must be addressed at the national level to effectively design targeted, efficient subsidy programmes. Most notably, the difference between a successful and unsuccessful end-user subsidy programme is heavily influenced by consumer affordability estimates. This is how entities would determine which markets to enter, what would be the required concessionality to crowd in investment for an initiative from the private sector, and which subsidy thresholds for a technology would lead to increased uptake.

Therefore, the brief recommends that researchers advance a modified energy burden threshold for measuring the affordability gap in developing and emerging economies. An energy burden threshold is the percentage of household income spent on energy costs. Spending on energy beyond the defined percentage is called an energy burden. This threshold is used to determine affordability gap calculations at the moment.

This brief argues that the energy burden, which is defined by certain researchers as 6 percent or higher, is probably not accurate in a developing country context and needs revision based on market conditions and the type of technology.  

Policymakers should also invest resources to improve data on several fronts: demographic data to more accurately target subsidies, technology, and access tier data to assess the potential for phases interventions of subsidies, and household consumption data to minimize potential for market distortion.

This blog post is part of a series Sustainable Energy for All (SEforALL) is running throughout March related to our work and partners from the People-Centered Accelerator. The series has been timed to coincide with International Women’s Day on March 8, 2018.

“If energy poverty had a face, it would be of a brown or black woman. And yet, there is a large gap of financing available for women energy entrepreneurs who have faced the problem first-hand. As we celebrate International Women’s Day this month, we must acknowledge that ecosystem support services for women entrepreneurs is critical for achieving energy access objectives under Sustainable Development Goal 7.

Currently, energy access investors have been focused on picking winners – so-called unicorns –that can scale their services to reach millions of customers. However, with 1.06 billion people still lacking access to basic electricity, many of them women living in urban slums and rural areas in Africa and Asia, a combination of unicorns and zebras (typically female-founded businesses that have slower growth, but sustainable returns) is needed to achieve SDG7, which calls for universal access to sustainable energy by 2030.

Regardless of the wealth and advancement of their economies, according to the Mastercard Index of Women Entrepreneurs, countries that have favourable entrepreneurial conditions for Small Medium Enterprises (SMEs) and good governance tend to have more women business owners. The backing of local SME financiers, local intermediaries and providing cheaper debt capital are a few ways to make energy investments more inclusive.

SMEs are the engines that drive an economy’s growth, create jobs, and are conducive for women in the workforce. Furthermore, when women energy entrepreneurs do receive financing, they create innovative approaches to furthering energy access to so-called ‘last mile’ populations, such as tapping into Self Help Groups, Village Loans and Savings Associations, Cooperatives, Community Based Organizations, schools and other institutions.

The lack of access to financing has long been identified as the biggest barrier for achieving SDG7 goals, especially in Least Developed Countries. Much of the capital flowing to renewable energy sectors in these countries is geared towards large-scale, infrastructure projects. Development Finance Institutions (DFIs) are a key stakeholder, filling the gap where the private sector is reluctant to participate.

Gender disparities, however, remain quite clear in terms of access to finance and investment flows. Women-owned businesses in developing countries typically are smaller businesses. Energy businesses popular with women, such as pico solar lantern distribution, retail, and small-scale production in briquettes and cooking stoves, tend to have low revenue and operate with slim margins. They are typically funded by grants rather than investment capital, making it difficult for micro and small businesses to grow. Most Microfinance Institutions have not supported energy entrepreneurs at the scale originally envisioned due to lack of expertise and experience with energy lending.

Tailored incubators and accelerators, such as ENVenture in Uganda, support local energy entrepreneurs by helping to make connections, facilitate introductions, extend networks, and provide mentorship. This type of facility especially supports women energy entrepreneurs in developing countries who typically require more training and financial literacy programs to improve their business growth. The key, however, is to offer both financing and mentorship. Without mentorship, many entrepreneurs become stuck in the difficulties of running a business and may use financing unwisely. Similarly, an entrepreneur who receives mentorship, but has difficulty accessing financing, is a creating a road leading to nowhere. Both are necessary for entrepreneurs to succeed.

Another way that ENVenture is tackling these issues is by partnering with Sustainable Energy for All on its People-Centered Accelerator, a global initiative aimed at advancing gender equality, social inclusion and women’s empowerment in the sustainable energy sector. Unlocking finance and collaborative mentoring are key priorities for the Accelerator, which is especially focused on delivering clean, affordable energy to under-served ‘last-mile’ populations.

Investing in women is not just altruistic; it makes good business sense and will increase access to modern energy. Global investments in women entrepreneurs are already extremely low; investors must not fall into the same pattern when investing in energy access. This is a uniquely gendered market that requires equal participation of women and men for universal energy access goals to truly be achieved.

To find out more about joining the People-Centered Accelerator, or any other partnership opportunity with SEforALL, please email partnerships@SEforALL.org

Read more on the Accelerator here and follow #SDG7AllEqual for the latest.