Subsidy: A catalyst for universal electrification

The need for subsidies in universal electrification

Almost a billion people in the world are without access to electricity. The UN Sustainable Development Goal 7 aims to ensure access to affordable, reliable, sustainable and modern energy for all by 2030. Achieving universal electrification will happen through either main grid extension or off-grid energy solutions to reach the unserved population. Nearly 80% of those without access to electricity are in rural areas. 

The International Energy Agency estimates that 140 million of the projected 315 million rural Africans who will gain access to electricity by 2040 will be served by mini-grids and 80 million through off-grid systems. Therefore, rural electrification has a major role to play in universal electrification. Nevertheless, it is necessary to know:

  1. Rural dwellers have low-income and low-purchasing power when compared to urban areas.
  2. Rural electrification has peculiar challenges in terms of finance and operation.

Although the cost of connection in rural electrification is lesser than the connection to the main grid, the unpredictable consumption pattern of rural dwellers makes it difficult to attract investment for rural electrification. This creates the need for subsidies.

The rationale for energy subsidies is to promote growth within the industry and incentivize developers to develop projects in less attractive areas. While this will help to bridge some of the viability gaps, it will also protect consumers or end-users from high costs of energy that may be charged by project developers.

Subsidies are implemented worldwide, including on the African continent. The global fossil fuel industry is subsidized to the tune of US$5.3 trillion (6.5% of global GDP) every year. But there are uprisings over the need for subsidies in rural electrification. Why should that be?  If high and moderate-income earners in served and underserved areas can receive energy subsidies, what makes the unserved off-grid population less deserving? 

The technical report, Mini-Grids for Half a Billion People indicates that many national utilities in Africa receive implicit subsidies that are more than 40 percent of their connection costs. With fuel subsidies, the richest 20 percent of households capture, on average, over six times more than the poorest 20 percent. In addition, more than 83 percent of the total benefits of gasoline subsidies are accrued to the richest 40 percent of households. In the end, there is a case of poorly targeted subsidies. 

Not providing rural electrification subsidies will, in turn, mean rural dwellers would bear full financial responsibility for their power consumption. Dwellers may not be able to sustain this cost thereby making the off-grid solution not financially viable. 

In 1972, only about ten per cent of the population outside Bangkok city had access to electricity. After adopting the National Plan for Thailand Accelerated Rural Electrification in 1973 and implementing tariff cross-subsidies and subsidized loans, at least 99% of the villages in Thailand are electrified after thirty years.  

In 2010, a World Bank report, Addressing the Electricity Access Gap, summarized the need for subsidies throughout the history of electrification. “Although 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,”. 

Like Damilola Ogunbiyi, Former MD/CEO of Rural Electrification Agency, Nigeria & CEO and Special Representative of the UN Secretary-General for Sustainable Energy for All and Co-Chair of UN-Energy) said

“Subsidy is NOT a bad word. The problem is how you effect subsidy,(…). It is the transparency brought to the entire process that is important”. 

Implementing subsidies is not a one-size-fits-all business. It may be demand-side or supply-side subsidies. It may even be tariff cross-subsidies. But the need for subsidies to accelerate universal electrification cannot be shoved aside. With effective implementation of subsidies, the industry will scale.