4 Reasons Subsidies Are Not A Dirty Word In Energy Access Efforts
If we want to end energy poverty we must be willing to embrace market based approaches to subsidies and government intervention.
That’s an important and fairly radical shift for many in the energy access community. But it’s one we must make at a time when resources, energy, and attention are rushing to this space from a host of new constituencies and institutions. This moment of international attention will be vanishingly short and the community of passionate advocates working to solve this problem needs to capitalize. Because if we don’t come out the other side of this political moment with lasting support we will have squandered a chance to fundamentally change the lives of over a billion people on this planet.
Here are four reasons why this change must happen:
There is not a single scaled power delivery system on earth that has not been subsidized. The fact is most have been lavishly supported while ‘mature market oriented technologies’ like coal fired power plants feed those systems and fight tooth and nail over any effort to reduce the steady stream of public resources that has been filling their coffers for a century plus. The notion that a nascent industry driven largely by startups with uncertain levels of investment and bankability would deliver on one of the most important development challenges of our time in the world’s poorest, often most politically fragile countries without any public investment is frankly laughable.
It’s also why the industry has been criticized for serving ‘the rich of the poor’ — those living in peri urban areas or the higher rungs of rural society. It’s because that’s what we actually are doing today. By no means are we delivering for the poster child of energy poverty — the rural poor. That’s not to say serving these customers is not important, or that taking a strategic call to start with those who can afford these technologies today and work your way down the pyramid isn’t smart. But we need to be honest about the state of the industry and recognize that if we want to enter new markets, or drive deeper into the markets we are already in, we need to benefit from the same public support all other mature industries enjoy. Indeed, we must benefit at least from the same level of subsidies and support the fuels we seek to displace do (Kerosene, diesel just to mention a few).
Subsidies become more important the further up the energy ladder you go. It is one thing for pay-as-you-go solar home system providers to seek to avoid the market distorting effects of subsidies at all costs. Indeed, their allergic reaction to subsidies is a rational response to the many egregious examples of poorly designed, market destroying, subsidies that have occurred in the home system space over the past few decades. But it’s also true that solar home systems are essentially a consumer good which has a very different set of unit economics and market dynamics that allow companies to thrive absent government support (at least in a limited number of countries).
Mini-grids on the other hand, are still at a nascent stage of development and are a fundamentally different industry– they are public infrastructure. More importantly, they simply don’t have the same set of underlying economics as solar home systems. They absolutely require subsidies and concessional capital that have been the hallmark of rural electrification efforts from US to China and beyond.
This public investment is all the more important to drive productive use and the accompanying GDP growth we all seek in rural areas. The fact is the private sector can never size a minigrid for “future” growth because no financier worth their salt can justify an investment based on mystical revenue growth in year five of a proforma. Only governments can do that — and we need them to.
That’s why advocates need to recognize that a homogenous approach to subsidies that benefits one subset of the space at the expense of another hurts us all. And let us not forget that even solar home system providers would benefit greatly from well designed subsidies that support entry into new markets beyond the handful of countries currently home to the majority of home system deployment to date.
It’s time to embrace ‘market friendly market distortions’ (i.e. subsidies). If you look at the type of support the industry has sought, whether it’s first loss loan guarantees or reduced VAT, the reality is these are subsidies by another name. At the same time, these subsidies also have impacts on markets — they just happen to be the impacts we want to see. It’s time for the industry to proactively push for more of these ‘market-friendly market-distortions’ that develop a pipeline of new companies and projects with steady and predictable funding flows in order to enable a market focused ecosystem to flourish.
Governments can create the mandate and public investment to enable markets do what they do best — efficiently deliver. That does not mean supporting end-user subsidies or donor giveaway programs. But it does mean embracing things like frontier market funds to support pioneer home system companies as they enter challenging new markets, results-based finance for those capable of delivering on energy access goals for previously out of reach populations, and many other yet to be developed innovative forms of support.
We can embrace government intervention without embracing ineptitude and red tape. Increasingly government ministries are taking off-grid and mini-grid approaches to electrification more seriously. Where only a few years ago this industry would have either not been invited or been left out of the room there are now several examples of countries that have explicitly carved out support and mandates for these approaches in national electrification plans. That’s an incredible opening and opportunity to shape the conversation, the nature of support, and the direction of travel for these markets for decades to come. But despite the early signs of this significant shift the industry is still largely missing in action. That’s a huge problem because if you are not helping to set the menu you are on it.
Ultimately, if we are not at the table then others will decide our fate. And when they do they will continue to decide the fate of the billion or so living in the dark and the other billion or so living with intermittent power. Yes, subsidies and government intervention have by and large harmed more than helped this industry in the past. But we are no different than any other sector on earth and we need to roll up our sleeves and work with these institutions to change that. Because billions of people are counting on us and time is running short.