Deploy a Grant per Unit Installed on a Consistent Basis

Most, if not all, rural electrification programmes around the world have been funded through subsidies, often cross-subsidies from segments of the population who pay a bit more for electricity than rural inhabitants. The rationale for having to subsidize is quite clear, as World Bank studies have recognized:

This is because rural settlements are among the most expensive to serve by traditional grid extension, often containing the smallest individual loads, and customers are least able to pay - low projected sales and high expected costs make for poor business prospects.11

The same logic applies to the sale of solar in rural areas of emerging markets: selling solar in remote places, where customers are often dispersed and have limited purchasing power, is not intuitively an ideal place for an entrepreneur to earn a return. As we have seen, to sell solar in this environment, entrepreneurs will need to invest in training staff, establishing networks of salespeople and technicians, vehicles, mobile phones, and so on. The only reason significant capital will flow to this sector is if entrepreneurs can show that it is possible to earn a return on investment by doing so. Subsidies need to be designed to fundamentally convince entrepreneurs that there is an attractive opportunity in investing in, developing and remaining in this market.

A grant per unit installed, channelled directly to entrepreneurs, provides an excellent incentive. By improving the margins that a firm can earn on each solar system, this grant not only makes it more attractive for entrepreneurs to enter the rural solar market and develop the market infrastructure more quickly, but it enables them to do so with a better overall profit and cash position; thereby ensuring some degree of financial sustainability. We have seen in the case of Sri Lanka how it provided an incentive for the eventual entry of 14 different firms, all actively selling solar and driving diffusion. Equally, we saw in the case of Bangladesh how it led to the entry of 16 NGOs and firms, which, in addition to selling solar, were driving diffusion even faster by offering in-house finance.

As discussed in Chapter 6, the idea for a grant per unit installed came from within the World Bank when preparing the Indonesia loan. It was not intuitive, because many, not least within the World Bank itself, would have described it as a 'sop' to business. Indeed, we saw, for example, how the IFC was not in favour of disbursing GEF grants directly to entrepreneurs - and this stance is largely why programmes like the PVMTI and SDG did not have the same impact as the World Bank's country-level programmes. But it was not only the correct policy innovation, it was also bold, because it would have faced resistance.

How the grant works is straightforward. It is channelled directly to the firm that invoices the final customer, with no mandates for how much is passed on. It is up to the firm to decide whether to use the grant to reduce the price or to strengthen its margins, but, by and large, over time the grant will get passed on simply because there will be more and more competition in the sector.

In terms of the amount of subsidy that has tended to be deployed under this approach, experience suggests that an effective starting point is roughly 20 per cent of the system price. For instance, under the first World Bank programme in Sri Lanka (the ESD project), firms received a maximum grant of US$120 at a time when the average retail price for a 50-watt system with six lights was US$530 (after the grant). Firms were using the grant partly to reduce the price and partly to improve their margins. Later, as the grant declined, and as costs of some components went up, so the price went up. For instance, under the second World Bank project (RERED), the grant was reduced to US$70 and the retail price of the 50-watt system described above rose to US$650.

However, it is worth taking a minute to consider what happened under the second World Bank project in Sri Lanka, as it shows the dangers of discontinuity in the grant-per-unit-installed policy. Under the second loan, the World Bank mandated that from July 2004, the grant of US$70 would only be available for systems of 40-watts or less. And after 2006, it was envisaged that the grant would only be available for the smallest systems, of 10-20 watts. The rest of the systems would not be given any grant whatsoever.

Table 7.2 Grants based on size of solar system in Sri Lanka

Solar system capacity

Oct 2002-June 2004

July 2004-Dec 2005

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