We know that subsidies and cross-subsidies will be required to achieve SDG7: Universal access to clean and affordable energy. Some of the arguments for this conclusion are presented in a recent paper that I co-authored with Tearfund. Ultimately, a purely private-sector led approach will not deliver universal access. But without the involvement of the private sector, and the innovation driven by that involvement, the progress that has been made in recent years would not have happened.
How can we allocate subsidies efficiently, without undermining private sector innovation or distorting the market?
Introducing the Energy Access Accelerator
One option might be to introduce what we might refer to as “Energy Access Accelerators”. The accelerator itself is a regional concession, with a mandate to achieve universal access. It receives funds from a variety of sources: maybe a surcharge on energy bills (as exists in Ghana), direct funding from Government, and funding from donors. The accelerator is then responsible for allocating these funds as it sees fit to maximise its impact on catalysing improved access to energy.
Having a regional focus, the accelerator understands the local market dynamic better than central planning authorities. This feeds into how it allocated funds, for example between different energy access technologies and different business models. It might also allocate funds to capacity building, education, or roadshows if that is what is needed to achieve the outcomes that it is committed to. At the same time, where the private sector (or utility) is successfully delivering new connections the accelerator would be incentivised to stay out of the way. Subsidies would be targeted towards achieving universal access in areas where the private sector alone is not delivering results.
The accelerator is structured as a PPP and would be procured competitively. Once appointed the accelerator would be free to determine the most appropriate allocation of resources, but a large portion of its revenues would be at risk, depending on its performance against a set of output measures, which would be bid parameters in procuring the accelerator.
Funding energy access for hard-to-reach areas
The primary job of the accelerator is essentially to target subsidies to address gaps between the market price of energy access solutions and affordability in individual communities. Subsidies would need to be administered in a way that minimised distortion of the market (e.g. through an account credit, so that energy consumers still have visibility of the full value of the energy services they procure).
Over time, as the market accelerates and demand increases, affordability will increase and prices will decline, reducing the amount of subsidy required. The subsidy requirement can increasingly be funded by energy users as the charging base increases. This in turn will reduce the reliance on funding from central government and donors.
The energy access accelerator model provides a framework that can be used to catalyse increased access to energy and do this in a coordinated way, without services providers themselves being directly subject to complex and burdensome economic regulation.