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www.tearfund.org/action
October 2020
Designing sustainable
subsidies to accelerate
universal energy access

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Context: progress on energy access
In 2030…
Under business-as-usual we won’t meet SDG 7
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620m without access to
electricity
2.2bn without access to
clean cooking
Covid-19 crisis increases the challenge:
• Link to respiratory illnesses
• Access is an enabler of healthcare
• Operating and cashflow challenges resulting from lockdowns and other measures

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Barriers to accelerating progress
When designing subsidies, we need to be clear about what problem we are trying to solve…
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Cost of service and affordability will be persistent barriers to making progress on energy access
Higher cost of service in hard to reach areas
• Higher capex
• Higher ongoing operating costs
• Not unique to off-grid, to the electricity sector, or to
developing markets
Affordability gaps
• Higher cost of service exacerbated by lower ability
to pay
• Gap should decline as costs decline and ability to
pay rises
• But some affordability gaps will still persist
• These are challenges that will persist well into the future, as demonstrated by developed markets.
• Should we be thinking about this more as a market design challenge, rather that one of subsidy design?
• What is the target model for 2025 / 30 / 35?

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Progress on subsidies
Subsidies have attracted increased attention since
our first paper on the topic in 2018.
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In recent years there has been increasing recognition of the role of carefully designed subsidies
We reviewed a wide range of subsidy schemes,
covering:
• On-grid and off-grid
• Electricity and clean cooking
• Different geographies
• Countries at different stages of development
The aim was to understand how we might lay the
foundations for a sustainable market that
facilitates achieving SDG 7.

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Subsidy (or market) design
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There are lots of decisions to make in designing a subsidy…it’s complicated!
Targeting
Funding source
Technological scope
Inputs vs. outputs
Geographical scope
Immediate beneficiary
Exclusivity
Allocation mechanism

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Results from previous schemes
• Subsidies and cross-subsidies have been used widely
to achieve desired energy sector outcomes
• Subsidy schemes for decentralised technologies have –
to date – had mixed results
• Schemes targeting the last mile have often been time-
limited, aligning with donor programmes
• A lack of foresight in addressing long-term
maintenance requirements has undermined many
schemes
• The sustainability of schemes is often poor if long-term
affordability gaps are not addressed
• Many of current generation of RBF schemes appear to
ignore this experience
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The subsidy schemes we reviewed achieved mixed results
Countries covered in our sample

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• In utility sectors around the world,
hundreds of millions of dollars
are redistributed annually to
address these issues.
• This is inherent in market design.
• These transfers take place in high
income countries, middle income,
and low income countries.
Lessons from elsewhere
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In many countries cost of service and affordability gaps are tackled through market design
However, this model cannot simply be lifted and applied in many countries where the largest energy access gaps
remain. We need to recognise that there are insufficient funds in the ‘system’ to pay for such cross-subsidies.

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A phased approach
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A three-phase approach can be used to transition towards a sustainable market to deliver access

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Policy recommendations
• Implement subsidies that are systemic, standardised, and scalable
• Be clear on what a subsidy is trying to achieve and the expected funding trajectory required to meet that
need
• Don’t reinvent the wheel where there are proven models that work
• Get the enabling environment right; without which, subsidies will not catalyse investment
• Avoid policies that pose a barrier to systemic support schemes
• Focus on outcomes
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The recommendations are for implementing governments, MDBs, and donor governments:

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Further reading and contacts
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Both available on https://learn.tearfund.org
Sue Willsher
Senior Policy Advisor – Climate Change
Sue.Willsher@tearfund.org
Stephen Nash
Energy Sector Advisor
Stephen.Nash@kuungana-advisory.com