Barriers to off-grid energy development: Evidence from a comparative survey of private sector energy service providers in Eastern Africa

In light of recent growth and falling costs of solar photovoltaic technology, this paper examines the barriers and opportunities facing off-grid development in Ethiopia, Kenya, Tanzania and Uganda, four countries whose off-grid sectors vary in maturity. We compare and link the perspectives of nearly 200 private companies to the development of the sector in each country, and measure trade-offs among different institutional designs for regulating and supporting off-grid investment. The survey reveals a set of common challenges but also considerable variation within and across countries. Development of the market is constrained by a lack of market information and technical capacity, insufficiently comprehensive regulation, and in specific countries, informal sector competition (Tanzania), the cost of doing business (Ethiopia), poor tariff policy (Tanzania), and lack of funding (Uganda). Moreover, firm responses emphasize the need for several policy supports: subsidy, financing, access to foreign exchange, technical assistance for regulatory matters, and capacity building. A discrete choice experiment clarifies these policy preferences, but reveals trade-offs as well as country differences. Though the off-grid sector is growing in all four countries, many policy and regulatory obstacles remain, and these will continue to challenge achievement of SDG7: Sustainable, modern energy for all.

Introduction
Off-grid energy holds great potential to provide modern energy services, and the myriad benefits they provide, to lower- and middle-income country households located far away from the conventional energy grids [[1], [2], [3]]. The falling costs of solar panels and progress with development of new and more cost-effective battery technologies have made off-grid solutions the preferred least cost technology for electrification in many rural settings [[4], [5], [6]]. Yet many of the same barriers that impede connections to the grid, including lack of affordability for the poor, and low demand for electricity that impedes financial sustainability, etc. [7], also apply to off-grid energy sources [8,9]. Moreover, off-grid technology faces an additional challenge in being largely private sector driven, in a domain where electricity service has typically been provided through public utilities, most of which deliver power well below the cost of production [10]. This leads to challenges related to mobilizing finance for new types of providers and service models. In addition, incumbent utilities possess considerable market power that increases risks for new service delivery models, for example if grid encroachment undermines private investments [11]. The end result is that the off-grid investment that was deemed necessary to meet SDG7 (sustainable, modern energy for all) electrification targets (e.g., in Ref. [1] is falling well short.

In low income countries, the growing literature on the constraints and opportunities for greater off-grid energy development identifies political and institutional dimensions; economic and financial factors; social dimensions; technical and management aspects; technology diffusion; and rural infrastructure as key barriers [6,12,13]. Institutional challenges arise from the typically highly centralized and top-down nature of the power sectors in many countries, and their low human capacity for managing renewables [11,14,15]. This means that traditional utilities are poorly suited to pursuing a decentralized investment strategy, but conversely create opportunities for new private actors. Political prioritization and capacitation of key actors can help to partly address institutional problems, but priorities can change, and skilled human capital often proves difficult to retain [2].

Access to capital is a major economic and financial barrier to the growth of off-grid in low-income countries as few energy consumers in these countries or settings can afford to pay the tariffs needed to recover investment and operating costs. This is particularly the case for mini-grid based electrification, and less so for solar home systems, though the ability to pay for quality service from the latter often remains limited. Even when large subsidies are provided, private developers do not always target poor users, and when they do (for example with well-targeted results-based financing schemes), they often promote solutions that primarily allow basic lighting and phone charging [16,17]. This substantially limits private sector participation and development of sustainable business models [[18], [19], [20]]. In addition, few consumers use energy for income generation or productive uses [21] at the levels needed to generate the revenues that energy system operators desire, owing to difficulties accessing needed equipment, credit, markets for products [22]. Donors and governments can of course subsidize services and facilitate the flow of capital, but have typically focused on the grid and on major or state-run utilities [11,23,24]. They also often fail to sufficiently coordinate their efforts or to adequately consider the long term sustainability of the subsidies they provide [6].

An additional challenge in much of Africa is that infrastructure – roads, markets, etc. – is especially lacking and difficult to extend due to relatively low population density and difficult terrain. There are also technical difficulties relating to the structure of traditional housing, which is often unsuitable for wiring, and persistent gaps in provision of maintenance personnel with adequate training, services, and replacement parts [19,20]. Lower cost systems or lifeline tariffs, while affordable and therefore socially more acceptable, nonetheless mostly fail to provide sufficient energy to spur economic activity, locking in low levels of consumption in a way that perpetuates energy poverty.

In spite of this growing literature on barriers, however, evidence on the perspective of the mostly private off-grid energy firms remains limited, and what is known regarding these service providers' views on supportive institutions and policies (e.g., regulatory approaches, availability of subsidies, access to finance) is mostly anecdotal [25]. There is little systematic evidence collected from large or representative samples of such organizations. In light of this gap in data and evidence, this paper draws on a survey of nearly 200 such firms, located in four Eastern African countries with off-grid sectors that are varying in their maturity. At one end, Kenya represents perhaps the most vibrant off-grid energy market in Africa, while development in Ethiopia is very nascent despite that country's massive ambitions as expressed in its national electrification plan. Uganda and Tanzania lie somewhere in between. Our first contribution is to compare the perspectives of private companies in each of these locations, which relate both to constraints and opportunities, and to place these in the context of the current development of off-grid energy in each country. Our second contribution is to measure tradeoffs between different institutional designs that would aim to regulate and support the off-grid sector, using a discrete choice experiment (DCE) design. Design features such as subsidy support, tariff regulation, grid connection policy, centralized vs. decentralized licensing, and availability of foreign currency exchange were considered in this DCE.

Marc Jeuland, Peter Babyenda, Abebe Beyene, Gabriel Hinju, Richard Mulwa, Jonathan Phillips, Samuel A. Zewdie

EfD Authors

Babyenda, Peter

Mulwa, Richard

Jeuland, Marc

Hinju, Gabriel

Sustainable Development Goals

Affordable and Clean Energy