Subsidization

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DESI Power

Overview

For this model, enterprises find companies, governments, or other actors who have an interest in their beneficiary’s energy needs, and will subsidize the cost of products. These subsidies come most often from donors, but could come from companies operating in the vicinity of the target community, like an off-grid cell phone tower which would prefer an alternative to its existing diesel generator (see DESI Power case). With donor-subsidized solutions there is always a tradeoff between trying not to distort the market and recognizing that some people can’t afford energy solutions without a subsidy. Similarly, the corners one would need to cut without subsidies might substantially reduce the total impact that the enterprise can have. The key may be in determining in which situations it is or isn’t possible to operate without subsidies. Some enterprises try to tie subsidized products to positive behaviors. For example,Shidhulai Affordable Technologies, in Bangladesh, gives away free lanterns as a scholarship to good students. Village Tech Solutions is trying to get NGOs in Nepal, to which it supplies solar panels, to ask recipients to attend family planning clinics.

Pros

This model may be the only option if customers are too poor to afford the product and there is no financing available. If done correctly, involving other actors (companies, government, donors), who are willing to help cover costs can be a powerful method for lowering costs. Finally, even if the product would be affordable on its own, additional services which are necessary for desired impact (training, community building), will drive the cost outside the range of customer affordability, which subsidies can help to mitigate.

Cons

An enterprise must make sure it knows the interests of the organization offering the subsidy (mines, mobile towers, donors). Subsidies are not necessarily stable or sustainable and scaling is limited to the capacity to raise donor funds. Similarly, organizations offering subsidies may pull out at any time. Having access to subsidies can cause an enterprise to stop looking for ways to reduce costs or source financing for customers. Subsidies often create unfair competition for market-based suppliers, if there are any.

Case Studies

DESI Power

DESI Power‘s model places biomass power generators in villages which make it possible for the villagers to start more lucrative businesses than they could without power.

The costs of a biomass generator is often far too high for a single village to afford.Therefore, DESI targets villages near one of India’s 150,000 off-grid mobile phone towers. These are normally powered by diesel generators, but DESI’s biomass generators can generate enough power to cover the village and the mobile phone tower. The mobile company is able to save money and still able to support the village and cover 40% of the generator’s operating cost.

Light Up the World

Light Up The World designs and implements rural electrification projects around the world, focusing particularly on the long term sustainability of projects.

LUTW operates specifically in off-grid areas that are not served by the market and where grid extension is deemed uneconomic in the foreseeable future. Establishing a supply chain for the necessary components as well as ensuring the transfer of skills and knowledge necessary to maintain the products over time are crucial for the success of many energy products. Unfortunately, these costs make projects unaffordable to target customers, even if the products themselves are not too expensive. Therefore, Light Up the World uses donor subsidies to cover the difference, and sees the need for these subsidies as the reason these areas have not been served by the grid in the first place.

Enterprises