Leapfrogging into the light
Financial Times | 27 March, 2017
Solar systems help Rwanda government switch from provider to regulator of electricity
by Imaduddin Ahmed
Mobile phones were the “leapfrog” infrastructure of the last decade. They allowed governments and companies in developing countries to skip installing landline systems underground.
Off-grid solar home systems are proving to be the leapfrog infrastructure of the current decade. They have helped the government of Rwanda, for example, to switch its role from provider of energy to facilitator and regulator of private-sector provision.
Ever-reducing costs and risks allow the financial returns of solar home system vendors to match the welfare gains enjoyed by rural consumers. This is revolutionary. Solar home systems offer customers cheaper light than traditionally-used kerosene lamps and candles, according to BBOXX, perhaps Rwanda’s largest vendor.
Harnessing the sun’s energy, standalone home systems do away with large, indivisible investments in generation and distribution. They can be removed from households that fail to make monthly lease-to-own payments, thus solving the problem of irreversibility of investment. BBOXX claims to have sold 23,000 50 watt systems across Rwanda and, in an act of double leapfrogging, has become one of the country’s largest recipients of mobile phone payments. Having secured $2m of debt in local currency from Banque Populaire du Rwanda, it has also overcome foreign exchange liability risk.
In recognising the cost efficiency of solar home systems over on-grid connections, the government of Rwanda — where only a quarter of households have electricity or electricity connections — has reduced its targets for on-grid rural electrification. The government wants solar home systems to cater to demand with appropriately scaled systems, rather than connecting at great public expense citizens who would struggle to pay for on-grid electricity.
BBOXX’s 50W systems, for instance, can be scaled down to light as little as two lamps and charge a mobile phone for less than $5 a month, after a deposit of the same amount that gives customers ownership of the lamps and charger. Those same systems can be scaled up with demonstrated timely monthly payments to include power for additional lighting, radio and television for up to $16 a month plus a $20 deposit for a 14W, 24-inch colour television.
The government is adapting its role to regulate competition and product standards to ensure value and consumer confidence, as well as sustainable disposal. (This is the government that banned plastic bags.)
To facilitate further private investment, the government plans to set up a risk mitigation facility. One form this could take would involve funding grassroots co-operatives to lend to end users for the outright purchase of solar home systems, with warranties and after-sale servicing.
But there are risks. While the extra working capital generated would enable vendors to roll out more aggressively, taking away their receivables risk might also tempt them to sell products in a less responsible manner, probably resulting in more defaults. Guarantees to vendors would have the same effect. Funds for aggressive rollout directly to selected vendors would subvert the competition the government would do better to promote.
The government is considering vouchers or other financial support for the lowest earning households, along with financial disincentives on “primitive fuels”. For the latter, the government should be careful not to punish those households with little alternative.
Meanwhile, according to government data for 2014-15 published last year, almost three-quarters of households collected water from improved water sources, but only 11 per cent of households had water on their premises, while almost half had to travel more than half an hour to get water from improved sources. Until there is universal access to clean water, unconditioned support for scaled-down electricity seems unjustified, except perhaps to those who cannot afford to burn candles.
Instead of foisting market-destroying subsidies for uneconomical on-grid connections on less savvy governments of developing countries, the World Bank should note the Rwandan government’s downgrade for on-grid electrification. The Bank should continue to facilitate markets for cost-effective solar home systems. It could then reallocate funds earmarked for rural infrastructure to the type where the invisible hand truly is nowhere to be seen.
Imaduddin Ahmed is a PhD candidate at The Bartlett, University College London. He served the Rwandan government for four years as a PPP transactions adviser and as a special policy adviser to the Rwandan Treasury. @beyondbrics