Reducing tariffs unlocks electricity demand from rural mini-grid customers, new research finds
CrossBoundary and Energy 4 Impact have published the first in a series of white papers for the Mini-Grid Innovation Lab. Backed by the Rockefeller Foundation, the Lab was launched in 2018 with the aim of developing the business model for mini-grids in sub-Saharan Africa.
The Lab works with mini-grid developers to identify and test innovative prototypes that improve the business model – and as the prototypes generate results, it shares evidence on their impact so that successful innovations can spread. It also works closely with partners – developers, governments and funders – to scale the prototypes across all participating developers and markets.
The first white paper looks at the impact of tariff levels on the demand for electricity from rural mini-grids and overall revenues for the mini-grid. If tariff levels are set too high, the ability and willingness of rural customers to pay for electricity is reduced and demand may not be sufficient. If tariffs are too low, then the mini-grid may not cover its operating costs and the viability of the project may be threatened.
In May and June 2018, the Lab agreed to help two operating solar mini-grids in Tanzania to lower their tariffs by 50% and 75% respectively over a 5 year period. Early results show that that rural mini-grid customers are very price sensitive – and they are ready to consume much more power than they can afford at current tariffs.
Over the nine months since the prototype begun, demand for electricity on the two mini-grids has grown significantly allowing the developers to almost maintain their revenue levels (revenues fell by just 7% despite the sharp price reductions). The percentage increase in demand was particularly pronounced for low consumption customers. Interestingly, while demand from existing users grew, the reduction in tariffs did not lead to an increase in the number of connections. Based on these preliminary results, we can make two observations:
- Reducing tariffs has an immediate and strong effect on rural customers’ electricity consumption. This suggests that rural customers have a fixed budget for electricity spending. It will be interesting to see whether customers will continue to move up the energy ladder by using more appliances or using electricity for more hours during the day.
- Mini-grid developers may be able to lower tariffs and achieve the same or similar revenue. Subsidies will still be required if the tariffs do not cover the operating costs of the mini-grid.
Energy 4 Impact has played a key role in the development of the Lab, establishing the prototypes with CrossBoundary and the developers, and liaising directly with the developers to gather and analyse data. This white paper reports on the economic impact of the tariff prototype. Future white papers will also evaluate the social impact such as changes in household income and increased employment.