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Can Market Mechanisms Enable Energy Access for People Living in Extreme Poverty?

By Practical Action On 24.11.2023 EnergyBlog

A house in the middle of a field at dusk, exemplifying extreme poverty.

A new study estimates that in 2023 around 454 million people in sub-Saharan Africa, South Asia and the Indo-Pacific are living in extreme poverty.

Within this population, 312 million also lack access to electricity, and 430 million do not have access to clean energy for cooking. Without substantial financial investment and tailored market mechanisms, a considerable segment will struggle to attain even a basic level of energy access.

Together with Kuungana Advisory, we were asked by the UK aid funded Transforming Energy Access (TEA) platform to uncover challenges faced by people living in extreme poverty when trying to access energy, and to analyse the potential of different business models and market interventions (referred to here as ‘market mechanisms’) to improve this.

This research project is part of TEA’s Leave No One Behind portfolio with the objective to support and inform future funding decisions. The project draws on our previous experiences – including the Poor People’s Energy Outlook series, the Moving Energy Initiative, the pioneering Renewable Energy for Refugees Programme and hosting the Global Distributors Collective – all of which have provided us with insights into the hurdles of reaching displaced and hard to reach communities.

The study investigated energy access for those living in extreme poverty in general and for six demographic groups:

  1. Rural workers
  2. Residents of informal urban settlements
  3. People in fragile-and-conflict-affected areas
  4. Displaced people
  5. Women and girls
  6. People with disabilities

Through economic modelling, we obtained concrete insights into the market mechanisms and funding needed to increase energy access for those living in extreme poverty. Surveys conducted in Kenya and Nepal also added a human perspective to the study.

Here are some of our key findings:

We estimate that electricity access for those living in extreme poverty was 37% in 2019; significantly less than the global average of 78%. More than 90% of people in extreme poverty with no access to energy live in sub-Saharan Africa, with seven countries – the Democratic Republic of Congo, Nigeria, Tanzania, Ethiopia, Madagascar, Mozambique and Uganda – accounting for over half of this population. Those living in rural areas and fragile-and-conflict-affected countries are most affected.

Unsurprisingly, our findings confirm that affordability remains the primary barrier to energy access for those living in extreme poverty. Market mechanisms are designed to address affordability and other barriers to access. However, several factors hinder their uptake by people living in extreme poverty including:

  • Income variability and low financial resilience are likely to reduce people’s ability and willingness to engage with business models requiring regular fixed payments such as PAYGo.
  • Low experience with and high aversion to financial services can result in households being hesitant to take on inflexible financial commitments, which are often required to bring down the up-front cost of an energy access product or service.
  • Many people living in extreme poverty live in places or under circumstances that increase the cost for a market mechanism provider reaching them. Rural and remote communities are the most obvious, but not the only, example.
  • People in informal settlements and excluded groups often lack documentation that enables them to take up market mechanisms or are excluded from social security registers.
  • Low levels of education and lack of access to information can result in populations not being aware of the various market mechanism opportunities that are available.

Mechanisms which combine elements such as flexible repayments, concessional consumer financing, and service-based models can better serve those living in extreme poverty. Modelling results for Kenya showed that lowering customer interest rates and extending payment terms (through concessional consumer financing) can double the number of households living in extreme poverty who are willing to pay for a basic multi-light system.

Mechanisms providing a lasting funding injection, such as tax exemptions and regulatory cross-subsidies, can enable companies to better serve higher-cost locations where many people affected by extreme poverty are concentrated.

More targeted funding injections are needed to reach remote and socially excluded communities. However, targeting increases the costs and this needs to be justified by the increase in reach.

End-user subsidies reach more people living in extreme poverty than product/tariff subsidies, as the customer is the direct recipient. This mechanism could target the poorest households with reduced risk of distorting the market as advertised market prices can be maintained.

This blog offers a glimpse into the research study and its key findings, and we encourage readers to refer to the reports for comprehensive results and recommendations.

The suite of three reports which will be launched on the 29th of November will be looking specifically at:

  1. The relationship between energy access and extreme poverty.
  2. The market mechanisms which can make energy accessible to people in extreme poverty and by how much.
  3. Recommendations for the sector.

We will also provide national level deep dive reports for six countries: Ethiopia, Kenya, Nepal, Nigeria, Rwanda, and Zambia.

It is vital that donors and governments support those with little to no energy access. Inevitably, this will require decision makers to prioritise their resources and find the convergence between lifting as many as possible from the darkness of Tier 0 while continuing to support those who can achieve higher levels of access.

At Practical Action we remain committed to working with others to craft programmes that showcase viable approaches to make energy accessible to all. The findings of this research study will support donors, governments, and advocacy bodies to select, target, design, and implement market mechanisms that are tailored to those living in extreme poverty.

Note: source for all figures and estimates presented in this blog is the forthcoming report ‘Can Market Mechanisms Enable Energy Access for People Living in Extreme Poverty? Findings and recommendations’

Get the documents here

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