In some villages in Laos, only 60-80% of households had electricity, despite grid access in their communities. The cause of the ongoing gap? A hefty connection fee of $100 – three-quarters of the average monthly income for the poorest households in Laos.
The local utility, Electricite du Laos, in collaboration with the World Bank decided to offer households in 20 villages a microloan to pay for the connection. They eliminated the $100 upfront connection fee and added $2 to monthly bills for 36 months.
Access increased to 95%.
New models for financing household connections – even as simple as what was done in Laos – are enabling low-income households to access essential services, such as energy. These solutions, led by utilities, microfinance institutions, nongovernment organizations, and private companies, are a necessary ingredient for achieving targets under the Sustainable Development Goals (SDGs) around energy access, water and sanitation – specifically:
SDG 6: “Ensure availability and sustainable management of water and sanitation for all,” with subgoals related to universal access to safe, reliable water and sanitation by 2030. Improved water means piped water in the home, and improved sanitation is defined as access to a toilet with safe management for fecal waste.
SDG 7: “Ensure access to affordable, reliable, sustainable modern energy for all,” with a subgoal on universal access to electricity and modern (i.e., nonsolid) cooking solutions.
Energy and WASH: the scope of the access gaps
Globally, 1.1 billion people do not have electricity in their homes, and another 1 billion have unreliable electricity at best. WHO estimates that 4 million people died in 2012 from diseases related to indoor air pollution, including almost 2 million children. Studies have shown significant increases in household well-being when it comes to rural electrification: In India children studied two hours more per week, women spent 20% less time collecting biofuel, and the household as a whole was half as likely to experience moderate poverty.
On the water and sanitation side, 3.1 billion people lack access to piped water on their property (with over half drinking from water that is faecally contaminated), and 2.4 billion people do not have access to improved sanitary facilities (data from the 2015 UNICEF-WHO Joint Monitoring Program Update). This has serious implications for human health: Over 800,000 people died in 2012 of preventable diarrheal diseases related to unsafe or insufficient water, sanitation and handwashing (WASH), according to the World Health Organization. The World Bank’s Water and Sanitation Program estimated that poor sanitation cost the world $260 billion in 2013.
What will it take to overcome these access gaps?
The World Bank estimates that for the 140 countries with real WASH access gaps, it will take $114 billion annually to achieve universal access to safely managed water and sanitation by 2030, or about three times the current spend. For universal access to electricity and clean cooking, Pachauri et al. (2013) estimate that $79 billion to $104 billion in additional investment is needed annually. Yet these enormous sums will mean little, if we cannot overcome the financial and geographical barriers that prevent poor households from accessing services under current models.
As seen in Laos, even when grid service is available, the cost of an electrical or piped water connection can often exceed a household’s monthly income. The problem is acute in sub-Saharan Africa: in a 2013 World Bank study, the average electric connection fee in 15 sub-Saharan countries was $170 (17% of GDP per capita). The solution – allowing households to pay for connections over time as part of their bill – is simple but powerful.
Take another example: Water.org is a nonprofit organization that works with financial institutions through its WaterCredit program to unlock financing for household water and sanitation. To date, its partner institutions have issued 600,000 loans, with an average loan size of just over $200 and repayment rates of 99%. In Kenya we see interesting versions of the same story: Equity Bank provides Stima loans to customers who want to connect to the electric grid.
In rural villages or small towns with sufficient population density, mini-grids have become increasingly affordable. Operators like Safe Water Network in Ghana and PowerGen in Kenya are building local-scale utility grids that offer service comparable to urban users. They use remote monitoring and are incorporating mobile money to create efficient, scalable solutions that can dramatically improve the lifestyle and economic potential of rural households.
There may not be a business case for connecting more isolated houses to service grids, but there are still ways they can access reliable power and water. M-KOPA has revolutionized asset financing in Africa, having sold more than 375,000 solar home systems on a pay-as-you-go basis to off-grid households. Affordable, convenient, and located right on a customer’s roof, such systems do not need any grid to be effective. Similar pay-as-you-go solutions are being developed for water and sanitation: Loowatt has installed container toilets in Madagascar for a fraction of their cost, allowing households to pay every week via mobile money to have the container switched out.
For all of these solutions, the ability to collect small, frequent, digital payments has enabled new business models and expanded access for millions. As businesses grow and innovate, we would expect to see greater returns to scale, but also to scope: rural microgrids that connect users with electricity and water may have more success than those that pursue these goals individually.
Where to go next?
Smoothing payments addresses only one part of the equation – making costs low enough in order to offer services to a larger number of clients who can pay through small amounts. But on the demand side, a question remains. Will these small payments substitute existing expenses? In some cases it might, but for many it might not, or at least not enough to solve the affordability issue. More research is needed to understand if and how access to energy or clean water can lead to increased income. Where that happens, it will represent an opportunity for microfinance institutions or other private-led models to finance that access. For cases where this does not happen, models with a mix of subsidized capital and private funding may be needed to run sustainable businesses. From this perspective, a larger spectrum of solutions will be needed to catalyze universal access to services that are flexible, affordable and vitally essential.
Thank you for a well written and informative post.
This is a very insightful article. This model of service service delivery can actually be replicated not just in the energy sector but even in the agriculture and health sector.