Cost-Benefit Analysis of Off-Grid Solar Investments in East Africa
Authors: Nathan Martinez, Paul Oliver and Adam Trowbridge
Economists from USAID’s Office of Economic Policy conducted a cost-benefit analysis (CBA) of four off-grid solar energy investments, representing $8.4 million in development assistance through USAID’s Development Innovation Ventures (DIV).
An initial review of the results suggests USAID’s $8.4 million investment is creating over $17 million in net present value to the East African countries of Rwanda, Tanzania, and Uganda.
The results of the analysis and research have led to four recommendations and conclusions to inform future work in the off-grid solar energy market.
Donors should consider supporting solar investments that produce social welfare benefits, at least until companies can create financially sustainable investments in partner countries.
Each of the analyses demonstrated how the economic returns to the projects were positive, meaning there were net social gains for each investment despite the financial losses. These positive gains are attributed to the consumer surplus gained by households able to purchase lighting devices for a price that is less than the highest price that they would be willing to pay. It is thus clear the economic returns to the investments are being driven by households. A determination should be made as to the most effective way to deliver cleaner energy to households with the objective of supporting the most cost-effective delivery models. This may require an analysis looking at a variety of energy options, such as mini-grids, hydroelectric power, etc., in a country-specific context.
Identify the target beneficiary group, and make sure projects support the selected beneficiaries.
It has become clear through our research that companies and NGOs in the East African solar energy market have begun to differentiate themselves in part by targeting different income groups. The segment of the population that can afford unsubsidized solar products but is not yet connected to the grid is smaller than most people assume, so it is critical to understand the income distribution in each recipient country, the affordability of solar products, and the benefits provided to customers.
Focus innovation efforts on three main constraints to financial viability: the distribution model, the payment system, and the supply chain.
The four grantees studied in this report have developed unique distribution models, payments systems, and supply chains. Some have been more successful than others, and often there are pros and cons in these choices. For the off-grid solar market to fully scale, it must become financially viable without donor assistance, but in most cases this is not happening. The profit margins on most solar products are not sufficient to cover the distribution costs in rural areas of East Africa. Pay-as-you-go models provide a financing option to bring new technologies to poor customers, but the default rates are high. Upfront payment models can be successful, but they prevent most customers from purchasing products beyond basic lamps and lanterns. International supply chains are threatened by tenuous partnerships, tariffs, and exchange rate fluctuations that add risk to investment opportunities and discourage further growth. 22 Ultimately, more work needs to be done to find a financially viable business model to reach low and middle income households in East Africa.
Emphasize data and evidence collection.
One of the biggest impediments to this CBA study was a lack of good data, particularly household survey data specific to energy consumption. Solar is just one of many energy sources available to households in East Africa, and customers must make economic decisions every day about what sources to use and how much. Although many impact evaluations have been done on solar, few provide the details necessary to conduct an incremental cost-benefit analysis of how household energy use and expenditures — for both lighting and phone charging — changed after the adoption of solar. Data must be disaggregated by income, access to grid electricity, household size, and region, just to name a few. Other important variables could include default rates and costing trends related to soft costs. This can be established in the initial grant agreement and reported through regularly enforced increments as part of a monitoring and evaluation plan.
Find the full report here.