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November 21, 2014

The World’s First Rural Feed-In Tariff?

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How do we move clean energy access beyond just a light bulb?

With millions of dollars in new investment capping a record year for beyond the grid solar markets, that’s the question many are now asking. This record investment is building markets, starting with pico solar products like lanterns, from the bottom up. But just over the horizon lies much larger solar home systems and the next big opportunity capable of powering whole communities -- mini-grids.

One way to get us from here to mini-grids is a novel new concept: rural feed-in tariffs, or RFITs for short.  

What an RFIT does is adapt the principles that made feed-in tariffs (FITs) wildly successful in Germany and other parts of the world -- including certainty for investors and early stage support for nascent clean energy markets -- to a radically different operating environment. That’s because policy making beyond the grid requires a whole new approach steeped in the realities of the communities it’s attempting to serve. That’s how you tame the wild west of beyond the grid policy making.

So what exactly is an RFIT? Here’s a checklist:

Guaranteed Minimum Revenue: An RFIT provides a targeted payment per household ‘connected’ to either a large solar home system or a village power/micro-grid  installation. This guaranteed revenue will make projects bankable and investable, triggering much needed capital investment without the need for capital cost subsidies.

Target Energy Services, Not Kilowatts: An RFIT guarantees a minimum level of energy service delivery -- one set by policymakers above what the private market is currently delivering. That means an RFIT adheres to the number one rule in beyond the grid markets: energy efficiency unlocks clean energy for low-income populations by prioritizing service delivery, not kilowatt hours.

Sunset Payments Over Time: An RFIT sunsets over time with volumetric reductions (as did the much ballyhooed California Solar Initiative).

All of which is well and good, but are there any RFITs actually in use?

Interestingly enough, yes. The World Bank’s Lighting Africa program is currently piloting such an approach with mini-grids in Mali. Details are still not forthcoming, and the Bank has not currently labeled the program an RFIT, but conversations with Bank staff suggest all the aspects of an RFIT are present. This means Light Africa could well be the world’s first RFIT.

At the same time, many of the concepts integral for RFITs have been in place in the world’s most wildly successful beyond the grid solar market for years: Bangladesh. In Bangladesh, their solar program just so happens to be doubling in size and introducing support for mini-grids and mobile money. More importantly, there are new initiatives being announced all the time, including the Rockefeller foundation’s $100 million, 1,000 mini-grids in India (where Prime Minister Modi has promised solar for all by 2019).

With sky high bills for subsidizing dirty kerosene already in the crosshairs in certain countries, funds for potential RFITs need not be found, only redirected to support all this activity. And to be clear, there is the full expectation households will pay for these services given the large amounts they already pay for dirty, expensive forms of energy like kerosene. This means RFIT revenue may never be needed. But the payments can still help unlock these markets by covering the risk of default by households while helping to get more services to low-income communities than they could otherwise afford themselves.

All of this means governments need to make a choice to use smarter, better targeted, and ultimately cheaper support for rural electrification. That’s why it’s important for policymakers interested in expanding clean energy access to become intimately familiar with what an RFIT is. Because it just may help unlock clean energy for all.

-- Justin Guay, Associate Director, International Climate Program

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