New plans announced by Canadian company SkyPower to develop billion-dollar solar power projects in Bangladesh and Kenya cast a welcome spotlight on the massive opportunity for renewable energy in the developing world.
SkyPower's ambition should be applauded. We need more multinationals to enter the solar market in developing countries, and to provide a faster, more affordable and sustainable alternative to the business-as-usual, fossil-fuel powered, centralized electricity grid.
However, SkyPower announced as part of its plans that it intends to "gift" millions of home solar kits in Kenya and Bangladesh--two countries with active markets for a range of decentralized renewable energy (DRE) solutions, such as solar home systems. While the desire to provide energy access is admirable, history has shown that this kind of well-intentioned charity almost always leads to market distortions that stunt economic and job growth.
Quite simply, "gifting" is distortive. In markets like Kenya and Bangladesh (IDOCL is one the great success stories of electrification)--where the energy poor have proven time and time again that they are willing to invest in clean, affordable, reliable energy--the negative impacts of short-term "gifting" has serious long-term implications.
A 2013 workshop of top global energy, finance and development groups, including the IFC, leading European development agencies and industry representatives, warned that it may be best to "avoid consumer or reseller subsidies" altogether. Short-term price subsidies that introduce unrealistic consumer expectations can be particularly detrimental to the health of the market.
- Build sustainable Markets. Giveaways or subsidies that reduce retail prices undermine entrepreneur-driven market growth, and lead to a dramatic drop in impact once donations or subsidies end.
- Create consumer choice. Free product donations tend to involve one product or brand; this "choice of one" syndrome stifles competition and innovation.
- Ensure consumer Protection. Giveaway programs rarely establish mechanisms for honoring warranties, repair or after-sales service, which are vital to building trust in the industry.
- Establish quality standards. While there is no indication that SkyPower will use cheap knock-offs, giveaways often involve sub-standard products that undermine trust and reduce demand.
To be sure, there are situations where giveaways are acceptable, such as humanitarian and relief situations. However, ignoring the principles of smart market design--as SkyPower has--can set markets back for years. In the case of off-grid solar, this ultimately means that the more than 1 billion people in the world without access to reliable, affordable and clean power are the ones who may suffer the most. Moreover, giveaways like the ones in Kenya and Bangladesh set a precedent within other national governments to expect free goods, when they should instead be seeing distributed renewables as an investment in their economies and jobs growth.
The stakes could not be higher, with the potential market for distributed renewable energy products and related appliances estimated at up to $500 billion. One UNEP study estimates that 15,000 new jobs have been created already in Africa due to off-grid solar lighting markets and that the sector could grow to half a million jobs in West African countries alone.
But it is not just jobs. The enterprise, networks and business models needed to enable families and businesses to progress from solar home systems to other off-grid products such as solar refrigerators, solar water pumps and low energy consumer products might also be less likely to happen at pace because of giveaways and the ensuing market disruption.
Companies like SkyPower deserve credit for helping to build the market for global clean energy. But they should not do so at the expense of longer-term market growth and social impact. Achieving energy access by 2030 as part of the Sustainable Development Goals will only happen with smart market development. Free giveaways aren't smart.