Tariff Reduction Innovation Insight – CrossBoundary Innovation Lab

In our first Tariff Reduction Innovation Insight, published in May 2019, we reported results one year after reducing tariffs at two sites in Tanzania by 50% and 75%.

We found that rural customers are extremely price sensitive, and are ready to consume much more power than they can afford at current tariffs: 

1. Following the tariff cut, customers immediately consumed significantly more electricity. Customers are budget constrained.
2. For every $1 they saved on price, customers spent $0.93 on increasing their energy consumption. Therefore, after one year, developers’ revenues had decreased by only 7% on average.

This Innovation Insight builds on those findings, incorporating:

• A third, larger site, with 3x as many connections as the first sites
• 15 more months of data and 210 new connections under the prototype
• New analysis for governments and donors to act on

The Lab has been running the Tariff Reduction prototype since 2018 to test the impact of lower tariffs on customers, developers,and subsidies. At five sites across Tanzania, developers have cut tariffs for all customers by 50-75%, to on average $0.48/kWh1. 

We present evidence supporting two headline findings with major implications for developers, governments and donors:

1. Governments cannot mandate lower tariffs without seriously damaging the business case for mini-grid developers, and developers should not introduce them without financial support. The tariff reductions implemented under this prototype resulted in a decrease in average Net Present Value (NPV) of 13%, excluding subsidy payments.
2. Lower tariffs are a) so beneficial for customers that b) less subsidy is required than is typically provided to the main grid. 

• • • Customers increased their consumption by 1.5-3x baseline levels after two years. The lowest consuming users increased their consumption by 5x, suggesting their low electricity use was due to budget constraints, not a lack of demand. 
    • This increase in consumption reduced the amount of lost revenue that subsidy needs to bridge. The subsidy required to maintain NPV appears to be far lower than the main grid. Main grid subsidies are difficult to identify, but the Lab’s academic partners at UMass Amherst and Rochester Institute of Technology are publishing a paper that quantifies the implicit subsidy provided to the main grid in Kenya.

What’s next for the Lab: The Lab is collaborating with AMDA and P4G to work with donors and regulators, gathering more data on the optimal tariff and subsidy in our target markets, and then developing tariff reduction programs at scale.