Posted by: keshavcdas | May 4, 2012

Why do we need subsidy for promotion of cleantech?

Why do we need subsidy for promotion of cleantech?

It is a very pertinent question, should we introduce subsidy to promote clean technologies in least developed countries? This question is more important and urgent to answer, as because there are good numbers of examples of market distortion and policy failure of subsidy mechanism in the world. For instance, the irrigation subsidy in India is a good case in point. However, there are also success stories, which made a paradigm shift in the socio-economic sector and introduced modern facilities (like health, water, energy, food) to poor at affordable prices. Therefore, subsidy is a double edge knife!

I tried to find the answer for this question based on the backdrop of Nepal and particularly focusing on the clean cooking facilities in rural areas mainly targeting one of the most under developed regions of the country (Hill and mountain districts of Mid-Western and Far-Western Development Regions[1]), where the penetration level of modern energy sources and efficient/clean renewable energy technologies are significantly low. I have visited this region recently and found that the districts of Far-Western Development Regions have only 589 biogas plants compared to the national figure of over 250,000. The penetration rate of modern cooking facilities like improved cook stove in these districts has been roughly 11% while for biogas facilities, it is around 0.28%.  This is really a pity that this region of Nepal could not be benefited from the ongoing renewable energy program and this is true for other national programs like water and sanitation. This also implies that the promotion of renewable energy in least developed countries is not based on the broad principles of equity of economic and social development which eventually fails to promote renewable energy technologies for the most needed area and population.

Therefore, it is crucial to introduce subsidized renewable technologies and it is also true for improved cook stoves, which can act as a gateway into the efficient cooking facility in the under developed districts, mainly for two basic reasons, viz., (i). Subsidy for equity and (ii)., Efficiency concerns in the renewable energy sector of Nepal. It is expected that with a modest subsidy for each cooking appliances (stoves), perhaps, 30% of the unit cost can boost up the affordability of the population of those districts. As an outcome, the rural poor of the far west of Nepal will have access to more efficient clean cooking facility and hence there will also be introduction of development with equity in line with the more developed districts of Nepal.

Administrative cost of subsidy mechanism is very high:

It is very clear based on the evaluation of the current renewable energy programs of Nepal that the cost of monitoring and administration is very high. This cost is even exponentially high for micro-scale technologies like improved cook stoves, although the subsidy system for costly technology like solar PV, medium scale and/or domestic biogas is manageable. The reason for this escalated cost of subsidy administration is mainly due to the low price of ICSs, [not more than 1000-1500 Nepali Rupee for fixed mud and brick high efficient cook stoves], where household could receive 350 NPR subsidy per stoves. With this consideration, if we estimate the administrative cost of subsidy system and its effective delivery, then this will be not less than 700 NPR per stove. Based on this rationale, it will not be difficult to argue that subsidy should not be introduced for cook stoves rather household should be encouraged to make their own contribution which will not be more than 350 NPR. And, here is the question of equity and development!

The household, which has less than 50 NPR daily incomes and living in abject poverty; for them the aforesaid rationale of favouring non-subsidy, will be an irony. I believe this rural population of far west and mid hill of Nepal has rights to enjoy an equitable development in the energy consumption and hence reduce indoor air pollution and deforestation by availing clean cooking facilities. Perhaps, international development organization like SNV Netherlands Development Organisation and government agencies should therefore create a strong symbiosis to dedicate itself for the development of this region.

I agree that this topic of subsidy and micro-clean energy needs more discussion and research. It is envisioned that SNV could carry out a market analysis on this front with well structured pedagogy and clear objectives on the subsidy issue. This study could also result clear roadmap and analysis comprising of the issues of access, affordability, market distortion and changing behaviour due to the subsidy mechanism.

Why is it difficult to implement a pro-poor cook stove program?

There are good number of examples of commercially oriented cookstoves programs in Asia, Africa and Latin America. All these programmes are linked into very strong forward and backward linkages which follow absolute market intelligence starting from centrally controlled stove manufacturing, decentralized assembling with the basic principles of international business, distribution and retailing. The price of stoves under these market domain is relatively high (affordable to middle income users) but stoves are robust, durable, highly efficient with after sale warranty.

Unfortunately, the above imperfect market and its cook stoves is a luxury for the rural poor of remote areas of Nepal. The critical point for the rural poor of Nepal is not only efficiency of cook stove but also affordability. Besides, we do not need a foreign direct investment in cook stoves in Nepal rather we need to focus on sector development, capacity enhancement of rural poor which will enable them to have access to clean and efficient energy as well as promote new avenues for income through market development.

Based on my recent trip to Kailali district of Nepal (One of the SNV’s ICS district) and interactions with social groups, NGOs, households and development professionals, it was understood that rural poor household expects an efficient cook stove with satisfactory thermal efficiency which are affordable (not more than 1000 NPR) and has good potentiality to reduce indoor air pollution, heavy particulates and safe for their children. And this is the challenge for SNV and its partners to design a cook stove of this kind, which fulfills all the unavoidable expectations of households of rural and remote Nepal, who has less than 20% PPP than the national average!

Moreover, it is more difficult to introduce a market led approach of cook stoves as because majority of previous cook stoves projects were supply driven without any visible presence of post installation supervision and quality control. The establishment of retailing chain, rural enterprise development at the bottom of the pyramid (BOP), bringing semi-skilled masons to the mainstream and transforming them into qualified rural technicians are a few key challenges. Fortunately, these components of ICS market are quite well structured in other SNV countries like Vietnam, Lao PDR and Bangladesh. Besides, there is a grievous social problem, which pushes the rural households into a non-confidence scenario on cook stoves as because the previous cook stoves initiatives, which were started sporadically, provided low performance due to its non-conformity into the standard protocol of improved cook stove. The big illation from this situation analysis is that – there is an urgent need to define the improved cook stove at the national level [perhaps, by the statutory body of government) which will clearly spell out what do we mean by an ICS? Indeed, this will also stop the market distortion.

A visit to experience reality and myth:

When the small plane of Buddha Air landed in the Dhangadhi aiport of Kailali district of Nepal, it was noon. The road was deserted without any public transport and with a very few Rickshaws. It was a regional strike (Bandh) and close down in the far west region of Nepal. Our team for cook stove market study was very small, consisting of two advisors from SNV, one senior official from the Centre for Rural Technology, Nepal and another senior executive of the Alternative Energy Promotion Centre, Government of Nepal.

In absence of any public transport, we walked for an hour and then took Rickshaw to arrive hotel. The team was highly determined and enthusiastic; immediately after lunch, we went to a meeting with the local implementing partner. Thanks to the better internet and data service connectivity, my blackberry smart phone was working. I twitted: In #rickshaw with #AEPC & #SNV advisors, then walking in remote areas of far west of #Nepal for cookstove project. It is bandh in Kailali. My colleague and Team Leader of Renewable Energy Sector of SNV, Nepal replied to my tweet, saying- @keshavcdas one of the normal days of #SNV Advisors. I was thrilled to note that advisors of SNV are so dedicated, committed for a cause and supportive to its partners.

For the next two days, we were conducting the market survey by walking in a 40 degree Celsius temperature. We visited a workshop of improved water mills and improved cook stoves (metallic). The interesting fact, which came out during discussion that bulk production of cook stove is major concern for masons and owners of workshops. The higher opportunity cost is also major concern for masons for which they prefer to employ themselves in other income generating activities than stove manufacturing. Therefore, for the team demand creation was a prominent subject, which was discussed in the breakfast table as well as during lunch and dinner. The reality, which came out from this brief field visit was clear:  development of cook stove in far west and mid hill region of Nepal is challenging, which has a unique set bottlenecks and challenges (discussed above); different from the successful ICS districts of Nepal.

The biggest myth, which was proved wrong during the field visit, was the general perception about the far west and mid hills region, and that is: cook stove does not have potentiality in this area as because the demand for cook stove is very meager.  In reality, the team identified that the demand of cook stove in far west and mid region has not yet scientifically explored. The region has more than 45% poverty level (higher than national average -35%) and does not have access to clean cooking facilities. The reality was: far west and mid hill region of Nepal is a less travelled poor area, which is a fertile land for development.

While boarding another Rickshaw on the International Labour Day (indeed, we congratulate the Rickshaw pullers on the occasion of World Labour Day), I was murmuring softly to myself: Two roads diverged in a wood, and I.., I took the one less traveled by, and that has made all the difference. (The Road Not Taken, Robert Frost). When my AEPC colleague got wind my poetic expression, he swiftly replied: that is why we need SNV!

[1] The poverty rate in the project districts of ICS programme is more than 45% in comparison to national poverty status, which is approximately 35% as per the recent census data (2010). The districts are also affected with poor socio-economic infrastructure. Indeed, the purchasing power parity of the project districts will also be very low. According to the International Monetary Fund (IMF), the Implied Purchasing Power Parity (PPP) conversion rate in Nepal was reported at 28.83 National currencies per U.S. dollars in 2010.

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  1. Subsidy and tax are fiscal tools available to the government for correcting market distortions or directing scarce resources towards desired sectors. My opinion is that only incorrectly applied subsidy or tax distorts markets, In renewable energy sector, subsidy has played positive role in Nepal in expanding the market for renewable energy products. In contrast to the subsidy provided on petroleum products – subsidy on each unit of the product provided and hence those who consume more of the products enjoys maximum from the subsidy – subsidy on renewable energy is provided only one time to a consumer for only one unit of the product. While there is much space for criticizing the subsidy on petroleum products for being rich-biased, subsidy on renewable energy is directed towards poorer sections and hence attract least criticism.
    Next, the cost of not adopting renewable energy options by large no. of people is many many times higher than the cost the society bears in the name of subsidy that contributes in accelerated growth of renewable energy systems.

  2. [...] Note: Also read my another post on subsidy: [...]

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