How Energy Subsidies (And Their Reform) Can Enhance Clean Energy Access

Goal Seven of the Sustainable Development Goals (SDGs), adopted by the General Assembly of the United Nations last month, calls on governments to “ensure access to affordable, reliable, sustainable and modern energy for all.”

This draws welcome attention to the serious issue of global energy poverty, which affects as many as 2.6 billion people worldwide, including about 800 million people in India.

Access to clean, modern energy for cooking and lighting can transform livelihoods, particularly for the rural poor. Indoor air pollution from the burning of kerosene, fuelwood, dung and other biomass leads to 1.3 million premature deaths each year in India alone. The provision of clean, reliable lighting has been shown to enhance literacy in children, create opportunities for entrepreneurship in the ‘night economy,’ and increase the time spent by men in the family home.

Moreover, the provision of clean cooking energy in households—which often means using liquefied petroleum gas (LPG) or clean cook stoves rather than fuelwood, other biomass or kerosene—has significant implications for the opportunities and quality of life of women, who otherwise are often required to spend several hours per day foraging for fuelwood and other forms of biomass for cooking. That liberated time allows women to pursue other productive activities.

The role of fossil fuel subsidies

Fossil fuel subsidy reform is aptly listed as a means of implementation for achievement of the SDGs because the large fiscal savings can be used to finance pressing developmental priorities. However, fossil fuel subsidies are also directly critical to the achievement of greater energy access for the large populations currently living in energy poverty. Fossil fuel subsidies can hinder clean energy access; for example, kerosene subsides—which are provided in numerous countries in South Asia, Africa and Latin America—tend to ‘lock-in’ in kerosene use in cooking and lighting by providing a financial incentive for its consumption.

Well-designed energy subsidies have a positive role to play as well. Subsidies targeted at rural solar home systems in Bangladesh have helped enable 3 million households to gain access to electricity and displace kerosene lighting. Government support towards LPG stoves and connection has also enabled the displacement of kerosene as a cooking fuel in Delhi.

From kerosene to LPG in India

In keeping with the aims of SDG Goal Seven, the IISD Global Subsidies Initiative is actively working in India to promote reform to energy subsidy systems in ways that encourage energy access. This has included an official evaluation of India’s cash subsidy for LPG (the largest unconditional cash transfer in history) and an examination of the cost-cases and business models that provide opportunities to replace kerosene subsidies with subsidies for small solar applications, among other projects.

We have also been looking at Delhi’s success in becoming the first Indian city to totally eradicate kerosene usage under the Kerosene Free Delhi (KFD) program. Under this scheme, subsidised kerosene was no longer to be supplied in Delhi, replaced instead for poor households with a free LPG connection and basic equipment to manage LPG cylinders. As demonstrated by an evaluation conducted by GSI and partners in late-2014, KFD was a significant success, demonstrably improving the quality of life of beneficiaries across a range of indicators, including by saving women on average 2 hours per week by reducing cooking time and eliminating the need to find various other fuels for cooking.

The success of ‘Kerosene Free Delhi’ scheme begged the question: why couldn’t the scheme be replicated in other urban and peri-urban areas to reduce kerosene use and enhance LPG penetration among poor communities? Working with our local partner IRADe, we are in the process of surveying poor households in Ghaziabad to test this proposition in a peri-urban context (as opposed to the strictly urban context of Delhi), with lessons learned for the application of kerosene-to-LPG schemes in other peri-urban areas across India. Do households use kerosene and will they be negatively impacted if kerosene is eradicated? How do households cook and do they want to use LPG for this purpose? What are the barriers in accessing LPG?

In general, households reported that they tend not to use kerosene because accessing their kerosene rations is time-consuming and difficult, given the shortage of kerosene in the public distribution (i.e., rationing) system, and because they tended to have informal electricity connections for lighting; suggesting that kerosene was ripe for phase-out. They tended to cook with biomass (typically cow dung cakes) or with LPG, and strongly preferred the latter. Unfortunately, however, the LPG that was being used for cooking in poor households is not subsidised; rather, it is generally bought from the open market at high prices. The primary research being conducted is finding that, despite billions of dollars of dollars spent per annum in India, LPG subsidies are not reaching the poor (let alone the rural poor).

There are largely administrative reasons for this. Poor households are eligible for free registration to the LPG subsidy system, which usually costs about US$ 40 to register. However, in practice, LPG consumers are asked by LPG distributors for a fee of around US$ 70 to process registration, which poor households are unable to pay. This was combined with the complexity of the registration process, with poor households often lacking the requisite documents, or uncertain of their entitlements. Conversations with local LPG distributors showed, frankly, that distributors lacked the incentive to provide free registration to poor households, when others pay for these. All of this suggest that improving ‘last-mile’ administrative processes and modes of subsidy provision, and distributor performance, will be critical in allowing for greater LPG access among poor households over time, including through KFD-like schemes. And there are relatively simple ways of making these improvements which will be communicated to the policymaking community in a series of reports by GSI and our partners in late-2015.

This is just one example of the way that effective energy subsidy design can assist in achieving the goal of “affordable, reliable, sustainable and modern” energy for all in India. It does, however, demonstrate the critical importance of consulting directly with those who suffer from energy poverty to identify key barriers to energy access and to therefore be able to effectively design relevant and helpful pro-poor solutions to these challenges. It is only in this way that progress is likely to be made.

More information:

IRADe (2014) – Evaluation of the scheme for Kerosene Free Delhi

Laura Merrill (2014) – Power, Gender and Fossil Fuel Subsidy Reform in India

Laura Merrill and Vivian Chung (2014) – Financing the Sustainable Development Goals through fossil fuel subsidy reform: Opportunities in India, China and Southeast Asia

CEEW (2015) – Access to clean cooking and electricity: A survey of states

Since 2012, the IISD Global Subsidies Initiative has maintained a strong country work program on energy subsidy reform in India, funding and working collaboratively with numerous research institutes and civil society groups and regularly presenting its analysis and consulting with a variety of government agencies. In February this year, IISD launched a new programme to support partners in research around the impact of energy sector reforms on gender across India, Nigeria and Bangladesh.