Savings of Rs 26,470 crore from kerosene subsidy should be given to solar
The prime minister’s Independence Day speech re-enforced his commitment to universal electrification by March 2019, the Power for All program. While a worthy target, connecting households in remote areas may still take years. In some electrified areas, a reliable power supply may not be available for some time. Subsidised kerosene for lighting is the alternative for a large number of these mostly marginalized households.
But kerosene is not an ideal fuel: its fumes are a health hazard and kerosene subsidies are an expensive and inefficient way to help the poor. Research by the International Institute for Sustainable Development shows that almost 45 per cent of the subsidised kerosene lost and marketed for other purposes. The government recognises this. As electrification has increased, spending on the kerosene subsidy has been wound down through increased prices, reduced allocation of subsidised fuel to states and by encouraging cities to voluntary give it up (for example Chandigarh and Delhi).
A share of the subsidy savings could be reinvested in helping the vulnerable access clean lighting through off-grid solar technologies. Known as a subsidy swap, this concept makes a lot of sense. According to the International Energy Agency, off-grid systems including solar PV and mini-grids are the least-cost solution for three quarters of the additional connections required in India to provide electricity for all.
Kerosene subsidy expenditure was Rs 31,255 crore in 2013-14, gradually decreasing annually to Rs 4,785 crore in 2017-18. Thus since 2013-14 the central government has cumulatively saved Rs 26,470 crore in kerosene subsidy expenditure. By reducing subsidised kerosene allocation for some vulnerable states with high rural populations like Odisha, the central government has also transferred responsibility for financing affordable lighting to state governments.
The central and state governments should adopt a policy to reallocate kerosene subsidy savings to solar off-grid and increase energy access for households. Pico solar PV products—like solar lanterns, study lamps, task lights and torches— are currently available in the market and provide an affordable, reliable, direct replacement for lighting with kerosene. Some of these entry-level products under 3 watt peak capacity make up a considerable share of the off-grid solar market as affordable backup lighting systems. The International Institute for Sustainable Development has released a report understanding the business case for a swap policy.
Most importantly, these solar options are already cost-effective, being already available at various price points in the market. Large government orders could bring the price down further through bulk buying. And these products would impose no extra costs on households than subsidised kerosene, while providing a better product. The International Institute for Sustainable Development found that government expenditures on kerosene subsidies could fund the full capital cost of 350 million entry-level solar lanterns over 1.5 years or 97 million mid-level solar lanterns over two years.
As exposure to grid electricity increases and households see an increase in energy aspirations, higher-level solar home systems (supporting television, fans), solar inverters for back-ups will be reliable alternatives. To acquire these households will require financial assistance to meet upfront costs. The Indian solar market has several suppliers using a range of business models to offer financing on these products, making it affordable for households to implement a switch.
Unlike kerosene subsidies, solar subsidies fund the initial capital cost of products rather than running costs. This means that governments are not locked into ongoing expenditure on subsidized fuel. After-market care is needed, but would be a fraction of the cost of fuel subsidies. Thus for every rupee spent on solar subsidies, the government is buying its way out of future liabilities for kerosene subsidies.
A kerosene-solar subsidy swap is a zero-net cost policy that would fast track electricity access—lighting and micro-grids—to some of the most vulnerable homes in India. Governments should get behind the idea. Rare are the opportunities to achieve multiple policy objectives with no new costs. And after all, March 2019 is just around the corner. The prime minister will need to embrace every good “lightbulb” idea to achieve his target.
Shruti Sharma (email@example.com) and Tara Laan (firstname.lastname@example.org)
Authors are associates with the Global Subsidies Initiative (GSI) at the International Institute for Sustainable Development (IISD).
About the report:
Kerosene to Solar PV Subsidy Swap: The business case for redirecting subsidy expenditure from kerosene to off-grid solar