Decentralized Markets for Electricity in Low-Income Countries

Governments in low-income countries are increasingly integrating off-grid electricity provision into national electrification strategies, creating novel, decentralized markets for electricity. This paper studies a highly decentralized product that plays an important role in energy access: pay as you go (PAYGo) solar home systems. Unlike grid electrification, PAYGo solar features low upfront costs but relatively high usage costs. To what extent do high intensive margin prices limit the adoption of solar home systems? In 2019, the Togolese government implemented a large subsidy that reduced usage costs by 17.8 to 41.7 percent, while upfront costs remained constant. This paper estimates that the subsidy dramatically increased adoption, with the largest effects occurring for the smallest systems (240 percent increase). The paper goes on to develop a theoretical framework that shows that the effects of such subsidies are uncertain due to the unique cost structure of decentralized solar electricity. The results highlight the importance of use prices in the electrification decisions of low-income households.