Are subsidies necessary to achieve rural electrification?

From the newsletter

Namibia has introduced a $7.9 million electricity subsidy to boost national power access from 60% to 70% by 2030. Subsidies have useful in connecting rural populations in many African countries. But they also create a challenge around cost-reflective tariffs, scaring off private investors reluctant to compete with government-backed initiatives.

• Namibia imports about 70% of its electricity, primarily from neighbouring countries such as South Africa. This reliance makes the country vulnerable to external price shifts, driving up electricity costs.

• While subsidies can absorb additional costs and protect consumers from unexpected burdens, it stifles investment from independent power producers.

More details

• Namibia consistently allocates subsidies in its annual budget to assist its citizens and maintain affordable new electricity connections. This is especially beneficial for low-income households and rural areas, where connectivity rates have historically been low. These measures are a direct response to ongoing price increases from the country's main electricity suppliers. For instance, in 2025, electricity prices saw a 3.8% increase, prompting the government to set aside $16 million for the 2025/2026 financial year to alleviate the financial strain on consumers.

• These subsidies have kept Namibia's electricity tariff below compared to the countries it imports from, such as South Africa, charge. For instance, it costs about $0.136/kWh for residential customers and $0.184/kWh in South Africa. Across most African countries, tariffs for power services generally remain heavily subsidised, which often compromises the performance of utilities.

• Typically, subsidies lead to utilities selling electricity at a price below the actual cost of generation and distribution. This creates substantial revenue shortfalls, which in turn undermine their financial viability. It also limits their capacity to invest in crucial infrastructure, maintenance, and network expansion. Such situations frequently result in a reliance on government bailouts, operational inefficiencies, and a struggling power sector.

• Namibia implemented a Modified Single Buyer (MSB) model, which permits Independent Power Producers (IPPs) to sell electricity directly to large consumers. However, the government's direct subsidies to NamPower's bulk tariffs create an uneven playing field. IPPs often find it difficult to compete on price with these subsidised rates. 

• While renewable energy IPPs can be competitive without direct subsidies due to the high costs of grid electricity, the overarching subsidised environment restricts their market reach and can discourage investment.

• Across Africa, countries like Nigeria have significantly reduced both electricity and fuel subsidies, moving towards cost-reflective tariffs, albeit with some targeted support for vulnerable populations. Morocco has also undertaken comprehensive energy subsidy reforms, including those for power generation. Fuel subsidies have been phased out in Nigeria, Ghana, Angola, and Kenya, driven by fiscal pressures.

Our take

• Subsidies are important for rural electrification to ensure that even remote populations can access power affordably.  But it risks becoming burdensome to power utilities due to low consumption. There is a need to support economic activities that will boost consumption and increase return on investment.

• However, there is a danger of misuse where subsidy funds might sometimes end up in the pockets of a few corrupt government leaders, completely undermining the fund's intended purpose. Strict policies, regulations, and implementation are needed to prevent this.

• As the cost of renewable energy technologies continues to fall, IPPs will find it easier to compete with governments that rely on volatile fossil fuels. However, before this happens, governments must restructure subsidies to effectively target those who need them most, rather than artificially distorting the overall energy market.