Equitable subsidy amounts for upfront energy costs in developing countries

We investigate the sensitivity of households to subsidy amounts for proposed investments in a solar lighting system or a connection to the electricity grid. Using a large microdata sample of 15,930 households for a group of 12 developing countries, the results show that having a formal bank account significantly influences the willingness to pay for a solar lighting system or for grid access, but this effect diminishes with delayed payment options. Economically constrained households, such as those without a formal bank account, are not sensitive to subsidies for solar lighting systems, which may be too expensive, but they are sensitive to subsidies for cheaper investments. Our interaction analysis reveals that households without a bank account (and thus constrained by financial conditions) who are offered an investment with a 66 % subsidy are more likely to be willing to pay than are those households with a bank account and who receive a full price offer without any subsidies. We can then calculate equitable subsidy amounts, which we normatively define as the amounts necessary to give each household an equal probability of being willing to pay the upfront cost. For example, when there are no subsidies for households with a formal bank account, equitable subsidy amounts for households without a formal bank account are approximately 43 % for a solar lighting system and 65 % for a grid connection.