Analyses of House-Hold Willingness to Pay for Off-Grid Electricity Service Koftu Mini-Grid Akaki District Oromia Region, Ethiopia
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Date
2024-12
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Addis Ababa University
Abstract
Satisfying the ever-growing energy demand, but at the same time reducing greenhouse gas emissions and mitigating climate change are some of the most challenging and ardent issues for the policymakers around the world. Renewable energy is perceived as an effective way to cope with the dual nature of these challenges, usually topping the list of meaningful changes that our society can implement. Mini-grids play a critical role in providing electricity to remote, off-grid communities in grid option is not feasible. However, success of mini-grid projects can be hindered by poor cash flows and limited revenue returns. A clear understanding of off-grid household’s preferences for electricity services is a prerequisite for mini-grid stakeholders to set tariff structures and stimulate income-generating power demand to scale up mini-grid deployment. The purpose of this paper is to determine to what extent the rural population is willing to make financial expenses for development of renewable energy. We also explore what lifestyle and socio-demographic factors influence willingness to pay. A contingent valuation methods were applied to 380 households from the rural populous and willing to pay is 355 birr (USD 6.57) per month. However, the empirical model reveals that the rural household’s WTP value alone is insufficient to cover the cost of electricity. The total willingness to pay (TWTP) falls significantly short of the proposed project costs, covering only about 57% of the running costs and 39% of the total monthly costs. Investing in a decentralized mini-grid (DMG) with these characteristics would result in a capital loss over the system lifetime, necessitating subsidies to avoid financial losses. Our results also show that the creation of new jobs, household income, family size, age, basic education level, gender of the household head, occupation (particularly farming), and marital status, significantly impact household’s WTP for renewable mini-grid services in the study area. Additionally, asset ownership, particularly land access, also significantly influences household WTP for these services. The study is useful in the design of adequate fiscal and renewable support policies and serves companies by identifying willingness to pay influence factors, as well as by demonstrating a market segmentation procedure. Additionally, creating an enabling environment by improving access to low-cost financing, implementing regulations that minimize project-related risks and fostering collaborative partnerships through a mix of public and private investments should be key policy objectives. These measures will facilitate the deployment of renewable hybrid mini-grid systems and help achieve targeted electrification ratios in a sustainable manner
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Keywords
Renewable energy, Willingness to pay, Mini-grids, Bouble bound dichotomous choice, valuation methods.