Rural Electrification and Public Policy in Developing Countries

1
Rural Electrification and Public Policy in
Developing Countries

• Douglas Barnes
• Energy Transport and Water Dept.
• The World Bank
• October 26, 2007

2
Organization

• The Problem
• Benefits of Rural Electrification
• The Challenge of Rural Electrification
• Case Study Examples
• Principles for Success

3
Introduction

• People think of energy as wires, poles, and power
  plants, oil wells, and pipelines

• But we forget the demand side the nexus between
  poverty, energy, health, education and gender
  empowerment. For instance lighting, electronics
  motive power, cooking fuels, and heat by
  households, home enterprises, and small
  businesses.

4
Electricity Production to Distribution
5
Two Distinct Rural Electrification Markets

• Near the Network..?Grid Extension
• Far from Network..?Off-Grid
• Isolated Grids Diesel, Micro Hydro Hybrids
• Individual Systems Solar Home Systems, Pico
  Hydro, Battery Charging

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The Challenge

• 1.6 billion people do not have electricity access
• Average cost per connection is say 1k
• 2.6 billion people depend on biomass fuels for
  heating and cooking
• Average use is 1 kg of biomass per person per
  month

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Electricity Access by Region
1 out of 12 people in rural Sub-Saharan Africa
have access to electricity
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When the Lights Go Out in Guinea

• Source AP Images
• Energy Access helps achieve literacy outcomes
• Electricity for clinics and government offices
  help achieve health outcomes

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Government Intervention Rationale Benefits of RE

• Homes with grid electricity have about 50 to 100
  times more light than households without
  electricity.

• Energy Access helps achieve Literacy outcomes
• School attendance is higher in households with
  electricity
• Telecommunications easier
• Greater economic productivity

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Rural Electrification Benefits The Price of
Electric Lighting is LowIndia Kerosene and
Electricity Prices
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Benefits of ElectricityPhilippines Rural HH
Spending on Lighting
People Spend a bit more on electricity than
kerosene, but get much more light.
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Tempering Optimism The Electricity Myths

• Economic development will follow electrification
• Electrification will reduce rural to urban
  migration
• Subsidies will surely help the poorest
• Electrification will help conserve fuelwood

Be realistic in expectations Electricity is
necessary but not sufficient conditions for
development and thus complimentary conditions
need to be in place
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Rural Electrification Challenges

• Dispersed populations and difficult terrain mean
  High capital costs and high operating costs
• Often connection cost greater than 1,000 USD per
  HH
• For urban areas it is about 250 USD
• Customers are often poor Annual Income of about
  USD 1,000 per year
• Cannot afford full upfront lump sum connection
  costs
• Load profile is poor, meaning electricity used
  mainly in evening so sunk investment costs are
  not used during the day leading to low cost
  recovery

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Rural Electrification Challenges

• Main power companies have institutional
  difficulty meeting special demands of rural
  distribution
• Already dealing with generation, transmission and
  distribution issues
• Orientation towards larger users such as business
  and industry.
• Local community level problems often are not
  addressed
• Who provides or pays for rights of way
• How to promote electricity use beyond lighting
• How to deal with rural perception that they are
  they are a low priority

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Rural Electrification Challenges

• Political interference in operation of rural
  distribution company reduces financial viability
  
• Subsidies are involved in rural electrification
  so politicians feel they have a right to deliver
  electricity to their constituents
• This often distorts electrification extension
  plans and interferes with pricing, bill
  collection, disconnection policy resulting in low
  revenues
• Power sector reform does not mean we can walk
  away from electricity access issues.

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Power Sector Reform Issues and RE

• Optimism that sector reform will lift the subsidy
  burden of RE from the government is unfounded
  i.e.. Government of Peru has had franchises
  returned to it for 1.
• Limits coverage to regions that will be
  profitable. After privatization without further
  incentives rural electrification tends to stop or
  slow down.
• Old Subsidy Mechanisms do not work
• Cross-subsidies may not be possible
• Re funds created often go unfunded
• Equity issuesMost well off households have
  electricity at time of reform.. What about the
  rest?

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RE Countries in Study
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Grid Example ChilePrivate Companies
Cooperatives

• After privatization, investments in new grid
  extension ceasedElectricity connection rate
  stuck at 50 percent
• Found general social funds not oriented to the
  unique financing requirements of power utilities.
  
• 1990 Government developed electricity subsidy
  fund (PER) to promote expansion. Subsidy
  dimensioned to be
• Promote financial viability of investment for
  the utility
• Be economical attractive investment for the
  country (as measured by consumer surplus)

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ChileExample of Private Companies and
Cooperatives

• How does the Electricity Subsidy Fund (PER) Work
• Communities request Private Utility Co or
  cooperatives to develop rural electrification
  plans for their community
• PUCs develop plans and apply to PER for
  construction funds
• PER reviews proposals for financial and economic
  viability and also whether costs of plans are
  reasonable
• Funds also are reviewed by regional political
  agencies and are allocated regionally to enhance
  regional equity.
• Subsidies cover about 75 to 80 percent of
  construction costs

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Costa Rica--Cooperatives

• Initial loans from USAID40 years with grace
  period of 10 years, then annual interest of
  1-2.5
• Communities required to come up with part of
  capital costs if too far from networkdifference
  between rate of return (cash flow) allowed by
  regulatory agency
• No national rates--Cost covering tariffs with
  break-even after 5 years (4 cent energy charge,
  lifeline rates, increasing block rates for
  households)

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Thailands PEA--Public

• Initial grants for feasibility study
• Soft loans from WB, Japan, Saudi Arabia, and ADB
• Lower bulk (one-third) supply from EGAT, but all
  electricity companies are financially viable
• Contributions from rural communities-- mainly
  from social fundsto be put on priority list for
  being connected to the grid system
• Pricing carefully base on the system load
  characteristics, and bills are collected

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Political Interference Resist Distortion of
Electricity Connection Plan

• Thailand--Developed objective selection criteria
  to rank villages, allowed communities to jump to
  higher rank if they paid for part of village
  connection charges, village selection plan was
  included in national economic development plan
• Costa Rica--Standard procedures for least cost
  expansion overseen by regulatory agency,
  customers have to pay for extension cost if too
  far away from system

23
Community Level ProblemsRights of Way, Theft,
Vandalism, Low Load

• Thailand--Community meetings concerning
  electricity plan well before electricity came to
  community, local leaders to collect bills and
  report problems, had community agree to provide
  right of way and settle disputes internally
• Costa Rica--Cooperatives used rural
  electrification committees for community liaison.
  People are automatically members of the
  cooperative when they pay for their service
  initiation. Programs to explain service options,
  meeting on time schedule, construction issues,
  etc.

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Summary Rural Electrification Surprising
Findings

• No one kind of institution works best (or assures
  success)
• Greater local involvement than anticipated
• Rural electrification master plan or planning
  capability quite common
• Most programs had ways to deal with political
  interference
• Subsidies and financing also quite varied.
• Pricing structures differ greatly
• Financial viability a key

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Public Policies--Guiding Principles

• Set up effective institutional structures
  mandated to deal with rural electrification
  (cooperatives, agencies, institutions to extend
  the grid)
• Address political temptation to pork barrel and
  impact utility financial viability (Thailand
  example of use of social funds)
• Have a rational expansion plan based on revenue
  growth and expansion costs (Build load and
  revenue to support expansion)

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Public Policies--Guiding Principles

• Importance of cost recovery subsidies should
  encourage not destroy business incentives (To
  serve consumer rather than government)
• Charge a cost recovering price for electricity
  after the subsidy, but help with service
  connection costs (delicate balance)
• Foster community involvement (Increase the
  likelihood of bill payment versus cutting off
  non-paying households creating ill will)
• Reducing construction and operating costs (Single
  Phase in Tunisia reduces 30 of distribution
  capital cost)

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Recipe for Rural Electrification
Cookie Cutter
Rural Electrification Stew
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Diverse Ways of Making Stew Country Economic,
Political and Cultural Context

• Buy a low cost pot (most programs have rural
  standards lower than urban ones)
• Subsidies generally are necessary to make the pot
  affordable
• For broth cook up a rich stock of financial
  viability to provide the base for the stew
• Add a pinch of long term financing. Two to five
  years just is not enough

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Recipe for Rural Electrification

• Put in a handful of local cooperation and
  sometimes you can mix this with a bit of bill
  collection
• Simmer for 20 years or more, as patience is
  necessary
• Taste often and make adjustments
• For selling this stew, make sure to get your
  prices right
• The sustenance from the stew will make you strong
  and healthy

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Thank You

• Douglas Barnes
• Energy Strategy Management Assistance Program
• The World Bank
• 1818 H Street NW
• Washington DC 20016
• dbarnes_at_worldbank.org
• (www.esmap.org)