financial aspect for sustainable r …counted as part of the project costs, although they are likely...

CHAPTER 9

FINANCIAL ASPECT FOR

SUSTAINABLE RURAL ELECTRIFICATION

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CHAPTER 9 FINANCIAL ASPECT FOR SUSTAINABLE RURAL ELECTRIFICATION

9.1 INTRODUCTION This chapter assesses the financial sustainability of rural electrification projects comprising micro-hydro and solar home systems.

The PLN’s Annual Report for 1999 states that the population electrification ratio had reached 51.75% by the end 1999. Since the total population of the country is reported to be 207.4 million, those who are not electrified could be as many as 100 million persons or greater.

Out of these 100 million non-electrified people, PLN’s and BPS’s statistical data estimate that at least 74 million people or 15 million households reside in the rural areas, which need to be electrified not by PLN’s grid development but by independent rural electrification projects. On the basis of detailed cash flow analysis, which considers the requirements of households only, it could roughly cost between US$ 2.2 to 7.6 (or more in some cases) per household per month to supply them with electricity, irrespective of the type of energy resource used. The total costs for the whole country would then range from $400 million to $1.4 billion every year to keep the rural population electrified without PLN facilities.

However, the social surveys carried out during the Study warn that most of the non-electrified villagers do not have sufficient willingness to pay the cheapest bound of tariff of $2.2 per household every month for their electricity. Even if all of them were able to pay, majority of the non-electrified villagers would only have access to very limited electricity supplies. This is because substantial part of rural electrification can be achieved only with photovoltaic power, which is considerably more expensive than other type of power facilities, such as micro hydro, in terms of the unit energy cost. For example, despite paying a similar electricity tariff, villagers with a typical solar home system (SHS) can be served with only 360 Watt-hours per household per day, while those who access to a micro-hydro power system can receive 1,800 Watt-hours, which is five times greater.

It should be noted that this distortion is also reflected in the existing tariff structure for rural electrification and PLN, as compared in the following table:

Table 9.1-1 Comparison of Energy Tariffs

System PLN Rural Electrification

Energy Source Independent of energy resource types SHS Hydro

Electricity Tariff 2.5¢/kWh♣ 80 to 110 ¢/kWh♦ 8 to 28 ¢/kWh♦

♣ The lowest tariff, PLN, 2001, while the actual unit energy cost is reportedly 7.5¢/kWh. ♦ Estimated by JICA Study Team, 2003.

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To overcome such a difference between the costs and willingness to pay and the distortions in existing PLN electricity tariff, one should think of a set of supporting measures to make the rural electrification projects financially sustainable and fair as well.

9.2 CHARGES AND COSTS OF RURAL ELECTRIFICATION PROJECTS

9.2.1 Charges The charges for rural electrification project will be composed of i) periodical or monthly payments for electric energy, ii) one time payments for service opportunity, and iii) unscheduled payments for unscheduled maintenance or repair. The first item is the recipients’ payments for electricity supplied. The second item is often referred to as the “connection fees” which is collected when electricity services begin. The last item will be required when the project facility is in trouble. All of these costs are expected to be recovered from the power recipients. The power recipients could be of households, any community facilities, and enterprises using electricity within the community. Unfortunately, the typical villagers are not usually rich enough to pay for full cost recovery for rural electrification project.

9.2.2 Valuation of Charges The recovery of three types of charges of a rural electrification project will depend on the level of electricity tariff, which should be established by the villagers concerned and depends on their willingness to pay. However, this does not imply setting up a grossly high tariff without discretion. The tariff should be agreed by the villagers through discussions about the need for project sustainability, and their own capacity to pay.

The Study suggests the following prices for electricity:

• Energy fee: Rp. 25,000/household/month or 10% of villagers’ income. • Connection fee: Twelve times of the monthly energy fee (desired to save money out

of villager’s salary to be paid on participatory construction) • Unscheduled payment for repair/maintenance: No required. (It is more important to

raise the energy fee up to the villagers’ capacity to pay.)

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

0% 20% 40% 60% 80% 100%Village Sample

Rp.

/HH

.Mon

th

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

0%

Rp.

/HH

.Mon

th

Max. Rp. 1,281,500/HH.Month Min. Rp. 36,500/HH.Month Ave. Rp. 312,700/HH.Month (Note) 77 samples.

Figure 9.2-1 Non-Electrified Villagers’ Income

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According to the Rural and Social Surveys conducted for the South Sulawesi, East Nusa Tenggala and West Tenggala Provinces, the average family disposable income ranged from Rp.36,500/month to Rp.1,281,500/month in 2002, as shown Figure 9.2-1. The average income is Rp.312,700/month/household.

The expenditures of the households on alternative sources of lighting can be taken to represent their willingness to pay for the future electricity. As a proportion of their income, the expenditures on alternative lightening sources range from 4% to 20% as shown in Figure 9.2-2.

For these non-electrified villages, the average monthly expenditure on alternative lighting sources such as kerosene lumps is as high as Rp.25,670/household/month with the lowest and highest bounds of Rp.5,925/household and Rp.64,400/household respectively. The monthly expenditures for the alternative lighting sources are given in Figure 9.2-3.

The Rural and Social Surveys found that average family size and working family members of a household in rural areas are 5.81 persons and 1.91 persons, respectively.

0%

5%

10%

15%

20%

0% 20% 40% 60% 80% 100%Village Sample

Shar

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Exp

endi

ture

to H

Hs'

Inco

me

Max.Rp.20.26 % to HHs’ Income Min. Rp. 4.45 % to HHs’ Income Ave. Rp. 8.21 % to HHs’ Income (Note) 77 samples.

Figure 9.2-2 Non-Electrified Villagers’ Expenditure

Ratio for Alternative Lighting

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

0% 20% 40% 60% 80% 100%Village Sample

Rp.

/HH

.Mon

th

0%

5%

10%

15%

20%

0%

Shar

e of

Exp

endi

ture

to H

Hs'

Inco

meMax. Rp. 64,400/HH.Month

Min. Rp. 5,925/HH.Month Ave. Rp. 25,670/HH.Month (Note) 77 samples.

Figure 9.2-3 Non-Electrified Villagers’ Expenditure

for Alternative Lighting

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9.3 COSTS

9.3.1 Definition of Costs There are a lot of costs associated with promoting a rural electrification project at every stage and every phase of the Project Initiation, Project Development, and Project Operation discussed earlier. However, one should have a clear definition on what goes into the project cost and what does not, so that consistency and transparency can be ensured throughout the project promotion. Costs are assumed to be borne by associated stakeholders. That is, costs specifically related to the promotion activities for a specific rural electrification project are the only ones counted as part of the project costs. This concept is illustrated graphically in Figure 9.3-1 and further discussions are made in Chapter 7 in the Guidelines, which have been separately prepared during the Study.

The project cost items are therefore defined as costs specifically required for the Project Development, Community Preparation, Project Implementation, and Project Operation. In principle, wages or other direct and indirect costs for governmental staff cannot be counted as part of the project costs, although they are likely to be incurred with various kinds of services to the project. Possible cost items that may be counted as part of the project costs are listed in Table 9.3-1.

Figure 9.3-2 illustrates likely disbursements of a project.

GOIDistrictVillage

Daily O&M

Expression of Interest

Reconnaissance

Feasibility Assessment

Prioritization

Support and Monitoring

Project Implementation

Community Preparation

Project Development

ProjectOperation

ProjectDevelopment

Potential Survey &Campaign

Coordination andAdvice based onFive-year Rolling

Plan

ProjectImplementation

Project Initiation/Rural ElectrificationPlanning

Figure 9.3-1 Cost Items Counted for Rural Electrification

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Table 9.3-1 Possible Cost Items

Project Phase Activity Possible Cost Items To Be Counted

Specialists' Fee for engineering services Costs of investigations for hydrology, wind, etc.

Project Initiation

Project Development

Taxes Specialists' Fee for engineering services Costs of capacity building

Community Preparation

Taxes Costs of land acquisition Specialists' Fee for engineering services Cost of contractor procurement Facility cost exclusively for power system Training costs Cost of new enterprises

Cap

ital C

ost

Project Development

Project Implementation

Taxes Costs of daily operation and maintenance Management costs Unscheduled repair costs Scheduled replacement costs

Ope

ratio

n C

ost

Project Operation Project Operation

Taxes

9.3.2 Valuation of Project Costs (1) Project Costs of Micro-hydro Power Systems

As discussed in Chapter 8 of these Guidelines, the major component of the total project costs for a micro-hydro power system is the facility cost, which is mainly composed of civil construction cost and cost of equipment and installation. The facility cost may fluctuate widely ranging from $2,000/kW to $7,000/kW. From the financial point of

Engineering Fee

Construction Cost(Capital Cost)

Unscheduled Repair Cost

Scheduled Replacement Cost

Daily O&M Cost

Years

Cos

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Com

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ing

Con

stru

ctio

nE

ngin

eerin

g

Sch

edul

ed R

epla

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ngin

eerin

g

UnscheduledRepair Cost

Figure 9.3-2 Example of Disbursements Required

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view, however, one should make strongest effort to reduce the unit facility cost to around $4,000/kW or less. Such cost reduction seems possible for most cases, when one utilizes local technologies, local materials, and local human resource.

Table 9.3-2 shows three alternative examples of potential life cycle costs for a micro-hydro power system. Life cycle costs are derived over the whole economic life of a project in present value terms, discounted at 10%. In other words, all costs streams of over the economic life of the project, assumed to be 20 years, including capital investments, annual operations and maintenance and repair and replacement are discounted to bring them to a common basis in present value terms. This technique enables the planner to compare the average incremental costs (AIC) of any number of alternative projects in terms of their unit costs of supply. The example in table 10.2-2 shows these unit costs can be subdivided into each major component of costs for ease of comparison.

The example represents a case of 22.2 kW of the installed capacity with the unit facility costs at $2,000/kW, $4,500/kW, and $7,000/kW, which correspond to the low, average, and high unit facility costs, respectively.

The unscheduled repair is assumed to be required shortly after the commissioning amounting to 10% of the facility cost. Each of the example cases supplies more than 48.7 MWh of annual energy over ten years of the facility life, and it is assumed to be completely replaced with a new facility when the system is 10 years old. However, it should be noted that such items as civil works and transmission mains etc, may not need replacing after 10 years and they could continue to be used over the whole 20 year period. Nevertheless, for the sake of simplicity and consistency of this example, the earlier assumption is retained.

Table 9.3-2 Examples of Project Costs in Micro-hydro Power Implementation Operation

kW Cost Facility O&M Repair Replace Sub Total

Total Project Cost

2,000 $/kW $44,444 $11,351 $5,598 $15,578 $32,527 $76,972 4,500 $/kW $100,000 $25,541 $12,596 $35,049 $73,186 $173,186 7,000 $/kW $155,556 $39,730 $19,594 $54,521 $113,845 $269,400

Ratio 100.0% 25.5% 12.6% 35.0% 73.2% 173.2%

Assuming 150W x 6 hours per day of supply to 148 households, it will approximately cost $2.2 to $7.6 per household per month throughout 20 years of the project life. These charge rates represent full cost recovery tariffs for the three systems over their total economic lives of 20 years. The values given in Table 9.3-3 can be computed from Table 9.3-2.

Table 9.3-3 Examples of Monthly Cost per Household in Micro-hydro Power Implementation Operation

kW Cost Facility O&M Repair Replace Sub Total

Total Project Cost

2,000 $/kW $1.25 /HH $0.32 /HH $0.16 /HH $0.44 /HH $0.92 /HH $2.17 /HH 4,500 $/kW $2.82 /HH $0.72 /HH $0.35 /HH $0.99 /HH $2.06 /HH $4.88 /HH 7,000 $/kW $4.38 /HH $1.12 /HH $0.55 /HH $1.53 /HH $3.21 /HH $7.58 /HH

Ratio 100.0% 25.5% 12.6% 35.0% 73.2% 173.2%

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(2) Costs of Photovoltaic Power Systems

The project cost for a photovoltaic power system also varies. Unlike hydropower, however, the cost of photovoltaic system does not depend on natural conditions but on capacity. The Solar Home System (SHS) is the most widely used rural electrification measure in the country. It usually comprises many individual generating units based on one system for one recipient. The minimum available unit size is often 50 W-peak. It has an advantage that the system capacity can be easily matched to meet the recipient’s capacity to pay. However, the electric energy the recipient can receive is very small, and is often regarded as a pre-electrification facility, which fulfills only lighting needs.

Table 9.3-4 gives two examples of the life cycle costs, for a 50 W-peak and 100 W-peak capacities. As in the previous example SHS are installed to 148 houses. The 50 W- peak currently costs $401 and 100 W-peak $632. The systems will supply approximately 66 kWh to 132 kWh of annual energy to a single recipient respectively. No engineering cost needs to be assumed, because districts are expected to be able to work for the Project Development with technical support from BPPT or other existing agencies.

The systems will last for about 20 years, if well maintained. Each one accepts three 6W bulb lamp and monochrome television turned on for 1.8 hours to 3.6 hours per night, and will cost roughly $2.6 to $3.9 per household per month as shown in Table 9.3-5. The replacement items will be mainly batteries.

Table 9.3-4 Example of Project Costs in SHS Implementation Operation

Wp Class Facility O&M Repair Replace Sub Total

Total Project Cost

50Wp $59,348 $12,641 $0 $20,238 $43,434 $102,782 100Wp $93,536 $19,904 $0 $24,600 $68,455 $161,991 50Wp 100.00% 21.30% 0.00% 34.10% 55.40% 155.40%

100Wp 100.00% 21.28% 0.00% 26.30% 47.58% 147.58%

Table 9.3-5 Example of Monthly Cost per Household in SHS Implementation Operation

Wp Class Facility O&M Repair Replace Sub Total

Total Project Cost

50Wp $1.67 /HH $0.36 /HH $0.00 /HH $0.57 /HH $0.93 /HH $2.60 /HH 100Wp $2.63 /HH $0.56 /HH $0.00 /HH $0.69 /HH $1.25 /HH $3.89 /HH 50Wp 100.00% 21.30% 0.00% 34.10% 55.40% 155.40% 100Wp 100.00% 21.28% 0.00% 26.30% 47.58% 147.58%

(3) Costs for Other Power Systems

Project costs of other types of power systems, such as biomass power and geothermal power, need to be specifically determined on a project by project basis, when such power systems are planned. There are no sources of data that can provide costs structures for typical projects of this nature for rural electrification purposes. Consequently, generalized discussions and analyses are not considered very useful.

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9.4 SUSTAINABLE FINANCIAL STRUCTURE

9.4.1 Financial Viability It is considered that a typical rural electrification project is not financially viable, as illustrated by earlier assumptions and discussions. Therefore, one should conclude that official subsidy is required for the rural electrification projects. It should be noted that if a rural electrification project seems financially viable and affordable then the villagers are probably paying very high prices for electricity, or project costs have been underestimated. In the former case, the power users might suffer from electricity payments over and above their ability to pay. If it is the latter case, the project could survive for few years but not be sustainable to last over the long term.

9.4.2 Cost Recovery As the rural electrification projects need to be sustainable over the long term, it is of paramount importance to clearly establish which cost components can and should be borne by respective power recipients and which cost components need to be paid by others as subsidy. To do this, one can prioritize cost recoverable items of the required project cost components as follows:

Priority 1: The power recipients should pay for at least the project cost of the daily operation and maintenance without exception.

Priority 2: If the power recipients have greater capacity to pay over and above the daily operation and maintenance costs, then they should be required to pay additional amounts for the unscheduled repairs.

Priority 3: If the power recipients have further capacity to pay beyond the costs for operation and maintenance plus unscheduled repair, then they should be required to pay additional amounts for the scheduled replacement costs.

Priority 4: If the power recipients have even greater capacity to pay over and above all costs, then they should be required to pay for the full project cost.

The above listing can be used to determine the cost recovery principles. The examples of the projects presented in Table 9.3-2 and Table 9.3-4 are reproduced in Table 9.4-1 to illustrate which component of the project costs could be recovered in typical non-electrified villages.

Table 9.4-1 Evaluation of Project Cost Components

Operation Cost Capital Cost Type Cost Range

O&M Repair Replacing Low Unit Facility Cost A B B C Average Unit Facility Cost B B C C Hydro High Unit Facility Cost B C C C 50 Wp, 200 Wh Package A A A B

SHS 100 Wp, 500 Wh Package A A B C 10 kW Wind + 3 kW Solar A A A C

Hybrid 30 kW Wind + 6 kW Solar A A A C

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In the table, the symbol “A” represents a cost component that is below the amount typical villagers would be willing to pay for electricity, and the potential for cost recovery would be high. “B” corresponds to a cost level between the willingness and the ability to pay of the villagers, and it is probable that the costs can be recovered from the recipients. “C” represents a level of costs beyond the capacity of the villagers to pay. In such as situation cost recovery from the beneficiaries of the project would be difficult. In this example, the villagers’ willingness and capacity to pay are assumed to be US$1.00/month/household and US$3.00/month/ household, respectively.

The table illustrates that the typical non-electrified villagers would be at least willing to pay for the costs of all daily operation and maintenance, and probably be able to make a contribution to the costs of scheduled replacements of the facility.

9.4.3 Funding Options Two funding scenarios are used to determine out the potential funding sources. They represent the situations under the “Minimum Cost Recovery Scenario” and the “Full Cost Recover Scenario”. These are compared as in Table 9.4-2, which shows what could be paid as cash directly by villagers, where loan funds would be needed, and what could be paid by grants or gifts.

Table 9.4-2 Financial Structures of Rural Electrification Projects

Scenario Gift Loan Cash Remarks Minimum Cost Recovery

All of the Project Cost except for Daily O&M None Daily O&M Not

recommended Full Cost Recovery None All of the

Capital Cost All of the Operation Cost the ultimate case

In the table, “Loan” and “Cash” are the components that could be recovered from power users through electricity tariff. The amount of “Gift” is literally a gift, and it should be excluded from the cost stream of the project. Because the Minimum Cost Recovery Scenario is regarded as the worst case from the point of view of cost recovery, and because of absence of loans would decrease the villager’s incentive to pay, this scenario is not recommended for the future.

The financial structures are graphically illustrated in Figure 9.4-1. The Maximum Subsidy Case (Gift) corresponds to the Minimum Cost Recovery. The Zero Subsidy Case coincides with the Full Cost Recovery. The Cash and Loan components are fully recoverable in the chart.

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These financial structures are numerically translated into Table 9.4-3, which correspond to the minimum cost recovery, the full cost recovery, and the average case.

Table 9.4-3 Cost Recovery Pattern

a) Minimum Cost Recovery Case Unit: $/Household/Month Cost Recovery

Energy kW Cost Gift Loan Cash Recovered

2,000 $/kW $1.85 /HH $0.00 /HH $0.32 /HH $0.32 /HH 4,500 $/kW $4.16 /HH $0.00 /HH $0.72 /HH $0.72 /HH Hydro 7,000 $/kW $6.47 /HH $0.00 /HH $1.12 /HH $1.12 /HH

50Wp $2.24 /HH $0.00 /HH $0.36 /HH $0.36 /HH SHS

100Wp $3.33 /HH $0.00 /HH $0.56 /HH $0.56 /HH

b) Arithmetical Mean Case Unit: $/Household/Month Cost Recovery



50Wp $1.12 /HH $0.84 /HH $0.64 /HH $1.48 /HH SHS

100Wp $1.66 /HH $1.32 /HH $0.91 /HH $2.22 /HH

c) Full Cost Recovery Case Unit: $/Household/Month Cost Recovery



50Wp $0.00 /HH $1.67 /HH $0.93 /HH $2.60 /HH SHS

100Wp $0.00 /HH $2.63 /HH $1.25 /HH $3.89 /HH

DailyO&M

ScheduledReplacement Capital Cost

��Cash

��Subsidy

��Cash

��Loan

��Cash

��Subsidy

��Loan

Maximum Subsidy Case(Minimum Cost Recovery)

Zero Subsidy Case(Full Cost Recovery)

Arithmetical Mean Case

Unscheduled Repair

Total Project Cost

Figure 9.4-1 Financial Structures of Rural Electrification Project

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In the above table, the values of the “Loan” do not include interest because the amounts shown are given in present value, discounted at 10% per annum, which explicitly takes into account the “cost of capital” The most fundamental issue for long term sustainability is the requirement that the daily operation and maintenance costs should be payable by the villagers. All of the rural electrification projects should and could aim at greater cost recovery from villagers themselves than the Minimum Cost Recovery Scenario case.

To implement the above financial structures, the loan and gift facilities are both needed. The loan facility is needed from the proposed government “non-bank” agency, and bilateral and multilateral development agencies providing ODA soft loans. The gift facility is desired from the GOI’s budget, Local Government Budget, and various ODA grant aid programs. These loan and gift facilities should be appointed with strong coordination by GOI.

9.4.4 Savings Funds In order to prepare for the scheduled and unscheduled expenditures during the Project Operation Phase, each rural electrification project needs a “savings fund”. Such savings funds can be used for depositing additional money from villagers and for retaining surplus earnings from tariff revenues. It may be practical to have either one large fund for multiple projects or a small fund for each specific project.

The Study, however, recommends one small fund for each project rather than larger fund covering multiple projects. This is simply because the main stakeholders and the owner of the rural electrification project will the villagers. If one large fund is established under a district government or the Central Government, these will need to be managed by these authorities, and villagers would lose their direct ownership of the fund and an incentive to contribute additional resources.

In the context of the need for community based projects, it is recommended that the tariffs are set individually for each project or community. It is also recommended that an official ownership of each rural electrification project be passed on to respective community, once the project commences operations.

9.5 TARIFF STRUCTURE OF RURAL ELECTRIFICATION PROJECTS

9.5.1 Project-dependent Tariff Systems When discussing a tariff system, the first and largest question is whether it has an equal value independently of projects, or it is different and highly dependent on projects. For the Study Team, it should be answered that the tariff system is to be established project by project with different values and different rules to pay. This is because a rural electrification project is a villagers’ own project, and needs villagers’ own management. Such villagers’ ownership is expected to be the dominant driving force to make projects sustainable.

Meanwhile, there must be arguments for and against such project-dependent tariff systems. The negative arguments are probably against possible unfairness in energy payments from rural people. However, any rural electrification projects require the villagers’ initiative to operate and manage them for decades. Otherwise, the projects

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could be deadlocked very quickly. As the equal tariff cannot guarantee the villagers’ initiative, the other measures should be realized to strengthen villagers’ initiative and incentive for electrification. One of such measures is an ownership of the project; namely, the project belongs to the villagers, and accordingly, the villagers make necessary managements. In fact, the Project Operation Phase, which mostly forces the villagers alone, is the longest phase and the target itself of the rural electrification. It is very important to guide villagers to have a strong incentive to manage their own project by themselves. To do this, the project-dependent tariff system can be regarded as the better selection.

9.5.2 Desired Tariff Structure (1) Electricity Tariff

A discussion on the electricity tariff may be needed at every project phase. A depth of the discussion may vary depending on the project phase concerned. However, each discussion on the electricity tariff needs the following steps:

Step 1: To estimate the total project cost,

Step 2: To estimate number of future power users,

Step 3: To survey and/or estimate the willingness and capacity to pay of the future power users,

Step 4: To build a cost recovery plan,

Step 5: To value affordable electricity tariffs, and

Step 6: To agree with the future power users.

Here, it is assumed that necessary technical studies, such as the probable energy resource type and project scale, have been done in necessary depth. Each of the above steps is further discussed below, together with a tariff example.

(2) Step 1 — Cost Estimate

First of all to set up the tariff, a cost estimate should be made. For example in this case, persons in charge of the tariff studies may temporarily use applicable values of the monthly cost share per household as shown in Table 9.3-3 or Table 9.3-5. These cost shares will be useful when the project is in its initiation phase, such as the Field Reconnaissance and Electrification Planning.

(3) Step 2 — Future Power Users

Following the project cost estimate, it is needed to forecast number of the future power users within the project area. Since a rural electrification project is often attractive enough for non-electrified outsiders to move into the project area, the number of power users should not be underestimated. At the same time, it will be needed to estimate such non-domestic power users too as community owned offices, schools, hospitals, mosques, and even expected future private enterprises in the community. Because of unreliability, however, it should not be overestimated the demand of the non-domestic power users that do not exist at the study stage concerned. Information from the

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community or village must be very useful and effective to foretell such probable power users in the future.

(4) Step 3 — Willingness and Affordability to Pay

Measuring the villagers’ willingness and affordability to pay are very important. It is only available in the fields. The non-electrified people’s willingness to pay for electricity may be defined to be the cost they are spending for a lighting purpose in their houses such as the cost for kerosene used for lamps in most cases. According to the village surveys during the Study, it is roughly $2.8 or Rp. 25,000 per household every month in average. The affordability to pay is often greater. The said village surveys estimate that it is roughly $3.0 to $4.0/month/household, which is 10% of the monthly cash income per household. However, it should not be overestimated the affordability to pay. Especially when the rural electrification does not expect any increase of the villagers’ income, like most of cases with SHS, such overestimation can be a critical issue to entire processes of the project promotion.

Persons in charge and the villagers themselves should carefully value the affordable price for the electricity. Such affordable price will be used as the main base of the tariff studies.

(5) Step 4 — Cost Recovery Plan

The Study Team recommends applying the cost recovery priority. Once the affordable price for electricity has been obtained, and then it is compared to each component of the project cost in the order of the cost recovery priority.

When the cost recovery plan is worked at a very beginning phase of the project promotion, such as the Field Reconnaissance and Electrification Plan, it is very difficult to expect accurate components of the project cost. In such cases, Table 9.5-1 would be helpful for judging which parts could be cost-recoverable. The table gives accumulation of the cost components in the left to right order of the cost recovery priority, and the largest cell less than the affordable price corresponds to the cost components that would be fully cost-recovered.

Table 9.5-1 Cumulative Financial Costs of Rural Electrification Projects Unit: $/month/household

Type Description Daily O&M Only

Up to Unexpected

Repair

Up to Replacement

Up to Facility

2,000 $/kW 0.32 0.48 0.92 2.17 4,500 $/kW 0.72 1.07 2.06 4.88 Hydro 7,000 $/kW 1.12 1.67 3.21 7.58

50Wp 0.36 0.36 0.93 2.60 SHS 100Wp 0.56 0.56 1.25 3.89

For example, if the affordable price is $2.0/month/household, it can cover the cost only for daily O&M and unexpected repair in a case of the hydropower system ranged in the average unit facility cost, while it can cover cost up to the facility replacement in the case of SHS.

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All of the cost parts that have been judged not cost-recoverable need to be subsidized by means of a certain monetary gift facility.

(6) Step 5 — Electricity Tariff

When a tariff structure is being established, it is needed to carefully value the connection fee as an advance payment, energy tariff for households (or the most likely affordable rate of proportion against the most probable monthly income), and other possible level of fees.

Because a large amount of the connection fee can effectively reduce the future monthly payments, it is recommended that part of labor wages to be paid to villagers as participatory labor during the construction works of the power facilities are to be deposited as much as possible. If it is of the hydropower, there is a great chance for the villagers to participate in the construction.

Monthly fixed payments are advantageous to villagers, because they do not demand any extra facilities to measure energy used by each power user. If necessary, such fixed monthly payments are determined not equally but differently user by user depending on his or her income level, so that every power users can pay charges for electricity within the affordability to pay. In this connection, it may be necessary for the community to control all of electric equipment used in terms of its supply and replacement.

When new enterprises are planned to established in targeted area on the rural electrification project, it is needed to pay the greatest attentions to estimate the electricity payments from such enterprises. Because commercial liability of such enterprises is not guaranteed, it is of paramount danger to underestimate the households’ payment share in the future.

(7) Step 6 — Agreement with Power Users

The future power users must be informed of all of outputs yielded from Steps 1 to 5 above. Any further promotion activities should be strictly subject to an agreement with the power users. Upon disagreement, if happens, it should be considered about a different scheme with a different energy resource.

It is of paramount importance for power users not only to agree to the electricity tariff, but also to regulate how and when the energy tariff is changed. The regulation should include a scheduled rise of monthly electricity payments to meet expected price escalation, or to meet scheduled changes of electricity tariff of PLN.

(8) Example of Tariff System

Assumptions of the Project Features: Energy Type Micro-hydro Power Installed Capacity: 30.0 kW Number of Recipients: 200 Households 150W/household assumed Facility Life: 10 years Facilities will be replaced after the life. Project Life: 20 years Facility Cost: Rp.1,215 Mill. ($4,500/kW in unit facility cost) Yealy O&M Cost: Rp. 310 Mill.

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Unscheduled Repair Cost: Rp. 153 Mill. After completion and replacement Scheduled Replacement Cost: Rp. 425 Mill. Total Project Cost: Rp.2,104 Mill.

Assumptions of the Tariff System: Connection Fee: Rp. 48 Mill. Rp. 240,000/HH Yealy Energy Fee: Rp. 409 Mill. Rp.20,000/HH/Month Cost Recovery: Rp. 457 Mill. 22% Subsidy: Rp.1,648 Mill. 78% Depreciation Rate: 10% per year

Financial Stream:

From the above assumptions, a financial stream is demonstrated as given in Table 9.5-2. The cash flow tells that the example project can be achieved with Rp. 2,104 million of the total project cost in terms of present monetary worth. Its cost recovery by the power users is Rp. 457 million and subsidy is Rp. 1,648 million. The cost recovery is as low as 22%, and would cover the costs of daily O&M and great part of unscheduled repair cost.

Table 9.5-2 Example of Balanced Financial Stream Cost Portion (Rp. Million) Recovery Portion (Rp. Million)

Year Facility O&M Repair Replace Total Subsidy Conn. Energy Total

Balance

0 1,215 0 0 0 1,215 1,648 48 0 1,696 481 1 0 36 122 0 158 0 0 48 48 -110 2 0 36 0 0 36 0 0 48 48 12 3 0 36 0 0 36 0 0 48 48 12 4 0 36 0 0 36 0 0 48 48 12 5 0 36 0 0 36 0 0 48 48 12 6 0 36 0 0 36 0 0 48 48 12 7 0 36 0 0 36 0 0 48 48 12 8 0 36 0 0 36 0 0 48 48 12 9 0 36 0 0 36 0 0 48 48 12

10 0 36 0 0 36 0 0 48 48 12 11 0 36 122 1,215 1,373 0 0 48 48 -1,325 12 0 36 0 0 36 0 0 48 48 12 13 0 36 0 0 36 0 0 48 48 12 14 0 36 0 0 36 0 0 48 48 12 15 0 36 0 0 36 0 0 48 48 12 16 0 36 0 0 36 0 0 48 48 12 17 0 36 0 0 36 0 0 48 48 12 18 0 36 0 0 36 0 0 48 48 12 19 0 36 0 0 36 0 0 48 48 12 20 0 36 0 0 36 0 0 48 48 12

Total 1,215 729 243 1,215 3,402 1,648 48 960 2,656 -746 NPV 1,215 310 153 426 2,104 1,648 48 409 2,104 0

Loans are crucial in the financial stream to make the community’s cashbook balanced. For example, the facility replacement is only possible with such loans, unless extra

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subsidy is provided. Wealth pile-up is also important to effectively use cash in hand for the project’s sustainability. Table 9.5-3 demonstrates how loans eliminate negative balance in the cashflow. In the same table, Rp. 75 million of a loan is assumed to make the cashflow balanced when the project facility is replaced. In the table, the “Loan” is a debt, and the “Repay” is a constant combination series of the loan repayment plus interest pay back. “Savings” is a series of money to be deposited. “Yield” is a series of interests earned from “Savings”.

This example assumes 10% for both of the loan interest to pay and the savings’ interest to earn.

Table 9.5-3 Example of Debt and Wealth (Unit: Rp. Million)

Debt Wealth Pile-up Year Balance

Loan Repay Savings Yield Cash in Hand Remarks

0 481 0 0 481 48 529 Procurement 1 -110 0 0 419 42 461 Commissioning 2 12 0 0 472 47 519 3 12 0 0 531 53 584 4 12 0 0 595 60 655 5 12 0 0 667 67 733 6 12 0 0 745 74 819 7 12 0 0 831 83 914 8 12 0 0 925 93 1,018 9 12 0 0 1,030 103 1,132

10 12 0 0 1,144 114 1,258 11 -1,325 75 0 8 1 84 Replacement 12 12 0 -13 83 8 78 13 12 0 -13 77 8 71 14 12 0 -13 70 7 64 15 12 0 -13 62 6 56 16 12 0 -13 54 5 46 17 12 0 -13 45 4 36 18 12 0 -13 35 3 25 19 12 0 -13 24 2 13 20 12 0 -13 12 1 0 End of life

Note that the “Repay” column in the table corresponds to the payment for the loan based on constant total payments (Rp. 13 million) and a constant interest rate (10%). The payment includes principal and interest but no taxes, reserve payments, or fees sometimes associated with loans. Table 9.5-4 shows numerical example of composition of the constant payment value.

Table 9.5-4 Example of Constant Payment for Loan (Unit: Rp. Million)

Year Loan Repayment Interest Total Pay 11 75.0 12 5.5 7.5 13.0 13 6.1 6.9 13.0

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Year Loan Repayment Interest Total Pay 14 6.7 6.3 13.0 15 7.4 5.7 13.0 16 8.1 4.9 13.0 17 8.9 4.1 13.0 18 9.8 3.2 13.0 19 10.8 2.3 13.0 20 11.8 1.2 13.0

Total 75.0 75.0 42.2 117.2

9.5.3 Verification of Fairness in Tariff Level The Study Team recommends a Project-Dependent Tariff System as discussed earlier. Nevertheless, fairness in tariff level comparing the tariff system of public grid of electricity supplied by PLN might be a big issue in the future.

In other words, if the public grid of electricity supplied by PLN will be expanded in the future to near areas of the rural electrification, the fairness in the tariff level might be requested to keep. Therefore, when tariff system is set up in the areas of the rural electrification, the tariff level of PLN should be taken into account. Then, one of ways to verify is discussed hereunder for keeping of the fairness in tariff level.

In 2001, the Government of Indonesia has modified the electricity tariff system, and it should be modified periodically. Following Table 9.5-5 shows the tariffs for small scale domestic customers in low voltage distribution line as of 2003 modified based the regulation of the said tariff system.

Table 9.5-5 Existing Electricity Charge for Small Scale Domestic Customers

(Unit: Rp./kVA in Demand Charge and Rp./kWh in Energy Charge)

8,500 163 9,500 166 11,000 169 12,000 1728,500 350 9,500 355 11,000 360 12,000 380

16,200 225 18,100 240 20,000 275 23,000 31016,200 360 18,100 395 20,000 445 23,000 490

(Note) Demand charge means capacitiy charge and/or fixed charge.Energy charge means specific charge and/or variable charge.

Source: PLN.

Within 20 kWhOver 20 kWh till 60 kWh

RemarksDemandCharge

DemandCharge

Within 30 kWhOver 30 kWh till 60 kWh

Contracted Power

Within 450 VA

DemandCharge

EnergyCharge

DemandCharge

EnergyCharge

EnergyCharge

EnergyCharge

950 VA

During Jan.1 -Mar.31

During Apr.1 -Jun.30

During Jul.1 -Sep.30

During Oct.1 -Dec.31

If the average consumed electricity is 30 kWh per month per household applying the tariffs indicated in the above table for domestic users and advance payment (connection fee) is assumed as the sum of Rp.1,000,000 per household (actually, the advance payment is negotiable, but most case is set at least as Rp.1,000,000 per customer), the monthly payment for electricity in minimum case within 450 VA at present (during July 1 – September 30, 2003) may be:

- Energy Charge portion: Rp. 4,800 (=Rp.169kWh * 30 kWh per household per month)- Demand Charge portion: Rp. 11,000Sub-total Rp. 15,800

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Furthermore, when comparing between PLN customers and electricity recipients in the rural electrification projects, the difference between the advance payment (the house connection fee) of PLN and that in the rural electrification projects should be converted into monthly payment. Assuming that the house connection fee in rural electrification projects is Rp.300,000 and depreciation period for facilities is 10 years, the monthly payment converted from the difference of advance payment of PLN with that in rural electrification project may become at:

Rp. 5,800 (=(Rp.1,000,000-Rp.300,000)/10 year/12 months)

Converted advancepayment into monthlyamount to be paid:

Therefore, the total amount of monthly payment may become Rp.21,600/month per household (= Rp.15,800 + 5,800).

If the people in rural areas have greater affordability to pay, PLN recommends the next charge category of the above table (mostly, PLN recommends this category under the present financial states), the amount to be paid can be estimated as follows:

- Energy Charge portion: Rp. 5,500 (=Rp.275kWh * 20 kWh per household per month)- ditto: Rp. 4,450 (=Rp.445kWh * 10 kWh per household per month)- Demand Charge portion: Rp. 20,000Sub-total Rp. 29,950

Rp. 5,800 (=(Rp.1,000,000-Rp.300,000)/10 year/12 months)Total Rp. 35,750

Converted advancepayment into monthlyamount to be paid:

Of course, the tariff level of PLN will be increased year by year. When the tariff system is established for rural electrification project, the higher tariff level will be the better as possible within the affordability people to pay. And it should be taken the tariff level of PLN into account at that time.

9.6 MANAGEMENT ORGANIZATION FOR RURAL ELECTRIFICATION The Study Team recommends to establishing a management unit as an organization for managing the rural electrification project.

The Management Unit is requested a good governance covering (1) to keep accountability, (2) to train the people in charge so that the Management Unit is always in good states, (3) to keep the financial states being open and aboveboard at all times, and (4) to keep the comprehensive management system from the viewpoint of establishment of the monetary pool, (5) decision-making system, and so on.

9.6.1 Accountability To keep the accountability is one of importance for keeping good governance of the Management Unit.

As discussed earlier, incentives of the people belonging to the Management Unit is a key matter for successful promotion of the rural electrification projects. To enhance

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the people’s incentives, data and/or information should be clear to the public because of the rural electrification being public works in their community.

9.6.2 Training People in Charge The Management Unit is not a temporary one, but for long term as 10 years, 20 years to manage the project.

Therefore, to train the people in charge is to be needed for long term management and to strengthen the body of the Management Unit.

Subjects of the training are not only the technical matters for operation of power facilities, but also for the management technology covering the human relations, accounting, book keeping, basic information technology to take all the information in the nation concerning economic activities, especially the information on price of commodities in the market, electricity tariff of public grid of electricity supplied by PLN, etc.

9.6.3 Openness on Financial States If the Management Unit is financially not open and aboveboard, people who belong to the Management Unit can not believe the core members of the Management Unit.

Once a relationship of mutual trust in the Management Unit is lost, the management of the Unit may be disrupted. Therefore, to keep the relationship of mutual trust in the Management Unit, all the business concerned, especially such financial matters as account books and/or states of cash management should be open and aboveboard to people who are belonging to the Management Unit.

9.6.4 Comprehensive Management System from the Viewpoint of Making Monetary Pool

There are no any donors for making financial aid forever. Therefore, the Management Unit should make its own monetary pool as discussed earlier. Accordingly, following attentions should be paid such as (1) to make people belonging to the Management Unit pay monthly electricity charge without delay, (2) to take care of cash management well with systematic book keeping, (3) to control the expenditures, (4) to create a moral sense, especially on monetary matters so that for avoiding dishonest behavior of the people belonging to the Management Unit, and so on.

(1) To Make Payment without Delay

Monthly payment amount is not a small sum for the villagers. Once the payment is delayed, the amount will grow larger in no time, and payment will be difficult to make. Additionally, some amount of penalty will also be needed to pay based on the regulations of the Management Unit.

Therefore, people belong to the Management Unit should pay their monthly electricity charge periodically without delay, and the core members of the Management Unit should guide the people to do so with keeping a good human relations.

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(2) To Keep Systematic Cash Management

Most of the villagers may be unfamiliar with a systematic book keeping. However, it is one of the most importances for cash management in any establishments.

Then, the people in charge of accounting should be well trained for systematic book keeping so that they can make best book keeping exhaustively without any omissions.

(3) To Control Expenditures

All the payment of villagers consisting of house connection fee and monthly electricity charge are accounted to spend based on the regulation of the Management Unit, for example, the house connection fee is for installing the distribution facilities as cable and/or pole, for preparation of indoor-facilities at least. And its balance will be kept for replacement of the power facilities. The monthly electricity charge is for daily operation and maintenance such as wages for operators and some incidental use.

Also as discussed earlier, the Management Unit should prepare for making the monetary pool for the future.

Therefore, the expenditures should be controlled to keep to a minimum as much as possible.

(4) To Create a Moral Sense

The amount of money collected from the villagers will be a huge amount for them who may not have any experiences to have or to see. Therefore, the people may behave some dishonest practices on the spur of the moment. This is one of the weak characters of human being.

However, to keep the healthy cash management, people should overcome it, and all the members of the Management Unit dealing with the cash management should create their moral sense by themselves to overcome that weak point of human being.

9.6.5 Decision-Making System The Meeting of the Management Unit should be the supreme decision-making organ of the Unit. And some important matters such as a large amount of expenditure must not be decided by the Head’s or the Acting Head’s own discretion, but should be decided by agreement of all the members of the Management Unit at the meeting.

In this case, following attentions should be paid about following process and/or procedures:

(1) The Head or the Acting Head calls the meeting of the Management Unit, if something happened to be discussed with all the people belonging to the Unit.

(2) The announcement on meeting of the Management Unit to the members is made through someone as a secretary or an assistant secretary who is asked by the Head

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and/or the Acting Head.

(3) When the meeting held, the minutes of meeting should be prepared at least in 2 copies. The Minutes of Meeting come into force by signing of the members concerned.

(4) The Head or the Acting Head should keep the original, and the secretary should keep duplicated copy for public reading.

(5) Any members belonging to the Management Unit may peruse the minutes of meeting at the secretary.

9.7 OFFICIAL SUBSIDY FOR RURAL ELECTRIFICATION PROJECTS As discussed earlier, the unit energy cost of rural electrification projects is very expensive as high as 8¢/kWh to 28¢/kWh even with the cheapest energy resource in case of the micro-hydro power. These are, in general, over the villagers’ willingness or sometimes affordability to pay.

As PLN stops playing the role of rural electrification, another official facility other than PLN needs to subsidize to backfill the gap between the required cost and willingness or affordability to pay.

Assuming that the rural electrification all over the country is achieved by only 50 W-peak SHS, the cheapest subsidy, one needs to realize that the official monetary budgets required for subsidy is as expensive as $202 million every year as the most optimistic figure. The subsidy will be necessary as far as rural electrification projects are being implemented and maintained. The numerical computation and unit subsidy used follow:

$202 million/year = $1.12/month/household x 12 months/year x 15 million households

Where, the unit subsidy $1.12/month/household comes from the “Gift” cells corresponding to “50 Wp SHS” in b) Arithmetical Mean Case, derived as below.

b) Arithmetical Mean Case Unit: $/Household/Month Energy Class Gift Loan Cash Hydro 2,000 $/kW $0.92 /HH $0.63 /HH $0.62 /HH SHS 50 Wp $1.12 /HH $0.84 /HH $0.64 /HH

9.8 EXISTING OPTIONS OF OFFICIAL SUBSIDY SEDF discussed earlier was, unfortunately, not adopted in the Parliament of the Government (People’s Representative Conference, called as “DPR” (= Dewan Perwakilan Rakyat) in local terms). Instead, “the Electricity Law” (= the Law of Republic of Indonesia, No.20, 2002, Regarding the Electricity) was newly adopted in July 2002. By this Electricity Law, the Governmental authorities concerned should prepare a financial source for rural electrification. The Law says that:

“The Central and Regional Government provide the fund for electric power supply facility development to help the poor people, the electric power supply facilities development of undeveloped area, the electric power development in the remote area, and rural electricity development (Article 7)”.

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The Governmental authorities are mainly consisting of the Ministry of Energy and Mining Resources (MEMR) and the State Ministry of Cooperatives and Small & Medium Enterprises (SMOC&SMEs). Each of them has a plan to provide a fund or some ideas for rural electrification in conformity to the Law.

9.8.1 A Plan of the Ministry of Energy and Mining Resources (MEMR) MEMR has a plan to establish a Monetary Pool System to provide a funding resource for making subsidy for the rural electrification. The basic concept of the Plan is as follows:

(1) To collect a specified tax to be levied from the existing electricity firms and/or establishments concerned with a rate of 1 % of their net profit, and this tax revenue it to be a capital fund for subsidy.

(2) To collect a specified tax to be levied from the other existing large scale establishments such steel industry and/or petroleum as using electricity in bulk with a certain rate of their net profit, and this tax revenue it to be the other capital fund for subsidy.

(3) The capital fund for subsidy as a monetary fund can be used for electrification in remote and rural areas having no access to the public grids of electricity.

(4) MEMR makes a community apply to the local government for the subsidy, and makes the local government apply to MEMR for facilitating the subsidy for the community after evaluation of proposal applied by the community.

9.8.2 An Idea of the State Ministry of Cooperatives and Small & Medium Enterprises (SMOC&SMEs)

(1) Preconditions of Financing for Rural Electrification

• A village based cooperative (= KUD, Koperasi Unit Desa) should be set up for investment in construction of power facilities in the rural electrification.

• The cooperative is originally a commercial establishment to make a certain scale of profit from its business. However, for the cooperative being still in the cradle which has no capacity to make commercial profits, there is a subsidy system from the Government.

• The Ministry of State Owned Public Corporation (Ministry of BUMN, Badan Usaha Milik Negara) is dealing with this System. Namely, the cooperative is one of the public corporations.

• The said Subsidy System is basically a loan system but not a gift facility. The terms of the Loan are as follows:

– Annual Interest: 6 %.

– Grace Period: One year.

– Payment Period: 7 – 10 years after the grace period.

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• A basis of the Subsidy system is the Law No.9 1995 Regarding the Small Scale Enterprises (the Law of PSK, Perusahaan Skala Kecil). Namely, the cooperative belongs to a category of small scale enterprises.

(2) Functions of Cooperative

• Because the cooperative has a precondition to make certain scale of commercial profit as mentioned above, the Government give an administrative guidance to people to get their commercial profits such as to introduce an electric milling machines for paddy and/or coffee, etc. so that the local industry can be developed.

• When such local industry is developed, the cooperative can get their revenue due to collection of electricity charge not only from the domestic users, but also from the industrial users. At the same time, the local economic activities can be developed by establishing and developing of these local industries.

• Accordingly, family income may also be increased by the said development of the local economy. These are the functions of the cooperatives.

• There is a cooperative established based on specified purposes, but in general, the cooperatives can deal with not only the electrification or electric business but also all the economic activities in the village. Accordingly, in case of using the said Loan System, paying back the principals and/or its interest is no need to expect the revenue due to collection of electricity charges only from the domestic users.

9.9 CONCLUSION AND RECOMMENDATIONS FOR FINANCIALLY SUSTAINABLE RURAL ELECTRIFICATION

9.9.1 Conclusion (1) The financial cost components are composed of the costs specifically required for

the Project Development, Community Preparation, Project Implementation and Project Operation.

(2) The typical rural electrification project is financially NOT feasible.

(3) Official subsidy is required to make rural electrification projects for keeping financially feasible. The subsidy required could be $202 million/year or greater.

(4) The cost recovery priority is in the order of 1) the daily operation and maintenance costs, 2) the unscheduled repair cost, 3) the scheduled facility replacement cost, and 4) the Capital Cost.

(5) To promote the rural electrification successfully, villagers’ initiative and incentive are the most important matters because that the Project Operation Phase, which mostly forces the villagers alone, is the longest phase and the target itself of the rural electrification. For this purpose, the project-dependent tariff system can be regarded as the better selection to strengthen villagers’ initiative and incentive in rural electrification projects for making necessary managements by their own hands.

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Then, the villagers may have their own self-consciousness as the owner of the project.

(6) There are no any donors for making financial aid forever. Therefore, the community targeted to promote the rural electrification should make its own monetary pool.

9.9.2 Recommendations (1) Power recipients should recover at least the daily and operation costs, and is desired

to recover the unscheduled repair and scheduled replacement costs.

(2) A tariff system should be individually established project by project.

(3) A tariff system includes a regulation how to raise the tariff amount.

(4) A connection fee should be maximized, if the most of power recipients can participate in the project construction.

(5) No new enterprises should be counted as future power recipients, when a tariff system is built.

(6) Individual cash accounting should be carried out project by project with a specific monetary pool established for a project.

(7) An official owner of each rural electrification project after commissioning should be respective villagers or community.

(8) GOI should have both of soft loan facility and monetary gift facility.

(9) GOI and Local Governments should make a program on official subsidy systems.

(10) An organization as a management unit should be established for managing the rural electrification project to keep the comprehensive management system from the viewpoint of establishment of the monetary pool in the villagers or the community targeted to promote the rural electrification.

(11) The Management Unit should at least pay attention (1) to keep accountability, (2) to train the people in charge so that the Management Unit is always in good states, (3) to keep the financial states being open and aboveboard at all times, and (5) to establish an open and participatory decision-making system, in addition to establish the monetary pool.

financial aspect for sustainable r …counted as part of the project costs, although they are likely...

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