1

Rural Electrification Public Policies and Programs:

Do They Matter?Evidence from Case Studies

Douglas BarnesESMAP

The World Bank, Washington, DC

Electricity and the Human ProspectStanford University, December 8-9, 2004

2

RE Problems To Be SolvedRural areas involve dispersed populations and difficult terrain: High capital costs and high operating costsCustomers are often poor: Cannot afford afford full upfront lump sum connection costs; poor load profiles (evening)Political interference in operation of rural distribution company: Distorts electrification extension and interferes with pricing, bill collection, disconnection policyMain power companies have institutional difficulty meeting special demands of rural distributionLocal community level problems often are not addressed (rights of way etc.)Power sector reform poses unique problems for rural electrification--potential for “skimming the cream” and leaving rural people without service

3

Countries in Study

80%50%19904,390240

ChileUganda

85-90%40-45%19581,100China

88%6%19731,990Tunisia

95%44%19506,230Mexico

90-95%20%19732,190Thailand

24%8%1978400Bangladesh

76%8-19%19691,080Philippines

90%15%19614,280Costa Rica

Recent Coverage

Initial Coverage

Initial Program

$ GNP /Cap

Country

4

Successful Cases of RE-Cooperatives

Costa Rica-- USAID/NRECA assistance; 90% of rural HH have electricity; Cooperatives developed when private sector would not enter.Philippines--Initial USAID assistance, WB assistance (Unsatisfactory) 65-70 % Bangladesh—Assistance from USAID and World Bank. Still low rate of electrification, but connecting about 500,000 per year. Rural electrification cooperatives supported by central administrative unit (PBS and REB).

5

Successful Cases of REPublic Companies

Thailand--Government initiated. WB Supported; 80-85% of rural HH have electricity; Regional distribution company financially viableMexico—Government budget 95%Tunisia—Government budget with meager external assistance—90% +

6

Successful Cases of REDecentralized Companies

China—Decentralized Power Companies-- A local approach Reaches Over 800 million households or 85 % of the population; Currently want ways to reach remaining 60 million Chile—Private sector companies supplemented with poverty type subsidy fund reaches 75 percent of population and growing

7

Costa Rica--Cooperatives

Initial loans from USAID—40 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 network—difference between rate of return (cash flow) allowed by regulatory agencyNo national rates--Cost covering tariffs with break-even after 5 years (4 cent energy charge, lifeline rates, increasing block rates for households)

8

Philippines--Cooperatives

Initial USAID grants and concessional loans. Now financed mainly from government budgetCost covering prices once grants and concessional loans are taken into considerationNo national rates: Electricity rates vary from 8 to 18 cents per kilowatt hour depending on cooperativeExtremely remote diesel areas (SPUG) charged lower national bulk supply rates

9

Bangladesh--Cooperatives

PBSs receive loans of 3 % and lower bulk supply rates. PBSs pay Tk 1.7 versus industry price of 2.4TA grants and concessional loans from WB, USAID, Japan, ADB and othersCooperatives expected to cover operation costs after 5 years of service—For those beyond 5 years, only 17 of 39 are covering their costs

10

Thailand’s PEA--Public

Initial grants for feasibility studySoft loans from WB, Japan, Saudi Arabia, and ADBLower bulk (one-third) supply from EGAT, but all electricity companies are financially viableContributions from rural communities--mainly from social funds—to be put on priority list for being connected to the grid systemPricing carefully base on the system load characteristics, and bills are collected

11

Example: Thailand’s Rate Structure, 2002

400+1501003515 200 250 300 350130703.00

3.50

4.00

4.50

5.00

5.50

6.00

6.50

7.00

7.50

Monthly kWh blocks

US

Cen

t per

kW

h

151-400 kWh at US Cent 6.6 per kWh400+ kWh at US Cent 7.1 per kWh

Fixed charge of 20 cents for first 5 KWhFixed Charge for excess of 35 kwsFixed Charge for excess of 150 KWh

12

Mexico—Public CompaniesInitially state and local government contributed funds for RE1970s government contributed budget to social infrastructure funds, that could be used for getting electricity to a communitySocial infrastructure funds received contributions from federal, state, municipal, and local governments amounting to about 60 million dollars per yearYear 2000 fiscal contribution to electricity sector in the billions of dollars

13

Tunisia--STEGMost of the program is financed directly from the government budgetThe new expansion shared between STEG, consumers, and the StateCurrently, $200 from STEG financial resources, $200 from consumer, and up to $1800 from state budget (State contribution started at $400 25 years agoPresidential fund for very poor communitiesSTEG is financially viable, but there is a cross-subsidy from gas business to electricity business

14

China—Decentralized PCsInitially financing of RE came from state to local governments, but now the state share is small and most financing comes from commercial banksSmall hydro production given extensive support in the form of TA and low or no cost loans from central governmentIn some cases, construction materials were provided at low cost; Extensive local construction and investment in locally run PCsDecentralized PCs expected to be commercially viable; rural tariffs are twice urban tariffs

15

Chile Example of Private Sector RE Program

Will be examined later.

16

High Capital Cost of RECosta Rica--Concessional borrowing, low cost system design (single phase), and consumer connection feesThailand--Concesional borrowing, cross-subsidies from bulk power rate, standardized procurementChile--Developed grant fund combined with technical assistance for new expansion, with some clear criteria for qualification

17

High Operating Cost of RE

Philippines--actively minimize losses, high tariff, barangay bill collection (meter banks), urban areas are in service territory, cross bulk power subsidy for isolated island systemsThailand--actively minimize losses (especially theft), high bill collection rate through village leaders, cross subsidy from urban to rural due to nationwide tariff, also bulk tariff cross subsidyChile--After initial capital grant subsidy for system expansion, system required to be financially viable

18

Customers Are Poor: Keep Upfront and Operating Costs Low

Costa Rica--Require up-front payments for service drops, but charge was same for group making it more affordable;initial stages tariffs contain capital chargesThailand--careful system extension planning prioritized high consumption areas, encouraged productive loads, load promotion, lifeline rates based on load profile (i.e. less than 25 kWh)Philippines--Accepted low load and charged high tariff

19

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 planCosta Rica--Standard procedures for least cost expansion overseen by regulatory agency, customers have to pay for extension cost if too far away from system

20

Institutional Issues: Focus on Solving Problems

All case studies countries had special institution for RE because main power companies had difficulty implementing programThailand--Office of Rural Electrification in PEA which dealt only with distribution. It also had its own budget and could raise grants and loans for distributionCosta Rica--Development of rural cooperatives specializing in distribution. They could raise their own funds through loans and grants.Chile--National office to qualify communities for grants and provide them with technical assistance; regional offices do actual selection

21

Community Level Problems:Rights 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 internallyCosta Rica--Cooperatives used rural electrification committees for communitylaison. 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.

22

Power Sector Reform and REOptimism that private sector will lift the subsidy burden of RE from the government is unfounded; i.e.. Peru has had franchises returned to them for $1.Limits coverage to regions that will be profitable. After privatization RE tends to stop or slow down.Old Subsidy Mechanisms Do not Work: Eliminates the possibility of cross-subsidies unless service territories contain both urban and rural areasEquity Issues: Those with service received past subsidies. Protection needed for poorest households? (low access charges, lifeline rates, low cost wiring, etc.)

23

Chile—Example of Private Companies and Cooperatives

After privatization, investments in new extension ceased—Electricity connection rate at 50 percentFound general social funds ineffective for RE1990 Government developed PER, subsidy fund for new expansion to financial viable and economically attractive areasCommunities request Private Utilitiy Co (incuding cooperatives (PUCs) to develop rural electrification plansPUCs applied to PER for construction funds, but had to prove revenues from project exceed costs of service to the communities, and that they are economically attractive (Consumer Surplus Calc.)Subsidies cover about 75 to 80 percent of construction costs

24

Power Sector Reform and RE: The Example of Chile

Source of financing is a fund similar to social development fund, which also has involved some donor grant funds for renewable energyAdministration of fund: Planning agency evaluates projects based on special programs that evaluate financial and social rates of return.Approved projects go to regional council which allocates fundsOnce approved funds go to communities who pay the distribution companies with the fund for service expansion. Distribution company pricing is regulated under existing guidelines.Since 1992 rate of electrification went from 50% to 75%

25

Do Public Policies Matter—Yes, but certain guiding principles

necessarySet up effective institutional structuresDeal with the political dimensionCriteria for rural electrification: Have expansion plan or criteria for inclusionImportance of cost recovery: subsidies should encourage not destroy business incentives Charge the right price for electricity, but help with upfront costsBenefits of community involvement Reducing construction and operating costs Consider Off-grid Alternatives