PV for Rural Electrification within Restructured Power Sectors in Developing Countries

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1 PV for Rural Electrification within Restructured Power Sectors in Developing Countries July 6, 2001 Anil Cabraal and Kevin Fitzgerald Over the past twenty years much has been learned about the substantial benefits of electrification and how to design and manage cost-effective rural electrification programs. But despite considerable progress, 1.7 billion rural dwellers still do not have access to electricity, a significant share in remote communities where off-grid options will be costeffective. Over the same period, power sectors in many countries have been undergoing an historic transformation toward competitive markets. Power sector restructuring fundamentally alters the roles of government, utilities, the private sector and NGOs, and financial institutions in rural electrification. As a consequence, many governments are developing methods to harness market forces for providing least-cost (grid-based and offgrid) rural electrification services. Two models have emerged for off-grid services using market forces: direct support to remote power system dealers and rural energy service concessions. The World Bank/GEF has a growing portfolio of projects supporting development of effective approaches to off-grid electrification using renewable energy. Initial experience shows that the most effective support options must be custom fit to local conditions. Overall, the trend toward competition in power markets can be expected to continue, opening new opportunities for rural and renewable energy developers. Rural Electrification Status of rural electrification in the developing world Substantial progress has been made globally in bringing power to the people. Recent progress is most pronounced in developing countries with active rural electrification programs. Whereas roughly 2 billion people in the developing world were without access to electricity in the early 1980s, recent estimates indicate that the global population without access has declined to roughly 1.7 billion, even in the face of rapid population growth. While this progress is encouraging, many developing countries have a long way to go in pursuit of universal coverage. Table 1 presents a regional summary of electrical access in the developing world. Most countries in LAC have nearly universal coverage. The reverse is true in most countries of sub-saharan Africa where electrification rates below 10% are common. Countries in South and East Asia have made great strides in the past twenty years, but a few large countries still have a long way to go nearly one-half of the world population without access to electricity live in India, Anil Cabraal is a Senior Energy Specialist, Asia Alternative Energy Program, The World Bank. acabraal@worldbank.org. Kevin Fitzgerald is an Alternative Energy Specialist, Asia Alternative Energy Program, The World Bank. kfitzgerald@worldbank.org. 1

2 Bangladesh and Pakistan. Two major factors largely explain the variation in electrical access across countries: income and sustained, high level political support for rural electrification. Table 1 Electrical Access in Developing Countries by Region (Year 2000) Total Population Electrical access Year 2000 (estimate) with access unserved Millions Millions % Millions % TOTAL 5, , , Europe & Central Asia Latin America & Caribbean East Asia & Pacific 1, Middle East & North Africa South Asia Sub-Saharan Africa Source: World Bank, Prepared from country level estimates using best available data. Much has been learned about the substantial benefits of rural electrification Rural electrification programs in many developing countries have often been defended on the basis of enhanced rural productivity. But while electric water pumping for irrigated agriculture has in many instances substantially raised agricultural productivity, significant growth of other productive uses has generally not resulted from rural electrification. It was also claimed that rural electrification could stem urban migration. But this is now widely seen as just one of the many myths about rural electrification, which in itself has little effect on urban migration. For many years, the benefits of electric service in rural homes was evaluated in terms of the value of displaced lighting kerosene. The economic benefits of activities enabled by electricity education, communications, entertainment, health, comfort, etc. were simply too difficult to measure. Advocates for rural household electrification had to rely on anecdote. More recently, a pioneering empirical study of the benefits of rural electrification in the Philippines has quantified significant benefits from electrification. Controlling for all other factors, electrification of a rural household results in 1.82 additional years of education, 33 hours/month of additional leisure time, and 48 hours/month of additional business activity (for those with a household level business). 1 The economic value of these few previously unmeasured impacts is nearly double the cost savings from lighting kerosene displacement. Moreover, due to measurement difficulties, additional benefits to health, comfort/protection, and convenience remain unquantified. Clearly, electricity can have a marked impact on people s lives. The economic value of even a few of the development outcomes that can now be measured markedly exceed previous estimates based on lighting fuel displacement alone. The high value of electricity in many rural productive applications has long been known. For example, in India farmers who use solar irrigation pumps have seen their incomes rise from Rs. 1 Domdom, A., V. Abiad, D. Barnes and H. Peskin, Benefit Estimates of Rural Electrification in the Philippines, Draft This study analyzed data from a detailed survey of 2,000 households in the franchise areas of four rural electric cooperatives. 2

3 6,000 to Rs. 30,000 per year ($120 to $600). 2 Simple lighting applications can also have a very high value. A Rural Traders Cooperative in India offers solar lanterns to its members at a cost of 1 Rupee daily for ten years. This constitutes a small increase in the 10 Rupees that traders deposit daily in a savings scheme administered by the Coop. Not only does each lantern displace 2-4 Rupees worth of kerosene daily, but they burn brighter, attracting more customers and, as a consequence, members who use a solar lantern have seen their incomes rise by %. The demand by rural dwellers for the services that electricity provides reflects only its private consumption value. In addition, electricity enables many community-level services that are expensive or not even possible without it power for vaccine refrigeration and medical equipment in health clinics, communications, water pumping for irrigation or community water supply, and lighting for public spaces and schools. When it is considered that a partial measure of the private consumption value of electricity appears to be well above previous estimates, and that community level benefits and productive uses add even more, the economic justification for bringing power to the people through well designed and cost-effective rural electrification programs is strengthened considerably. Attributes of successful rural electrification programs Because electricity is so desirable to the public, power sector operations and rural lines extension are often highly politicized. Where politicians interfere with the orderly planning and running of programs by, for instance, directing that favored constituents are connected first or by preventing constituents from being disconnected for not paying their bills, rural electrification efforts can quickly become inefficient and a burden on the public budget or on power sector finances. In fact, successful and sustainable rural electrification programs are almost always implemented by an agency with a high degree of operating autonomy one that can pursue rural electrification as its primary objective such as the programs in Bangladesh, Cost Rica, Thailand, and Tunisia. Barnes and Foley identify this and other characteristics of successful rural electrification programs, including: clear criteria for selecting projects; a focus on cost recovery; getting tariffs right; community involvement in decisions; and supporting alternatives to the grid in remote areas. 3 Electric Power Sector Restructuring An historic transformation toward competitive power markets Since the early 1980s, the electric power industry has been undergoing a fundamental transition to competitive markets in many countries around the world. The chief goals of power sector reforms are to improve the efficiency of resource allocation in the sector and to reduce the fiscal burden on the state of a poorly managed and poorly operated sector. Consequently, power sector reforms are often analyzed along two main dimensions: i ) restructuring (i.e., vertical unbundling or separating ownership of generation, transmission and distribution, horizontal unbundling, and 2 Varadarajan and Co., Presentation on PV irrigation pumping in India, Barnes, D. and G. Foley, Rural Electrification in the Developing World: Lessons from Successful Programs, Draft

4 allowing wholesale bulk power prices to be set by the wholesale market); and ii) privatization, whereby state-owned power system assets are sold (in whole or in part) to the private sector. Disintegrating vertically integrated utilities into separate businesses, by function and by region, is a key step in transforming utilities from an extension of government into commercially motivated firms that will survive or perish according to their ability to manage according to commercial principles. As shown in Figure 1, there are many possible reform paths. The path followed in any given country follows from initial conditions, traditions and trends in industrial governance, and the power of political/technical elites. While these and other unique national conditions make reforming a complex industry with valuable fixed assets a very challenging task, a few major lessons have been learned that apply universally. Market transformation toward a competitive structure is the key dimension leading to efficiency improvements in the sector. Privatization is important, but the state need not entirely divest as long as competition is vigorous. Moreover, regulatory needs are far more demanding in restructured power sectors. A competent and vigilant regulatory authority, with enhanced information needs, is necessary to guard against the potential abuse of market power and other anti-competitive practices. Figure 1 Power Sector Reform Paths in Several Countries Source: The Development of Electricity Markets in the Euro-Mediterranean Area, World Bank Technical Paper No. 491, April Of all developing regions, countries in Latin America are generally the most advanced in transforming their power sectors from state-owned and operated monopolies to vertically and horizontally unbundled companies with substantial private sector participation. Many countries in East and South Asia are now undertaking substantial restructuring. Power sector reforms are in the very early stages in most countries of sub-saharan Africa. 4

5 Implications of Restructuring on Rural Electrification Programs from the Perspective of PV Electrical Service Provision The high cost of rural electrification is more transparent The most immediate effect of restructuring on rural electrification programs is that competition between new players, created through vertical and horizontal unbundling, serves to make subsidies that were previously implicit, more transparent. As such, the relatively high cost of rural lines extension can no longer be hidden in implicit cross-subsidies. Most (if not all) rural electrification programs around the world have been funded through implicit cross-subsidies (often from industrial to residential consumers and from urban to rural consumers). This is because rural settlements are among the most expensive to serve by traditional grid extension, often contain the smallest individual loads, and customers who are least able to pay low projected sales and high expected costs make for poor business prospects. Because the costs of rural electrification can no longer be hidden in overall power system costs, governments have sought and developed innovative mechanisms to transparently fund their social obligation to rural electrification. Guatemala and some other central American countries reserved a share of privatization proceeds from power sector assets and used them to capitalize extension of rural lines. Chile has developed an effective decentralized scheme to attract private investment from electric companies and communities for rural electrification projects, awarding funds to those projects that require the smallest payment per unit of social value (the scheme is called the minimum subsidy vehicle ). Other countries have funded rural electrification programs out of Social Electricity Development Funds that are replenished by general tax revenues, electricity sales taxes, international donor contributions, or other sources. The roles of key stakeholders is fundamentally altered Government The fundamental changes in industrial organization introduced by restructuring transforms the role of government from a provider and operator of assets in the sector to a regulator and market enabler. In its traditional role, a government agency or utility department commonly implemented rural electrification programs according to a master-plan that was often inefficient, not sustainable, and entirely based on grid extension. In its new role, government enables markets by regulating providers and distributors, monitoring and enforcing the quality of service by setting standards and certifying equipment, protecting the consumer from dangerous equipment and abusive business practices, building capability in the off-grid energy service industry, raising awareness in remote communities, and designing and administering welltargeted subsidies. Clearly, the information and regulatory requirements of government s emerging role is substantial. The traditional centrally controlled approach is often being displaced by a variety of institutional arrangements that are being employed (and pilot tested) to give the private sector (and NGOs) explicit and transparent incentives to provide rural energy services within a sustainable business practice. Rural electrification authorities in countries with reformed power sectors (such as Chile and Argentina) are awarding contracts and concessions for rural energy service to the lowest cost (lowest subsidy) provider. Thus, power sector reform actually provides an opportunity for the savvy rural energy service provider. 5

6 Local governments can also play a key role in facilitating the dissemination of remote power systems through public-private partnerships that serve to extend credit to residents (see financing below). Utilities Companies spun off from incumbent utilities will naturally specialize in their previous functions (such as generation or distribution) and will have to manage their new businesses according to commercial principles. While power reforms are underway, utility corporate culture has been observed to change quickly, but only after senior management realizes that maintaining the status quo would be ruinous. In the classic transition, the engineers in senior management are displaced by managers with marketing backgrounds. Utilities that do not make fundamental internal changes until well into reforms often do not survive. Recognizing that rural lines extension projects are probably losing business prospects, the more dynamic companies cancel or stall implementation of rural electrification obligations or attempt to shift these projects to some other entity. In Chile, successful utilities have concentrated on their own comparative advantage, grid operations, and have begun to contract or tender concessions for off-grid service provision. Private sector/ngos Previously the role of the private sector was limited to providing construction services for lines extension and other civil works as contractors to utilities. When franchise areas open up, firms and NGOs can become power suppliers to villages, remote communities and individual households. Two major approaches have been used to foster an emerging SHS industry: direct dealer support (used in Indonesia, China, India, Sri Lanka, Kenya, Bangladesh, Uganda, and Vietnam) and the rural energy-service concession (used in Chile, Argentina, Mexico, and under consideration in the Philippines). Dealer support models assist SHS dealers to strengthen their business with assistance developing business plans, building delivery infrastructures, and training staff and also to augment demand by assisting with market campaigns, offering customer credit, and even delivering first cost subsidies and concessional financing for poor households or communities. In the concession model, an exclusive concession (usually years) is awarded to the energy service provider that is willing to provide a specified level of service to all qualified households within a defined area for the lowest level of support or subsidy. These emerging models are not mutually exclusive, nor will there be one approach that is universally better. Rather, they define a spectrum of options that can be used in the essential process of custom fitting solutions to local conditions. For Solar Home Systems, family hydro and wind systems, suppliers are not limited to dealers and NGOs operating through markets or as concessionaires. A sizeable untapped potential for disseminating household-level renewable energy technologies in many countries lies in the capabilities of consumer durables merchants. These merchants, found in rural towns in almost all countries with modest rural electrification, routinely offer credit to households to help them buy major electric appliances and white goods. It could be argued that a ready market for additional equipment might develop if they offered Solar Home Systems for those without access to the grid. 6

7 Financing institutions Since very few rural households can afford to buy a solar home system outright, the availability of credit at reasonable terms is the most important pre-condition for commercialization of these technologies. Local banks and micro-finance institutions (MFIs) are critical players in facilitating the uptake of household-level renewable energy systems. The extension of credit to SHS schemes by local financial institutions is essential for the SHS market to become sustainable. MFIs specialize in small consumer loans and most have an extensive network for monthly collections and frequent personal contact with borrowers. The involvement of MFIs in loan collection has been found to be critical to SHS project success because most dealers do not have the network to collect monthly from a dispersed clientele. Experience in Sri Lanka and Bangladesh illustrates the importance of ready and reasonable consumer credit. The Sri Lanka Energy Services Delivery (ESD) project (World Bank/GEF) delivered consumer financing for SHS through several local banks. But SHS dealers found early on that collections were too difficult and time consuming. The ESD project, therefore, turned to MFIs, such as Sarvodaya Economic Enterprises Development Services (SEEDS), that have a well established rural presence for extending consumer credit. MFIs provide essential services in SHS efforts around the world, including: small loan administration, collections, social incentives, and raising consumer awareness (marketing). Though SHS installations were slow for several years after the project began, once MFIs became involved installations have been growing rapidly, from 1,000 in June 2000 to over 3,200 at the end of March A local government also contributed to this acceleration through a public-private partnership. The Uva Provincial Council, recognizing that the grid will not be available in the province for many years, formed a rural electrification initiative that promotes adoption of SHS by providing a grant to eligible households. The Council works very closely with all parties to deliver the grant using the same demand-driven and transparent subsidy delivery mechanism employed by the ESD project. The Council is aiming to stimulate the installation of 3,000 SHS in 2001 and 5,000 in 2002, which, if achieved, would constitute a substantial scale-up of the entire project from one province alone. In a fashion similar to SEEDS in Sri Lanka, Grameen Shakti extends one time loans for purchase of a consumer durable that can be repaid over a period of up to three years. Grameen Shakti grew out of the Grameen Bank and is actually a specialized non-profit SHS dealer that extends its own credit and uses a network common with the Grameen Bank for loan collections. Growing Demand for Off-grid Electrification and the World Bank SHS Portfolio The introduction of competitive markets for energy service provision is opening new opportunities for rural energy entrepreneurs. In countries that are committed to universal service, decentralized and renewable energy service providers are showing that they have a comparative advantage in serving communities that are remote, with dispersed demand, or are otherwise high cost for traditional grid extension. Demand for off-grid electrical service is growing rapidly in the developing world. The growing World Bank/GEF portfolio of projects supporting off-grid electrification using renewable energy is a reflection of this demand growth, which in turn is in 7

8 response to fundamental power sector reforms sweeping through the developing world. Table 2 shows no less than eighteen World Bank/GEF projects with PV components that are under implementation or are being prepared. All of these project components focus on new business models that are designed to foster sustainable markets for SHS as an off-grid power supply option. They each promote private sector energy-service provision rather than government sponsored demonstration programs. Conclusion Power sector restructuring in the developing world is causing fundamental changes in the roles of rural electrification stakeholders. The government plays a critical role as market enabler and in fostering the emergence of sustainable private solutions to meet rural energy needs. Markets in developing countries for off-grid power technologies are still young, but the trend toward competition in power markets can be expected to continue expanding opportunities for rural energy-service providers and entrepreneurs. Table 2 World Bank/GEF SHS Projects Project SHS component Funding India Renewable Resources Development Project (1991) Indonesia Solar Home Systems Project (1995). Restructured to $11m GEF grant (2001). Sri Lanka Energy Services Delivery Project (1996) PV Market Transformation Initiative (1996) Small and Medium Scale Enterprise Program Replenishment (1997) Lao PDR S. Provinces Rural Electrification Project (1997) Renewable Energy and Energy Efficiency Fund (1998) Cape Verde Energy & Water Sector Reform & Development (1998) 2.5 MWp of PV in various applications, (commercial, water pumping and SHS) 200,000 SHS sold and installed by private dealers/ entrepreneurs 70,000 SHS to be sold and installed. 15,000 SHS to be sold and installed through dealers and microfinance organizations Finance commercial SHS business ventures in India, Kenya and Morocco Finance commercial SHS business ventures 20 solar battery charging stations by national utility and village electricity assoc. Invests in mid-sized renewable energy and energy efficiency projects 4,000 SHS in households through regulated energy-service concessions GEF: $26 m. Bank: $190m. Total: $450 m. GEF: $24 m. Bank: $20 m. Total: $118 m. GEF: $5.9 m. Bank: $24 m. GEF: $30 m. Total: $90-120m IFC: $16.6m. GEF: $0.7 m. Bank: $1.5 m. GEF: up to $30m. IFC: $65-210m. GEF: $4.7 m. Bank: $17.5 m Total: $48 m. China Renewable Energy Promotion 10 MWp of SHS and PV wind hybrid GEF: $35 m. 8

9 Project SHS component Funding Project (1998) Solar Development Group (1998) Benin Off-Grid Electrification/Traditional Energy (1998) Togo Off-Grid Electrification/Traditional Energy (1998) Argentina Renewable Energy in Rural Markets Project (1999) Vietnam Rural Energy Project (2000) Uganda Energy for Rural Transformation (2000) Bolivia Decentralized Energy, Information and Communications Technology for Rural Transformation Bangladesh Rural Electrification: Grid and Off-Grid Development Ecuador Power and Communications Sectors Modernization and Rural Services project Mexico Off-Grid Electrification LIL Nicaragua Off-grid Electrification and Private Sector Development Project Cambodia Rural Electricity Enterprise and Association Support Project Philippines Rural Power Project systems installed through private dealers Finance PV-related business and provide business services 5,000 SHS through regulated energyservice concessions 5,000 SHS through regulated energyservice concessions 70,000+ SHS in households through regulated energy-service concessions 10-20,000 SHS over 10 years through urban and rural enterprise support ,000 SHS over 12 years through various mechanisms 20,000 SHS through regulated energyservice concessions SHS dealer support through Grameen Shakti (and other MFIs) and energyservice concessions to be tendered by electric cooperatives and utilities 2,000+ SHS administered by government agency 10,000 SHS and community uses through energy-service concessions Remote power supply through regulated energy-service concessions Support to private dealers, NGOs, and entrepreneurs SHS through regulated energy-service concessions being examined. Bank: $100m Total: $444 m. GEF: $10 m. IFC: $6 m. Total: $50 m. GEF: $1.1 m. Bank: $2.2 m. Total: $5.7 m. GEF: $1.1 m. Bank: $2.2 m. Total: $5.7 m. GEF: $10 m. Bank: $30 m. Total: $121 m. 9