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close this bookRural Energy and Development: Improving Energy Supply for Two Billion People (WB, 1996, 132 p.)
close this folderChapter four - Options for rural electrification
View the document(introduction...)
View the documentProgress to date
View the documentPricing and financial policies
View the documentCost-effectiveness and the choice of alternatives
View the documentCosts of grid supplies
View the documentReducing initial investment costs by using appropriate design standards
View the documentMicro-grids supplied by diesel generators
View the documentElectricity supplies from renewable energy sources
View the documentRegulatory and price reforms, unbundling, and privatization
View the documentImplication for rural electrification
View the documentApproaches

Implication for rural electrification

Countries that permit more commercial policies and independent ("arm's length") regulation in the electricity supply industry will see the industry's financial position greatly strengthened, and thereby its ability to extend and offer reliable service ice to rural areas. Average real tariffs in the electricity supply industry in developing countries had declined from US¢5.2 per kWh (already below the costs of supply) in 1979 to less than US¢3.8 pet hWh by the early 1990s whereas supply costs were around US¢10 per kWh. Given electricity sales of approximately 2.2 trillion kWh per year, annual revenue shortfalls were thus in excess of US$130 billion per year, mote than was needed to expand capacity ten times the amount needed for even ambitious rural electrification programs. As box 3.1 pointed out. the bulk of the implied subsidies were for commercial, industrial, and household consumers who were both able and in the economist's sense of the term) willing to pay for service.


About 20,000 households in rural Kenya have purchased PV systems for electric lighting, despite the absence of any government program and in the face of import taxes of 30 percent or higher on PV equipment. The private sector has accounted for about two-thirds of the total installed capacity. By contrast, the country's highly subsidized rural electrification (RE) program has reached only 17,000 households (see the figure below). The cost of PV-supplied electricity for low levels of lighting in rural areas is now competitive with the cost of grid electricity.

Rural electricians are joining forces with urban entrepreneurs and solar electric suppliers based primarily in Nairobi. Currently, at least eight companies supply the PV market and compete through agents in rural areas to market, install, and maintain PV systems. Such growth in PV use illustrates the high value people in remote locations place on electric lighting. They view PVs as an attractive alternative to waiting indefinitely for the grid system, which may never reach them.

Source: ESMAP (1994a).

Comparing Grid and PV 1987-92


Many countries are introducing reforms to increase the efficiency of their electricity industries and attract more private sector financing and management. Reforms include

· Cutting governments" role by separating policymaking from regulation and operation of utilities

Establishing transparent regulatory systems with predictable price setting rules and procedures

· Putting power sectors on a commercial basis, preferably as companies under a commercial code

· Raising capital on local and foreign markets

· Encouraging direct investment and competition in generation and distribution. Since 1992, the pace and depth of energy sector reform have intensified in developing countries. particularly in Latin America and Asia. In Argentina. Bolivia, and Peru, governments are unbundling the sector and selling facilities to the private sector. Competition is evident in generation and the acquisition of distribution facilities. While each country is developing its own approach to reform, many of the reforms have been modeled on those in Chile, because it completed its restructuring and privatization long before other countries in the region. Most recently, Brazil and the smaller countries of Central America have begun to follow the trend.

In most Asian countries, progress is intensifying. As private power projects develop, reforms to encourage competition and increase the efficiency of existing producers and distributors pick up speed. Governments are paying much greater attention to the performance of the distribution enterprises to ensure that they can act as reliable power purchasers and be depended upon to collect electricity bills on time and minimize losses. Asian utilities are tending toward incorporation, as companies and governments are not focusing on unbundling to date except in Pakistan and the Philippines, but are paying particular attention to regulation. China has passed a new electricity law that is expected to pave the way for separating the regulatory functions of the provincial power enterprises. Likewise, in India, many of state boards are considering radical reform based on the "Orissa model." The government passed the first major regulatory law in Orissa, and this is likely to be adopted in the other states.

In Eastern Europe and the former Soviet Union, progress has been much slower. Many are beset by old, poorly maintained plant; excess capacity; and environmental and safety problems. These issues are limiting the focus on reform, and little new investment is now being sought. The Czech Republic and Hungary have made good progress toward privatization, however, and reforms in Poland and Ukraine are promising. Still governments seem reluctant to relinquish their regulatory roles.

In Africa, governments are increasingly recognizing the need for reform as they come to understand that reform in other regions could leave them behind and discourage private involvement unless they, too, commit to changes.

Source: World Bank (1993a,b, 1994d) and internal staff reports.

The main question about the reforms now being sought, therefore, is not about their desirability, but whether they will bring about sufficient commercial interest in rural electrification. urban markets are not only easier to serve and more lucrative, hut also have big supply backlogs and are growing rapidly. All the countries that have so tar succeeded in providing universal service to rural areas and towns (the high-income industrial countries) did so with public leadership and financial support. Governments mandated service expansion, often coupled with regulatory permission to recover the extra costs from higher prices in urban areas. provided tax incentives, or both. Whether the private sector in developing countries will respond to the challenges involved is unknown.

So far. private investors have been mainly interested in generation. not distribution, something that adds to the problems of public authorities that wish to encourage private investment anti service extension on the one hand. but find limited private response on the other. In Asia, private ownership of installed capacity almost wholly in generation ranges from less than 20 percent in China, India. and Thailand. to 20 to 50 percent in Indonesia, Pakistan. and the Philippines. to more than 60 percent in Malaysia. The figures are higher, on average. for the Latin American countries. where privatization is proceeding more rapidly. but as in Asia, private investors' interest in distribution is still quite low. Yet another complication is that with rare exceptions. countries cannot accomplish the reform in a short period, so for the next several years. policymakers and the industry will have to continue to supply and expand service while reforms are under way.