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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

Pricing and financial policies

Practically all developing countries have set tariffs for electricity supplies to rural areas at below the costs of supply, even making generous allowances for declines in costs as load density increases (see figure 3 1) This is the same policy that the high-income industrial countries have used in the past. Table 4.3 shows the rural tariffs for several countries compared with the long-run marginal costs of supply. In all cases tariffs are significantly below the estimated costs of supply, although several countries do at least cover fuel' operating. and maintenance costs. A common policy is to have uniform national tariffs," that is. the same tariffs in rural and urban areas, even though average actual costs can he two or three times higher in rural than in urban areas.

In cases where the overall financial position of an electric power utility has been sound, in that it has been able to recover the rural subsidies from general tariffs, shell even ambitious rural electrification programs have been successful

Table 4.3 Costs and Tariffs for Electricity in Rural Areas of Selected Countries, 1993 U.S. cents per kilowatt hour

Cost components



Generation & transmission capacity

Distribution capacity

Total agricultural

Average tariff





































Note: The figures in the table relate to the long run marginal I cost of electricity use in agriculture at low voltage. Source World Bank (1994)


Thailand's rural electrification program began during the early 1970s. Between 1975 and 1994, the number of electrified villages increased from 20 to 98 percent. During the same period, the population covered outside the Bangkok metropolitan area increased from 18 to more than 80 percent.

Reasons for the program's success include thorough planning for careful system expansion; keeping costs low; using a unique billing program to ensure revenue collection; paying careful attention to customer service, marketing, and community involvement; and employing a system of cross-subsidies from large to small customers. Retail tariff rate structures were designed to charge larger users higher rates than small users. With respect to residential classes for both urban and rural customers, the retail tariff structure consisted of a fixed charge and several increasing blocks as shown below.

Source: Tuntivate and Barnes (1995).

Resident Tariff Schedule

Tariff schedule includes a fixed charge and the increasing block rare: less than 150 kWh. a fixed charge of US$20 for the first 5 kWh or less; more than 150 kWh. a fixed charge of US$3.56 for the first 35 kWh or less.

Lifeline rates for the first 35 kWh were designed to make service affordable for poor people who used small amounts of electricity. primarily for lighting. Because of such limited use by the poor, lifeline rates did not adversely affect the company's financial performanceIy implemented. The policy is not ideal. but Thailand's experience, summarized in box 4.1. shows what can be accomplished. The program was started twenty years ago and has achieved connection rates of more than 75 percent for the whole country. with high participation by the rural poor. An interesting aspect of this program is the low lifeline rates offered to low-income consumers: as people's incomes grow and their consumption increases. they move into a higher tariff category, eventually reaching US¢ 10 per kilowatt hour (kWh). The tariff thus gradually reduces the overall subsidy as incomes and demand grow, and the high costs of stats-up recede into the past - a highly desirable feature.

Long-term subsidies for grid-supplied rural electrification are not sustainable in most developing countries. For example, as the Centre for Urban Poverty Alleviation, an Indian nongovernmental organization (NGO). has commented: " The highly subsidized and free power to agriculturists in some Indian states is an extreme example of political largesse in which there are no winners, only losers. The foremost loser is the State Electricity Board. not because of financial losses. but because it perpetuates the debilitating process which makes the Board less and less capable of fulfilling any part of its mandate. Urban and industrial consumers (who pay) suffer because the system is plagued by load shedding and other inefficiencies. The agriculturists hardly get the power they need. The country loses on all counts."

More generally. cross-subsidies have five disadvantages. (Note that they do not arise in connection with the relatively small amounts, typically about 5 percent of total consumption, needed to support such policies as lifeline rates.) They are as follows:

· They undermine the utilities' financial viability, and thus their ability to provide service. In the Philippines (before the recent reforms of the electricity sector) and India, financial losses diminished the utilities' ability to support the expansion of service, not only in rural areas, but also in urban areas. In addition, facial weaknesses eventually led to deterioration of the maintenance of the power plants and electricity networks.

· The costs are high. In rural areas, per capita consumption for household uses typically ranges from 25 to 50 kWh per year. and for nonhouse-hold uses is some two to three times this amount, bringing the total to some 100 to 200 kWh per year per person. a figure that is somewhat higher in the middle-income countries. Meanwhile subsidies are frequently US¢5 to US¢ 10 per kWh, sometimes higher, and so may amount to US$5 to US$20 or more per person served per year. These are substantial costs to bear in light of both of the hundreds of millions of people already receiving service (table 4.1) and the yet greater numbers who will be demanding it in future.

· The prospects of alternatives - such as solar energy, small hydro and wind generator sets, and diesel-powered autogenerators--are all undermined. In everyday terms, the playing field is not level, a source of much concern to the numerous businesses, small-scale and large, otherwise able to offer electricity services from such sources to people living in rural areas and towns


When people in the rural villages of Mizque and Aiquile in Bolivia were given the opportunity to purchase electricity service from local diesel micro-grids, high costs prevented all but 25 percent of households from accepting the offer (the cost of the initial connection to the system is high, and the cost per kilowatt hour of service is high in such isolated microgrid systems because of the high cost of operation compared with central electric grids).

The electricity companies that operate the micro-grids serving Mizque and Aiquile then decided to finance the connection charges of about US$100 to US$125, allowing their customers to pay back the costs in small installments over five years The customers also had to agree to receive electricity service only during the evening hours. This scheme enabled the number of households able to purchase electricity service to double or more, making connection rates comparable to those achieved in villages served by the central grid (such as Vacas; see the column in boldface in the table).

Even though the households of Aiquile and Mizque still had to pay about five times more than the households of Vacas on a kilowatthour basis for electricity service - service that was limited to the evening hours at that - a majority valued electrification enough to subscribe when an affordable financing scheme became available. The example shows that people are willing and able to pay prices that cover a substantial portion of the cost of electricity supply and suggests how important credit can be in expanding access.

Source: Torres (1993).

Credit Access and Electricity Adoption in Three Villages



Credit access

% on credit

% of households w/electricity

Price ($/kWh)












0 30







· Private investment in distribution is discouraged. This can. in theory, be overcome by Lax incentives or direct subsidies from public revenues. but again. one must ask whether the state can afford this and whether greater claims on public revenues do not exist. for example. from education and health.

· Inovation is discouraged. Such inovation might. for example, include providing small scale supplies from renewable energy sources.

More often than not, subsidies are not needed anyway. Rural consumers are willing to pay more if suppliers are willing to incorporate the capital costs of start-up and connection in the tariffs. The cases of Pura (box 3.7) and Bolivia (box 4.2) provide good illustrations of people's willingness to pay. In Bolivia. the costs of energy supplied by diesel were Eve times the costs of electricity supplies in urban areas, but when the capital costs of connection and supply were incorporated into the tariff (as a from of credit), connection rates were high. In many countries people have purchased diesel engines at cost from irrigation pumping. crop processing. and off-grid electricity supplies (Child and Kaneda 1975). Recently. rural households in Kenya have been purchasing PVs at cost. inclusive of import duties. to provide electricity when grid supplies were not available.

An ideal policy is one in which prices recover the present value of costs over the long-term, that is, prices are equal to the discounted unit cost (see Turkey and Anderson 1977). In general. this will mean that prices will be below average costs for some time until demand and load densities have increased sufficiently, but above the long-run marginal costs of supply so as to provide for an eventual recovery of the initial costs of extension. Such a policy has the advantages of' including a credit component, of being financially viable, and of snaking it attractive to the company to expand service and promote use. As noted earlier. there is no reason why such a tariff cannot include lifeline rates without compromising the utility's financial position.