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close this book Development in practice - Rural energy and development
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Open this folder and view contents Chapter four - Options for rural electrification
Open this folder and view contents Chapter five - Innovations in renewable energy
Open this folder and view contents Chapter six - Cooking fuels: toward more sustainable supply and use
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Development in practice - Rural energy and development

Improving Energy Supplies for Two Billion People

THE WORLD BANK WASHINGON D. C.

© 1996 The International Bank for Reconstruction and Development /THE WORLD BANK

All rights reserved

Manufactured in the United States of America

First printing September 1996

The Development in Practice series publishes reviews of the World Bank's activities in different regions and sectors. It lays particular emphasis on the progress that is being made and on the policies and practices that hold the most promise of success in the effort to reduce poverty in the developing world.

This report is a study by the World Bank's staff, and the judgments made herein do not necessarily reflect the views of the Board of Executive Directors or of the governments they represent.

Cover photos: Douglas Barnes, Curt Carnemark, Richard Spencer.

0-82 1 3-3806-4

 

Foreword

Many people do not think about where their energy comes from They just flick a switch or start their car. For nearly two billion people in developing countries, however. the search for energy is a daily grind. These people have neither electricity nor gas nor oil to cook their food. Women and children from these families often spend hours each day gathering dung and wood - hours they might otherwise be able to spend on productive work or education. Their health is damaged by the smoke given off by these fuels. Their environment may be damaged as they chop down trees for wood.

The problems of rural energy have long been recognized. What is the World Bank doing about them'? In recent years the Bank's work in energy has largely focused on making existing energy supply and consuming industries more efficient, opening them up to competition. and encouraging private sector participation. This is an important job and is tar from finished. In many developing countries. for example, electricity prices are heavily subsidized. These subsidies often benefit the wealthiest households the most. They also undermine the financial health of utilities. making it difficult for them to extend services to rural areas.

But the Bank should not concentrate on reforming existing energy markets alone. Any reform will fail in the long run if it does not benefit the whole population. improving rural energy should therefore be seen as an important goal in itself. The exciting message of this report is that, through a combination of better technology and decades of experience. we are now able to tackle the problems of rural energy better than ever before. The report draws on the experience of many experts in government, industry, and nongovernmental organizations (NGOs). We thank them for sharhig their knowledge with us.

Tackling the problems of rural energy will force us to challenge some old assumptions. Those kings of the energy world - coal. oil. and gas, for example - are not the only modern forms of energy suitable for rural areas. This report describes the growing attractions of renewable technologies. such as solar power. It argues that policymakers, governments. NGOs, and the private sector should concentrate on improving the use of traditional fuels. such as wood, and not just on promoting modern energy, such as electricity. It stresses the importance of designing policies and projects with local people rather than Imposing schemes from above. It shows, for example, how the environment can be protected by giving farmers responsibility for managing forests.

Rural energy presents the Bank with an important challenge. It should be a key part of our work, whether we are discussing country assistance strategies. energy sector reform. or new investments. While the Bank can play an important catalytic role, real progress in tackling these issues is critically linked to the adoption of the needed policy and institutional reforms. mobilization of local entrepreneurial and NGO resources, and development of innovative rural energy delivery and financing mechanisms. We therefore also plan to promote regional and country workshops to discuss these issues, encourage investment in rural energy, and foster policy reform. Such an effort has started already: this report itself reflects the results of widespread consultations between the Bank, donors, NGOs, and recipient governments that took place during its preparation. We will regularly report back to the Board and to the public on our progress on this vital task.

Jean-François Rischard Vice President

Finance and Private Sector Development The World Bank

 

Acknowledgments

 

This report was prepared by Douglas Barnes, Dennis Anderson, and Karl Jechoutek, under the direction of Richard Stern. The report benefited from the valuable assistance of Willem Floor and Robert van der Plas. Background papers were written for the preparation of the report by William Hyde, Gregory Amacher, Robert Wirtshafter, Deng Keyun, Zhang Zhengmin, and Russel DeLucua. Zhang Zhihong and Andrew Young also made helpful contributions to the project.

The report also profited greatly from extensive discussions both within and outside of the Bank. Within the Bank the report received thought-full and thorough reviews by more than fifty staff members. all of whom made valuable contributions to the project. The paper was also improved through a dialogue established with numerous individuals and groups outside of the Bank, and we wish to thank all those who met with us, including experts in government, industry, academic institutions, and nongovernmental organization In this regard, we appreciate the efforts of Andrew Barnett and Daphne Wysham in organizing meetings with nongovernmental organizations representing a wide range of organizations and countries.

This paper was edited by Norma Adams, Alice Dowsett, Daniel Litvin, and Paul Wolman. We also wish to express our appreciation to Paul Wolman for coordinating the production of the document for publication.

 

Abbreviations and acronyms

 

ASTAE

Asia Alternative Energy Unit

ESMAP

Energy Assessment and Energy Sector Management Assistance Programme

GEF

Global Environment Facility

GNP

gross national product

IFC

International Finance Corporation

ITDG

Intermediate Technology Development Group

kW

kilowatt

kWh

kilowatt hour

LPG

liquid petroleum gas

NGO

nongovernmental organization

OED

Operations Evaluation Department

PV

photovoltaic

TA

Technical Assistance

WDR

World Development Report

 

Executive summary

 

It is hard not to be daunted by the scale of the problem of providing modern energy service to the world's rural population. There ate nearly two billion people without access to modern forms of energy. such as electricity and oil. This report describes in detail the plight of these two billion. Its message however, is that there are now many ways in which their situation can be improved. For though the problem is daunting. practical and affordable prescriptions are available

To understand the possible solutions. consider first what is known about the problem. Around a third of all energy consumption in developing countries comes from burning wood. crop residues, and animal dung. Such biofuels are mostly used in rural areas. though wood is also used as a fuel by the urban poor Biofuels produce the equivalent of twice the energy of the coal mined in China or the United States in a single year They produce energy. however, in a seriously inefficient way.

For a start they help trap the user in poverty Gathering fuelwood and dung takes time - thee that could be devoted to more productive activities such as farming A recent study in the hill areas of Nepal showed that even in areas with fairly good supplies of wood. women need to spend over an hour a day collecting fuels In areas where wood was mote scarce. the chore lasted about 2.5 hours a day Moreover. most biofuels need to be collected in large quantities They are a highly inefficient means of cooking compared with fuels - such as liquid petroleum gas (LPG) - used by wealthier households. A kilogram of wood. for example, generates a mere tenth of the useful heat for cooking delivered by a kilogram of LPG

Biofuels can also damage people's health. because they give off smoke that contains many hazardous chemicals. Studies of rural areas show that smoke levels inside dwellings often fat exceed safe levels recommended by the World Health Organization Cooking with biofuels does not cause health problems everywhere. but in houses that have poor ventilation it can be as dangerous as smoking cigarettes A study in The Gambia. for example examined the health of 500 children under five years old. It found that children v ho were carried on their mothers' backs as they cooked in smoky huts were six times more likely to develop acute respiratory illness than other children. Studies of women in Nepal and India exposed to biomass smoke - but who did not smoke themselves - found that their death rate from chronic respiratory disease was similar to that of male heavy smokers.

The use of biofuels can also damage the environment. The search for fuelwood often involves chopping down local trees. As trees disappear, fuelwood has to be sought further and further away. Using dung and crop residues as a fuel reduces the amount available for use as a fertilizer for growing crops. Such problems are avoidable. As the report shows. farmers in many areas use biofuels in sustainable ways. But in many other areas the gathering of biofuels ranks together with logging. and the clearing of land for agriculture. as a cause of deforestation. In the northern Chinese county of Kezuo for example, people have already cut down most of the trees around the term lands. Poorer households are now turning to even less efficient fuels such as straw and dung.

Without electricity, moreover, poor households are denied a host of modern services such as electric lighting and refrigeration. To an extent, some of these problems are being alleviated. Electricity supplies have been extended to over 1.3 billion people in developing countries over the last twenty-five years. Yet most of these connections have been in urban areas. In many regions of the world, including sub-Saharan Africa and South Asia. populations have grown even taster (figure I). With the total population of developing countries expected to grow by more than 3 billion in less than four decades, the problems of rural energy are likely to become more pressing than ever. So what can be done to solve them?

 


Figure 1 Rural Electrification, Increases in the Number of People with and without Service. Selected Countries and Regions, 1970-90

The problems of rural energy should certainly not be dealt with in isolation. Poverty and dependence on biofuels go hand-in-hand. As household incomes rise, people normally switch to modern fuels, if these are available (figure 2). Higher-income countries also depend much less on biofuels than do poor countries. The best schemes for improving rural energy may therefore fail if other policies prevent economic growth.


Figure 2 The Use of Biomass in Relation to GNP per Person in Eighty Countries

Provided the background conditions are right, one of the most powerful ways to improve energy supplies is to ensure that the energy market is determined by consumers' choices. In particular that means both that the price of energy should reflect its cost and that regulation of energy industries should encourage competition and choice. Governments should concentrate on ensuring that there is a level playing field for different investors in energy. whether they are public utilities. private firms or enterprises set up by the local community.

The opposite has been true in most developing countries. Rules and regulations have strangled the emergence of firms other than the state-run utility. For example, it is illegal in many countries for local private or cooperative nongrid-connected generation and distribution enterprises to enter the market. Many government programs have attempted to extend energy supplies to rural areas. But too often the result has been unsustainable public institutions promoting technologies that are unsuitable for rural consumers.

Subsidies for electricity consumption are a particular problem. In the early 1990s average electricity tariffs in developing countries were less than US¢4 per kilowatt hour (kWh). even though the average cost of supply was around US¢ 10 per kWh. Such subsidies are harmful in a host of ways. They constitute a huge financial drain (revenues from electricity supply in developing countries tall short of costs by some US$ 100 billion every year). As a result utilities are often economically crippled, unable to finance the extension of set-vices to rural areas Where supplies have been extended to rural areas. subsidies often undermine the efforts of businesses to provide cheaper ways of generating electricity. In remote rural at-east for example. diesel engines or solar photovoltaic (PV) systems may provide electricity at a lower cost than grid supplies. But consumers will not opt for them if grid supplies are subsidized, not will investors come forward to develop least cost options to set-ye rural consumers.

Overall subsidies on energy consumption tend to benefit rich people more than the poor. A recent World Bank study of seven countries showed that high-income households benefit disproportionately. largely because they use more electricity. In Malawi. for example. a poor consumer on average receives a mere US¢4 a year in electricity subsidies, while a rich one gets US$6.60. Some subsidies may be justified - but only if they are limited to specific and affordable goals. such as providing cheaper rates for very poor households for a fixed maximum consumption per month (which can be achieved by charging wealthier households a little more than the cost of supply).

Hefty subsidies tot modern cooking fuels. such as kerosene and LPG. are also common in a number of developing countries. As with electricity. the results are often counterproductive. In Indonesia, for example, kerosene used for cooking and lighting is subsidized. But richer households reap a disproportionate share of the benefits because they can afford to buy more energy than the poor The government of Ecuador also subsidized kerosene until recently. But the poor received little of the fuel because retailers could make more Money selling it for use in vehicles. Even if subsidies reach the poor they often become unsustainable financial burdens on the state budget. Senegal's annual subsidies for LPG. for example. rose from US$2 million to US$10 million between 1990 and 1994 - an increase that could have paid for thousands of desperately needed teachers.

Market-opening reforms can be dramatically effective. as shown by the experience of Hyderabad in India. In 1980 only the richest 10 percent of households in Hyderabad used LPG. The proportion has since risen to over 60 percent. Meanwhile fewer households are using fuelwood even though the city's population has doubled since ] 980. The main cause of the change was the liberalization of energy markets In particular the Indian government relaxed restrictions on the production and import of LPG. As a result more middle-class households could buy LPG. a more efficient fuel than kerosene. That in turn allowed the poor to graduate up the fuel ladder from wood to kerosene.

 

The new agenda

 

Liberalizing energy markets. however important. may not be the complete answer. Despite the progress made in encouraging private investment in the electricity industry since the beginning of the 1990s, for example. private companies have shown little interest in extending electricity supplies to rural areas. They have instead preferred to concentrate on more lucrative contracts to generate electricity and to supply industrial and urban customers There is evidence, in other words. that creating urban-based energy markets by itself will fail to provide rural electricity.

There is one obstacle in particular that discourages companies from providing supplies to rural areas: high start-up costs. Extending an electricity grid to a remote village can be very expensive. especially if only a few households are to be connected. Until more households join the network, the cost of electricity can reach US¢70 per kWh. seven times the typical cost in an urban area. Even setting up a solar electricity system for a single home can cost between US$500 and US$ 1,000. a large sum to spend in one JUMP.

The problem here is not necessarily that people are unwilling to pay. Evidence suggests that people will spend a significant proportion of their incomes on better energy. which improves their quality of life or enables them to become more productive. In Bangladesh even the poorest people are connecting to the grid when the service is available. In rural China. many people without easy access to cooking fuels are investing in efficient stoves and tree planting.

The problem is that rut-al customers often cannot get affordable credit. That makes it difficult for them to pay the high stat-up costs of improving their energy supplies. One solution may be to establish a local member-supported bank to make small loans (such as the Grameen Bank in Bangladesh. which lends mainly to women and poor people). Another is to promote companies that lease basic equipment to consumers, communities, and local energy suppliers (e.g.. LPG distributors and small power companies).

The importance of credit is illustrated by the experience of Mizque and Aiquile, two rural villages in Bolivia that are supplied by local diesel microgrids. When the villagers were first given the opportunity to buy electricity from their local micro-grids. barely a quarter of them could afford the service. The electricity company that runs the microgrids then decided to provide credit for the US$100 to US$125 connection charges. allowing customers to pay back the costs in small monthly installments over five years. As a result more than half of the villages' households were able to purchase electricity. even though the prices of local micro-grid power were fairly steep, at US¢25 to US¢30 per kWh.

Suppliers can also expand their markets in rural areas simply by reducing start-up costs for rural consumers A key aspect of the electrification scheme in Mizque and Aiquile, for example, was that supplies were limited to evening hours. Uniform standards and codes that prevail in many developing countries and that have been designed for industrial and higher-income customers often prohibit such service adjustments.

Technologies such as solar. wind. and small-scale hydropower are often ideal in rural areas and require tat more systematic attention by policy takers than they have hitherto received. Renewable technologies have significant environmental advantages relative to fossil fuels. Sunlight is also in ample supply in many developing countries. Most important of all, the costs of many renewable technologies have come down significantly over the last decade. A combination of improved technology and economies of scale has pushed down the costs of wind power, solar thermal power (sunlight is used to heat air or water), and photovoltaic power (electricity is generated directly from sunlight).

In the 1950s and 1960s, for example, PV cells were only used in the space industry. Their costs have fallen so dramatically since then (figure 3) that they are now used to power tens of thousands of homes in developing countries. Though electricity generated from PVs is still more expensive than electricity generated from fossil fuels. PV modules can be easily installed in remote locations, circumventing the need for large investments in extending the electricity grid. For this reason, PVs often make economic sense for rural households or for water pumping.. In recent years in Kenya, for example. 25.000 rural households have bought (unsubsidized) PV modules - more than have been connected to the electricity grid under the highly subsidized government rural electrification program. Still, both electrification strategies have so far reached only a tiny fraction of Kenya's rural population of 19 million.

The effective exploitation of the new renewable technologies requires a 'leveling of the playing field" - that is, eliminating tax, subsidy, and import distortions that now discriminate against renewables in favor of fossil fuels; initiating national surveys of wind and solar resources; promoting credit schemes to help consumers meet the high first costs of such systems; developing private supply and service infrastructures and associated training; and supporting selected demonstration projects.


Figure 3 Actual (1970-92) and Projected (1993-2015) Costs of PV Modules

Note: The ranges of costs show the PV module costs required to complete with small-scale applications and with decentralizes power generation (assuming supply costs of US¢8 to US¢10 per kWh (at base load) and US¢16.5 per kWh (at peak load. The spread in the points reflects the spread in costs of different technologies Source: Ahmed (1993)

However quickly modern energy spreads in developing countries, dung, crop wastes, and wood will be used by tens of millions for decades to come. Encouraging the use of improved biomass stoves is one step in improving the efficiency and sustainability of the use of biofuels. Relatively simple and inexpensive improved stoves can reduce by as much as 30 percent the amount of fuel needed tot cooking, thus cutting the time needed to gather wood. Moreover. because the improved stoves give off less smoke, they make the domestic environment less damaging to householders' hearth.

Encouraging the use of improved stoves is easier said than done. A number of programs run by governments and donor agencies in the late 1970s and early 1980s "'ailed, partly they were oblivious to local customs and the local economic climate. But lessons have been learned - in particular that schemes should target those who would benefit most. For example, the Chinese National Improved Stove Program (the world's largest stove scheme. which has installed 120 million stoves in rut-al households) wisely concentrated on areas with the greatest fuelwood shortages. In Tanzania a project funded by the International Development Association started up a self-sustaining market that by 1992 had sold more than 60,000 improved stoves. It no doubt helped that production and sales of these stoves wet-e put in the hands of local artisans and shopkeepers.

Farm forestry and natural forest management have long played an Important role in alleviating wood problems in China, India, and many other countries. By providing market incentives for effective management of existing trees and shrubs and limited planting of new ones, these practices significantly increase afforestation rates. Programs that support such market-driven approaches directly address farmers' needs for fuel. fodder. mulch. medicine. and wood. They also l-educe pressure on agricultural residues and can improve soil fertility. Other benefits include curbing soil erosion, improving soil moisture retention, and supplying soil nutrients.

Effective management of existing forest resources requires that local people take active responsibility and that forestry departments must change their role. Success depends on voluntary participation and decision-making as well as on formal transfer of responsibility for forest management to the rural communities.

Perhaps the most important lesson learned by the World Bank and other organizations in recent years is that local input is vital to success. Local people understand their situation and their problems better than outsiders. The village of Pura in south India is a prime example of this. Community biogas digesters. which produce gas from dung and farm residues. have a history of problems in India. Initial attempts to promote this technology failed in Pura too. The aim of the initial schemes was to encourage villages to use biogas as a cooking fuel. even though fuelwood is abundant in Pura. When finally asked, villagers explained they were more interested in getting clean water. So the biogas was instead used as a fuel to generate electricity, some of which was used in turn to power a deep tubewell pump. The result was a double gain for the villagers: clean water and electricity supplies.

 

The role of the world bank

 

In the 1980s the finances of electricity utilities in a number of countries were deteriorating sharply. As a result the Bank turned toward encouraging countries to liberalize their energy markets. introduce transparent forms of regulations, and attract private investment. Two Bank policy papers published in 1993 set out this policy reform agenda. Since then. the Bank hats been learning a great deal about how to improve rural energy development At the same time the economics of renewable energy have also been changing rapidly As a result the Bank is now pursuing a new set of solution.) to supplement the established ones of liberalizing energy markets (box I)

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BOX 1 BROADENING THE SCOPE OF ENERGY OPERATIONS

Bank

Commitment lending

Promotion of clean technologies

Countries

Sector reform

• Transparent regulation

• Commercialization/corporatization

• Private involvement

• Importation of services

• Market pricing

• Demand management

Added dimensions - a renewed commitment to

• Extend modern energy supplies to unserved populations

• Promote sustainable supply anti use of biofuels

• Introduce new and renewable energy technologies by

• Promoting commercial pricing and private involvement in distribution

• Providing incentives for extension of service

• Supporting agroforestry and biofuel programs

• Encouraging local initiative and open markets

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Some of the Bank's operations in recent years have borne the stamp of this new knowledge. The sustainable management of forest resources has been improved by empowering local populations to gain revenue from supplying wood to nearby fuel markets. Forestry assistance has led the way, followed by natural resource management and energy operations.

Innovative delivery of renewable energy to consumers has been spearheaded by lending operations in India and Indonesia that focus on developing the ability of retailers and other intermediaries to reach rural markets. Technical assistance co-funded by bilateral donors is identifying policies and projects in many countries of Sub-Saharan Africa. Asia. and Latin America that pave the way for using new decentralized technologies to provide affordable energy.

However, this is just a beginning. The emerging strategies that promise to make a real difference for rural populations require a new and powerful commitment by the Bank and its partners. The Bank is committed to devoting significantly more attention and resources to the alleviation of the "energy poverty" of large portions of the developing world's rural populations. An Action Plan to achieve this is in place (table I).

The Bank's Action Plan (see table I) calls for a strong effort to accelerate the opening of rural energy markets, help consumers to have a choice, and put in place better systems to deliver and finance rural energy. The Bank intends to base its efforts to provide better access to energy for rural people on five main principles:

• Provide for consumer choice. A better choice of affordable energy sources should be provided to rural consumers. Informed consumers will choose the most cost-effective solution. according to their preferences.

• Ensure cost-reflective pricing Distortions in prices that are created by subsidies and taxes should be eliminated. They create a disincentive for entrepreneurial solutions to rural energy supply, and give consumers the wrong signals.

• Overcome the high-first-cost barrier. The obstacle of the high initial cost of obtaining energy needs to be removed. Credit mechanisms. lower-cost equipment, and lower service standards can all contribute to achieve this.

• Encourage local participation. Participation of local communities. investors. and consumers in the design and delivery of energy services is essential. Decentralized approaches need to be part of the solution, including systematic local capacity building.

• Implement goad sector policies These are the basis for bringing better energy access to rural populations. Energy sector reform should include the opening up of the rural energy market Macroeconomic policies should not discriminate against rural energy. The role of the government should change from central planning to supporting markets.

The task of improving energy supplies for two billion people remains daunting. What has changed is that we now have solutions more firmly in our grasp.

Table 1 Broadening Energy Access: An Action Plan for the World Bank

1. Develop Regional, Country, and Local Owernship and Commitment to Efforts to Broaden Enegy Access.

• The Bank should continue to conduct regional workshops, road shows. and training seminars in Latin America. Africa. and Asia to initiate and reinforce planning for effective and affordable rural energy supply. For example. Bank activities should sustain and build on the regional dialogues such as the recent Johannesburg power reform symposium, which addressed the requirements of expanding electricity supply and use in Sub-Saharan Africa. The institution should also earmark country-focused assistance as a follow-up to regional work shops. as in the ongoing upstream work in Cameroon, Mali. and other countries. On the local level. an example of productive assistance is reflected in a joint Chinese/ESMAP technical assistance project. which included training of county level staff in economic analysis of energy projects.

• Finance technical assistance and training projects to assist countries in developing policies. institutions, and programs designed to promote rural energy. Most of the Bank's traditional energy clients - notably the power and oil and gas companies - are ill-equipped to pursue programs involving provision of energy in rural and poor areas. Indeed, their current programs and policies often undermine rural energy markets. It is essential. then. that both the energy "establishments" and the new institutions involved in developing rural energy build the necessary capacity.

2. Systematically "Operationalize" Rural Energy in Bank Assistance Programs

• The Bank's energy sector assistance instruments need to make a more consistent and systematic effort to address the problems of people's access to energy services. The course of normal Bank work provides many opportunities to promote energy access for rural and poor people. but at present those openings are not systematically exploited. Bank assistance efforts can help promote wider energy access by helping client countries to "level the playing field" for existing and new energy service providers - for example, by setting import tariff levels on energy products at reasonable levels. limiting distorting taxes and subsidies for house hold fuels, eliminating or regulating monopolies to allow wider entry into the business of rural energy supply, and so on.

In addition. "operationalizing" rural energy development in the Bank's policy dialogues and reviews conducted with client countries will help broaden the base of expertise within the Bank and will help the Bank and its clients develop creative and effective approaches. For example. in India an ESMAP project involving renewable energy led to the development of a new type of renewable energy loan; in Kenya. policy dialogues on the distortionary effects of import tariffs have helped to create a more attractive environment for private photovoltaic (PV) marketers.

• As they do for power sector reform staff appraisal reports for all energy projects should describe the country's and the Bank's strategy for rural energy development even in the operation does not include direct support for rural energy It is not enough to assume that policies to address the problems of large energy industries will indirectly benefit rural anti poor people.

• The Bank should help its clients develop cross-sectoral strategies that take advantage of the well-established finding that energy projects are most effective ``hen coordinated with efforts to promote rural development through agriculture, health, and education projects. The importance of this approach is illustrated by the Brazil rural development project, in which communities are using social development funds to purchase PV and wind systems for lighting and televisions at community centers. Local demand for these systems in rum has encouraged the development in Brazil of commercial distribution networks for renewable energy products. To encourage communities to see energy us part of the menu of rural development choices. energy services and components should be typically included on the Bank's list of approved uses of social development funds along with schools, roads, health clinics. and so on.

• Bank staff should pay more systematic attention to the energy access problems of people in rural areas in country assistance strategies (CAS). In this context, the CAS is important for coordinating energy assistance with other sectors.

3. Promote Best Practices and Innovations in Project Design and implementation

• The Bank can help to develop innovative projects and project components for rural energy. Efforts should he made to include components in energy projects with the goal of incorporating the best practices into the Bank's lending program. Examples are Niger and Chad Fuelwood Resource Management Projects. India Renewable Energy Project and Indonesia Solan Home Systems.

• Micro-finance for rural energy will he an important part of the strategy to ease access. This will involve working with local financial institutions and NGOs to establish rural energy as an eligible item for small-scale financing A link with the CGAP program will he established.

• If access is really to be expanded to rural and poor people. a consistent effort is needed to devise means to case or deter the all-important first costs of energy access (e connections, appliances. and equipment Innovative experiments in financing, leasing. and delivering systems must be designed and piloted.

• The Bank should develop standard analytical tools for project appraisals of innovative rural energy projects as well as for traditional rural electrification projects.

4. Disseminate Innovations and Best Practice

• Make available information on good practice in delivering and financing rural energy - including leasing and credit schemes. grid rural electrification, micro grid systems. renewable energy systems. and natural forest management for fuelwood production. Conduct research on impact of rural energy and energy policies on rural development. Best practices can be seen in the Thailand Rural Electrification Program. which lowers grid electrification costs for rural people by using local donations of land and labor in the construction of electricity net works. and by providing modest utility cross-subsidies that help keep the first costs of connection low.

5. Partnerships with Donors. NGO's. and Other Organizations

• The Bank should expand its work with bilateral donors. NGOs. and foundations in providing technical assistance. This is an area in which the Bank can exert global leadership in direct support of innovative and new projects and learn from best practices.

• One way of broadening the base of involvement and coordinating efforts is to promote joint implementation of projects in collaboration with groups outside the Bank. including bilateral donors NGOs. and foundations. The Bank has already undertaken a successful rural electrification project in Bangladesh with the help of the U.S. National Rural Electrification Cooperative Association (NRECA). New initiatives include the launching of a financing vehicle for solar home systems being conducted in cooperation with a major foundation.

• The Bank can also provide technical assistance to make funds available for on lenddig to NGOs and voluntary and grassroots organizations that can catalyze investments in communities and organize communities to carry out energy-related programs One such program. proposed in the Haiti Forest and Parks Protection Project. involves assistance for implementing an improved charcoal stoves project through CARE.

6. Special Initiative on Africa

• Sub-Saharian Africa has a particular need to address the issues of serving dispersed rural energy demand. The lack of population density in rural areas requires innovative solutions for electricity and cooking fuels.

• An initiative will design a program of assistance to African clients that will aim to reform the power sectors, fin/l solutions for improving energy access for the 80 to 90 percent of the continent's unserved population. and facilitate development of local delivery and financing mechanisms.

• Electricity delivery will be looked at in terms of designing ways to put in place decentralized locally financed solutions (including renewables and solar home systems) and the rebated reforms required in the existing power systems.

• Access to cooking fuels will be enhanced through programs emphasizing fuelwood management, stove efficiency. charcoal efficiency. and transition to modern fuels.

• Assistance in policy reform will include opening of markets, elimination of price/tax/tariff distortions. and facilitating entry of competitors.

7. Improve the Bank's Capacity to Deal with Rural Energy Issues

• Training and retraining of staff to deal with rural energy issues will remain an important nee of the Bank. This can be accomplished through training courses, internal workshops on best practices, and opportunities to work in agencies dealing with rural energy issues.

8. Monitoring of Progress in Achieving Objectives

The following activities will be important:

• Preparing an annual status report that reviews the progress in implementing the action plan This would include reviewing the extent to which rural energy has been included in Bank assistance and the effectiveness of the instruments used, such as promotion of structural reforms designed to open the rural sector to new entrants, grid rural electrification. renewable energy, fuelwood, and so on.

• Monitoring the investments and policy work in the areas identified in the paper as reflected in the CAS.

• Assessing the recruitment and retraining activities for bringing Bank staff skills in line with goal of increasing activity in rural energy project development.

• Assessing the effectiveness of regional and country workshops.

Note

CARE Cooperative for American Relief Everywhere

CAS Country Assistance Strategy

CGAP Consultative Group to Assist the Poorest

ESMAP Energy Sector Management Assistance Programme

NGO Nongovernmental Organization

NRECA National Rural Electrification Cooperative Association

 

Chapter one - Introduction

 

Policies on energy and the environment are overwhelmingly preoccupied with the production and use of modern energy forms. Thus they focus on private versus public ownership, global warming. acid deposition, urban smogs, and so forth. While all these matters are extremely important, and the energy. industry. policymaking. and environmental communities, including the World Bank Group, pay a great deal of attention to them, another aspect of energy production and use gives rise to developmental and environmental problems of equal, if not greater, importance: half the populations of developing countries lack access to modern energy forms.

Approximately 2 billion people depend on traditional fuels - animal dung, crop residues, wood, and charcoal - for cooking, and an equal number are without electricity.! We also know that fuelwood and dung are inefficient energy sources - gas. for example. is fully ten times more efficient for cooking - and that their use leads to environmental damage through the stripping of forests and woodlands, and to respiratory diseases and premature death for millions of people through smoke inhalation.

Dependence on such fuels is also an economic hardship. as in many parts of the world people spend excessive amounts of time gathering and cooking with these fuels. While using traditional fuels more efficiently and in ways less damaging to the environment and to people's health is possible, this is not happening in large regions of the world. while the shift to modern fuels (which most people in developing countries would surely count as a blessing) is not progressing as rapidly as it could.

 

The challenges ahead

 

The total population of developing countries will grow by more than 3 billion people in less than four decades and by 5 billion within the lifetimes of children now in school. Thus energy policies will not only have to grapple with the task of meeting the needs of the 2 billion people currently without service, but with new demands resulting from population growth. The alternative. a situation in which billions more people continue to lack access to modern energy forms and to depend on fuelwood and dung for cooking. would be socially iniquitous. environmentally unsustainable. and a failure for development.

In addition, developing countries need to meet the rapidly growing demands for modern or commercial energy from households and businesses that already have service. Their per capita consumption of commercial energy is extremely low relative to that in the industrial countries. For example. per capita consumption of commercial energy in the United States is 8 tons of oil equivalent energy per year. or 80 times more than in Africa. 40 times more than in South Asia. 15 times more than in East Asia. and 8 times more than in Latin America (figure 1.1). Electricity consumption is also much higher in industrial countries. about 13.000 kilowatt hours (kWh) per capita per year. compared with about 600 kWh per capita in developing countries.

The financial and managerial requirements of serving those lacking access. of keeping up with population growth, and of meeting increased demand on the part of those already served are driving the current movement to liberalize the energy industry in many countries.


Figure 1.1 Per Capita Consumption of Commercial Energy in Selected Regions and Countries. 1992

 

Past responses

 

How might rural energy demands be met in ways that are sustainable? A good starting point for answering this question is to consider what has been done already and what can be learned from experience.

Rural energy problems have long been recognized, and for more than two decades the electricity industry. forestry and agricultural agencies. development organizations, nongovernmental. and many others have made innumerable efforts to address them Few. if any. ideas and approaches have not been thought of or tried. India's interest in rural electrification, for instance, goes back three generations In the past 25 years, developing countries have extended electricity supplies to more than 1.3 billion people (500 million in rural areas. 800 million in urban areas), equivalent to almost twice the population of the Organization for Economic Cooperation and Development countries Whatever the shortcomings of electricity supply industries in developing countries, this is an impressive achievement. and testifies to their commitment to expanding service In Africa and South Asia, however, the efforts to expand service still lag behind population growth. which underscores the immensity of the task that still lies ahead (figure 1.2)


Figure 1.2 Rural Electrification, Increases in the Number of People with and without Service, Selected Countries and Regions. 1970-90

Many countries have tried to provide incentives, some successful, others counterproductive, to improve the supplies of LPG and kerosene for cooking and lighting. As concerns biofuels and renewable energy, countries have experimented with numerous approaches: introducing wood stove programs, promoting agro-forestry and farm forestry (the former involving intercropping of trees or shrubs and traditional crops and the latter involving cultivation of trees alone as a crop), demonstrating sustainable ways to use local forest resources, and encouraging the use of biogas from dung and crop residues. They have also attempted to introduce new ways of utilizing solar, wind, and hydroelectric energy resources on a small scale. Practically all these efforts were pioneering, and much can be learned from both the successes and the disappointments.

The World Bank has also had significant experience with rural energy, and has supported rural energy programs for more than twenty years. Its policy paper on rural electrification was published in 1975 (World Bank 1975), and was followed by thirty-four projects in eighteen countries amounting to US$2 billion, plus several general electrification projects that had rural electrification components. In addition, the Bank financed more than forty fuelwood-related projects during 1980-95, often as components of agricultural and forestry development projects, and twenty-one renewable energy projects. with a total commitment of more than US$4 billion. The joint United Nations Development Programme/World Bank Energy Assessment and Energy Sector Management Assistance programs, begun fifteen years ago, facilitated extensive policy discussions on the energy sector (including the rural energy sector) and project preparation activities in nearly 120 countries.

In addition to investment and policy advice to improve the rural energy situation directly, developing countries also need a financially sound and well-managed modern energy supply industry to meet the energy needs of the millions currently unserved. The 1980s, however saw a marked deterioration of finances and managerial efficiency in the industry in numerous countries. Often with deleterious consequences for their public revenues (given the frequent recourse to subsidies). This eventually culminated in the recent surge of interest in regulatory reform and the liberalization of energy markets around the world. The Bank's own policies on the subject were laid out in its policy papers on electric power and energy efficiency (World Bank 1993 a,b), approved by the Bank's Board in 1992, and in a number of subsequent publications and seminars

Important as efforts to reform and liberalize the energy sector are, they leave several questions unaddressed. How will fundamental shifts in policy affect the energy supply situation for the rural - -and also the urban - poor? In all countries, rich and poor, public utilities have historically undertaken almost all rural electrification programs. Is service provision likely to become more widespread in the new institutional and economic settings. as many believe it will, or will the low-income markets for electricity and other modern fuels, such as LPG and kerosene, be neglected without public leadership? Will services be affordable? Who will be concerned about using traditional fuels in more sustainable and healthier ways? Will the reforms help with the introduction of solar energy technologies? More generally, how will public policies on energy and the environment ensure that the world's most impoverished people are not left out?

The purposes of this paper, therefore, are to take stock of the efforts of the developing countries and of the support the development community has provided, to see what we can learn from experience to date, and to identity ways by which the World Bank Group can help its member countries address the problems discussed. To this end, several drafts of this paper have been shared with and critiqued by many people and organizations that have been involved in developing policies and projects in this area.

As the title implies, the paper is mostly about rural energy supply and use. However, the problems it discusses are not confined to rural areas. Millions of people in urban areas also lack access to modern energy forms and depend on supplies of wood. charcoal. and in some countries dried dung, for cooking - another manifestation of urban poverty and a source of damage to rural and urban environments, as well as to people's health. The policies discussed in the following chapters are often equally applicable to unserved urban populations, for whom the costs of service extension are much lower.

 

Chapter two - The rural energy situation

 

Approximately one-third of all energy consumption in developing countries derives from the burning of wood. crop residues, and animal dung (biofuels). By some estimates. it amounts to around 1,000 million tons of oil equivalent energy per year, more than three times the energy of the coal mined in Europe in a single year and twice the energy of the coal mined in the United States or China. Most of this energy is used in rural areas, which account for about 60 percent of the population of the developing world. or up to 70 percent in the low-income economies. Consumption of fuelwood and charcoal in urban areas is also large in many countries. and results in deforestation and environmental damage in the surrounding countryside. with fuelwood eventually having to be trucked over large distances. This is especially true in African countries. where the costs of distribution and of acquiring appliances often inhibit the use of gas and electricity.

 

Effects of biofuel use by the poor

 

Aside from the economic hardship associated with gathering and cooking with biofuels. the indoor air pollution created by such fuels is a health hazard. particularly to women and children (see box 2.1). In addition, collection of biofuels frequently leads to ecological damage to forests, woodlands. and farmlands. and biofuels are generally energy-inefficient.

 

Pollution and health

 

As the 1992 World Development Report (WDR) noted (World Bank 1992). studies of smoke from the use of biofuels in rural areas (Smith 1987. 1988: Smith and others 1993) have found levels of solid particulate mattes that regularly exceed the safe levels cited in World Health Organization guidelines by several orders of magnitude (table 2. 1). Cooking can expose women and children to such levels for several hours a day. and has serious health effects that have only recently been studied systematically. even though they are often just as serious as the effects of cigarette smoking. Carbon monoxide emissions may give rise to ambient concentrations that interfere with the body's normal absorption of oxygen. Estimates indicate that smoke contributes to acute respiratory infections that kill some 4 million infants and children a year Recurrent episodes of such infections show up in adults as chronic bronchitis and emphysema. which can eventually lead to heart failure Studies in Nepal and India of nonsmoking women who are exposed to biomass smoke have found abnormally high levels of chronic respiratory disease. with mortality from this condition occurring at far earlier ages than in other populations and at rates comparable to those of male heavy smokers

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BOX 2 1 TIME, HEALTH, AND COOKING WITH WOODFUELS

When wood-fuels are scarce. the time people spend collecting fuels reduces the time they can devote to productive agricultural activities A recent survey in the hill areas of Nepal, for example, found that even in regions with relatively good supplies of fuelwood, women still need to spend more than an hour a day collecting biomass. and the time they devoted to agriculture was correspondingly less compared to people not dependent on these fuels. In the more deforested areas where fuels are scarcer, the time and effort women expended were even greater, with about 2.5 hours per day being spent collecting fuelwood, fodder, and grass. Surveys in Africa dating back to the 1970s have similar findings.

The use of biofuels also has an adverse effect on the health of women and children, especially children, though the provision of improved wood stoves along with household education and extension programs can help remedy this. A study of 500 children under five years of age in The Gambia found that girls who were carried on their mothers' backs as they cooked in smoky huts had a risk of acute respiratory illness six times that of other children. Studies in Papua New Guinea and India show that nonsmoking women who have cooked on biomass stoves for many years exhibit a higher prevalence of chronic lung disease than those who have had lower levels of exposure to cooking smoke.

In conclusion, the quality of life of women and children can be improved by improving access to biomass and providing improved biomass stoves.

Source: Kumar and Hotchkiss (1988); Smith (1987, 1991). See also Cleave (1974) for surveys of people's use of time in Africa.

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Ecological damage

 

The costs to the environment of biefuel use in teens of increased deforestation. soil erosion, and reduced soil senility have also attracted much attention. The consumption of fuelwood and dung is not the only cause of these problems - logging and clearing land for agriculture often cause greater damage - but it is, nevertheless, a source of environmental damage and cannot be ignored (see World Bank 1978, 1991). A study on Ethiopia (Newcombe 1984) found that where tree cover losses were severe, all the natural cycles through which nutrients were returned to an initially rich topsoil had been breached: first through the losses of trees themselves, and then through losses of grasses, crop residues. and dung when they were used for fuel instead of being used to fertilize the soil. Another consequence is that the soil retains less moisture, which results in reduced crop yields. Investigators have found that farms with good tree cover - where farmers have planted trees as windbreaks or shelter-belts, for example - have yields 20 to 50 percent higher, depending on local climates, terrain. and ecosystems, than those without good tree cover (Anderson 1987; Doolette and Magrath 1990: Gregersen. Draper, and Elz 1989; Spears 1986).

Table 2.1 Indoor Air Pollution from Biomass Combustion in Developing Countries

Location and year of study

Measurement period

Concentrations of suspended particulate matter as multiple of WHO peak guideline(a)

China, 1987

Cooking

11

The Gambia. 1988

Average over full day

4-11

India. 1987-88

Cooking with - wood

75(15-minute peak)

 

- dung

90 (15-minute peak)

 

- charcoal

2.5 (15-minute peak)

Kenya

   

1987

Average over full day

5-8

1972

Overnight (space heating)

12-34

Nepal, 1986

Cooking

9-38

Papua New Guinea, 1975

Overnight (space heating)

1-39

Zimbabwe, 1990

Cooking (two hours)

6

Brazil. 1992

Stoves with flues

< 0.4

Note: The studies are not completely comparable because Or different measurement methods. a. The WHO peak (98th percentile) guideline recommends that a concentration of 230 micrograms per cubic meter nor be surpassed by more than 2 percent (seven days) of a year Source: Smith (1988)

Recognition of the linkages between biomass use and the productivity - many would argue the sustainability of agriculture has done much to revive interest in the once time honored practice of agro-forestry. Development practitioners now understand that they should not view the "fuelwood problem" and its resolution in an isolated way, but as part of the larger problem of energy supplies, poverty alleviation. and the protection of natural resources in rural areas (see chapter 6).

More people now also recognize that the use of biomass need not be inherently negative. In principle, biomass fuels can be supplied - from forests, woodlands, or farmlands - and used in sustainable ways. One can cite several examples from Kenya and India of tanners turning to agro-forestry autonomously to respond to local demand for wood and to improve the local ecology. Biofuels are traded and are an important source of cash income for many of the world's rural people, and growing fuelwood can yield a comparatively high return. In Africa alone. the production and marketing of biofuels represents a US$5 billion business that provides gainful employment to more than 400,000 people.

Nevertheless some regions in densely populated countries have already passed the point of sustainable production of biomass fuels. In areas of China and India. the combination of intensive use of land and rural population growth has already transformed many forests into farmland. leaving only marginal lands to supply trees and shrubs. In the northern Chinese county of Kezuo, for example, people have already cut most of the trees around the agricultural lands and are now turning to less efficient fuels - straw and dung - while wealthier households are using coal. Deforestation has other undesirable effects on energy production: in Yongchun County, Fujian Province, China, lands and forests had become so degraded by 1983 that siltation had reduced annual hydroelectric production from the 1960 level of 5.000 hours to only 2,200 hours.

 

Energy efficiency

 

Figure 2.1 presents data on the efficiency of various cooking fuels. Biofuels are generally much less efficient for cooking than modern fuels such as liquid petroleum gas (LPG) and kerosene. An exception is biogas. This is derived from digesters of dung and farm residues. and both China and India have done much to develop biogas and encourage its use among people in rural areas.

The least efficient fuels are agricultural residues, leaves, and grass. With few exceptions, people use these fuels because they are available from the local environment at no cash cost, not because they value them as convenient cooking fuels (Agarwal 1983). Many parties have worked hard to try to raise the efficiency with which biofuels are used by introducing stoves. often with positive results.

Urban and some rural households generally purchase wood. charcoal. coal. and kerosene. These fuels have higher energy values per unit of weight than wood and are generally used in more efficient stoves. In addition, the level of heat output of kerosene stoves can be adjusted relatively easily. so kerosene is more convenient for preparing a wide variety of dishes. Households with the highest incomes use gaseous fuels such as LPG. LPG bums cleanly and efficiently. it is convenient. and it has an easily adjustable heat level.


Figure 2.1 Energy Efficiency of Selected Cooking Fuels

 

The transition to modern fuels

 

As their incomes grow. rural people begin to use modern fuels more extensively. Table 2.2 summarizes some typical changes in patterns of energy use by households and in agriculture and small industrial enterprises. The initial dependence on biofuels in the home eventually gives way to the use of electricity for lighthig and fossil fuels for cooking. In agriculture and industry, diesel engines and electricity replace manual and animal power for a variety of purposes. Where rural electrification from the grid is not available or is too costly, diesel generators may be used instead. More recently, photovoltaic systems have become an attractive option for small-scale electricity supplies for homes. businesses. refrigeration and lighting in health clinics, and water pumping.

However, as figure 2.2 shows, the transition to modern fuels is likely to take some time, In the lower-income developing countries, high percentages of rural people in particular, but also of the urban poor, continue to rely heavily on biomass. Even residents of countries approaching the lower middle income range. such as Ecuador and Uruguay. still consume large amounts of biomass energy.

As regards the regional use of biomass, in Africa, about 85 percent of the total energy used is in the form of biomass, in South Asia this figure amounts to 60 percent. and in East Asia and Latin America to 2.5 to 30 percent. Table 2.3 provides estimates of the current shares of biomass in total energy consumption and of likely levels in 2000 and 2010. The actual rate at which the transition to modern fuels will occur will depend on countries' economic performance and development policies: the extent to which people currently use biomass, coupled with population growth, suggests that a large number of people will depend on biofuels for many years to come. Even in East Asia and the Pacific, a region that has experienced significant economic growth and a major increase in the use of commercial energy. biomass use still accounts for 33 percent of energy supplies and is expected to decline only by some 50 percent during the next fifteen to twenty-five years.

 

Table 2.2 Rural Energy Use Patterns in Developing Countries by End Uses

End use Household

Low

Household income Medium

High

Cooking

Wood, residues. & dung

Wood, residues, dung. kerosene & biogas

Wood. kerosene. biogas, LPG. & coal

Lighting

Candles & kerosene (sometimes none)

Candles, kerosene. & gasoline

Kerosene. electricity. & gasoline

Space heating

Wood, residues, & dung (often none)

Wood. residues. & dung

Wood. residues, dung. & coal

Other appliances

None

Electricity & storage cells

Electricity & storage cells

Agriculture

     

Tilling

Hand

Animal

Animal. gasoline, diesel (tillers & tractors)

Irrigation

Hand

Animal

Diesel & electricity

Post-harvest processing

Hand

Animal

Diesel & electricity

Industry

     

Milling & mechanical

Hand

Hand & animal

Hand. animal. diesel. & electricity

Process heat

Wood & residues

Coal. charcoal. wood, & residues

Coal, charcoal, wood kerosene, & residues


Figure 2.2 Use of Biomass by Rural and Urban Populations in Four Developing Countries

Table 2.3 Current and Projected Use of Biomass by Region, Selected Years (percentage of total energy used)

Region

1990

2000

2010

Sub-Saharan Africa

85

83

80

South Asia

60

52

43

East Asia and Pacific

33

26

20

North Africa and Middle East

27

23

19

Latin America and Caribbean

26

22

19

Source: World Bank estimate

The conclusion must be, therefore that energy will need to be as concerned about the supply and use of biofuels as they are about modern fuels. and so have two aspects. not one. They must create the necessary conditions so that modern fuels - primarily electricity from the grid. renewable energy sources, liquid fuels, and LPG - can be efficiently supplied to large populations that still lack them. Second. they must support ways to use biofuels more efficiently and sustainable. a task that is not confined to those working in the energy sector, but must also involve those working with agriculture and forest management.

 

Chapter three - Emerging practices and policies

 

The transition to modern fuels and the sustainable provision and use of biofuels will both depend on the quality of the enabling conditions for development. When human resource programs are in place and enabling conditions for investment are favorable policies to extend energy services to those without them, whether rural or urban. are much more likely to succeed. Under such circumstances the markets for energy will be stronger, and suppliers of electricity. photovoltaic (PV) sets. liquid petroleum gas (LPG). kerosene, wood stoves. biofuels, and so forth will have better financial returns both to investment and to labor Such situations give rise to a "virtuous circle," because with increased rewards, efforts to expand services further will grow. Thus development policies can accomplish a great deal independently of policies that focus directly on the rural energy problem, though both types of' policies are necessary.

There are five general principles that experience has shown to be relevant to the provision of both modern and traditional fuels. namely:

• Enabling people to choose alternative forms of energy

• Avoiding unnecessary subsidies

• Addressing market failures

• Emphasizing participation and institutional development

• Recognizing the central role of enabling conditions.

We consider these before examining the specifics of policies toward each type of energy.

 

Enabling people to choose from among alternative forms of energy

 

In economic terms. giving people choices and allowing them to express preferences means liberalizing the pricing of and regulatory policies toward energy supply and use. and allowing people to express their willingness to pa, for service. In the past, interventionist financial and regulatory policies restricted people's ability to make choices and ultimately undermined the provision of services. Notable examples are the restrictions often imposed on electricity prices and, in some countries. on LPG and kerosene prices. By reducing energy companies' revenues. such restrictions often had the counter productive effect of limiting their financial capacity to invest and extend services.

Evidence from rural areas suggests that people are willing to spend a significant portion of their incomes on higher quality energy services that improve their quality of life or enable them to become more productive. In Bangladesh. for example. when service is available, even the poorest people are connecting to the grid. In Kenya, where the possibility of timely connection to grid service is remote. higher-income rural households are buying solar PV systems. In rural China. people without easy access to energy for cooking are investing in etfficient stoves and in tree planting. In India, during the 1970s and 1980s people shifted from using animal power for irrigation to diesel or electric pumps. In some parts of rural Bolivia, those without access to electricity use LPG lanterns as an alternative to candles.

Experience shows that if services are available and reliable. rural people are willing to use many different types of energy. and that given a choice. they generally select the combination appropriate for their daily demands.

 

Avoiding unnecessary subsidies

 

Many governments have sought to promote the provision of affordable modern energy services in rural areas by subsidizing particular forms of energy. Rural electrification is perhaps the main example, although governments have sometimes offered subsidies for kerosene, LPG, solar energy, wood stove programs, and so on. Although well intentioned, such policies have often proved to be counterproductive for the following reasons:

• They worked against consumers making least-cost choices. and in doing so also undermined investors' efforts to provide alternative energy forms. Commonly cited examples are the choice between diesel engines, solar PV systems. and grid-supplied electric motors for irrigation pumping and small-scale power supplies. When load densities are high or connection distances are short, the least cost alternative is generally grid-supplied electricity, but subsidized investment programs of electric utilities have too often led to grid supplies being extended to small loads when diesel, solar energy, or in some areas wind energy, would have been cheaper.

• Widespread recourse to unnecessary subsidies has frequently proved to be fiscally unsustainable. When coupled with price restrictions, subsidies eventually limited energy companies' investment programs (see chapter 4). This has not only happened to some countries' rural electrification programs, but sometimes to the suppliers of fuels such as kerosene and LPG for cooking.

• Subsidies have discouraged efficient energy use.

Subsidies have also, for the most part, gone to higher income households (box 3.1).

Subsidies have often gone to farms and commercial enterprises willing and able to pay for the full costs of service. For example, in Indonesia. subsidized kerosene for cooking and lighting is available to anyone who wants to buy it, but middle-class and better-off households, who can afford to buy more energy than the poor, reap a disproportionate share of the benefits. Until several years ago. the government of Ecuador subsidized kerosene, a fuel used predominantly by the poor. However, the poorest households ended up receiving only limited amounts because retailers could make higher profits by diverting supplies to those using them for vehicles. Large subsidies have also been ineffective in reaching the poor through rural electrification programs, particularly when decreased cash flows undermine power companies' ability to maintain the quality of service and to extend service to remote areas.

 

Addressing market failures

 

Limited subsidies or financial support can be justified for some programs in areas where education and training may be needed or where the costs and risks of start-up are high. 4 No country so far has succeeded in providing universal electricity service without some form of public support or cross-subsidies in the tariff structure. A typical approach that most industrial countries followed was for the government to mandate a regulatory requirement or to stipulate that a utility had to expand services in rural areas and towns, but could recover the costs through an overall increase in average electricity tariffs As the costs of service are higher in rural areas, such policies led to some cross subsidization from urban consumers, though without undermining the utilities' financial position.

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BOX 3.1 WHO BENEFITS FROM ELECTRICITY SUBSIDIES?

The shift from subsidized tariffs to economic pricing is urgent in several transitional and emerging market economies. Many governments have historically set prices far below cost recovery levels through subsidies and cross-subsidies to serve social and political objectives. Generally, however, the wealthiest benefit the most. The subsidies often amount to a significant portion of gross national product (GNP) and lead to excessive demand, higher investment requirements, fiscal stresses, and inefficient energy use.

A recent Bank study looked at the distributional impact of electricity subsidies in seven countries. Electricity subsidies are significant in all seven, ranging from 0.2 percent of gross domestic product (GDP) in Malawi to 2.7 percent in Poland. The higher the household income, the greater the subsidy realized, with the extent depending on the level of electricity used. However, as high income households have more electrical appliances, they benefit more than poorer households. Thus a poor consumer in Malawi receives US$ 0.04 a year in electricity subsidies, while a rich one receives US$ 6.60.

Source: Gutéerrez (1995).

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Electricity Subsidies as a Percentage of GUP in Seven Countries

Most countries also recognize the wisdom of supporting the development and use of new and innovative technologies, for example, by providing tax incentives, and sometimes investment grants, for solar energy technologies, which have considerable promise as commercial and environmentally attractive sources of energy (see chapter 5).

Public doubts about the capacity of unfettered markets to meet the needs of the lowest income groups are often important in policies. The use of "lifeline" rates (that is, low tariffs) for low levels of electricity consumption is not an uncommon practice, and rates are effective IT properly targeted. Experience has shown that they can be implemented without undermining industries' financial integrity (see the example of Thailand in chapter 4).

Aside from the social justification of such polices as lifeline rates are there any ground rules for the application of subsidies and other forms of public support? Experience and economic principles both suggest that they work best if they are targeted directly on - and are limited to addressing market failures. In the case of rural energy provision and use in developing countries, two circumstances merit attention: high startup costs and risks and external costs and benefits.

 

High start-up costs and risks

 

Programs to extend electricity to rural areas and towns and to establish solar energy programs are perhaps the best-known examples of energy sector activities that entail high start-up costs and risks. The costs of grid extension can be high initially because of the lumpiness of the investments needed to reach rural areas and towns for the first time. Costs are often US¢40 to US¢70 or more per kilowatt hour initially. but can decline rapidly toward the levels found in urban area as load densities rise (see figure 3. l). Average costs during a program's early years may greatly exceed the marginal costs of expanding service. and some allowance for this in the tariff structure and financing arrangements may be justified to encourage use.


Figure 3.1 Costs of Grid Electrification in Relation to Load Density. Urban and Rural Areas

The situation is similar in relation to the costs of connection and the purchase of appliances and of solar home systems. Setting Up a community grid can cost tens of thousands of dollars. and the expense of connection to grid electricity is a pervasive problem, with initial connection costs being as much as US$1,000 in some cases (not including the additional costs of internal house wiring). A solar home system costs between US$500 and US$1,000 or more, depending on the system's configuration, import tariffs. and profit margins. Stoves and cylinders necessary to burn LPG are also a significant investment for the rural poor (see chapter 6). Another start-up cost for many programs is that of providing education and training, which was an important feature of Kenya's PV program, which is discussed more fully in box 4.4.

The problems posed by start-up costs and risks arise partly from a real or perceived lack of creditworthiness of low-income consumers. and partly from a shortage of long term credit. Although many researchers have found that rural savings (like people's willingness to pay for service) are often higher than commonly thought (don Pischke. Adams, and Donald 1983). the lack of affordable credit can he a barrier to meeting the initial costs of more modern energy. However, emerging innovations in credit delivery systems, such as the Grameen Bank in Bangladesh (a member-supported bank mainly comprising poor families and women), offer some promising approaches to easing the credit situation in rural markets (Khandkher, Khalily, and Khan 1995). Leasing arrangements for equipment such as PV sets. such as are being considered in India, are another possibility. While micro-financing and other programs have been directed mainly at nonenergy uses, they seem well suited to financing energy investments. such as small scale generating and distribution equipment and appliances.

Electricity companies can also provide credit by including connection and service fees on consumers' bills and spreading the costs over several years The five-year installment payment for the connection charge operated by the Bolivia public utility is a good example (see box 4.2). Similarly, and perhaps with the aid of a participatory program, wholesalers or retailers of household PV systems, LPG, and improved appliances could. in principle, also become useful conduits for consumer credit. Nongovernmental organizations, cooperatives, extension services. and other community organizations could play a role in designing and overseeing such programs.

Private industries in the rich countries frequently absorb start-up costs themselves, and also extend credit to their customers in anticipation of commercial rewards later when markets develop. Examples of this abound in appliance markets. the same may eventually occur in developing countries as they liberalize their economic policies, it cannot be assumed that it will. Public policies to address the problems posed by high start-up costs are both necessary and dash-able.

 

External costs and benefits

 

Public support is also merited to address indoor and outdoor air pollution and the damage to natural resources arising from the use of traditional fuels for cooking. Economists have long recognized that the most effective way to address environmental problems is to tax or regulate pollution. But taxing or regulating rural households in developing countries for cooking with wood and dung is not a practical proposition. and other policy instruments are more appropriate - for example, working through rural education and extension services to inform people about the fuels' health effects and initiating related efforts to encourage the use of more efficient wood stoves with flues.

Not all externalities are negative. however, and in relation to energy supplies, rural (and urban) energy policies now need to take into account the positive externalities of new renewable energy technologies. The costs of solar technologies and solar-derived technologies. such as wind, are declining steeply for several reasons: learning by doing, the opportunities for innovation provided by new investment, and scale economies in the manufacture and provision of support and marketing services.

Given the considerable economic potential and environmental advantages of these technologies, both for small- and large-scale applications, the idea of subsidies to develop them further is fully consistent with the economic principles of public policy (Arrow 1962; Baumol 1995). The World Bank Group has also accepted this argument in relation to Global Environment Facility projects (see GEF 1995. 1996. various years).

 

Emphasizing participation and institutional development

 

As with other endeavors. development practitioners now recognize that participation by community organizations and local social units is crucial for the success of rural energy policies. To many community workers, scholars, voluntary organizations, and others who pioneered participatory approaches, this has long been self-evident; their efforts are now beginning to bear fruit.

 

Participation?

 

The World Bank Participation Source Book (World Bank 1995b) summarizes the main features of the participatory approach and draws on case studies from many countries to provide pointers toward good practices.

Cooperatives nongovernmental organizations. and local community organizations can be highly effective vehicles for supporting the delivery of energy services of all kinds and for managing natural resources. Such grassroots organizations are familiar with and understand local resources and needs, and are often willing to assume responsibility for implementing policies and projects.

For example, in Karnataka State. India. residents of the village of Pura. supported by the Karnataka State Council for Science and Technology and the Centre for the Application of Science and Technology to Rural Areas, now administer household electricity and water generated by large community biogas digesters (see box 3.2). Subsequent chapters of this report present further examples of the participatory approach.

Even the participatory approach. however. does not guarantee success; given its nature it must be tailored to the local situation and the task at hand. Experience has shown that unless projects are related to social groups or actors interested in their outcome and capable of carrying them out. they are unlikely to succeed (see Cernea 1992). Several World Bank-financed community woodlot or community forestry projects, for example, proved to be disappointing for this reason (Cernea 1992). Undertaken in the late 1970s and the 1980s, these projects were intended to reduce fuelwood shortages and pressures on local forests and woodlands by involving communities in planting local woodlots. However, even though they were based on local inquiry and sought to have high levels of local participation, planting rates and woodlot maintenance often tell below expectations. The underlying mistake was to view communities as units of social organization or economic agents, when in actuality, the interests of community subgroups frequently differed and worked against collective actions; community land was limited and the tenure of common lands was uncertain; the local systems of authority had uneven influence over subgroups' decisions; the distributional arrangements for sharing the products of the common endeavor were disputed; and. more generally the communities were geographical residential groupings. were not organized as joint producers. and were not systems onto which external economic activities could be grafted (Cernea 1989, 1992).

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BOX 3.2 DECENTRALIZED POWER MEETS VILLAGE'S NEEDS FOR CLEAN WATER

Near Bangalore, south India, the village of Pura supplies household electricity and water through large community biogas digesters. Although community biogas digesters have a history of problems in India, the key to Pura's success was in listening to what villagers viewed as their main problems and needs.

Original attempts to promote community biogas systems in Pura failed because they were directed at substituting biogas for wood as a cooking fuel. Abundant wood resources in Pura make fuelwood collection relatively easy, and therefore villagers had no incentive to maintain the system.

Subsequent discussions with villagers revealed they were more interested in obtaining clean and reliable water supplies near their houses. Because grid electricity supplies were unreliable, the community decided to establish a system of biogas production for fueling a five-horsepower diesel generator. Electricity from the generator was supplied to households through a micro-grid, and also powered a deep tube well pump. All households participating in the program received a tap with clean water in front of their houses, eliminating long walks to the local tank and significantly improving their health. Each household is charged a fixed rate for the water tap and each electricity connection. Some households now have both a grid and a village connection, which some villagers refer to as "people's power."

Source: Ramani. Reddy, and Islam (1995)

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In contrast. when project designers identify the appropriate social unit. the chances of success are improved enormously. An excellent example is afforestation based on farm- or agro-forestry, in which the farmers themselves plant trees on farmlands in association with agriculture. Such projects began to receive more support in the 1980s. and have often exceeded the project designers' expectations, largely because as an enduring social unit able to sustain forestry development, the farm family is a powerful social resource" (Cernea 1989, p. 53) Participation in the development of wood stove programs by women's groups is another successful example.

 

Local institutional development

 

Community action may however be effective when people from several villages and towns in a particular region are seeking electricity services. To this end, various approaches are possible, namely:

• Establishing an electricity cooperative, a model followed in parts of the United States and encouraged in the 1960s and 1970s in several Latin American countries. Bangladesh's rural electrification program has recently used cooperatives and has achieved considerable success in terms of the number of connections achieved. cost recovery (close to 100 percent', and service quality.

• Sending deputations from the communities to the regional or national electricity utility to request service. perhaps in conjunction with offers of community self-help to reduce costs

• Establishing village-level or community ownership of a local where grid supplies are not available (box 3.2)

Historically, however. providers have used other means of making electricity available to villages and towns. In the first few decades of this century. it was often supplied by a local enterprise willing to invest in a small generator and establish a small. local grid to retail the electricity service or by an agro-industrial plant that had surplus power available In other cases, local governments established public companies to provide electricity service to their communities. either using their own generators or medium-voltage links to a grid. Joint public-private partnerships were another arrangement commonly followed in both industrial and developing countries. As villages and towns expanded following migration from rural areas and economic growth took place, the area's public or private companies also grew, and were the predecessors of the larger municipal - and sometimes regional electricity companies we still see in some regions Interconnection then followed. initially to pool reserve capacity. and later to reduce costs further through trading power and energy and through the scale economies that could be obtained by increasing the capacity of power stations. All this took place, if not always in a competitive environment, at least in a situation where good financial returns to investment could be, and generally were. being achieved.

In developing countries, public ownership succeeded local private or quasi-private ownership of electricity distribution in the 1950s and 1960s, and took place somewhat earlier in most industrial countries. Since then, the principal source of service expansion has been the direct extension of supplies from a national electricity authority under public ownership and regulation.

With the privatization and unbundling of the electricity industry in many countries, the question arises as to whether these historical models will reappear or, where countries do not pursue full privatization. ownership will be in the hands of municipalities that operate on commercial principles. This question is difficult to answer, because no country has followed this path before, and it raises new issues, not only about ownership but about risks, taxes, regulation, and the roles of local or regional governments (see chapter 4).

A monopoly element would still be present in any public or private involvement in distribution. though the companies would be more visible than their nationalized predecessors, and thus more accountable locally. However, this scenario assumes that companies are willing to invest extensively in extending distribution networks to villages and towns. Yet despite the progress made with institutional reform in the electricity industry since the beginning of the 1990s. private companies have 50 far shown comparatively little interest in distribution and much more in generation. Will local or regional governments have the capacity to attract private investment in distribution on the scale required? We are at the beginning of a new and complex process of institutional development, the path of which is not yet clear. In the meantime, service expansion needs to proceed. Chapter 4 pursues the discussion of options.

Even when well-tailored local energy approaches are pursued by cooperatives or municipalities, they run the danger of tailing because of inadequate training of personnel and inadequate maintenance and repairs of systems. Local diesel generators and microhydro schemes have failed for such reasons. and, as chapter 5 points out, so have some PV systems, even though they are inherently low-maintenance operations. A solution often suggested is for communities or cooperatives to share the needed infrastructure of services. a practice that can be facilitated by regional or central leadership.

 

Decentralization

 

In a broad sense. participation by local people in choosing and designing local investments is moving countries toward decentralized economic development. Thirty years ago a Nobel Laureate, the late Sir Arthur Lewis, drew attention to the importance both of decentralizing financing and of building up local government units. He also noted that public services (schools. water and electricity supply systems, local roads. and health centers and hospitals), which in mature economies are run by local authorities. were in many countries still being nun by central governments and financed from central revenues, a situation that persists in most developing regions (Lewis 1969). Local participation and the development of local institutions in this broader sense is desirable from both the demand- and supply-side perspectives.

On the demand side, it helps to reveal people's preferences among different services and may also reveal other things. For example, many studies have found that people's willingness to pay for electricity and other services is tar higher than had been assumed (Whittington, Lauria, and Mu 1991; World Bank 1992). Similarly, as noted earlier, rural savings are also often greater than assumed. which makes the problem of people raising enough money for initial connection somewhat less severe. On the supply side, decentralization increases local accountability and provides incentives for more efficient provision of services.

In sum, then, the general aims of seeking greater local participation in rural energy programs are to ensure that such programs are far more responsive to people's needs than they often have been in the past.

 

Recognizing the central role of good enabling conditions for development

 

The dependence of so many people who lack access to modern energy forms on biofuels is above all a manifestation of poverty, and unless development policies in general promote economic growth and development on a broad basis. not only will the rural energy problems described in this report persist. they will become worse as developing countries' populations grow.

Even well-conceived investments in rural energy may falter, not because they are inartistically wrong, but because economic conditions may be working against them. For example, in rapidly developing regions, the provision of electricity helps to raise the productivity of local agro-industrial and commercial activities by supplying motive power, refrigeration, lighting, and process heating. In turn, increased earnings from agriculture and local industry and commerce raise households' demands for electricity. However, when development efforts fail because of say. poor crop pricing and marketing policies, electricity supplies may be able to do little to remedy the situation, nor will electricity or other modern fuels be in great demand. If it is to serve a useful purpose, electricity needs a "market," as do other energy forms such as LPG and renewables.

Thus it is no coincidence that investments to improve energy supplies in rural areas are more successful when development is proceeding and incomes are rising. The higher a country's per capita income, the greater the use of modern fuels (figure 3.2). When per capita annual incomes are US$300 or less, 90 percent or more of the population typically depend on fuelwood and dung for cooking Once annual per capita incomes reach US$1.000 to US$1,500, substitution to modern fuels is almost complete.

With technological progress and reductions in the costs of supplying modern fuels, the income levels at which the transition takes place have been declining for more than a century. This can be illustrated by comparing the experiences of the United States and the Republic of Korea. In the United States. the transition from being 90 percent dependent on wood-fuels to eliminating them almost entirely took nearly seventy years, from 1850 to 1920. In Korea, the same transition took about thirty years. and was almost completed by 1980.

For each 1.0 percent increase in per capita incomes. roughly 0.6 percent of the population turn to modern fuels. Based on projections of per capita income in Global Economic Prospects and the Developing Countries (World Bank 1995c), the population served by modern fuels could rise from around 2 billion in 1990 to more than 4 billion by around 2010. and in this happens, the number dependent on traditional fuels would decline by 0.5 billion or more during the period The biggest gains would be in Asia and Latin America, but there is no reason why Africa could not make good progress, given a good enabling environment.

Looking at the relationship between per capita incomes and fuel use in this way is, of course, a simplification When development policies are such that incomes in a region are growing, both public and private investments in energy supply, in natural resource management, in soil erosion control, and so forth are all more likely to work" better and show good returns. When assessing the prospects for policies and investments focused directly on Improving energy supplies, therefore. one should also ask whether local health and education programs are being put in place; whether complementary infrastructure, such as rural roads, water supplies. and sanitation is being given proper attention; and whether macroeconomic and pricing policies are such that the investments will function and will serve useful purposes. Rural energy policies and investments are an adjunct to good general development policies, and their chances of success are greatly increased when the answers to such questions are positive.


Figure 3.2 The Use of Biomass in Relation to GNP per Person in Eighty Countries

 

Chapter four - Options for rural electrification

 

Rural electrification is generally thought of as grid electrification. and this is indeed the most common and most desired means of supply Where load densities are low, however. diesel generators. renewable energy (solar energy. micro-hydro wind, and small biomass-fired generators), and "hybrids" of such options are more cost-effective.

 

Progress to date

 

Developing countries' efforts to extend electricity supplies to their populations have been impressive. During 1970-90. nearly 1.3 billion people were newly supplied with electricity from national grids, of whom 800 million were in urban areas and 500 million in rural areas (table 4.1).

In all regions the share of the population served rose. China accounted for nearly half of the increases. but the extent of service in Africa remains low. During this period. populations grew by 1.5 billion. and in low-income economies outstripped the growth of people with service: in Sub-Saharan Africa, the number of people with service grew by 55 million, total population grew by 220 million; in South Asia. the number of people with service grew by 250 million, total population grew by 320 million.

Low-income households in developing countries use electricity mainly for lighting, television, radio, and ironing; as incomes rise. refrigerators and other appliances become affordable. Table 4.2 provides data from a survey of electricity use in urban households in Indonesia. where the pattern was similar to that found in rural households in other countries. unless one counts fans. which are quite popular. air conditioning. which is one of the biggest sources of electricity demand in rich countries. is virtually absent. Electricity is also rarely used as a cooking fuel, for which it is both expensive and energy inefficient.

 

Table 4.1 Urban and Rural People Connected to Electricity in Developing Countries, by Region, 1970 and 1990 /percent)

 

Urban

Rural

Region

1970

1990

1970

1990

North Africa and Middle East

65

81

14

35

Latin America and Caribbean

67

82

15

40

Sub-Saharan Africa

28

38

4

8

South Asia

39

53

12

25

East Asia and Pacific

51

82

25

45

All developing countries

52

76

18

33

Total served (in millions)

320

1,100

340

820

Note These estimate are only approximations.

Source: World Bank project and sector reports, other materials and surveys of electicity statistics by the World Bank's regional staff in Asia and Latin America.

Table 4.2 Appliance Use in Households with Electricity in Urban Indonesia' 1987 (percent)

Income class

Activity

Low

Middle

High

Lighting

100

100

100

Television

31

63

83

Ironing

21

51

77

Economic activity

5

6

9

Refrigeration

1

6

9

Water pumping

1

4

26

Air conditioning

0

0

1

Cooking

0

2

8

kWh/household/month

24

47

130

Source: Peskin and Barnes (1994) This paper was a background paper for the World Development Report 1994 (World Bank 1994b).


Figure 4.1 Energy Efficiency and Lighting

One sometimes overlooked feature of electrification programs is that they may improve the efficiency with which energy is produced and used. A particularly dramatic case is that of electric lighting. in which even the incandescent lamp represents a 50- to 100-fold increase in energy efficiency relative to the kerosene wick lamp (figure 4.1). The fluorescent lamp, which is well suited to solar home systems. raises energy efficiency several hundred times. The quality of the light electric incandescent or tiuorescent bulbs provide is also vastly superior to that of kerosene lights or candles.

Although electricity from central grids, local Crisis, or renewables can be expensive in absolute terms, the combination of higher efficiency and better quality service is attractive to those renal confers able to afford it, and Nay also reduce the real costs of the service (for example. Iight) itself On the island of Java, Indonesia. for example, the use of electricity compared with kerosene led to a seven- to tenfold increase in lighting for newly connected consumers, the cost of electricity pet kilolumen of light output being about 5 percent of the costs per kilolumen of light provided by kerosene lamps. In most countries. the biggest sources of demand for electricity in rural areas and towns are often farms, agro-industries. and small commercial and manufacturing establishments (for irrigation pumping. water supplies, crop processing. refrigeration, and motive power). Typically 60 to 80 percent of the electricity supplied in developing agricultural regions is used for such purposes.

Thus rural areas and towns often use electricity for purposes that are socially and economically valuable. They do so often enough to justify the investment an economic perspective. The main questions about grid electrification in rural areas and towns relate less to its usefulness, than to financing and costs and whether alternatives are more cost-effective. As noted in the introduction, current moves toward market and regulatory reform in the industry are also resulting in new questions being raised about the role of public policy in the expansion of service. Let us consider these questions in turn.

 

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

   

Country

Fuel

Generation & transmission capacity

Distribution capacity

Total agricultural

Average tariff

Bangladesh

4.6

9.2

10.6

24.4

16.0

India

2.1

5.8

8.7

16.4

0.5

Indonesia

3.8

4.1

9.8

17.6

5.8

Malaysia

2.3

8.8

4.4

15.5

7.2

Philippines

5.0

2.8

7.5

15.3

9.2

Thailand

5.0

.3.8

8.3

17.1

7.0

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)

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BOX 4.1 RURAL ELECTRIFICATION IN THAILAND

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).

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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

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BOX 4.2 CREDIT FINANCING COMPENSATES FOR HIGH COST OF ACCESS IN RURAL BOLIVIA

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).

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Credit Access and Electricity Adoption in Three Villages

Village

System

Credit access

% on credit

% of households w/electricity

Price ($/kWh)

Aiquile

Diesel

Yes

51

55

0.25

Mizque

Diesel

Yes

56

59

0 30

Vacas

Grid

No

0

54

0.06

• 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.

 

Cost-effectiveness and the choice of alternatives

 

Electrification programs have centered almost exclusively on grid electrification. While this is cost-effective for high-density loads. planners have often overlooked the alternatives. The costs of electrification can be reduced by working with lower service standards, but other options are available (Munasinghe 1987).

 

Costs of grid supplies

 

Table 4.4 shows the costs of extending distribution to unelectrified areas. The incremental costs of expanding grid supplies usually have the following comportents: (a) the capital and fuel costs of generation: (b) the capital costs of reinforcing the transmission and subtransmission networks; (c) the extension of medium-voltage transmission networks; and (d) the establishment of a low voltage distribution network and household connections. Such costs vary from country to country and among regions in a single country. and the costs of meeting peak demands are considerably higher. but the table illustrates how costs vary in a typical situation. Grid supplies are usually a cheaper option in areas with high load densities and high load growth near the grid.

 

Reducing initial investment costs by using appropriate design standards

 

The high initial costs are a major barrier to service extension. but can be reduced appreciably by using design standards suitable for areas with lower demand (once demand rises, standards can be increased). The demands of most rural consumers range from 0.2 kilowatts (kW) to 0.5 kW; however: the minimum service connection ratings in developing-country utilities are typically 3 to 7 kW. which raises costs. For the same reason. the costs of installation and wiring provided by the utility are high. Simplifying wiring codes and using load limiters (circuit breakers) for lower levels of consumption can reduce costs significantly. In addition, using cheaper poles and involving local people in works and maintenance will also reduce service costs. When service is being provided to millions of people, the aggregate of such economies is considerable.

 

Micro-grids supplied by diesel generators

 

Decentralized. isolated distribution systems have been common for several decades in remote population centers, and in most developing countries predate the establishment of grids. For example, such systems were serving numerous villages and towns in northern Ghana before the grid extensions in the 1980s. Box 4.2 on Bolivia provides another example. The costs of such systems typically range from US¢20 to US¢60 per kWh. Table 4.5 provides data for two schemes. each serving fifty consumers, one in Yemen. the other in Pakistan.

Maintenance and high fuel costs have been long-standing problems with diesel generators. The systems are often in remote locations. and the difficulties of purchasing imported spare parts and fuel have often made them unreliable.

 

Electricity supplies from renewable energy sources

 

The cost estimates in table 4.5 are fairly typical of small diesel plants. They also show why energy from solar. wind, and micro-hydro schemes has become attractive in regions where the solar insolation wine" regime, or hydro resources are suitable. A report by the former Office of Technology Assessment of the U.S. Congress (OTA 1992) found that the all-inclusive unit costs of electricity were as low as US¢ 12 per kWh for micro-hydro. depending on the site. US¢45 per kWh for PVs. and US¢25 per kWh for small wind sets (the costs of the latter two technologies have declined significantly since). Electricity for local distribution can also be generated from such fuels as biogas or biomass. depending on local availability of resources (see box 3.2 on the case of Pura).

Table 4.4 The Effects of Line Length and Consumption Levels on the Costs of Rural Electrification (costs in U.S. cents doer kWh)

Cost component

Unit costs

Totalsa

Generation and Transmission

   

Fuel

3 - 4

 

Capital

2 - 3

 

Transmission & subtransmission reinforcement

3

 

Subtotal (rounded)

10

 

Medium-voltage extension and low-voltage distribution

   

3 km spur title, 20 households

45

55

3 km spur line. 50 households

20

30

I km spur line. 20 households

15

25

I km spur line. 50 households

7

17

High-density rural loads

2

12

n.a. Not applicable

a Totals include the generation and transmission costs shown ill the upper rows plus the extension and distribution costs shown for each of the five cases of line length and load density Assumptions: Medium-voltage lilies. US$10.000 per kilometer low voltage distribution US$5.000 per kilometer. US$40 per kilovolt ampere for simple pole-top distribution transformers, consumption levels of 35 kWh per month per household: 20 meters of low-voltage circuit per house: 10 percent discount rate: twenty-five year lifetime for circuits. fifteen years for transformers. The above figures are adjusted for the higher losses experienced ill serving rural energy demands. Source: Arun Sanghvi personal communication.

Table 4.5 The Costs of Small Diesel Supply Systems in Pakistan and Yemen

System elements

Pakistan

Yemen

Number of consumers

50

50

Consumption/cosumer/month

25 kWh

25 kWh

Size of generator

20 kW

20 kW

Investment cost

US$14,250

US$ 14,250

(including network and civil works)

   

Fuel cost per liter

$ 0.17

$ 0.-22

Electricity costs

US$0.35/kWh

US$0.51/kWh

Source: Meunier (1993, cited in Folley (1995).

Micro-hydropower can be one of the cheapest options for providing electricity to rural areas that are too far away from the grid to be connected to it, and can sometimes also supply the grid. This is certainly true where local capacity to manufacture turbines exists, as in China and India. In India. a program to finance micro-hydro systems privately will both serve local demand and feed into the central grid system.

Another aspect of micro-hydro is the care needed when selecting a site, given the possible variation in stream flows during the year and from river to river. Costs vary significantly. depending on the site and the terrain. In Nepal. for example, some 25 percent of total costs for a micro-hydro project can be for transportation of equipment and materials alone. but are much lower in less mountainous regions. However, if all elements of the project cycle adopted a low-cost approach. even in Nepal the costs of extending the grid to small consumers could be as low as US$ 150 per consumer. One important aspect of such approaches is the participation of the local community, which reduces costs enhances consumer satisfaction, and helps to provide a financially viable investment. Box 4.3 provides an example of an innovative and successful micro-hydro development effort in Peru, at a village center distant from the national electricity grid.

The development of micro-grids, whatever their primary source of energy. requires a significant level of community consensus and support regarding such factors as billing, service, and organization. Local participation is a key ingredient in the design of such isolated systems. in their implementation, and in their day-to-day operation. This is self evident in the case of small local systems that are the result of local self-help or private initiative. However, even isolated systems put in place by a national program are more efficient if they enlist the cooperation of local consumers. Central grid systems also benefit from local participation in rural distribution. In Bangladesh, for example locally managed rural electric cooperatives are responsible for distributing power that they purchase from the grid or generate locally. Their record of billing, collection, losses. and maintenance is significantly better than that of the main power utility in charge of urban distribution.

Developments in new renewable energy technologies have greatly expanded the options for supplying electricity in rural areas (see chapter 5 for a more complete discussion). Consider developments in solar PV technologies, for example. Barely twenty years ago. at the time of writing the Bank's previous policy paper on rural electrification, costs were several hundred thousand dollars per kilowatt, conversion efficiencies were low, and the only applications were in aerospace and in specialized switching circuits. Today PV systems are providing electricity economically to rural areas of developing countries for domestic lighting and appliances. vaccine refrigeration for health clinics, village water pumps. telephones. irrigation pumping, street lighting. and schools. In areas tar from the grid or where delivering conventional fuels is difficult. renewables are often the least-cost options. Significant markets for PVs are thriving in rural areas of developing countries - in Kenya, for example (box 4.4).

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BOX 4.3 A CREDIT PROGRAM FOR MICRO-HYDRO IN PERU: A PROMISING BEGINNING

One constraint to the wider use of small-energy technology is access to capital. Many financiers see microhydro schemes as high risk, and are therefore reluctant to make funds available. This reluctance stems from the frequent lack of adequate support for training, operation. and management of schemes by borrowers.

In Peru in 1993, the Intermediate Technology Development Group (ITDG) and the Inter-American Development Bank established a rotating fund to make loans of up to US$30,000 available to rural communities and rural enterprises for micro-hydro schemes. The interest rate is 8 percent per year, and the payback period is five years.

The first scheme to be installed under the program supplies electricity to the village of Chálan, fifty miles from the national grid. Chálan has a population of 540 people in 120 families. In addition, nineteen other small settlements or hamlets in the area use Chalán as their main center for services.

The initiative for the micro-hydro scheme came from the village council and a local NGO that was working with local farmers. The funding for the scheme came from four sources: a loan from the credit program, a grant from the local NGO, the resources of the village council, and the labor of every family in Chalán who agreed to contribute a set amount of time to construct the channel, install the pipe, and build the powerhouse (the community provided a total of 4,318 per son-days of labor). The ITDG supervised construction and provided technical and management training.

The capacity of the Chalán microhydro scheme is 25 kW and the capital cost was US$82,700. Direct connections have been provided to eighty families to date, with most remaining households expected to connect in the future. A further 617 families from surrounding communities are indirect beneficiaries of the scheme as they now have access to improved health and education facilities, battery charging, agro-processing, and workshop and communication services and also benefit from public lighting in the village.

An elected committee that is independent of the village council manages the schemes and is responsible for overseeing operation and maintenance; collecting tariffs; promoting safe and efficient use of the energy; and managing the introduction of new uses, such as workshop equipment. At present, the power from the plant is priced at US¢9 per kWh, although this will increase to cover the costs of generation and to provide a reserve fund for repairs and replacements. Conversely, as demand increases, the costs of generation will fall, providing the opportunity to reduce tariffs.

The credit program aims to install around twelve schemes. The program has already attracted considerable interest among local communities and enterprises, government bodies, and international agencies.

Source: Courtesy of Stephen Fisher, ITDG, personal communication (1996).

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Cost-efficient use of renewable energy technologies in rural areas can be encouraged by educating people about the possibilities and by providing training in how to install and maintain the technologies. Electricity distribution companies also need to be encouraged to consider the costs and benefits of the solar alternative to grid supplies to meet small loads and provide supplementary power on the longer distribution networks. The World Bank Group's Solar Initiative. launched in 1994, is identifying such opportunities (see chapter 7).

 

Regulatory and price reforms, unbundling, and privatization

 

Extending electricity supplies to large numbers of people and growing markets in developing countries will require financially sound and efficiently managed electricity supply industries However. despite a six fold increase in electricity generating capacity and output since 1970 and the rapid increase in the number of customers served. by the late 1980s the financial positions and efficiency of electricity supply industries had deteriorated badly in many countries. Several of these countries are now attempting to reform their electricity supply industry and its ownership and regulation so that it can be operated on commercial principles and under independent management (see World Bank 1993b, 1994d). Box 4.5 summarizes the key aspects of the reform process and provides some examples.

 

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.

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BOX 4.4 PV MARKET GROWTH OUTPACES GRID CONNECTIONS IN RURAL KENYA

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).

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Comparing Grid and PV 1987-92

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BOX 4.5 INSTITUTIONAL REFORM IN THE ELECTRIC POWER SECTOR

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.

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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.

 

Approaches

 

In these circumstances rural electrification will require public involvement for some time to come, and as with the general institutional reforms now taking place. no uniquely best approach is available: much will depend on individual country's circumstances. The following are some possibilities:

• A continuance of public involvement in distribution. with regulations requiring companies to expand service in ways consistent with achieving satisfactory financial rates of return to investment.

• Joint public-private investments in distribution. with the same regulatory requirement as the first option.

• When the distribution company is privately owned, a regulatory requirement to expand service. coupled with permission to meet the financing requirements out of rural specific tariffs or la second-best measure) a surcharge on general tariffs.

• Full price liberalization on private investments in distribution. with regulators acting as monitors of prices and the efficiency of service, the latter being defined to include the expansion of service where the costs and returns justify it.

• Encouragement of the formation of electricity cooperatives, the private development of micro-grids, or both.

This list is not comprehensive, and other options are possible. Barring an economic surprise. however; public leadership does seem to be necessary to expand service to rural areas and towns: it will need to be open to alternative arrangements and to a variety of ways of encouraging private investment.

 

Chapter five - Innovations in renewable energy

 

Recent developments in renewable energy technologies have greatly added to the options available for improving rural energy supplies. The main technologies suited to rural areas are micro-hydro. biogas. wind generators. wind pumps. solar heaters for hot water and sustainable ways to provide wood supplies. All these are important sources of energy anti can be developed further. as illustrated by the examples of China (box 5.1) and Pura in India (box 3.2).). A more recent development has been the use of photovoltaic (PV) systems to provide electricity supplies for such small-scale applications as electric lights; and domestic appliances. refrigeration for clinics. village water pumps, street lighting. and health clinics and schools. For small-scale applications in rural areas, PVs are often less expensive and more reliable than grid supplies or diesel motors. The encouraging feature of the Kenya example discussed in box 4.4 was that it was financed on a purely private basis (van der Plas 1994). Solar thermal electric systems using parabolic dishes are also showing much promise for small-scale supplies (Ahmed 1993).

Aside from their environmental appeal, new renewable energy technologies are attracting professional interest for several reasons. namely: the abundance of the solar resource. from which most forms of renewable energy are derived: technical progress and cost reductions: and the modularity of the technologies. The rest of this chapter will focus on technological progress and on the supporting policies needed if renewable energy is to be widely used in rural areas.

 

Technical progress in using the solar resource

 

Each year. the earth receives energy from the sun equal to 10.000 times the world's commercial energy consumption and more than 100 times the world's proven coal. gas. and oil reserves. Modern solar electric schemes. such as PV systems and solar-thermal power stations, can currently convert 7 to 15 percent of the incident energy into a form useful for consumption. and in theory would need less than I percent of the world's land area to meet all its energy needs. Solar energy is an abundant and infinitely renewable resource.

Insolations are about 2,000 to 2,500 kilowatt hours (kWh) per square meter per year in many areas of developing countries, which means that a PV scheme of square meter can supply 100 to 300 kWh. depending on the type of cell used, which is sufficient for lighting. radio. television, and ironing, while a 5 square meter panel set is sufficient to meet the water pumping needs of a village or to provide for irrigation on a small farm.

Technical developments have been impressive, and reductions in the costs of all major solar energy technologies. including derived forms of solar energy such as wind. have been substantial (Ahmed 1993: Johansson and others 1993). As figure 5.1 shows. in the early 1970s PV modules cost several huncired thousand dollars per peak kilowatt and applications were largely confined to aerospace and other specialized uses. By 1990 costs had fallen to US$16,000 per peak kilowatt and PVs had become commercially viable for a wide range of small-scale uses: costs have declined by another 20 to 30 percent since. An estimated 100,000 to '-00.000 systems are installed in developing countries. including 40,01)0 in Mexico, 20,000 in Kenya. 16,000 in Indonesia. 15,000 in China. 10,000 in Brazil. and 4.000 in Sri Lanka.

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BOX 5.1 RENEWABLE ENERGY IN CHINA

China has long promoted renewable energy technologies for its large rural population. Nearly 800 of China's 2,166 counties depend on small-scale hydro for electricity, and some 5.5 million households use biogas systems that process animal manure, kitchen wastes, and night soil into biogas for cooking. Many small-scale wind machines are in household use - 120,000 in Inner Mongolia alone. The Ministry of Agriculture estimates that private artisans have assembled more than 4 million square meters of solar heaters using devices designed by

China's Solar Energy Research Institute. This is equivalent to the heat that several hundred megawatts of electricity generating capacity could deliver. Demand has grown by 50 percent in each of the past two years, stimulated by a rise in farm incomes. Until recently, the PV program had reached a modest 4,500 households. However, an active research program is under way, and in Qinghai Province alone, where insolations are good, plans call for PV electrification of 100,000 households in the next twenty-five years.

Source: Terrado and Cabraal, staff memorandum (1996).

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Engineering and economic data show that further progress is likely on two fronts:

• Scale and production economies. World output grew from I megawatt per year fifteen years ago to around 70 megawatts today. a growth rate of more than 30 percent per year. Markets are still small. but the technologies are modular, and economies of scale and the technical possibilities for batch production have barely been exploited.

• Cell. module, and systems design along with improvements in conversion efficiencies. Improved materials. multifunction devices and novel cell designs to capture more of the solar spectrum, and concentrator (Fresnel) lenses to focus sunlight onto high-efficiency cells are further areas of rapid development.


Figure 5.1 Actual (1970-92) and Projected (1993-2015) Costs of PV Module

The technologies are now at the point where they are competitive for oft: grid supplies, and are therefore of special interest to rural areas. Box 5.2 on Indonesia's experience with PVs provides a good example of the respective economics of grid and PVs for supplying rural areas. At high load densities the grid is clearly preferable. at lower load densities PVs are a more cost-effective option.

Good progress has also been made with small- and large-scale thermal solar schemes and with derived forms of solar energy, such as wind and biomass resources for power generation. In China and Middle Eastern countries solar-thermal collectors are a popular heat source for domestic hot water, and promising experiments with solar cookers are afoot in Asia and Africa. Another promising solar-thermal technology is the parabolic dish for small scale power generation. and when scaled up. for grid supplies Studies by the U S. Department of Energy have indicated that the costs of 25-kilowatt modular units vary from US¢12 to US¢20 per kWh (Ahmed 1993) In the case of wind for power generation on a larger scale, costs have declined from around US¢ 15 to US¢25 per kWh to US¢4 to US¢8 per kWh in favorable locations For small-scale applications the costs are US¢20 per kWh. but can be competitive for off-:grid supplies.

Of all renewable energy sources. biomass (ligneous and herbaceous crops and agricultural and municipal wastes) is the largest, most diverse, and most readily exploitable Biomass residues are often available in large quantities as agro-industrial wastes Recuperation, more efficient production, and more rational use of biomass residues and forest resources could make many agro-industries energy self-sufficient as well as provide additional energy to the economy in general. This requires the conversion of biomass into cleaner and more convenient fuels (gases, electricity. briquettes).

Developing-country agro-industries (saw mills, sugar mills, and palm oil mills) already use biomass residues to generate power and heat for the industry own use. On-site utilization is currently limited to raising process heat and power. but its use could be expanded to heat for drying and product treatment Also, co-generation of electricity for a mini-grid can he economically beneficial. Off-site utilization of residues includes direct utilization of residues in industrial oil, wood-. and coal-fired combustion systems

Biomass conversion technology may find application in situations where petroleum fuels are either unavailable or where the cost of power from engines fueled by producer gas is lower than from diesel or gasoline engines. Classification combined with the use of gas in an internal combustion engine or turbine is an efficient way to convert solid fuels into shaft power or electricity on a small scale, and more advanced processes for larger scale gasification are under development Heat gasifiers are technically reliable and economically attractive compared with conventional alternatives Apart from use in the rural agro-industry (for example, for tea drying), non-agro-industrial applications are also viable (for instance. brick and ceramic kilns). Consequently. this technology is already in large use in developing countries.

Economists believe that the costs of new renewable energy technologies will decline further because of scale economies and the stimulus that market growth will give to further research and development and innovation Japanese and American studies of the reaming curves for PV technologies have found that for each doubling of the cumulative volume of production during the past fifteen years. costs have declined by 20 percent (Ahmed 1993: Anderson and Williams 1994) Renewable energy technologies are fertile ground for innovation; the possibilities for further development and cost reductions are far from being exhausted

 

Policies toward new renewable energy sources in rural areas

 

New renewable energy technologies still account for less than 2 percent of the primary energy supplies of developing countries. but in light of their promise. with good economic and environmental policies and with the development of the necessary support systems for installation and maintenance. their market shares should expand Investments will also be required to acquaint energy engineers and managers with the technologies and to educate and train engineers and skilled workers As with all new and innovative technologies. developing the best approaches will take a good deal of effort (and some trial and error).

A recent review of PV programs in the Pacific islands (Liebenthal. Mathur, and Wade 1994), for example. found that many PV systems tailed after installation, and it was only when supporting services were introduced that the programs began to succeed. These services included training technicians. ensuring timely maintenance. collecting tees on a regular basis, providing proper oversight to prevent the diversion of revenues to other projects, and obtaining prompt feedback on needs from local user communities and passing the information on to the supplying utility Similarly, a program in India introduced PVs in several states for domestic and street lighting, community televisions, water pumping, and other purposes during 1986-93 Yet out of more than 5,000 street lights. more than half in some states all were not working a short while later, and the other applications exhibited similar failure rates The findings were particularly disturbing because PVs are durable, are relatively simple to install. and require little maintenance. As in the Pacific Islands. the problem turned out to be the lack of supporting services

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BOX 5.2 SOLAR PV HOME SYSTEMS IN RURAL INDONESIA

Solar home systems using PV technologies have the potential to provide electricity to a large number of rural households. In Indonesia 3,000 solar home units were installed during 1988-92. A recent evaluation found that the units are working as planned Today, more than 16,000 units have been installed through public programs and by commercial dealers.

In a typical 50-watt-peak system, a solar PV panel is installed on the roof of a rural home or shop The panel charges an automobile-type battery that is used at night to run up to four energy-efficient light bulbs and a black and-white TV or a radio for four to five hours a day - approximately equivalent to consumption of 0.5 kWh of grid electricity per day Systems ranging from 20-watt-peak (for lighting alone) to 200-watt-peak (for schools, meeting halls. or higher-consumption households) have also been used successfully.

Solar home system units offer a fast and least-cost means of providing decentralized rural electrification in two "niche" markets: (a) where the grid may be nearby, but consumers are dispersed and the load density is low, making grid extension to individual consumers expensive; and (b) where the grid is more distant and is not expected to be extended soon (see the figure) In these two markets combined, the economic potential for solar home systems in Indonesia is estimated at more than 5 million of the approximately 30 million rural households that lack grid supply.

Solar home systems also offer (a) superior quality and quantity of light, compared with kerosene lamps, along with absence of indoor fumes, pollution. and fire hazard associated with such lamps; (b) no need to haul battery to a central charging facility; and (c) environmental benefits One environmental problem that must be dealt with in all solar home projects involves ensuring proper disposal or recycling of batteries

Source: Arun Sanghvi, internal communication

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Grid Extension and Solar PV Switchover Values Outside Java Grid 3 Kilometer Medium-Voltage Extension

Successful programs require two main ingredients: (a) paying proper attention to program development. for example. initiating surveys of renewable energy resources. carrying out project identification and preparation, and investing in education and training: and (b) creating good enabling conditions through economically efficient pricing. credit. and tax policies

 

Program development

 

Establishing a program involves significant effort. The first task is to survey solar and wind resources. Such surveys have long been carried out for hydro programs, as geological and engineering investigations have usually been carried out for many potential sites. and data on river flows have been collected for several decades. but they are rarely available for solar or wind energy In addition. a program of field tests of equipment with a fairly substantial number of consumers (often several thousand households) will be necessary not only to justify the investment in the equipment. but to establish supporting maintenance services and to monitor progress.

As with any new area of investment. issues arise in connection with risks and uncertainties In the field of renewable energy. some of the questions raised are at a quite elementary level For example. some projects designers may not even have assessed the level of solar. wind. and biomass resources. while potential consumers are often not up-to-date on technical developments. costs, and how similar projects elsewhere have performed The predisposition of institutions to resist change is also a factor that widely impedes new investment and initiative

Another major task is to familiarize professionals in the electricity industry engineers. managers. financiers, regulators with the new possibilities Expanded education and training, including visits to operating projects. may help to change negative perceptions and aid the development of investment programs Beyond this. the facilities and curriculums of universities and technical colleges may need to be developed to provide appropriate education and training

The financial requirements needed to develop programs. identify and prepare divestments, and provide education and training are generally small in relation to the costs and benefits of the investments that eventually emerge As with the development of programs using more traditional renewable energy forms, such as micro-hydro schemes. biogasifiers, and sustainable ways of using wood-fuels. the participation of nongovernmental organizations in project development can be beneficial. Bilateral aid organizations and nongovernmental organizations. often working in collaboration. have also been influential in establishing pilot schemes and offering education and training to engineers and technicians from developing countries The many applications of PVs in developing countries owe much to such efforts.

 

Prices

 

As discussed in chapter 4. for rural areas both peak and average costs are sometimes twice the marginal costs of electricity supplies in a typical urban situation. If new renewable energy technologies are to succeed as an economic alternative to conventional power plants and to grid electrification in rural areas, then as chapter 4 emphasized. the electricity industry must adopt cost-reflecting price policies. Such pricing policies include time-of-day and seasonal, as well as regional, variations in prices.

Given the high costs of meeting peak demand and the declining cost of PVs, several European countries, Japan, and the United States are now conducting trials on the use of PVs to supplement peak loads These trials include " net metering" arrangements such that small users can sell surplus power to the grid Aside from the cost advantages. the relevance for rural areas and towns is that decentralized generation reduces line losses and voltage drops and provides a backup source of supplies in the event of line failures.

 

Credit

 

As with some other forms of rural energy. the initial cost of acquiring the equipment constitutes a significant barrier to the widespread adoption of renewable energy sources The development of innovative financing schemes. including supplier credits and leasing arrangements. is thus a critical element of any renewable energy program Those who have studied the credit problem closely have concluded that subsidies are not needed, at least for small-scale applications for which renewables are competitive (Cabraal and Cosgrove Davies 1995)

 

Taxes and subsidies

 

In recognition of their positive externalities (of innovation) and their environmental advantages, one can make a good case for exempting renewable energy technologies from or at least substantially lowering taxes and duties. while at the same time taxing conventional energy industries' supplies in accordance with standard principles of tax policy. Experts have also long argued in favor of imposing corporate and sales taxes on electricity on the grounds that it is a fairly price inelastic product In practice. however. governments have typically pursued the opposite policy, namely. of not only exempting electricity from taxes, but often subsidizing it, and imposing significant taxes on renewable energy equipment (See Cabraal and Cosgrove-Davies 1995. who report that in Sri Lanka, import duties added some 30 percent to the costs of PVs Kenya also has duties and taxes on PVs while subsidizing electricity to encourage local manufactured and assembly).

There is, furthermore, an economic case for providing public financial support for renewable energy technologies in program development, demonstration, education, training. and monitoring. again, in recognition of their positive externalities and environmental advantages This is the rationale behind the Global Environment Facility's (GEF's) financing of renewable energy: during 1991-94, the GEF financed renewable energy projects in eight countries that included PVs. wind power, and micro-hydro in India and biomass for power generation in Brazil (the CEF quarterly operations reports provide more details) Twenty-five renewable energy projects are currently under review or in venous stage of preparation and appraisal in twenty countries.

At the national level, financial support could come either from public revenues or from user charges or surcharges on the use of fossil fuels The latter has the advantage of making the programs less dependent on public financing A good example is the United Khigdom's "nofto." or non-fossil-fuel obligation program, which applies the revenues from a small surcharge on electricity to support the winners of competitive bids to supply electricity from renewable energy sources. Several similar schemes exist in Europe Japan. and the United States, all of which have active public programs to develop renewables

 

Chapter six - Cooking fuels: toward more sustainable supply and use

 

As incomes rise, rural and urban households gradually from using dung, crop wastes, and wood for cooking to modern fuels. such as liquid petroleum gas (LPG) and kerosene Households in rural areas and lower-income urban households rarely use electricity for cooking Given that people will be using biofuels for many years to come, policies need to focus on (a) improving the efficiency with which biofuels are used. (b) promoting more sustainable ways to supply biofuels, and (c) facilitating the transition to the use of modern fuels for cooking

 

Improving end-use efficiency with biomass stoves

 

The modern biomass stove is an important development for the millions of people who have ready access to low-cost biomass. but who cannot afford more expensive modern fuels. The fuel savings. often as much as 30 percent, reduce cash outlays: diminish the time spent collecting fuelwood; decrease smoke by improving combustion and the use of flues, thereby reducing the worst health effects of biofuel use (see the figures on Brazil in table 2.1): and reduce pressures on scarce wood resources.

Developing-country governments donors and nongovernmental organizations (NGOs) supported programs implemented in the late 1970s and early 1980s. and commonly assumed that their benefits were self-evident. They believed that people would adopt the improved stoves quickly, and that the initial promotional programs would lead rapidly to self-sustainity markets in the new products Hence. most early efforts focused only on dissemination. and were oblivious to local customs, the economic setting. and the availability and prices of local biofuels. Based on laboratory experiments. early programs anticipated three- to fourfold increases in energy efficiency and a 75 percent decrease in wood consumption With hindsight, we can see that many stoves did not perform as well as anticipated in the field. and the experiments both overestimated the energy efficiency of improved stoves and underestimated the energy efficiency of traditional stoves. Today, a 25 percent reduction in wood consumption is considered more realistic

However: development practitioners have reamed a great deal from these early efforts, and the notions that improved stoves could improve energy efficiency substantially. albeit less than originally thought. and reduce the damage to health caused by smoke. are still valid A recent evaluation (Barnes and others 1994a) of the programs found that the best of them had the following features:

• Identification of appropriate markets Through local inquiry. the best programs first identified the families most likely to adopt and benefit from the improved stoves These were always low-income households (but generally not the poorest) who usually had some cash income, a large portion of which they spent on food and cooking fuel.

• Participation in stove design and market testing The best programs involved much interaction between designers, producers, and users anti included stove testing by representative households. This process kept producers and designers focused on meeting the needs of prospective users, which increased the likelihood that more people would purchase the stoves

• Provision of public funding. The stoves were not heavily subsidized. Public funds were used to support marketing. design. and extension

• Standardization of stove parts and techniques facilitated widespread manufacture and reduced costs

Properly managed, Improved stove programs. such as the one in China (see box 6.1). can result in significant adoption rates. Successful programs have focused on the user groups most likely to benefit from improved stoves, including those paying significant amounts for fuel or those who must walk long distances to collect fuelwood. Subsidies have not proven particularly effective in promoting stoves because they create an artificial demand that hinges on the subsidy that is not sustainable when the subsidy is withdrawn. However, external grant support can be valuable if used for such activities as laboratory testing. carrying out field work. obtaining users' views on alternative approaches. and demonstrating the stoves

An examination of successful stove projects in Africa leads to similar conclusions. A project in Madagascar financed by the International Development Association promoted improved charcoal stoves (Government of Madagascar 1994). After two years of preparatory activities (identifying potential users. testing stoves, selecting appropriate stove models. obtaining feedback from users and producers, and testing marketing channels). an active commercialization phase consisting of promotional activities resulted in the use of 45,000 improved stoves in the capital. Antananarivo. which amounts to about 20 percent of all stoves in use. More than ten different models of improved stoves are available (all metal, all clay, and mixed models). and several different types of production units exist. both in the informal and in the formal sectors. The private sector carried out all production. marketing. and sales Today. the support for the project has been eliminated. but activities continue. and estimates indicate that more than 100.000 improved stoves ate in use. The government intends to extend the activities to all urban areas where charcoal is the major fuel

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BOX 6.1 LESSONS FROM THE WORLD'S LARGEST STOVE PROGRAMS

The two largest stove programs in the world are the Chinese National Improved Stove Program, which has installed 120 million stoves in rural households, and the Indian National Programme on Improved Chulhas, which has provided 8 million stoves.

Chinese stoves are mainly biomass types for cooking. but include dualuse stoves for cooking and heating in the northern states, where winter temperatures are low. Improved stoves are affordable (about US$9), with government contributions averaging only US$0.84 per stove.

Indian stoves have a minimum 50 percent government subsidy (about US$4.30 per stove) While dissemination has been impressive, follow up surveys indicate that only half the improved stoves are still in use India has since revised much of its program to use existing commercial distribution and marketing channels

Source: Barnes and others (1994a); Ramakrishna (1991); Smith and others (1993).

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Grid Extension and Solar PV Switchover Values Outside Java Grid 3 Kilometer Medium-Voltage Extension

China

• Program concentrated on areas with greatest fuelwood shortages.

• Direct contacts between government and counties bypass much bureaucracy.

• Stove adopters pay the full cost of materials and labor.

• Government supports producers with training in stove building and promotion.

India

• Program disperses efforts including areas with no fuelwood shortages.

• Cumbersome, top-down administration dilutes the program's effectiveness.

• Government pays producers half the cost of every stove sold.

• Government support is mainly financial.

Another project funded by the International Development Association in Tanzania had a similar outcome. The four-year project (1988-92) established a production capacity. mostly among private sector artisans, of 5.000 improved stoves per month Distribution and sales are through a network of private sector retail outlets By the end of the project. more than 60,000 improved stoves had been sold, while production and sales of improved stoves have continued on a self-sustained market-driven basis since (Government of Tanzania 1992)

The social, economic. and environmental benefits of improved stoves can be large. and the successes have demonstrated the utility of well-managed programs The economic returns of successful programs are good In urban areas, where most people purchase wood-fuels rather than gather wood-fuel themselves, the pay back; time is sometimes as little as a few months In rural areas of resource scarcity, the savings in terms of the time and energy people spend gathering fuelwood are significant.

 

Improving charcoal efficiency

 

For many families. an intermediate-level fuel between wood-fuels and kerosene and LPG is charcoal Not only is it relatively inexpensive. but it generates much employment. Like fuelwood. charcoal can be purchased in preferred quantities; but unlike fuelwood, it burns without smoke. does not create dangerous flames around cooking vessels, and requires a simple stove whose heat output is relatively easy to control However. dispersed local charcoal industries often use inefficient charcoaling kilns that use more wood resources than necessary

The potential for increasing biomass efficiency with improved charcoal kilns has been recognized since the early 1980s Kiln models based on traditional designs, but with higher heat-transfer efficiencies, have been developed in Rwanda, Senegal. and Tanzania in collaboration with end-users However. this has shown that such technical innovations should be complemented by easily enforced standards. systematic training. and demonstrations to convince traditional charcoalers to adopt the improvements. Such programs, particularly in wood-scarce areas work best when complemented by natural forest management efforts that have raised the price of wood stocks. thereby creating an incentive for charcoalers to use more efficient technologies Recent experience in East Africa has demonstrated that a comprehensive approach to introducing new kiln technologies to the small-scale charcoaling industry can succeed More efficient charcoal production is beginning to result in the use of fewer wood resources in peri-urban areas and is bringing down the cost of the fuel

 

Developing more sustainable ways to supply biomass

 

In the late 1970s and early 1980s, biefuels development tended to focus on plantations and community or private woodlots. Such programs proved expensive and had limited success. as discussed in chapter 2. During the past ten years or so, the possibilities for increasing biomass production through agro-forestry and farm forestry have become more widely recognized, as have more sustainable forms of forest management involving local participation Agro-forestry. farms forestry. and natural forest management projects yield a host of benefits in addition to an increase in fuelwood production - including fodder, medicines, fruits. and poles for construction

 

Agro-forestry and farm forestry

 

Agro-forestry entails planting trees, shrubs (and sometimes grasses, such as vetiver grasses), on farmlands in alternating patterns with more traditional crops. In addition to enhancing agricultural production by providing shade and complementary use of soils, agro-forestry plays an important role in alleviating fuelwood shortages and resource custody. Such intercropping reflects old and once well-known practices that have been neglected in recent years because of persistent poverty. population pressures. and failure to address tenurial or property rights. However, interest has been rekindled. Small farmers often practice agro-forestry and term forestry independently in response to economic needs and ecological problems. The spread of farm forestry in Kenya is an often-cited example of relatively autonomous development of effective practices. but many others can be found in China. India, Pakistan, the Philippines, and elsewhere.

In the Philippines. the island of Cebu lost most of its forests in the early part of this century The resulting fuelwood scarcity and rising prices caused farmers to begin planting trees to supply fuelwood to urban markets, which has helped ameliorate at least some of the environmental damage caused by the earlier deforestation (see box 6 2) In India. the first social forestry programs were aimed at establishing community wood lots, but few communities would engage in tree planting for urban markets. However, private farmers did respond to the incentives and began planting trees on their marginal lands. Recent programs in West Bengal have granted landless laborers tenure to manage trees on public wastelands.

Agro-forestry and term forestry can be encouraged through farmer education and extension programs and supported through agricultural and forestry research. Such efforts are both environmentally desirable and economically beneficial for the following reasons:

• Farmers outnumber foresters by several thousand to one. so involving fanners in planting trees and shrubs can dramatically accelerate afforestation.

• By their nature, agro-forestry and farm forestry investments are more closely related to farmers' needs, as they supply fodder, building materials, green mulch, fruit. and other by-products that are sometimes more valuable than the firewood itself (technically also a by-product)

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BOX 6.2 WOOD-FUEL MARKETS PROMOTE TREE PLANTING ON THE ISLAND OF CEBU

Cebu, the island province in the south central Philippines, is one of the worst cases of environmental degradation in Southeast Asia. With virtually no forest cover, but with steep terrain, population densities of 520 people per square kilometer, and widespread cultivation of annual crops like corn throughout its rugged interior, environmentalists consider Cebu to be on the brink of ecological collapse.

Despite increased use of kerosene and LPG, most of the island's 2.7 million inhabitants continue to depend on wood, particularly households and businesses in the metropolis of Cebu City. This heavy dependence on wood-fuel is often cited as a major cause of the province's environmental woes. As a result, many government and NGO officials believe that wood-fuel use should be discouraged in urban areas and that commercial trade in wood-fuel should be more tightly regulated, if not altogether banned.

A recent study found, however. that commercial markets for fuelwood and charcoal in Cebu City may actually be inducing more intensive tree planting and management activities among rural farmers and landowners. Most commercially traded wood-fuels originate from intensively managed agricultural lands and consist mainly of fast-growing, multipurpose tree species like Gliricidia and Leucaena. The growing, harvesting, and trading of wood-fuels is a substantial source of income and employment. Wood-fuels meet significant urban energy demands and represent a renewable and locally produced energy source that annually saves the economy millions of dollars in foreign exchange.

Rather than promoting the cultivation of tree species that require extensive inputs. which require more labor, capital, and time to harvest, rural development programs should also recognize the benefits of the low-input alternatives that Cebuano farmers have practiced for nearly a century. They should view commercial wood-fuel markets as an opportunity to promote more widespread tree planting and management practices throughout rural areas of the province rather than as a problem to be controlled by restrictive legislation.

Source: Bensel (1994).

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• Agro-forestry and farm forestry practices reduce run-off, coil erosion, and surface evaporation and improve micro-climates and soil water retention. Farmers can use the foliage of the trees they grow to provide nitrogen-rich manure or mulch for their fields and to improve soil structure Such attributes contribute to sustainable farming systems by raising the productivity of farm soils (Gregerson. Draper, and Elz 1989)

Field studies of agro-forestry practices in developing countries over the past twenty-five years have consistently found that agro-forestry has favorable effects on farm yields and incomes, just as similar studies have found in the high-income countries for the last century (Doolette and Magrath 1990: Gregersen. Draper, and Elz 1989) This is encouraging. because it demonstrates that biofuels can be supplied in ways that will not only help make agricultural practices sustainable but will also improve agricultural productivity and incomes

A recent study of twenty-ode agro-forestry projects in six Central American countries (Current. Lutz. and Scherr 1995) found that agro-forestry practicies were profitable under a inroad range of conditions (table 6 1 summarizes the results) These findings echo those of several other studies An earlier survey of field results (Doolette and Magath 1990) of more than a dozen studies in Brazil, Colombia, India. Indonesia. Malawi. Niger, the Philippines, the Republic of Korea. and Sudan did not find a single case in which the returns were less than 15 percent.

Table 6.1 Returns to Agro-Forestry Practices in Six Central American Countries

Agro-forestry system

Number of system studied

Benefit-cost ratio at 20% discounta

Payback period (years)

Trees with crops

5

1.8

3.4

Alley cropping

9

2.1

1.9

Contour planting

4

1.6

2.0

Perennials with trees

4

1.8

4.0

Home garden

4

2.2

n.a.

Taungyab

8

2.5

4.9

Woodlot

10

1.0

9. a.

a. The high discount rate is used to give a measure of the financial returns to the farmers not of the opportunity cost of capital.

b. A system in which new forest plantations are established together with food and cash crops which continue to be intercropped until shaded out by the maturing plantation.

Source: Lutz Current and Scherr (1995)

 

Participatory to forest management

 

Experience also suggests that effective management of existing forest resources depends on local people taking responsibility In such participatory programs, small farmers sell all the wood extracted from local woodlands; however; to obtain the revenue from the trees. the farmers must participate in a resource management program mutually agreed upon with the forestry department In such an environment. foresters are no longer enforcers of protective rules, but advisors to farmers on technical issues and on resource planting and management problems

Successful programs using this approach include the Niger Household Energy Project (see box 6 .3) Its initial results suggest that transferring responsibility for forest areas directly to rural communities and introducing taxes or user charges designed to ensure that the market value of fuelwood reflects its real economic costs should lead to more sustainable approaches to resource management Another such project is in the Nazinon region of Burkina Faso In operation since the late 1 980s, it enlists the participation of the rural population in supporting natural forest management and involves the creation of a forest fund from a sales tax on fuelwood that helps to recover costs (RPTES 1995)

To sum up, approaches to improving biofuel supplies have evolved considerably in recent decades. with the participation of farmers-and of rural communities mole generally - in policymaking and the recognition that biofuel supplies are part of the wider problem of resource custody in rural areas being central features of this evolution Many countries are now encouraging the practices discussed here through rural extension and education programs, seedling distribution. and agricultural and forestry research

 

Improving access to kerosene and gas

 

When people can afford kerosene and gas (mainly LPG) they prefer these fuels to fuelwood and dung for cooking As figure 2 1 showed' kerosene and LPG are five to ten times more efficient, far less damaging to the users' hearth and to their environment. and easier to cook with. They also greatly reduce the time women and children spend gathering fuelwood At the same time however. these fuels are more expensive than wood: the poorest people thus rarely use them In Africa, in particular. poor infrastructure. dispersed populations, and poor delivery also hinder access to such fuels

 

Subsidies versus price liberalization

 

Several countries have subsidized kerosene anti LPG in an effort to increase their use. A cross-country study (Barnes and others 1994b) found that house hold fuel subsidies do influence rate of substitution For example. in Indonesia the government subsidizes kerosene to make it available nationshide The result is that most people use kerosene for cooking In China, coal is heavily subsidized, which helps explain why coal accounts for a significant proportion of total household energy use in most parts of China In Senegal, the government subsidizes LPG as a cooking fuel. which has led to the substitution of charcoal by high-income and middle-income urban residents.

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BOX 6.3 RURAL MARKET APPROACH ANCHORED IN GRASSROOTS REALITY: THE NIGER HOUSEHOLD ENERGY PROJECT

Before the Niger Household Energy Project was implemented in 1989, indiscriminate mining of fuelwood had severely depleted the natural forest and had degraded soils. The situation was most serious around urban areas, because neither the land on which the wood was grown nor the wood itself belonged to those who cut it. Moreover, the economic value of the wood could not be easily recovered from the woodcutters.

Through an integrated program of taxation and land tenure reform, responsibility for managing forest areas is being transferred to rural communities, and local people now have the right to manage wood resources on their own land. The project's national and local-level information campaigns are helping educate rural people about their rights to harvest forest resources and about setting up rural markets. These are established at the request of villagers, who decide on the local management structure and negotiate annual fuelwood harvesting and sales quotas based on the sustainable production capacity of the village's natural forest.

A typical village plan (see figure) calls for sustainable harvesting and replanting on a twelve-year cycle (impending harvest plots are P1, P2, and P3). Villagers sell the fuelwood they harvest to commercial transporters at prices the villagers determine. The taxes villagers collect from local transporters ensure that the full economic value of fuelwood is reflected in its price.

Source: Floor (1995).

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Typical Village Plan for Sustainable Planting

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BOX 6 4 HOUSEHOLD FUEL-WOOD USE VIRTUALLY ELIMINATED IN HYDERABAD

In 1980, only the upper 10 percent of households in Hyderabad used LPG, most of the middle class used kerosene, and the poor mainly used fuelwood

In 1994, however, the India Urban Energy Project found that a transition from fuelwood to LPG had transpired in Hyderabad. Fuelwood had virtually disappeared from the city center, except for small industrial and ceremonial uses. and, overall, 20 percent less fuelwood was coming into the city - a major drop, given that Hydera-bad's population had doubled since 1980.

A major cause of this dramatic transition was a change in government policy that increased access to LPG, liberalized fuel markets, and eased access barriers. As a result, the middle class can now get LPG, which in turn has allowed the poor to shift from fuelwood to kerosene.

Today, kerosene, and LPG are the dominant fuels in Hyderabad's households. The decisions households make concerning which fuels to use are strongly correlated with income levels. Households in the city slums earn about Rs 1,500 per month, and their monthly housing expenses are Rs 400 to Rs 600. These households generally spend about Rs 50 to Rs 60 per month on kerosene for cooking, and about the same on electricity for lighting, television, and perhaps a fan. When asked why they no longer use fuelwood for cooking, the householders replied that it is both expensive and inconvenient (see table below).

Source: Alam (forthcoming).

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Urban Consumer Prices of Cooking Fuels. 1994 (rupees)

Energy type

Price per unit

Price per megajoule

Cooking efficiency

Price per useful energy

LPG (kg)

7.57

0.168

0.60

0.280

Kerosene

       

Pressure (1)

3.50

0.100

0.35

0.286

Wick (1)

3.50

0.100

0.25

0.400

Wood (kg)

1.10

0.069

0.15

0.458

Electricity

1.12

0 311

0.75

0.415

However; as already noted. subsidies are often counterproductive: they limit use to the amount that governments can afford to subsidize, their fiscal costs can become prohibitive at high levels of consumption, and they lead to energy inefficiency In Senegal. for instance, LPG subsidies rose from US$2 million to USE 10 million per year between 1990 and 1994 As some observers pointed out at the time this increase could have paid for the salaries of several thousand teachers at a time the country was seeking to expand its education system. Studies in Hyderabad, India, before prices were liberalized. Indonesia, and Senegal also found that such subsidies mostly benefit higher-income people already using the fuels They do help the poor, but the higher-income groups get a "free ride " Lastly, the subsidized fuels are often diverted for other purposes Smoky. diesel-fueled cars and fishing boats are prevalent in Indonesia and Senegal. while kerosene and LPC are exported to neighboring countries. as happened with LPG in Ecuador (Barnes and others 1994).

In contrast, price and market liberalization can be effective in accelerating the transition toward more efficient modern fuels. A recent study of fuel use in Hyderabad (Alam forthcoming) shows how intiuential such policies can be Fifteen years ago, only 10 percent of the city's households used LPG because the Indian government had restricted production and imports Since then. the government has liberalized policies, and today more than 60 percent of households use LPG for cooking (box 6 4)

Cape Verde's experience is also relevant In 1984. 50 percent of the population used biomass for cooking; 42 percent used kerosene; and 8 percent used LPG, which was in limited supply. Five years later, following market liberalization. 42 percent of households were using LPG and 8 percent were using kerosene, showing how quickly people will change fuels once they can Note, however, that 50 percent still depended on biofuels, which demonstrates the importance of not focusing policies on the modern energy sector alone.

Subsidizing cooking fuels is not, therefore, a good policy from any standpoint encouraging equity. protecting the environment. or even promoting greater use of these fuels Liberalizing prices is a much mot-e promising alternative.

 

Distortionary effects of high taxes on cooking fuels

 

Taxes on petroleum products are an economically attractive way to raise public revenues, and many developing countries favor such taxes The price elasticities of demand. at least for vehicle fuels. are relatively low, which means that the deadweight losses are also relatively low: the fuels are mostly used by upper income groups. so the taxes are progressive: and they ate relatively easy to administer Such classical arguments for taxes are generally valid Taxes on cooking fuels, however. are an exception in developing countries Such taxes impair the substitution from biofuels to fuels such as LPG and are in effect regressive for low-income people. Furthermore. such taxes may drive up the prices of traditional fuels such as chat coal, as happened in Haiti (box 6.5).

While subsidizing cooking fuels is not good policy, therefore, developing countries also need to avoid high taxes on them. At the same thee. the case for taxing petroleum fuels for vehicle use especially remains sound. Depending on circumstances. moderate rates of taxation on LPG. kerosene, and diesel fuels will often be the best option Such tax policies are, of course, fully consistent with the goals of price liberalization.

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BOX 6.5 TAXING THE RICH INADVERTENTLY HURTS THE POOR

Haiti has among the highest LPG prices in the Caribbean, if not the world, largely because of high taxes. Although few poor people in Haiti use LPG or kerosene, prices for fuels have historically been related (see figure). Hence, when LPG and kerosene prices are raised via taxes, demand for other fuels increases. Massive deforestation during the past twenty five years has depleted the country's wood supplies, so the poor use commercial charcoal, whose prices have risen with demand and along with those of the other commercial fuels. The taxes on kerosene and LPG thus have meant higher prices for the fuel used mostly by the poor.

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Energy Prices in Haiti, 1970-90

 

Chapter seven - The role of the world bank group

 

To recapitulate. accomplishments during the past twenty-five years include the extension of electricity services to more than 1.3 billion people, of whom more than 500 million were in rural areas and towns: the emergence of new renewable energy technologies, which were rarely an economic proposition even ten years ago. but are now well suited for use in rural areas and towns (and probably soon for grid-connected supplies): and the revival of interest in more sustainable ways to supply and use biofuels based on agro-forestry and participatory approaches to rural development. The importance of good enabling conditions has also become more widely recognized. Investments in rural energy are now viewed in the broader context of rural development, and development practitioners understand that they are more likely to succeed when complementary programs, themselves dependent on good enabling conditions, are in place toward infrastructure. education. family planning, and health. It is in this context that the chapter reviews the Bank's role.

 

Policies and operations since the 1970s

 

The Bank's work on rural energy since the early 1970s has focused on three areas: (a) rural electrification: (b) the supply and use of biofuels; and (c! some pilot operations in renewable energy. Much of this support has been delivered through technical assistance for new types of projects and policies, much of it sponsored by the Joint World Bank/United Nations Development Programme Energy Sector Management Assistance Programme (ESMAP) its precursor, the Energy Assessment Programme: the Asia Alternative Energy Unit's (ASTAE's) program; and the Africa Review of Policies in the Traditional Energy Sector (RPTES). The annex provides a listing of projects table 7.1 provides some examples.


Table 7.1 Bank Projects and Programs That Have Increased Rural Energy Access

 

Rural electrification

 

The World Bank's 1975 policy paper set the stage for Bank involvement in financing rural electrification projects. The paper reviewed the developing countries experiences with rural electrification in the 1960s and examined the costs and benefits of such investments. The paper's main findings and recommendations were as follows:

• Economically justifiable investments in rural electrification could be found in large regions of the developing world. The situation varied from one province to another depending on the enabling conditions for development - in particular' for the growth of agriculture. rural businesses, and rural incomes - and on load density. Load densities were greatest in villages and rural towns. which often also had significant demands for electricity from small enterprises. Investments would thus need to be selective. favoring areas where prospective uses of electricity justified expenditures.

• The Bank should base its investments on the rate-of-return criterion. The initial fixed costs of extending service were high' although average costs declined steeply in areas with good load growth. All the significant benefits of electrification were directly related to the uses to which it was put and to the costs of alternative sources of power and energy. Thus Bank staff considered the economic rate of return to investment to be an appropriate criterion for investment. It would encourage cost-effectiveness and help focus investments in areas where they would be most likely to be beneficial. In other areas. Bank staff often found that the alternatives were cheaper and had higher returns than grid extension. At that time the main alternative for motive power individual supplies, or to support microgrids was diesel engines. which are still commonly used.

• Cost recovery over the long term should be encouraged. Specifically. prices should be such that over some twenty to thirty years the present value of expected revenues equals the present value of the expected costs of service, less a small provision for lifeline rates if desired. The latter would take the form of a low kilowatt-hour charge for low levels of consumption A cost-recovery policy of this kind would increase the rate at which service could be expanded: it would help finance the high initial fixed costs of extending service and the costs of new connections. without undetermining the utility's financial position.


Figure 7.1 World Bank Commitments for Rural Electrification, 1976-95

These findings and recommendations are still valid, and are a good basis for future projects and policies. but need to be expanded given the advent of new technologies and institutional reforms in the electric power sector.

Lending Activities. From 1975 to ] 984 the Bank lent a total of US$ 1.4 billion for rural electrification, but the level of activity dipped substantially in the mid- to late 1980s before picking up again in the 1990s (figure 7.1!. Overall lending since 1980 has amounted to about US$2.7 billion for thirty eight projects in twenty-two countries. More than 75 percent of this lending went to Asia. about 13 percent to Latin America, and less than 3 percent to Sub-Saharan Africa. In Sub-Saharan Africa the Bank has not lent for standable rural electrification projects since 1980. although it has supported several projects that have extended grid supplies to regional cities and towns in agricultural provinces-for example, the northern grid extension project in Ghana. In addition, a number of electrification projects had rural electrification components.

The dip in lending for rural electrification in the mid- 1980s was probably caused by the sharp deterioration in the finances of - and in the quality of service provided by - the electricity industry in numerous countries during this period. As a consequence, the Bank's attention turned to restoring price and managerial efficiency to put the industry on a commercial footing Since the publication of the Bank's policy papers on power sector reform and energy efficiency (World Bank 1993a.b). it now views measures to promote private investment and finance and less intrusive forms of regulation as central to achieving a financially sound and more efficient industry, and the indications are that progress is being made in the areas of financial and institutional reform. (See box 4.5 for a summary of the general directions of the policies supported by the Bank and comments on progress.) The large increases in lending in 1990 and 1995 reflect more than $900 million of lending to rural electrification projects in Indonesia. The scene is therefore set for a renewed effort by the Bank to support its member countries' efforts to extend electricity to the huge numbers of people without service.

Evaluations of Experience. The Bank's experience with rural electrification is inseparably linked to that of the forty or so countries in which it has financed projects, and many other countries in which it has provided policy advice and finance for electrification programs more generally. As this experience was reviewed at length in chapters 3 and 4, a brief summary will suffice here.

First, on the positive side, rural electrification is an economically important area of investment capable of generating good economic rates of return. (In Asia. ten out of eleven Bank-financed rural electrification projects recently evaluated have had a satisfactory rating according to the audits of the Operations Evaluation Department.) With the huge populations still without service and with economic growth, further major investments, amounting to perhaps about 10 percent of total investment in electricity supply. will be needed for the next several decades. Grid extension is expensive, however. and needs good load densities and load growth to justify the investment, as the 1975 policy paper had argued. The best investment opportunities continue to be in villages and towns, which can be centers of new business opportunities. in-migration, and non-farm employment (and thus of load growth) as agricultural provinces develop. Where load densities are low, alternatives such as diesel generators and small-scale supplies from renewable energy sources were shown to be more cost-effective.

But experience has also shown that grid extension can have poor economic and financial returns, and this has happened in some Bank projects. The obvious case is when supplies are extended to areas at much expense when load densities are low. there are few demands from agriculture and agro-industries, and household use is minimal and the alternatives would have been better. Yet even where demands are high. in theory sufficient to justify the investments from an economic point of view. poor returns have sometimes resulted in practice for reasons that are now all too familiar: poor pricing and financial policies that undermined the quality of service and wasted energy and capital. The review of experience has not unearthed any evidence of a need for massive subsidies for rural electrification except. perhaps, for the very low levels of subsidy in support of lifeline rates for low levels of household consumption. As the various evaluations reported in chapters 3 and 4 have found. subsidies have widely proved to be counterproductive and to undermine the utilities' financial position and their ability to extend service.

By strengthening the finances and managerial position of the industry, the reforms now taking place to put it on a more commercial tooting provide a new opportunity for electricity services to be more widely and efficiently provided. They will, however. need to be complemented by some form of public leadership The uptake by the private sector in electricity distribution. where privatization has been taking place in developing countries, has so far been quite limited. and there has been a natural (and understandable) tendency for private investors to concentrate on investments in generation and in the more lucrative. higher growth, and higher-income end of urban markets. Thus policymakets and regulators will have to be vigilant on the matter of service extension if programs of sector reform and privatization are not to be undetermined by a discontented public lacking service. Options for policy (noted in chapter 4) include tax incentives. perhaps coupled with a regulatory requirement for distribution franchises to extend service: continued public involvement in distribution. but on commercial principles; joint public private ventures; electricity cooperatives: and the encouragement of the development of micro-grids

Two recent reviews by the Bank's Operations Evaluation Department (OED) (World Bank 1994b, 1995a) have also contained findings pertinent to this paper, one on lending for electric power in Sub-Saharan Africa and the other on rural electrification in Asia.

Only 2 percent of the components of the projects reviewed in Africa dealt with rural electrification directly, even though about 90 percent of Africa's rural population lacks access to electricity The QED's recommendations included (a! increasing the focus on decentralized. community-based power supply options; (b) placing greater reliance on private investment and management (c) instituting a vigorous push for sector reform; and (d) placing more emphasis on renewable energy

As noted. the review of experience in Asia found that nine of the ten projects had performed satisfactorily: however. only tour had achieved economic rates of return in excess of l(i) percent. and none were financially self-sufficient having depended on cross subsidies from general tariffs. In some countries, even where the investments were economically justified, the utility's poor financial performance had often been further undetermined by rural electrification subsidies. which ultimately undermined the electrification programs themselves. The disparities between the economic and financial returns were due to deficient pricing policies: none of the countries had adopted cost reflecting pricing policies for rural service

The review concluded that rural electrification projects can, and often did, have significant economic benefits. Its summary of the conditions uncle' which investments were likely to succeed echoed those of the Bank's 1975 policy paper. Among other things. it emphasized cost recovery in tariff policies and the need to pay greater attention to the economic rate of return when selecting investments. The most successful projects in Asia took into account the great variations in economic conditions and growth rates among rural areas (World Bank 1994b) and maximized benefits by selecting subprojects where a high rate of demand growth could be expected and the net economic returns would be the highest In general, these were in regions where the "productivity of agriculture was rising and supporting service industries are growing. ' On commenting on the report, the Bank Board's Joint Audit Committee further emphasized the need for having more local participation and for ensuring access for low-income consumes.

Thus the OED studies arrived at conclusions fully consistent with those of many others involved with rural electrification over the past twenty-five years, as reviewed in chapters 4 and 5. Once again, they emphasized the need for financial sustainability and cost-effectiveness and the need to recognize that alternative sources of energy and power are often available when loads are small.

 

The sustainable in a production and use of wood-fuels

 

The Bank's lending in the area of wood-fuels has mostly been integrated with its work on forestry and agro-forestry. Projects typically have the following components:

• Tree planting. once based mainly on wood lots but now more commonly based on agro-forestry and participatory approaches to forestry management.

• Institution buildings, or general support for the development of forestry services.

• Technical assistance. training services, anti research.

• Resource and forestry management focused 011 maintaining or improving existing forests or wood lots. Sometimes, this category will include project management costs.

• Stove and charcoal kiln programs. which have evolved as discussed in chapter 6.

During 1980-95. the Bank committed US$1.1 billion to sixty projects in thirty-two countries in support of sustainable wood-fuel supply and use in rural areas (see the annex and figure 7.2) - about a third of its forestry lending. Most of the support went to low-income countries (Sub-Saharan Africa had about a third. and Asia about halt: of the projects).

In contrast to rural electrification. the Bank's work on biofuels did not languish in the mid-1980s. but intensified. This initially resulted from the long-standing public concerns reflected in the Bank's Forestry Policy Paper (World Bank 1978) about deforestation and the losses of tree stocks on farmlands and woodlands, and all that this implied for the sustainability of agriculture. The Tropical Forest Action Plan (World Bank 1987) provided a further stimulus when the "mining" of the forests by fuelwood suppliers and the charcoal industry was recognized as a major cause of deforestation along with logging and land clearance. Sector studies of forestry and agro-forestry practices in the 1980s, together with the early work of the United Nations Development Programme World Bank Energy Assessment Programme, and later ESMAP, were also influential, and provided a basis for operations.


Figure 7.2 Lending Commitments for Sustainable Supply and Use of Wood-fuels

The emphasis of the Bank's work on biofuels shifted consider-ably during the period. however, almost wholly in the directions described in chapters 2 and 6. The afforestation components of the early loans were mostly for community wood lots. and generally yielded poor results. Although community wood lot programs aimed at a high level of local participation. the notion of community' was often too vague a concept and too broad a social unit to be operational. overlooked the diverse needs and functions of different social groups within their communities and left property rights and administrative and other matters unaddressed.

As the Bank's 1978 paper on forestry policy had anticipated. the agro- or farm-forestry projects that followed have yielded better results. Indeed. they have generally exceeded expectations (see chapter 6): form an excellent basis for continued Bank operations in the inter-related erects of rural energy, forestry. and agricultural development: and are now a mainstay ill the Bank's work (see World Bank 1994c). The Bank has also begun to support a promising approach in areas where local forest resources are still good: providing property rights to local people to manage and maintain the resources (see box 6 3)

Chapter 6 reviewed the Bank's anti others experience with wood-stove programs. As with biofuel supplies, the early projects got off to a poor start, with the projects often relying on the results of laboratory experiments. with tar too little involvement by users and by artisans who would manufacture them Evaluations of field experience. in the Bank's case facilitated by ESMAP. led to a fundamental redefinition of the approach such that local participation was central.

We can thus conclude approaches to investment in biofuel supplies and use have taken a distinct step forward since the early efforts some fifteen years ago.

The transaction costs of developing projects and new policies in the biofuels area can be high; leading per project is typically only about one-quarter of that for energy in the modern sector, and the preparation of investments requires considerable knowledge of local ecology and natural resources and of communities social units, and tenurial issues. Furthermore. for the reasons outlined in chapter 3, establishing the capacity simply to support particular investment without developing local institutional capacity more generally is insufficient. We are only beginning to understand what is involved Attending to such matters will often require a significant investment in assistance for preparing programs and developing policies. Collaboration with bilateral donors and nongovernmental organizations. who frequently support pilot projects and undertake field work and project preparation activities. is indispensable. Yet even taking such partnerships into account, the transaction costs to the Bank have proved to be [aloe.

 

Renewable energy

 

The Bank's efforts to bring renewables into mainstream financing began in the early 1980s, motivated by the high prices of oil at that time. During 1980-95. the Bank financed approximately thirty renewable energy projects in eighteen countries. including eight projects co-financed with the Global Environment Facility (GFF). By fiscal 1995. total commitments amounted to approximately US$1.3 billion.

Until 1990. however. about 75 percent of the lending was for geothermal energy. which is an economically attractive option for grid supplies in several countries, but does not have a direct bearing on the rural energy problems discussed in this paper (see the annex for a full list of projects during 1980-95). In the 1980s. lending for small-scale applications of new renewable energy technologies suitable for rural supplies was confined to a few pilot projects, which were sometimes components of ongoing energy projects. Aside from a number of activities identified by ESMAP, also of a pilot nature. the collapse of oil prices in 1985/86 led to such ventures being put into abeyance for a period.

Since 1990. interest and investment in renewable energy sources has been on the upswing worldwide As chapter 5 noted. the main reasons were the continued technological developments. concomitant cost reductions, and environmental benefits of renewable energy.

The establishment of the GEF has also proved to be a stimulus. because renewables are emerging as the most promising non-net-carbon-emitting technology for addressing global warming over the long term (Anderson and

Williams 1994; GEF 1996; World Bank 1992). The Bank financed eight renewable energy projects during the pilot phase, and a pipeline of projects in more than twenty countries is currently emerging A good example is the US$280 million India Renewable Energy Project, approved in 1993. It provides credit and investment incentives for the introduction of solar home systems in rural areas, wind farms. and micro-hydro projects. In 1992 India had only SO megawatts (MOO) of wind power plant, and experts anticipated that another 85 MW could be added over a five-year period. Within four years nearly 550 MW had been installed. There is a downside to this achievement. however, which is the dependence of the program on the unusually high level of tax incentives and subsidy; a financially more sustainable policy would reduce the subsidies and tax incentives and look to phasing them out over time, once the program has been established The photovoltaic (PV) component had a slower start. but is beginning to generate considerable interest among public suppliers in both grid and off grid markets

As Bank-financed renewable projects have not yet been completed and audited, it is too soon to provide a post-evaluation. We do, however. know about the performance of renewable energy projects other organizations have financed in developing countries and about the substantial. established programs in the industrial countries. We can sum Up this experience as follows:

• The basic technologies are fully proven, work well. and are no longer experimental.

• The potential for further development and cost reductions is considerable and will be facilitated by further investment and research and development

• The failure of some has generally been for familiar institutional reasons rather than for technological or economic reasons. for example, when projects paid too little attention to establishing follow-up and maintenance services.

• Investments in renewable energy will benefit from improved enabling conditions tot investment in the energy sector as a whole.

• The developing countries are becoming increasingly interested in the wider use of renewable energy. applications are increasing, and a plethora of investment and project preparation activities is under way.

• The projects can meet the investment criteria of the World Bank Group and the GEF.

• The investments in this area are supported by nongovernmental organizations, private industry, and departments of energy and industry in many of the Bank's member countries who are urging Bank involvement and leadership with respect to both policy and project development.

Thus in every respect. renewable energy is a good area for future investment by the Bank.

 

Project innovations and advisory services

 

Often an advisory activity or a successful pilot program provides the basis for a fuller Bank operation in rural energy. The Bank has often carried out such work through special bilateral. donor-supported programs, such as ESMAP, ASTAE. and the Africa Review of Policies in the Traditional Energy Sector. For example. the household energy strategy technical assistance. conducted in Niger under ESMAP. was the basis for a project subcomponent on household energy and urban fuelwood management systems in a power loan. In India. a review of renewable energy alternatives under ESMAP led to the development of the Bank's first project explicitly for renewable energy. The Africa Review of Policies in the Traditional Energy Sector has identified policies important for natural resource management and traditional energy use in West Africa. In Chad. Comoros, Kenya. Madagascar. and Rwanda. a special Bank program for nonconventional energy. supported by Dutch grants, has identified and mainstreamed traditional energy and renewable project components. The donor-supported ASTAE program has done the preparatory groundwork for innovative small rural systems in India. Sri Lanka. and elsewhere in Asia. Finally, the Bank's recently launched Solar Initiative. supported by donors and the energy industry. is identifying decentralized rural projects in China. Latin America. the Middle East. Southern Africa, and West Africa. Table 7.1 presents examples of Bank projects and programs that have increased access to rural energy.

A direct consequence of ESMAP's work has been an increase in World Bank lending operations that incorporate specific household energy components. By the end of 1995. ESMAP had designed household energy components of energy sector loans or credits in ten countries (Bolivia, Burundi, Ethiopia, Guinea. Haiti, Madagascar; Mali, Mauritania. Niger. and Rwanda) for a total of US$46 million. ESMAP studies also laid the groundwork for renewable energy investment in India and Mauritius for a total of US$240 million. ESMAP's training activities in financial and economic analysis, rural energy policy analysis. and rural survey work. include the development of training manuals and follow-up support activities. also contributed to the for mutation of China's rural energy program (US$1.5 billion). Other similar activities are in the pipeline (Cameroon, Chad, China. and Vietnam), and these could lead to investments of US$75 million.

Also with the financial support of bilateral donors, in particular the Netherlands, two other Bank programs are actively advancing activities in the fields of traditional energy and renewable energy. The Review of Policies in the Traditional Energy Sector, which was launched in 1993, has led to policy and project formulation in five Sahelian countries, and this work will be extended to other African countries (Burkina Faso. Senegal). Estimates indicate that the resulting investments will amount to some US$40 million. ASTAE. which started in 1992. has helped the Bank's Asia region with developing energy components or stand-alone projects for renewable energy in countries such as India (US$280 million), and is preparing similar projects in Indonesia (US$260 million), Sri Lanka (US$50 million). and. in cooperation with ESMAP, in China (US$150 million).

 

The way forward: a renewed commitment by the world bank group

 

This paper envisages a renewed commitment by the Bank to support its member countries' efforts to extend modern energy supplies to populations without them. and to promote sustainable supply and use of biofuels for as long as they remain important sources of energy. Modern energy as defined here includes new forms of renewable energy.

The time is ripe tot a renewed commitment. The experiences of the past twenty years have been substantive, spanning 100 projects of varying sizes and policy discussions in more than 100 countries, and we know much more about both the approaches that are likely to work and those that that probably will not. Where uncertainties are present as occurs. especially with respect to institutional development they have been recognized and options identified. Many developing countries are also committed to improving the enabling environment. at the macroeconomic level and in the energy sector, which the Bank Group is supporting. and this too should aid rural energy investments.

With the important exception of afforestation, however, the Bank's work on rural energy - and also the related problem of extending service to unserved urban populations - has declined since the mid-1980s. largely because of the financial and institutional problems afflicting the energy sector discussed earlier. which focused the Bank's attention on sector reform. The Bank is also still in the early stages of developing a pipeline of renewable energy projects and supporting policies. In addition. the Bank's work in these areas has become highly dependent on outside support from trust funds, secondments, and special programs such as ESMAP and ASTAE. The allocation of both Bank staff time and its financial resources to the challenges discussed in this paper amount to it modest proportion of its total efforts in the energy sector. Yet these challenges concern the most impoverished populations of developing countries and work in this area is fully consistent with Bank policies.

The Bank's renewed commitment must be reflected in its future work on energy sector reform and through its investments. While the following recommendations focus on unmet needs in rural energy markets. in the case of modern energy forms, they are equally applicable to unserved markets in urban areas.

 

Broadening the scope of energy sector reform

 

The Bank's policy papers on the electric power subsector and energy efficiency (World Bank 1993a.b) fundamentally redefined its energy sector and policy work. It was to lend only to countries committed to operating the industry on commercial principles; to introduce less intrusive and more transparent forms of regulations and, by implication. to be more open to private investment. the importation of energy services. and market pricing. Environmental concerns were also central in the form of a greater commitment to energy efficiency and the introduction of "clean" energy technologies. Box 7.1 summarizes the main points and indicates the added dimensions this paper brings to the Bank's approach.

The Bank's country economic and energy sector work is devoting significant attention to sector reform (World Bank 1994d). which is now the principal focus of most Bank ladling operations in electricity, oil. and gas The policy dialogues on options for energy sector reform are therefore the ideal stage at which to review the energy problems rural (and unserved urban) consumers face These dialogues engage the attention of those responsible for framing energy policies at precisely the right time. that is, when the policies are being framed.

The Bank is well placed to broaden the scope of energy policies during discussions with governments of structural and macroeconomic adjustments (when energy sector reforms often serve a fiscal purpose). of country assistance strategies, of energy sector reviews. and of sector and project loans Table 7.2 at the end of this chapter provides a checklist of the sorts of questions that need to be raised, based on the analysis of previous chapters. The first set of questions deals with the general scope of the problem: the numbers of people without service, the extent and use of biofuels and their health and environmental effects, experience with policies and investments so tar. and so forth. Other questions deal with prices and taxes, finance. the analysis of investment alternatives, and the institutional matters discussed in chapters 3 through 6. Often. when working on policy reform, it is not possible to address all, or even most. of the specifics at the time when policies are being discussed. as much depends on the background work already done. In such instances the technical assistance components of loans and credits may serve an invaluable function by fuming general principles agreed upon at the time into functioning policies later:

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BOX 7.1 BROADENING THE SCOPE OF ENERGY OPERATIONS

Bank

Commitment lending

Promotion of clean technologies

Countries

Sector reform

• Transparent regulation

• Commercialization/corporatization

• Private involvement

• Importation of services

• Market pricing

• Demand management

• Added dimensions - a renewed commitment to

• Extend modern energy supplies to unreserved populations

• Promote sustainable supply and use of biofuels

• Introduce new and renewable energy technologies

And thus to

• Promote commercial pricing and private involvement in distribution

• Providing incentives for extension of service

• Supporting agroforestry and biofuel programs

In 1992 the World Bank Board of Directors approved a single set of policies that were outlined in two papers The World Bank's Role in the Electric Power Sector and Energy Efficiency and Conservation in the Developing World. The Bank would he committed to lending only where there was demonstrated commitment to power sector reform and its projects would promote clean technologies and practices. These policies take on added importance in the context of this paper.

--------------------------------------------------------------------------------------------------------------------

 

Investments

 

Supported by a broader dialogue on energy policies, the World Bank Group will be better able to tailor its energy investments more closely to developing countries' needs and concerns. How its investment portfolio develops will vary with the country. but increasing commitments of Bank resources are likely for the following:

• Rural electrification and its alternatives

• New renewable energy forms, guided by the Bank's Solar Initiative and joint programs with ESMAP and ASTAE

• Agro-fotestry, farm forestry, and natural forest management along the lines indicated in the Bank's forestry papers

• More efficient and environmentally improved approaches to the supply and use of biofuels.

An increase in the supply and use of modern cooking fuels in rural areas should also follow, though these would be private investment activities rather than financed by the Bank.

Bank loans and credits have been available for such investments for mole than fifteen years, in the case of electrification for more than twenty years, and well-prepared projects can meet the investment criteria of both the World Bank Group and the GEF. No changes to the Bank's internal policies ale therefore required, though their application. as shortly discussed, often entails innovation in approaches to investments and policies. The policies on electric power and energy efficiency announced in 1992 should make such projects economically more attractive by improving the enabling conditions for investment and the financial positions of energy companies However, a significant allocation of the Bank's resources will be required to build on the policy reforms and finance investment in rural energy and service expansion.

In addition, there must be a willingness to innovate and to entertain new approaches. While the Bank has been able to finance the above kinds of investments for some time experience has shown that institutional as well as technological and economic innovations have frequently paved the way to mole successful investments and policies. Perhaps the best example on the institutional side has been the growing recognition of the importance of local participation in development (discussed in chapter 3), for example. in relation to managing forests and introducing agro-forestry and wood stove programs.

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BOX 7.2 SUB-SAHARAN POWER CHALLENGE: PROMOTING ELECTRICITY ACCESS TO RURAL AND LOW-INCOME USERS

A special problem for much of Sub-Saharan African is the need to expand access to electricity beyond its currently restricted level. In none of Sub-Saharan Africa's lower-middle or low-income countries does access exceed 20 percent, and the average for most countries is less that 10 percent. This compares quite unfavorably to most countries in Asia and Latin America, where several countries have electrification rates above 75 percent, most notably, China and Thailand. By comparison, in Ghana and Kenya the rural electrification rate is around 12 percent, in Tanzania and Uganda it is less than 10 percent, and in many other countries it is barely 5 percent. The reasons for the low rates of electrification involve a combination of poor management by African power distribution companies, a hesitation by companies to get involved in higher-cost distribution, and a practice of charging high connection costs for new electricity consumers. In many countries national uniform tariffs for electricity also discourages electricity companies from getting involved with more expensive rural and pert-urban service. For instance, in Zimbabwe consumers must sometimes pay as much as US$900 for obtaining an electricity connection, which limits the number who can connect to the system. Likewise, in many African countries, the distribution companies adhere to high and expensive standards for electricity provision, which effectively rules out many consumers from being able to afford electricity service. Given that the populations without electricity are growing in Sub-Saharan Africa, the task of developing innovative ways to promote electricity service without providing extensive subsides for poor and rural peo

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Equally important, and in a broad sense a development that also implies greater participation. is the movement to liberalize energy markets, encourage private investment, and introduce independent ("arm's length") regulation Although these ale old ideas, it is only recently that they have been finding practical application in developing countries and posing novel problems once we turn to the specifics of policy not least, as noted. with respect to finance. regulation. and the distribution of energy services. On the technological side. an openness to investments in new renewable energy technologies will be crucially important from both an environmental and an economic perspective

In Africa and South Asia in particular, major efforts will also be required for all four types of projects noted earlier (and on the supporting policies). because the pressures on soils and natural resources are especially severe in these regions In addition to the need to put biofuel supply and use on a sustainable footing, Africa has the furthest to go with electrification and the provision of modern. The Sub-Saharan Africa Power Reform Symposium, co-sponsored by the World Bank in Johannesburg in December 1995. made a promising start on addressing the major issues.

Box 7.2 illustrates the challenge decision-makes face in dealing with the power sector and rural electrification in Africa.

The preceding review has also shown that innovations in finance and credit will often be needed to address the high "first-cost" problem in extending modern energy supplies to rural areas They may come in the form of leasing and micro-financing arrangements - for example, for PV sets-or incentives in support of the development of local energy companies that themselves may be willing to finance (on a cost-recovery basis) the initial costs or extend credit

A rising area of investment activity will be the new forms of renewable energy, not only for rural energy supplies, but for grid supplies more generally. as discussed in chapter 5. The GEF, especially, is providing a golden opportunity to the Bank's clients to break new ground in the use of new renewable energy technologies (GEF 1995. 1996) To encourage investment in this area. the Bank's energy staff have launched the Solar Initiative The initiative is being supported externally by the donor community. primarily through ESMAP, ASTAE, and the secondment of staff with technical expertise in the subject to the Bank.

The initiative encourages the Bank's client countries to develop projects and policies in this area. It provides information on project experience, technical advice, and crosssupport and encouragement to the regional operating divisions to prepare such projects and policies for Bank and GEF financing. Also, in association with the International Energy Agency. it 'networks" the efforts of the industrial countries (where most of the technologies have been developed) to those of the developing countries. and in collaboration with the IFC, it encourages private investment in renewable energy (box 7.1).

 

Opportunities for partnerships

 

This report is based on the operational experience of the Bank's staff over the past twenty years and has benefited from the experience and perceptions of numerous other organizations. First and foremost were discussions of the substantial issues of policy toward and investment in rural energy in the course of operations with people from all walks of life in more than 100 countries, both when policies and investments were being defined and when they were being implemented As the report was being prepared. its findings were shared with and critiqued by twenty or so organizations involved in development assistance. nearly fifty nongovernmental organizations from industrial and developing countries. and workshops with private industries investing in renewable energy technologies.

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BOX 7.3 THE IFC AND RENEWABLE ENERGY

In July 1992, the IFC created its Infrastructure Department in response to the growing demand for its services in this area. The Power Division handles electric power generation projects, including projects using renewable energy resources such as hydro, geothermal, and biomass and new technologies such as wind energy, as well as conventional thermal generation projects and transmission and distribution projects, including national and international grids and metropolitan and local utilities

The IFC has recently financed hydro projects in Belize (25 MOO), Chile (450 MW and 80 MOO), Costa Rica (11 MOO), and Guatemala (10 MOO), as well as a biomass co-generation plant in Guatemala (70 MOO). Geothermal projects are under review in Guatemala, Indonesia, and Nicaragua Wind power funding proposals have been received for projects in Argentina, Chile, China/Mongolia, Costa Rica, Egypt, Guatemala, Honduras, Mexico, Morocco, Ukraine, and Uruguay. Biomass or PV projects have been considered in Belize, Brazil, Colombia, Costa Rica, India, and Jamaica. The IFC has also invested in PV manufacturing in China.

The IFC has made the environment one of its most urgent priorities and is encouraging private sector involvement in the development of GEF assistance strategies for the private sector. As part of these efforts, as well as in relation to its power investments, the IFC is actively pursuing potential investments in renewable energy (biomass, wind, solar thermal, and PVs). The IFC can provide nonrecourse project finance services, namely:

• Deb/equity investments in commercial technologies in developing countries

• GEF grants or concessional financing to buy down capital cost differences for qualifying technologies alongside conventional IFC project financing.

The IFC can also provide services for manufacturing, investment, and corporate finance as follows:

• Debt/equity investments in the manufacturing and assembly of commercial technologies in developing countries

• GEF grants to support investments in manufacturing and assembly investments for pre commercial technologies.

The IFC is also considering establishing a $100 to $200 million fund for renewable energy and energy efficiency that could provide equity (and possibly debt) financing for smaller on-grid renewable energy projects (5 to 20 MW) and for promising new off grid applications using solar energy and other renewables and for energy efficiency projects. The GEF Council recently approved a $30 million cofinancing facility to supplement the Fund's resources to promote less mature commercial technologies and to reduce risks associated with these types of investments.

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Although professional differences often remain on specifics. people working in this area usually agree on three aspects of policies on and investment in rural energy:

• There is no greater challenge facing the energy sector than to provide energy in environmentally sustainable ways to rural (and unsolved urban) populations in developing countries. Good enabling conditions for energy investments will undoubtedly help. but policies and investments focused directly on the various problems to be addressed will also be necessary.

• Such policies and investments are merited not only on social and environmental grounds but also on economic grounds, as measured by the economic rate of return to investment. In other words, there is no reason why solving the social and environmental problems arising from energy use should not bring with it appreciable economic benefits to rural people.

• Opportunities exist for collaborating and sharing experiences and information. In rural energy, as in other fields, no institution has a monopoly of knowledge or insights. Indeed, one of the most important developments in recent years has been the growing (if much belated) realization that the best information and insight come from the intended beneficiaries themselves. This has brought about the growth of interest in the participatory approach to the design of projects and policies and the current efforts to come to grips with the tenurial economic. financial, social. and administrative aspects of local institutional development.

The World Bank Group has the capacity both to bring rural energy into the policy dialogue and to co-finance divestments. Of these, it will probably be the bringing of substantive policy issues to the table and the catalytic effects of its projects that will be most important. In rural energy. as in the energy sector more generally, the developing countries will undertake the bulk of investment: the Bank's financing is unlikely to exceed 5 percent of overall investment. There will therefore be much that the Bank cannot do by itself, and it will be incumbent on all involved to work together it these endeavors are to succeed.

Table 7.2 Broadening Energy Access: A Checklist for Bank Staff

Specific actions and programs

Main

 

Bank instruments

1. Acknowledge the questions and define the challenge:

SALs SECALs.

• Define the energy supply situation for people without access to modern energy: types of fuels used their costs. anti their health and environmental impacts.

sector loans sector reviews SARs. TA and project identifi canon and preparation (Bank and GEF

Modern fuels. Evaluate past progress in supply expansion to urban and rural areas. and consider how energy sector reforms will affect the future provision of energy supplies to these people. Will the reforms increase investment in distribution of electricity. modern cooking fuels. and renewable energy alternatives? What pricing and tax policies are appropriate? Is sufficient project identification and preparation work under way? More generally. assess adequacy of current policies and investment activities of programs to improve. Traditional fuel Assess efforts to address health and environmental problems caused by use of biofuels: assess adequacy of supporting policies and programs.

 

• Keep track of progress in extending modern energy services to previously unserved populations and of progress in afforestation and biofuel programs.

 

2. Price energy to improve access:

SALs. SECALs. Sector loans sector reviews.

• Follow the general principle of pricing energy at economic cost. Fuel taxation and the import tariff regime should not discriminate against individual energy sources.

SARs. GEF

• Avoid subsidies that restrict the market to government programs including general fuel subsidies and targeted subsidies.

 

• Avoid uniform national pricing that prevents extension of service to rural areas.

 

• Generally. support incentives for market development and sustainable access such as temporary and transparent incentives to buy down initial capital and transaction costs for electricity connections and basic end-use equipment that allows for fuel switching.

 

• Within large energy companies (especially providers of LPG and electricity) allow modest cross-subsidization of lifeline rates and costs of basic end-use equipment.

 

• Implement a resource tax on the urban fuelwood and charcoal trade that is collected by local rural communities who manage these natural resources.

 

3. Finance and lower the first costs of energy:

Project lending.

• Expand credit to rural consumers for connections and appliances by spreading costs over time.

TA sector review. CAS

• Reduce service connection costs through modifying design standards to meet the needs of low-demand consumers.

 

• Expand credit for inventory to small energy retailers and sup pliers that serve rural consumers and explore leasing schemes and other such options.

 

4. Encourage a diversity of investments and investors in rural energy:

Energy rural development. forestry project lending sector

• Ensure regulatory environment does nor discriminate against or obstruct rural energy investment; goal is level playing field for public. local. arid private investments.

loans. TA. SARs GEF

• Include updated and approved energy components as options for use of development funds in rural development projects.

 

• Provide direct investments for public grid electrification programs that follow financially sound pricing policies.

 

• Include. as applicable. renewables. modern biomass-using equipment and other alternative energy in public health. Education, and agriculture projects.

 

• Ensure a liberal trade policy for imported fuels and equipment likely to he used by rural consumers including liquid fuels and renewable energy products/components.

 

• Provide TA for innovative product development aimed at serving rural areas.

 

5. Examine the institutional questions to be addressed:

SALs. SECALs. energy rural development forestry project lending, sector loans, TA. GEF

• Restructure government role to support local initiatives and projects. including closer cooperation with rural development agencies and programs.

 

• Evaluate institutional alternatives for electricity distribution-local franchises. public/private partnerships. cooperatives and other.

 

• Examine tax anti regulatory incentives to encourage supply companies to service.

 

• Provide financing and technical support for local/decentralized public or private energy supply initiatives through technical assistance and training.

 

• Encourage effective. transparent regulations promoting competition among retailers and distributors: discourage monopolistic policies for electricity. liquid fuels. anti renewables.

 

• Transfer responsibility for managing and exploiting forest resources to local rural populations based on a mutually agreed upon forest management plan.

 

• Base afforestation and wood stove programs on the participatory approach

 

Note: The term multilateral includes the World Bank, International Finance Corporation International Monetary I Fund Inter-American Development Bank African Development Bank Asian Development Bank United Nations agencies, and others.

CAS

Country assistance strategy

GEP

Global Environmentally

NGO

Facility nongovernmental organization.

SAL

Structural adjustment lending

SAR

Staff appraisal report.

SCC

Systemic client consultation

SECAL

Sector adjustment lending.

TA

Technical Assistance

 

Appendix

 

World bank lending for rural and renewable energy projects, fiscal 1980-95

 

A. Rural Electrification Projects/Components (millions of U.S. dollars)

Country

Region

Project name

Year

Loan/ credit no.

Total project financing

Bank loan amount

Bangladesh

SAS

Rural Electrification

82

CR 1262

64.5

40.0

Bangladesh

SAS

Second Rural Electrification

85

CR 1633

110.6

79.0

Bangladesh

SAS

Third Rural Electrification

90

CR 2129

163.5

105.0

Brazil

LAC

Eletrobras I Power Distribution

82

LN 2138

739.3

36.5

Brazil

LAC

Rural Electrification

83

LN 2365

585.2

222.8

Brazil

LAC

N.E. Rural Poverty Alleviation.

95

LN 3919

60

17.24

Brazil

LAC

Mato Grosso Natural Resource Mgt.

92

LN 3492

285.7

7.68

China

EAP

SW Poverty Reduction

95

CR 2744

486.4

9.36

China

EAP

2nd Red Soils Area Development

94

CR 2563

296.4

1.44

Colombia

LAC

Village Electrification

81

LN 1999

68.7

36.0

Cote d'lvoire

AFR

First Power Project

80

LN 1896

46.3

33.0

Egypt

MNA

Third Power

80

LN 1886/

677.8

22.2

       

CR 1052

   

Ghana

AFR

National Electrification

93

CR 2467

185.3

20.0

Ghana

AFR

National Electrification

93

CR 2467

185.33

13.45

Guatemala

LAC

Power Distribution

86

LN 2724

133.2

6.4

India

SAS

Third Rural Electrification

82

LN 2165

795.0

300.0

Indonesia

EAP

Eleventh Power

81

LN 2056

319.4

22.0

Indonesia

EAP

Rural Electrification

90

LN 3180

524.7

329.0

Indonesia

EAP

2nd Rural Electrification

95

LN 3845

841.3

618.9

Jordan

MNA

Fourth Power

81

LN 1986

86.6

4.1

Jordan

MNA

Six Power

86

LN 2710

71.7

6.9

Lao PDR

EAP

Southern Provinces Electrification

87

CR 1826

32.6

6.8

Lao PDR

EAP

Provincial Grid

92

CR 2425

49.3

34.13

   

Integration

       

Madagascar

AFR

Energy Sector Development

94

CR 2844

119.4

4.13

Malaysia

EAP

Rural Electrification

82

LN 2146

315.5

86.3

Mexico

LAC

Integrated Rural Dev. (PINDER III)

81

LN 2043

506.0

8.1

Mexico

LAC

Decentralization and Regional Dev.

91

LN 3310

1,362.7

27.9

Morocco

MNA

Second Rural Electrification

90

LN 3262

220.0

114.0

Nepal

SAS

Power Sector Efficiency

92

CR 2347

100.1

2.44

Pakistan

SAS

Private Tubewell Development

89

CR 2004

50.3

12.6

Pakistan

SAS

Rural Electrification

89

LN 3148/

715.0

160.0

       

CR 2078

   

Philippines

EAP

Rural Electrification Revitalization

91

LN 3439

118.5

91.3

Thailand

EAP

Second Accelerated Rural Electr

80

LN 1871

270.0

75.0

Thailand

EAP

Provincial Power Distribution

83

LN 2312

51.6

29.8

Thailand

EAP

Distribution System Reinforcement

94

LN 3798

375

49.7

Tunisia

MNA

Third Power

81

LN 2003

89.6

21.5

Tunisia

MNA

Fourth Power

84

LN 2455

83.0

13.8

Yemen Arab

MNA

Regional Electrification (Power II)

81

CR 1102

21.5

12.0

Subtotal

 

38

   

11,207

2,680.47

Note: Subtotals for each table in this appendix (i.e. sections A, B. and C) are correct but do not collectively sum to a correct overall total because some projects are included in more than one category.

B. Renewable Energy Projects/Components (millions of U. S. dollars)

CountryProject name

Year

Loan/ credit no.

Total project financing

Bank loan amount

Brazil

LAC

Alcohol and Biomass Energy Development

81

LN 1989

5,115.0

250.0

Cyprus

MNA

Energy Planning and Conservation

91

LN 2286

5.2

3.6

Djibouti

AFR

Geothermal Dev.

89

CR 2055

38.4

9.5

Djibouti

AFR

Geotherm Exploration

84

CR 1488

16.6

6.0

Ethiopia

AFR

Petroleum Exploration Promotion and Geothemal Reconnaissance

83

CR 1386

9.5

2.2

India

SAS

Renewable Resources Development

92

LN 3544/

250.0

138.0

       

CR 2449

   

Indonesia

EAP

-2nd Rural Electrification

95

841.3

17.1

 

Indonesia

EAP

Twelfth Power

82

LN 2214

1,470.9

154.8

Jordan

MNA

Energy Development

83

LN 2371

2.4

0.3

Kenya

AFR

Olkaria Geothermal Power Expansion

90

LN 2237

41.6

12.0

Kenya

AFR

Geotherm. Exploration

92

CR 1486

34.3

24.5

Kenya

AFR

Geothermal Development & Energy Preinvestment

88

CR 1973

59.6

40.7

Kenya

AFR

Olkaria Geothermal Power

79

LN 1799

89.0

40.0

Mali

AFR

Biomass Alcohol and Energy Efficiency

83

CR 1403

8.3

7.6

Mauritius

AFR

Sugar Energy Dev.

92

LN 3458

55.1

18.3

Panama

LAC

Energy Planning and Petroleum Exploration Promotion

81

LN 1954

8.0

0.6

Philippines

EAP

Energy Sector Loan

89

LN 3163-

3.509.2

390.0

       

LN 3165

   

Philippines

EAP

Geotherm.. Exploration

91

LN 2203

71.5

36.0

Philippines

EAP

Bacon Manito Geothermal Power

88

LN 2969

227.0

100.0

Philipines

EAP

Leyte-Cebu

94

LN 3702

458.9

199

   

Geothermal

 

LN 3700

   

Philippines

EAP

Leyte-Luzon

94

LN 3747

1078

231.

       

LN 3746.

   
       

LN B104

   

Yemen Arab

MNA

Petroleum and Geothermal Exploration Promotion

82

CR 1216

2.4

0.

Yemen Arab

MNA

Geotherm. Exploration

84

CR 1484

15.4

13.

Subtotal

 

23

   

13,407.6

1,695

C. Fuelwood-Related Projects/Components (millions of U.S. dollars)

Country

Region

Project name

Year

Loan/ credit no.

Total project financing

Bank loan amount

Argentina

LAC

Forestry Dev.

95

LN 3948

26.2

1.57

Bangladesh

SAS

Forest Resource Management

92

CR 2397

58.7

30.5

Bangladesh

SAS

Mangrove Afforestation

80

CR 1042

17.2

11.0

Bangladesh

SAS

Second Forestry

85

CR 1634

36.0

17.0

Bangladesh

SAS

Forest Resources Management

92

CR 2397

58.7

3.83

Belarus

ECA

Forestry Dev.

94

LN 3741

54.7

1.3

Benin

AFR

Benin Natural Resources Mgmt.

92

CR 2344

24.4

1.88

Bhutan

SAS

Forestry Dev.

84

CR 1460

6.8

5.5

Bhutan

SAS

Second Forestry Dev.

88

CR 1900

31.3

3.6

Bhutan

SAS

Third Forestry Dev.

93

CR 2533

8.9

5.4

Bhutan

SAS

3rd Forestry Dev.

93

CR 2533

8.9

1.15

Brazil

LAC

Minas Gerais Forestry Dev.

87

LN 2895

100.0

7.2

Brazil

LAC

Rondonia National Resource Mgmt.

92

LN 3444

228.9

3.13

Brazil

LAC

Mato Grosso Natural Resource Mgmt.

92

LN 3492

285.7

11.9

Burkina Faso

AFR

Forestry

79

CR 982

17.5

14.5

Burundi

AFR

Second Forestry

85

CR 1620

17.0

11.3

Cameroon

AFR

Forestry

81

LN 2092

35.5

2.8

China

EAP

2nd Red Soils Area Development

94

CR 2563

296.4

2.75

China

EAP

SW Poverty Reduction

95

CR 2744

486.4

.438

Colombia

LAC

Natural Resources Management

94

LN 3692

65.34

1.32

Ethiopia

AFR

Forestry

86

CR 1722

62.1

45.0

Gabon

AFR

Forestry and Environment

92

LN 3506

38.2

0

Ghana

AFR

Forest Resource Management

88

CR 1976

64.6

32.1

Haiti

LAC

Forestry

82

CR 1257

5.1

4.0

Haiti

LAC

Forestry and Environmental Protection

91

CR 2301

29.0

26.1

India

SAS

Himalayan Watershed Mgmt.

83

LN 2295

66.0

23.1

India

SAS

West Bengal Social Forestry

81

CR 1178

43.5

29.0

India

SAS

Jammu/Kashmir and Haryana Social Forestry

82

CR 1286

67.1

33.0

India

SAS

Watershed Dev. in Rainfed Areas

83

CR 1424

45.5

8.9

India

SAS

Kerala Social Forest.

84

CR 1514

54.5

31.8

India

SAS

National Social Forestry

85

CR 1611

327.8

165.0

India

SAS

Maharashtra Forest.

91

CR 2328

142.0

107.9

India

SAS

Karnataka Social Forestry

83

CR 1432

56.6

27.0

India

SAS

Gujarat Community Forestry

79

CR 961

76.0

37.0

India

SAS

Karnataka Rural

93

CR 2483

117.8

0.16

   

Water Supply & Envirom

       

India

SAS

Andra Pradesh Forestry Project

94

CR 2573

89.1

24.7

India

SAS

Madhya Pradesh Forestry Project

95

CR 2700

67.3

17.33

Kenya

AFR

Forestry Dev.

90

CR 2198

83.8

14.9

Madagascar

AFR

Energy Sector Dev.

94

CR 2844

119.4

0.75

Malawi

AFR

Phase 11 of National Rural Dev. (Wood)

80

CR 992

16.3

13.8

Malawi

AFR

Second Wood Energy

86

LN 2670

19.6

16.7

Mali

AFR

Second Forestry

85

CR 1654

]6.7

6.3

Morocco

MNA

National Rural Finance

93

LN 3622

1150

8.3

Nepal

SAS

Second Forestry

83

CR 1400

24.0

18.0

Nepal

SAS

Community Forestry Dev. and Training

80

CR 1008

24.8

17.1

Nepal

SAS

Hill Community Forestry

89

CR 2028

45.4

30.4

Niger

AFR

Second Forestry

82

CR 1226

16.8

8.5

Nigeria

AFR

Second Forestry

86

LN 2760

110.7

58.5

Pakistan

SAS

Punjab Forest Sector Development

95

CR 2747

33.75

24.65

Pakistan

SAS

Northern Resource Management Project

93

CR 2512

36

1.7

Philippines

EAP

Watershed Mgt. and Erosion Control

80

LN 1890

75.0

31.3

Rwanda

AFR

Second Integrated Forestry

87

CR 1811

20.1

13.8

Rwanda

AFR

Integrated Forestry and Livestock

80

CR 1039

23.6

11.1

Senegal

AFR

Forestry

81

CR 1103

17.1

9.3

Sri Lanka

SAS

Forest Sector Dev.

89

CR 2043

29.8

19.0

Tunisia

MNA

Forestry Dev.

87

LN 2870

50.2

20.0

Tunisia

MNA

National Rural Finance Project

95

LN 3892

420

8.5

Tunisia

MNA

Second Forestry Development Project

93

LN 3601

148.1

5.7

Uganda

AFR

Forestry Rehabilitation

87

CR 1824

33.3

12.1

Zimbabwe

AFR

Rural Afforestation

83

CR 1368

10.6

7.3

Subtotal

 

60

   

5,741.8

1,108

 

Methodology for estimation of world bank lending to rural and renewable energy projects

 

This research effort was carried out to review the Bank's historical lending patterns in rural and renewable energy. It sheds light on the magnitude of attention and resources directed toward these investments and the ongoing operational trends.

World Bank projects typically involve multiple components and funding sources and occasionally targeted cofinancing. Costing tables and summaries within the Staff Appraisal Report provide one cross-section of the project's economic make-up. However the lines along which they are organized do not usually aggregate the project data in accord with the subject of interest or do not provide the desired resolution to answer questions such as "how much was spent only on renewable energy equipment." or "what fraction of an institution building component focused on efficient stove and charcoal kiln commercialization.' Reverse-engineering and educated estimation were used to characterize the projects appropriately. leaving a modest margin for discrepancies. Below the method of distilling the data required for the Annex is outlined:

• The estimated Bank contribution is the sum of the subject components - that is, those relating to rural electrification. renewable energy, or cooking fuels. inclusive of the traction of contingencies and interest during construction attributable to the selected components on a percentage-of-project basis. multiplied by the fractional share of Bank lending in the total project financing.

• The projects span 1980 to 1995.

• Projects passing the Statf Appraisal Report stage were selected. No attempt was made to gauge the field success of any projects beyond that point of reference.

• The listed projects were identified via the Bank Reports Data Base through fifty keyword searches anti via personal communications with members of IEN's rural energy group. Bank data bases are not oriented precisely alone the lines of the search: thus it is expected that a few projects may have escaped detection.

• If a project. such as a forestry project. appeared to fit the search objectives but contained no local participatory component or energy-related outputs accruing to rural communities. the project was omitted from the analysis. Likewise if the project contained a renewable energy component but provided no direct energy outputs accruing to the national or local community, that also would not fit within the scope of the analysis and would have been excluded.

In projects relating to rural finance operational experience demonstrates that rural finance projects with a fuelwood component usually realize about 15 percent of the available funds. Where no predictions were made about expected allocation of finances among the project components. the 15 percent figure was applied.

 

Notes

 

Chapter One: Introduction

1. The term traditional fuel refers to such fuels as wood, charcoal, agricultural residues. dung. grass. leaves. and other biomass materials using open fires. "three-stone" stoves, and wood and charcoal stoves. These are sometimes also called biofuels. The term modern includes liquid fuels. such as liquid petroleum gas (LPG) and Kerosene, electricity: coal. modern biomass. including improved stoves and bagasse gasification and co-generation and innovative renewable energy technologies. such as those that use wind, solar. and small-scale hydroelectric resources The term commercial energy is sometimes used instead of modern energy.

2. This was a recurrent question members of the World Bank's Board posed during the discussions of the policy papers in 1992 and during a review of progress with these policies in 1994.

Chapter Two: The Rural Energy Situation

3. The term lower-income developing countries refers to the classification in the WDR's statistical annexes. This group had per capita incomes of less than US$695 in 1993.

Chapter Three: Emerging Practices and Policies

1. The distinction between subsidies and financial support is not always clear-cut. Some programs may require subsidies in the short term to absorb start-up costs. but mote than compensate for this by their revenues and profitability in the long-term. The topic is discussed further in relation to rural electrification anti renewable energy.

 

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