ENERGY & SUSTAINABLE DEVELOPMENT Salman Zaheer The World Bank IRADe Energy Conclave 2006 Rural Electricity Services: Institutional Arrangements for Sustainability

ENERGY & SUSTAINABLE DEVELOPMENT

Salman ZaheerThe World Bank

IRADe Energy Conclave 2006

Rural Electricity Services:Institutional Arrangements for Sustainability

New DelhiJuly 28, 2006

Structure of Presentation

Three Major Challenges of Rural Electrification and how some countries have addressed themHigh Cost of ElectrificationPolicy & RegulationSupervision & Service Quality

India’s approach Evolving World Bank Engagement

Rural ElectrificationChallenges and Impacts

Challenges Impact

High Cost of Electrification Dispersed Load - Low load factor Low incomes & household demand Uncertain commercial demand

Good economics Risky financials ??Opportunity for economic & social betterment, but: Cost recovery uncertain => Subsidy dependence Asymmetrical power of suppliers & consumers

Policy & Regulation Socio-political factors vs economic

• Farm supply vs income diversification Low domestic tariff (often flat rates) Supply “rationing” as primary

instrument of demand management High politicization => “strong”

consumers resist metering & tariffs

Good economics Good Politics?? Constraint to commercialization - financial viability

60% labor force in farm-related jobs Loss-making consumers w/o voice => poor service Supply decisions get further politicized

Misreporting of subsidized power supply

Supervision & Service Quality Frontline has limited say in network

design or flexibility to match bulk supply with demand

Uncertain Responsibility & Accountability Uncertain quality and suitability of rural network Operator-Builder blame each other for poor O&M

Rural ElectrificationChilean Experience

Challenges Action(s)

High Cost of Electrification

Private discoms bid for One time capital subsidy Subsequent operations on commercial basis (no revenue subsidy)

Lower tech standards possible - to reduce capital cost Non-exclusive concessions - to increase competition Demand driven approach – to enhance financial sustainability

Community participation in project identification 10% of project cost from consumers (wiring/metering/service line)

Policy and Regulation

Household access/consumption Commercial/industrial off-take Cost-recovery rural tariff set by regulator = Generation cost +

Distribution margin. Rural tariff higher than urban tariff

Supervision and service quality

Discoms have commercial incentives for access & reliable supply Local Government (LG) approves & monitors projects Central Electricity Regulator provides capacity support to LG Central Electricity Regulator monitors overall program performance

Rural ElectrificationChilean Experience

Results and Lessons Coverage: 53% => 76% in 7 years with private financing Service quality and financial sustainability achieved Cost of expansion 30% lesser than program estimates Instilling commercial incentive for improving access and

service was the key feature of the program; Demand driven nature supports future financial viability Competition for viable rural businesses kept costs down, reduced

fiscal burden, attracted private financing

Rural ElectrificationBangladesh Experience



Rural Electrification Board sets standards, aggregates design & construction, facilitates formation of rural electric coops (PBS);

Lower tech stds allowed Concessional long term loans Slightly subsidized bulk power / limited revenue subsidy for 5 years Demand driven approach supports financial sustainability

Selection/prioritization of schemes based on economic criteriaPBS responsible for construction supervision, O&M, managementConsumer membership and contribution to project cost


Increase household access and improve social indicators Increase commercial activity Tariffs - set by REB in consultation with PBS - 40% higher than urban


Coops governed by community - good quality and commercial stds REB reviews performance against Performance Target Agreements Employee Bonus & capital funding (expansion) linked to performance

Rural ElectrificationBangladesh Experience

Results and lessons Since 1980 67 PBSs serving 3.5 million customers established

Connections increased from 0.7 million in 1992 with over 0.5 million new connections being added now (vs 0.2 m in 1990s)

Sound technical and commercial performance achieved due to community involvement and despite higher than urban tariff

Other than the larger PBS’, most PBSs operate at a loss and depend on operating cross-subsidy from REB

In recent years increasing politicization and pressure to dilute economic criteria REB-PBS model needs updating Growing gap between demand and supply an additional problem

Rural ElectrificationThailand Experience



Office of Rural Electrification (ORE) formed within Provincial Electricity Authority (PEA) for grid extension, studies and load promotion

Tech stds set by PEA – construction by ORE Concessional long term loans/ slightly subsidized bulk power (cross-

subsidy from urban consumers) Villages identified in National Plan - PEA:

Prioritizes villages based on economic/financial returnsFurther prioritization based on extent of consumer contribution;


Increase in household access and productive use – extensive productive use promotion by PEA

Tariff set by National Government on advice from rate committee in consultation with PEA. Higher than urban tariff

Tariff set to cover PEA cost and raise self-financing for investment. Cross-subsidy from urban/industrial/commercial to rural households


Monitoring by PEA which in turn is monitored at national level

Rural ElectrificationThailand Experience

Results and lessons Access: 10% in 1972 => 80% in 1992; 97% villages electrified Villages contributed substantially to capital cost (based on

paying capacity) to ensure rapid electrification 25% villages contributed 30% of project cost, including from

individuals and local development funds PEA financed a major part of the program through internal

resources (in some years 40 – 70%) and raised commercial loans for some schemes

Strict use of financial criteria in prioritizing schemes helped make the program sustainable

Sound technical, commercial and financial performance achieved

Rural ElectrificationGuatemala Experience



Rural discoms have service obligation within 200mt of existing grid. Non-exclusive concession for other areas

National regulator sets tech stds – low-cost technology allowed Output based capital subsidy scheme - $650 paid to discoms for

each eligible household connection – 20% up-front; 80% after independent verification

Selection of villages for electrification by discoms with Government encourages financial viability


Increasing household access Tariff set by national regulator allows recovery of full generation cost

plus a distribution margin set as price cap Consumer tariff varies according to cost of supply Consumption <300 kWh per month subsidized through a social tariff

for which discoms get revenue subsidy from Government.


Public-owned company INDE, responsible for electricity supply outside Guatemala City, responsible for oversight

Independent verification of all aspects of rural program

Rural ElectrificationGuatemala Experience

Results and lessons 122,000 new rural connections made between May

1999 and May 2002 Commercial incentive to serve rural consumer

ensured; Output based aid helped ensure utility performance

before receiving subsidy; A criticism against the program has been that subsidy

was made available only to existing discoms thereby restricting alternate supply providers

Rural Electrification India : RGGVY



90% grant for program costs; 100% grant for connecting BPL families REC as nodal financing agency to channel GoI funds REC defines program design & implementation parameters CPSU services available for project formulation and implementation Enabling provision in National Electricity Act 2003 allows alternate

service providers – Panchayats, User associations, NGOs, franchisees


Increase household access, productive use and social indicators (modified from earlier limited farm supply focus)

Tariff setting by SERCs – may be deregulated for off-grid composite generation & supply systems

Responsibility for financial sustainability - through tariff & revenue subsidy as required - remains with SERCs


Overall supervision by REC (reporting to MoP, GoI) Distribution licensee responsible for quality of service Act provides for District Committees to clear projects & monitor quality

of supply/service

Rural ElectrificationIndia: Challenges ahead

Aggressive connection targets 100% households by 2012 => creates supply-side pressure

Uncertain financial sustainability Limited consumer mobilization or participation Tariff rationalization during program implementation Slow pace of franchisee development

Regulation, Monitoring & Evaluation – procedures/entities not in place Limitations of heavy-handed “cost plus” regulation High potential for mis-targeted and “leaked” subsidies Link program to broad rural development outcomes – farm & non-

farm incomes; health services & education Capacity building at all levels – local government, village level, and

district committees Overall power scarcity - Bold political leadership to balance sector’s

economic & social objectives for long-term sustainability

RE Challenge - Transitioning from vicious cycle, where customer is a liability…….

• Supply rationing• Inadequate O&M• Poor supply & service quality

• Rising Incentive for theft & collusion

FURTHER DETERIORATION IN:• Tariff collection• Financial condition• Ability to contract additional power

• More electricity needed to meet increasing demand

BUT…• Low cost recovery• Declining ability to contract new power

……to a virtuous cycle, where customers progressively become assets…….

• Enhanced prospects for attracting credible service providers/franchisees

• Assured supply to full cost paying customers

• Rationing for subsidized customers or mechanisms for targeted subsidies

• Increased economic activity, employment & local incomes

• Increased prospects for contracting additional power from grid and local sources

• Maintain service quality and financial viability

• At least self-sustaining O&M costs recovered from customers

• Mechanisms for self-regulation – benchmarking, etc.

World Bank Program being identified…selective & strategic

State-level power reform – key bottleneck in sustainable sector development Capacity building for governance & regulatory

effectiveness Rural energy services – for inclusive growth

Village Energy Security Program - cooking & lighting options Distributed Generation to improve “last mile” electricity

services Power Transmission System Development

Link power generation (including clean hydro) with load centers

Promote competition - attract investment into generation Generation expansion and emission reduction

1,500 MW of hydropower (out of plan 16,000 MW) and 1,000 MW of thermal plant R&M (out of potential 20,000 MW)

Strengthen institutional capacity and show case good practices

THANK YOU!

Documents

ENERGY & SUSTAINABLE DEVELOPMENT Salman Zaheer The World Bank IRADe Energy Conclave 2006 Rural Electricity Services: Institutional Arrangements for Sustainability