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To overcome such a difference between the costs and willingness to pay and thedistortions in existing PLN electricity tariff, one should think of a set of supportingmeasures to make the rural electrification projects financially sustainable and fair aswell.

9.2 CHARGES AND COSTS OF RURAL ELECTRIFICATION PROJECTS

9.2.1 Charges

The charges for rural electrification project will be composed of i) periodical ormonthly payments for electric energy, ii) one time payments for service opportunity,and iii) unscheduled payments for unscheduled maintenance or repair. The first item isthe recipients payments for electricity supplied. The second item is often referred to asthe connection fees which is collected when electricity services begin. The last itemwill be required when the project facility is in trouble. All of these costs are expected to

be recovered from the power recipients. The power recipients could be of households,

any community facilities, and enterprises using electricity within the community.Unfortunately, the typical villagers are not usually rich enough to pay for full costrecovery for rural electrification project.

9.2.2 Valuation of Charges

The recovery of three types of charges of a rural electrification project will depend onthe level of electricity tariff, which should be established by the villagers concerned anddepends on their willingness to pay. However, this does not imply setting up a grosslyhigh tariff without discretion. The tariff should be agreed by the villagers throughdiscussions about the need for project sustainability, and their own capacity to pay.

The Study suggests the following prices for electricity:

Energy fee: Rp. 25,000/household/month or 10% of villagers income.

Connection fee: Twelve times of the monthly energy fee (desired to save money outof villagers salary to be paid on participatory construction)

Unscheduled payment for repair/maintenance: No required. (It is more important toraise the energy fee up to the villagers capacity to pay.)

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

0% 20% 40% 60% 80% 100%Village Sample

Rp./

HH.Month

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

0%

Rp./

HH.Month

Max. Rp. 1,281,500/HH.MonthMin. Rp. 36,500/HH.Month

Ave. Rp. 312,700/HH.Month

(Note) 77 samples.

Figure 9.2-1 Non-Electrified Villagers Income


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According to the Rural and Social Surveys conducted for the South Sulawesi, East NusaTenggala and West Tenggala Provinces, the average family disposable income rangedfrom Rp.36,500/month to Rp.1,281,500/month in 2002, as shown Figure 9.2-1. Theaverage income is Rp.312,700/month/household.

The expenditures of the households on alternative sources of lighting can be taken torepresent their willingness to pay for the future electricity. As a proportion of theirincome, the expenditures on alternative lightening sources range from 4% to 20% asshown in Figure 9.2-2.

For these non-electrified villages, the average monthly expenditure on alternativelighting sources such as kerosene lumps is as high as Rp.25,670/household/month withthe lowest and highest bounds of Rp.5,925/household and Rp.64,400/householdrespectively. The monthly expenditures for the alternative lighting sources are given inFigure 9.2-3.

The Rural and Social Surveys found that average family size and working familymembers of a household in rural areas are 5.81 persons and 1.91 persons, respectively.

0%

5%

10%

15%

20%

0% 20% 40% 60% 80% 100%Village Sample

ShareofExpendituretoHHs'Income

Max.Rp.20.26 % to HHs Income

Min. Rp. 4.45 % to HHs Income

Ave. Rp. 8.21 % to HHs Income

(Note) 77 samples.

Figure 9.2-2 Non-Electrified Villagers Expenditure

Ratio for Alternative Lighting

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

0% 20% 40% 60% 80% 100%Village Sample

Rp./

HH.Month

0%

5%

10%

15%

20%

0%

ShareofExpendituretoHHs'Income

Max. Rp. 64,400/HH.Month

Min. Rp. 5,925/HH.Month

Ave. Rp.25,670/HH.Month

(Note) 77 samples.

Figure 9.2-3 Non-Electrified Villagers Expenditurefor Alternative Lighting


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9.3 COSTS

9.3.1 Definition of Costs

There are a lot of costs associated with promoting a rural electrification project at everystage and every phase of the Project Initiation, Project Development, and Project

Operation discussed earlier. However, one should have a clear definition on what goesinto the project cost and what does not, so that consistency and transparency can beensured throughout the project promotion. Costs are assumed to be borne by associatedstakeholders. That is, costs specifically related to the promotion activities for a specificrural electrification project are the only ones counted as part of the project costs. Thisconcept is illustrated graphically in Figure 9.3-1 and further discussions are made inChapter 7 in the Guidelines, which have been separately prepared during the Study.

The project cost items are therefore defined as costs specifically required for the ProjectDevelopment, Community Preparation, Project Implementation, and Project Operation.In principle, wages or other direct and indirect costs for governmental staff cannot becounted as part of the project costs, although they are likely to be incurred with variouskinds of services to the project. Possible cost items that may be counted as part of the

project costs are listed in Table 9.3-1.

Figure 9.3-2 illustrates likely disbursements of a project.

GOIDistrictVillage

Daily O&M

Expression of Interest

Reconnaissance

Feasibility Assessment

Prioritization

Support and Monitoring

Project Implementation

Community Preparation

Project Development

Project

Operation

Project

Development

Potential Survey &

Campaign

Coordination and

Advice based on

Five-year Rolling

Plan

Project

Implementation

Project Initiation/

Rural Electrification

Planning

Figure 9.3-1 Cost Items Counted for Rural Electrification


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Table 9.3-1 Possible Cost Items

Project Phase Activity Possible Cost Items To Be Counted

Specialists' Fee for engineering services

Costs of investigations for hydrology, wind, etc.Project

Initiation

Project

Development

Taxes


Costs of capacity buildingCommunity

PreparationTaxes

Costs of land acquisition


Cost of contractor procurement

Facility cost exclusively for power system

Training costs

Cost of new enterprises

CapitalCost

Project

DevelopmentProject

Implementation

Taxes

Costs of daily operation and maintenance

Management costs

Unscheduled repair costs

Scheduled replacement costs

OperationCost

Project

OperationProject Operation

Taxes

9.3.2 Valuation of Project Costs

(1) Project Costs of Micro-hydro Power Systems

As discussed in Chapter 8 of these Guidelines, the major component of the total projectcosts for a micro-hydro power system is the facility cost, which is mainly composed of

civil construction cost and cost of equipment and installation. The facility cost mayfluctuate widely ranging from $2,000/kW to $7,000/kW. From the financial point of

Engineering Fee

Construction Cost

(Capital Cost)

Unscheduled Repair Cost

Scheduled Replacement Cost

Daily O&M Cost

Years

Cost

Commissioning

Construction

Engineering

Schedu

ledReplace

Engineering

Unscheduled

Repair Cost

Figure 9.3-2 Example of Disbursements Required


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view, however, one should make strongest effort to reduce the unit facility cost toaround $4,000/kW or less. Such cost reduction seems possible for most cases, when oneutilizes local technologies, local materials, and local human resource.

Table 9.3-2 shows three alternative examples of potential life cycle costs for a

micro-hydro power system. Life cycle costs are derived over the whole economic life ofa project in present value terms, discounted at 10%. In other words, all costs streams ofover the economic life of the project, assumed to be 20 years, including capitalinvestments, annual operations and maintenance and repair and replacement arediscounted to bring them to a common basis in present value terms. This techniqueenables the planner to compare the average incremental costs (AIC) of any number ofalternative projects in terms of their unit costs of supply. The example in table 10.2-2shows these unit costs can be subdivided into each major component of costs for ease ofcomparison.

The example represents a case of 22.2 kW of the installed capacity with the unit facility

costs at $2,000/kW, $4,500/kW, and $7,000/kW, which correspond to the low, average,and high unit facility costs, respectively.

The unscheduled repair is assumed to be required shortly after the commissioningamounting to 10% of the facility cost. Each of the example cases supplies more than48.7 MWh of annual energy over ten years of the facility life, and it is assumed to becompletely replaced with a new facility when the system is 10 years old. However, itshould be noted that such items as civil works and transmission mains etc, may not needreplacing after 10 years and they could continue to be used over the whole 20 year

period. Nevertheless, for the sake of simplicity and consistency of this example, theearlier assumption is retained.

Table 9.3-2 Examples of Project Costs in Micro-hydro Power

Implementation OperationkW Cost

Facility O&M Repair Replace Sub Total

Total ProjectCost

2,000 $/kW $44,444 $11,351 $5,598 $15,578 $32,527 $76,972

4,500 $/kW $100,000 $25,541 $12,596 $35,049 $73,186 $173,186

7,000 $/kW $155,556 $39,730 $19,594 $54,521 $113,845 $269,400

Ratio 100.0% 25.5% 12.6% 35.0% 73.2% 173.2%

Assuming 150W x 6 hours per day of supply to 148 households, it will approximatelycost $2.2 to $7.6 per household per month throughout 20 years of the project life. These

charge rates represent full cost recovery tariffs for the three systems over their totaleconomic lives of 20 years. The values given in Table 9.3-3 can be computed fromTable 9.3-2.

Table 9.3-3 Examples of Monthly Cost per Household in Micro-hydro Power

Implementation OperationkW Cost


Total ProjectCost

2,000 $/kW $1.25 /HH $0.32 /HH $0.16 /HH $0.44 /HH $0.92 /HH $2.17 /HH

4,500 $/kW $2.82 /HH $0.72 /HH $0.35 /HH $0.99 /HH $2.06 /HH $4.88 /HH

7,000 $/kW $4.38 /HH $1.12 /HH $0.55 /HH $1.53 /HH $3.21 /HH $7.58 /HH

Ratio 100.0% 25.5% 12.6% 35.0% 73.2% 173.2%


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(2) Costs of Photovoltaic Power Systems

The project cost for a photovoltaic power system also varies. Unlike hydropower,however, the cost of photovoltaic system does not depend on natural conditions but oncapacity. The Solar Home System (SHS) is the most widely used rural electrification

measure in the country. It usually comprises many individual generating units based onone system for one recipient. The minimum available unit size is often 50 W-peak.It has an advantage that the system capacity can be easily matched to meet therecipients capacity to pay. However, the electric energy the recipient can receive isvery small, and is often regarded as a pre-electrification facility, which fulfills onlylighting needs.

Table 9.3-4 gives two examples of the life cycle costs, for a 50 W-peak and 100 W-peakcapacities. As in the previous example SHS are installed to 148 houses. The 50 W- peakcurrently costs $401 and 100 W-peak $632. The systems will supply approximately 66kWh to 132 kWh of annual energy to a single recipient respectively. No engineering

cost needs to be assumed, because districts are expected to be able to work for theProject Development with technical support from BPPT or other existing agencies.

The systems will last for about 20 years, if well maintained. Each one accepts three 6Wbulb lamp and monochrome television turned on for 1.8 hours to 3.6 hours per night,and will cost roughly $2.6 to $3.9 per household per month as shown in Table 9.3-5.The replacement items will be mainly batteries.

Table 9.3-4 Example of Project Costs in SHS

Implementation OperationWp Class


Total

Project Cost

50Wp $59,348 $12,641 $0 $20,238 $43,434 $102,782

100Wp $93,536 $19,904 $0 $24,600 $68,455 $161,991

50Wp 100.00% 21.30% 0.00% 34.10% 55.40% 155.40%

100Wp 100.00% 21.28% 0.00% 26.30% 47.58% 147.58%

Table 9.3-5 Example of Monthly Cost per Household in SHS

Implementation OperationWp Class


TotalProjectCost

50Wp $1.67 /HH $0.36 /HH $0.00 /HH $0.57 /HH $0.93 /HH $2.60 /HH100Wp $2.63 /HH $0.56 /HH $0.00 /HH $0.69 /HH $1.25 /HH $3.89 /HH

50Wp 100.00% 21.30% 0.00% 34.10% 55.40% 155.40%

100Wp 100.00% 21.28% 0.00% 26.30% 47.58% 147.58%

(3) Costs for Other Power Systems

Project costs of other types of power systems, such as biomass power and geothermalpower, need to be specifically determined on a project by project basis, when suchpower systems are planned. There are no sources of data that can provide costsstructures for typical projects of this nature for rural electrification purposes.

Consequently, generalized discussions and analyses are not considered very useful.


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In the table, the symbol A represents a cost component that is below the amounttypical villagers would be willing to pay for electricity, and the potential for costrecovery would be high. B corresponds to a cost level between the willingness andthe ability to pay of the villagers, and it is probable that the costs can be recovered fromthe recipients. C represents a level of costs beyond the capacity of the villagers to pay.

In such as situation cost recovery from the beneficiaries of the project would be difficult.In this example, the villagers willingness and capacity to pay are assumed to beUS$1.00/month/household and US$3.00/month/ household, respectively.

The table illustrates that the typical non-electrified villagers would be at least willing topay for the costs of all daily operation and maintenance, and probably be able to make acontribution to the costs of scheduled replacements of the facility.

9.4.3 Funding Options

Two funding scenarios are used to determine out the potential funding sources. They

represent the situations under the Minimum Cost Recovery Scenario and the FullCost Recover Scenario. These are compared as in Table 9.4-2, which shows whatcould be paid as cash directly by villagers, where loan funds would be needed, and whatcould be paid by grants or gifts.

Table 9.4-2 Financial Structures of Rural Electrification Projects

Scenario Gift Loan Cash Remarks

Minimum Cost

Recovery

All of the Project Cost

except for Daily O&MNone Daily O&M

Not

recommended

Full Cost

RecoveryNone

All of the

Capital Cost

All of the

Operation Costthe ultimate case

In the table, Loan and Cash are the components that could be recovered frompower users through electricity tariff. The amount of Gift is literally a gift, and itshould be excluded from the cost stream of the project. Because the Minimum CostRecovery Scenario is regarded as the worst case from the point of view of cost recovery,and because of absence of loans would decrease the villagers incentive to pay, thisscenario is not recommended for the future.

The financial structures are graphically illustrated in Figure 9.4-1. The MaximumSubsidy Case (Gift) corresponds to the Minimum Cost Recovery. The Zero Subsidy

Case coincides with the Full Cost Recovery. The Cash and Loan components are fullyrecoverable in the chart.


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These financial structures are numerically translated into Table 9.4-3, which correspondto the minimum cost recovery, the full cost recovery, and the average case.

Table 9.4-3 Cost Recovery Pattern

a) Minimum Cost Recovery Case Unit: $/Household/Month

Cost RecoveryEnergy kW Cost Gift

Loan Cash Recovered

2,000 $/kW $1.85 /HH $0.00 /HH $0.32 /HH $0.32 /HH

4,500 $/kW $4.16 /HH $0.00 /HH $0.72 /HH $0.72 /HHHydro7,000 $/kW $6.47 /HH $0.00 /HH $1.12 /HH $1.12 /HH

50Wp $2.24 /HH $0.00 /HH $0.36 /HH $0.36 /HHSHS

100Wp $3.33 /HH $0.00 /HH $0.56 /HH $0.56 /HH

b) Arithmetical Mean Case Unit: $/Household/Month


Loan Cash Recovered

2,000 $/kW $0.92 /HH $0.63 /HH $0.62 /HH $1.24 /HH

4,500 $/kW $2.08 /HH $1.41 /HH $1.39 /HH $2.80 /HHHydro

7,000 $/kW $3.23 /HH $2.19 /HH $2.16 /HH $4.35 /HH

50Wp $1.12 /HH $0.84 /HH $0.64 /HH $1.48 /HHSHS100Wp $1.66 /HH $1.32 /HH $0.91 /HH $2.22 /HH

c) Full Cost Recovery Case Unit: $/Household/Month


Loan Cash Recovered

2,000 $/kW $0.00 /HH $1.25 /HH $0.92 /HH $2.17 /HH

4,500 $/kW $0.00 /HH $2.82 /HH $2.06 /HH $4.88 /HHHydro

7,000 $/kW $0.00 /HH $4.38 /HH $3.21 /HH $7.58 /HH

50Wp $0.00 /HH $1.67 /HH $0.93 /HH $2.60 /HHSHS

100Wp $0.00 /HH $2.63 /HH $1.25 /HH $3.89 /HH

Daily

O&M

Scheduled

Replacement Capital Cost

Cash

Subsidy

Cash

Loan

Cash

Subsidy

Loan

Maximum Subsidy Case

(Minimum Cost Recovery)

Zero Subsidy Case

(Full Cost Recovery)

Arithmetical Mean Case

Unscheduled Repair

Total Project Cost

Figure 9.4-1 Financial Structures of Rural Electrification Project


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In the above table, the values of the Loan do not include interest because the amountsshown are given in present value, discounted at 10% per annum, which explicitly takesinto account the cost of capital The most fundamental issue for long termsustainability is the requirement that the daily operation and maintenance costs should

be payable by the villagers. All of the rural electrification projects should and could aim

at greater cost recovery from villagers themselves than the Minimum Cost RecoveryScenario case.

To implement the above financial structures, the loan and gift facilities are both needed.The loan facility is needed from the proposed government non-bank agency, and

bilateral and multilateral development agencies providing ODA soft loans. The giftfacility is desired from the GOIs budget, Local Government Budget, and various ODAgrant aid programs. These loan and gift facilities should be appointed with strongcoordination by GOI.

9.4.4 Savings Funds

In order to prepare for the scheduled and unscheduled expenditures during the ProjectOperation Phase, each rural electrification project needs a savings fund. Such savingsfunds can be used for depositing additional money from villagers and for retainingsurplus earnings from tariff revenues. It may be practical to have either one large fundfor multiple projects or a small fund for each specific project.

The Study, however, recommends one small fund for each project rather than largerfund covering multiple projects. This is simply because the main stakeholders and theowner of the rural electrification project will the villagers. If one large fund isestablished under a district government or the Central Government, these will need to

be managed by these authorities, and villagers would lose their direct ownership of thefund and an incentive to contribute additional resources.

In the context of the need for community based projects, it is recommended that thetariffs are set individually for each project or community. It is also recommended thatan official ownership of each rural electrification project be passed on to respectivecommunity, once the project commences operations.

9.5 TARIFF STRUCTURE OF RURAL ELECTRIFICATION PROJECTS

9.5.1 Project-dependent Tariff Systems

When discussing a tariff system, the first and largest question is whether it has an equalvalue independently of projects, or it is different and highly dependent on projects.For the Study Team, it should be answered that the tariff system is to be established

project by project with different values and different rules to pay. This is because arural electrification project is a villagers own project, and needs villagers ownmanagement. Such villagers ownership is expected to be the dominant driving forceto make projects sustainable.

Meanwhile, there must be arguments for and against such project-dependent tariffsystems. The negative arguments are probably against possible unfairness in energy

payments from rural people. However, any rural electrification projects require thevillagers initiative to operate and manage them for decades. Otherwise, the projects


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could be deadlocked very quickly. As the equal tariff cannot guarantee the villagersinitiative, the other measures should be realized to strengthen villagers initiative andincentive for electrification. One of such measures is an ownership of the project;namely, the project belongs to the villagers, and accordingly, the villagers makenecessary managements. In fact, the Project Operation Phase, which mostly forces the

villagers alone, is the longest phase and the target itself of the rural electrification. Itis very important to guide villagers to have a strong incentive to manage their own

project by themselves. To do this, the project-dependent tariff system can be regardedas the better selection.

9.5.2 Desired Tariff Structure

(1) Electricity Tariff

A discussion on the electricity tariff may be needed at every project phase. A depth ofthe discussion may vary depending on the project phase concerned. However, each

discussion on the electricity tariff needs the following steps:

Step 1: To estimate the total project cost,

Step 2: To estimate number of future power users,

Step 3: To survey and/or estimate the willingness and capacity to pay of thefuture power users,

Step 4: To build a cost recovery plan,

Step 5: To value affordable electricity tariffs, and

Step 6: To agree with the future power users.

Here, it is assumed that necessary technical studies, such as the probable energyresource type and project scale, have been done in necessary depth. Each of the abovesteps is further discussed below, together with a tariff example.

(2) Step 1 Cost Estimate

First of all to set up the tariff, a cost estimate should be made. For example in this case,persons in charge of the tariff studies may temporarily use applicable values of themonthly cost share per household as shown in Table 9.3-3 or Table 9.3-5. These cost

shares will be useful when the project is in its initiation phase, such as the FieldReconnaissance and Electrification Planning.

(3) Step 2 Future Power Users

Following the project cost estimate, it is needed to forecast number of the future powerusers within the project area. Since a rural electrification project is often attractiveenough for non-electrified outsiders to move into the project area, the number of powerusers should not be underestimated. At the same time, it will be needed to estimatesuch non-domestic power users too as community owned offices, schools, hospitals,mosques, and even expected future private enterprises in the community. Because of

unreliability, however, it should not be overestimated the demand of the non-domesticpower users that do not exist at the study stage concerned. Information from the


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community or village must be very useful and effective to foretell such probable powerusers in the future.

(4) Step 3 Willingness and Affordability to Pay

Measuring the villagers willingness and affordability to pay are very important. It isonly available in the fields. The non-electrified peoples willingness to pay forelectricity may be defined to be the cost they are spending for a lighting purpose in theirhouses such as the cost for kerosene used for lamps in most cases. According to thevillage surveys during the Study, it is roughly $2.8 or Rp. 25,000 per household everymonth in average. The affordability to pay is often greater. The said village surveysestimate that it is roughly $3.0 to $4.0/month/household, which is 10% of the monthlycash income per household. However, it should not be overestimated the affordabilityto pay. Especially when the rural electrification does not expect any increase of thevillagers income, like most of cases with SHS, such overestimation can be a criticalissue to entire processes of the project promotion.

Persons in charge and the villagers themselves should carefully value the affordableprice for the electricity. Such affordable price will be used as the main base of thetariff studies.

(5) Step 4 Cost Recovery Plan

The Study Team recommends applying the cost recovery priority. Once the affordableprice for electricity has been obtained, and then it is compared to each component of theproject cost in the order of the cost recovery priority.

When the cost recovery plan is worked at a very beginning phase of the projectpromotion, such as the Field Reconnaissance and Electrification Plan, it is very difficultto expect accurate components of the project cost. In such cases, Table 9.5-1 would behelpful for judging which parts could be cost-recoverable. The table givesaccumulation of the cost components in the left to right order of the cost recovery

priority, and the largest cell less than the affordable price corresponds to the costcomponents that would be fully cost-recovered.

Table 9.5-1 Cumulative Financial Costs of Rural Electrification ProjectsUnit: $/month/household

Type DescriptionDaily O&M

Only

Up to

UnexpectedRepair

Up toReplacement

Up toFacility

2,000 $/kW 0.32 0.48 0.92 2.17

4,500 $/kW 0.72 1.07 2.06 4.88Hydro

7,000 $/kW 1.12 1.67 3.21 7.58

50Wp 0.36 0.36 0.93 2.60SHS

100Wp 0.56 0.56 1.25 3.89

For example, if the affordable price is $2.0/month/household, it can cover the cost onlyfor daily O&M and unexpected repair in a case of the hydropower system ranged in theaverage unit facility cost, while it can cover cost up to the facility replacement in thecase of SHS.


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All of the cost parts that have been judged not cost-recoverable need to be subsidizedby means of a certain monetary gift facility.

(6) Step 5 Electricity Tariff

When a tariff structure is being established, it is needed to carefully value theconnection fee as an advance payment, energy tariff for households (or the most likelyaffordable rate of proportion against the most probable monthly income), and other

possible level of fees.

Because a large amount of the connection fee can effectively reduce the future monthlypayments, it is recommended that part of labor wages to be paid to villagers asparticipatory labor during the construction works of the power facilities are to bedeposited as much as possible. If it is of the hydropower, there is a great chance forthe villagers to participate in the construction.

Monthly fixed payments are advantageous to villagers, because they do not demand anyextra facilities to measure energy used by each power user. If necessary, such fixedmonthly payments are determined not equally but differently user by user depending onhis or her income level, so that every power users can pay charges for electricity withinthe affordability to pay. In this connection, it may be necessary for the community tocontrol all of electric equipment used in terms of its supply and replacement.

When new enterprises are planned to established in targeted area on the ruralelectrification project, it is needed to pay the greatest attentions to estimate theelectricity payments from such enterprises. Because commercial liability of suchenterprises is not guaranteed, it is of paramount danger to underestimate the

households payment share in the future.

(7) Step 6 Agreement with Power Users

The future power users must be informed of all of outputs yielded from Steps 1 to 5above. Any further promotion activities should be strictly subject to an agreementwith the power users. Upon disagreement, if happens, it should be considered about adifferent scheme with a different energy resource.

It is of paramount importance for power users not only to agree to the electricity tariff,but also to regulate how and when the energy tariff is changed. The regulation shouldinclude a scheduled rise of monthly electricity payments to meet expected priceescalation, or to meet scheduled changes of electricity tariff of PLN.

(8) Example of Tariff System

Assumptions of the Project Features:

Energy Type Micro-hydro Power

Installed Capacity: 30.0 kW

Number of Recipients: 200 Households 150W/household assumed

Facility Life: 10 years Facilities will be replaced after the life.

Project Life: 20 years

Facility Cost: Rp.1,215 Mill. ($4,500/kW in unit facility cost)Yealy O&M Cost: Rp. 310 Mill.


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Unscheduled Repair Cost: Rp. 153 Mill. After completion and replacement

Scheduled Replacement Cost: Rp. 425 Mill.

Total Project Cost: Rp.2,104 Mill.

Assumptions of the Tariff System:

Connection Fee: Rp. 48 Mill. Rp. 240,000/HHYealy Energy Fee: Rp. 409 Mill. Rp.20,000/HH/Month

Cost Recovery: Rp. 457 Mill. 22%

Subsidy: Rp.1,648 Mill. 78%

Depreciation Rate: 10% per year

Financial Stream:

From the above assumptions, a financial stream is demonstrated as given in Table 9.5-2.The cash flow tells that the example project can be achieved with Rp. 2,104 million ofthe total project cost in terms of present monetary worth. Its cost recovery by the powerusers is Rp. 457 million and subsidy is Rp. 1,648 million. The cost recovery is as low as22%, and would cover the costs of daily O&M and great part of unscheduled repaircost.

Table 9.5-2 Example of Balanced Financial Stream

Cost Portion (Rp. Million) Recovery Portion (Rp. Million)Year

Facility O&M Repair Replace Total Subsidy Conn. Energy TotalBalance

0 1,215 0 0 0 1,215 1,648 48 0 1,696 481

1 0 36 122 0 158 0 0 48 48 -110

2 0 36 0 0 36 0 0 48 48 12

3 0 36 0 0 36 0 0 48 48 12

4 0 36 0 0 36 0 0 48 48 12

5 0 36 0 0 36 0 0 48 48 12

6 0 36 0 0 36 0 0 48 48 12

7 0 36 0 0 36 0 0 48 48 12

8 0 36 0 0 36 0 0 48 48 12

9 0 36 0 0 36 0 0 48 48 12

10 0 36 0 0 36 0 0 48 48 12

11 0 36 122 1,215 1,373 0 0 48 48 -1,325

12 0 36 0 0 36 0 0 48 48 12

13 0 36 0 0 36 0 0 48 48 1214 0 36 0 0 36 0 0 48 48 12

15 0 36 0 0 36 0 0 48 48 12

16 0 36 0 0 36 0 0 48 48 12

17 0 36 0 0 36 0 0 48 48 12

18 0 36 0 0 36 0 0 48 48 12

19 0 36 0 0 36 0 0 48 48 12

20 0 36 0 0 36 0 0 48 48 12

Total 1,215 729 243 1,215 3,402 1,648 48 960 2,656 -746

NPV 1,215 310 153 426 2,104 1,648 48 409 2,104 0

Loans are crucial in the financial stream to make the communitys cashbook balanced.For example, the facility replacement is only possible with such loans, unless extra


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subsidy is provided. Wealth pile-up is also important to effectively use cash in hand forthe projects sustainability. Table 9.5-3 demonstrates how loans eliminate negative

balance in the cashflow. In the same table, Rp. 75 million of a loan is assumed to makethe cashflow balanced when the project facility is replaced. In the table, the Loan is adebt, and the Repay is a constant combination series of the loan repayment plus

interest pay back. Savings is a series of money to be deposited. Yield is a series ofinterests earned from Savings.

This example assumes 10% for both of the loan interest to pay and the savings interestto earn.

Table 9.5-3 Example of Debt and Wealth

(Unit: Rp. Million)

Debt Wealth Pile-upYear Balance

Loan Repay Savings Yield

Cash inHand

Remarks

0 481 0 0 481 48 529 Procurement1 -110 0 0 419 42 461 Commissioning

2 12 0 0 472 47 519

3 12 0 0 531 53 584

4 12 0 0 595 60 655

5 12 0 0 667 67 733

6 12 0 0 745 74 819

7 12 0 0 831 83 914

8 12 0 0 925 93 1,018

9 12 0 0 1,030 103 1,132

10 12 0 0 1,144 114 1,258

11 -1,325 75 0 8 1 84 Replacement12 12 0 -13 83 8 78

13 12 0 -13 77 8 71

14 12 0 -13 70 7 64

15 12 0 -13 62 6 56

16 12 0 -13 54 5 46

17 12 0 -13 45 4 36

18 12 0 -13 35 3 25

19 12 0 -13 24 2 13

20 12 0 -13 12 1 0 End of life

Note that the Repay column in the table corresponds to the payment for the loanbased on constant total payments (Rp. 13 million) and a constant interest rate (10%).The payment includes principal and interest but no taxes, reserve payments, or feessometimes associated with loans. Table 9.5-4 shows numerical example of compositionof the constant payment value.

Table 9.5-4 Example of Constant Payment for Loan

(Unit: Rp. Million)

Year Loan Repayment Interest Total Pay

11 75.0

12 5.5 7.5 13.013 6.1 6.9 13.0


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Year Loan Repayment Interest Total Pay

14 6.7 6.3 13.0

15 7.4 5.7 13.0

16 8.1 4.9 13.0

17 8.9 4.1 13.0

18 9.8 3.2 13.019 10.8 2.3 13.0

20 11.8 1.2 13.0

Total 75.0 75.0 42.2 117.2

9.5.3 Verification of Fairness in Tariff Level

The Study Team recommends a Project-Dependent Tariff System as discussed earlier.Nevertheless, fairness in tariff level comparing the tariff system of public grid ofelectricity supplied by PLN might be a big issue in the future.

In other words, if the public grid of electricity supplied by PLN will be expanded in thefuture to near areas of the rural electrification, the fairness in the tariff level might berequested to keep. Therefore, when tariff system is set up in the areas of the ruralelectrification, the tariff level of PLN should be taken into account. Then, one of waysto verify is discussed hereunder for keeping of the fairness in tariff level.

In 2001, the Government of Indonesia has modified the electricity tariff system, and itshould be modified periodically. Following Table 9.5-5 shows the tariffs for smallscale domestic customers in low voltage distribution line as of 2003 modified based theregulation of the said tariff system.

Table 9.5-5 Existing Electricity Charge for Small Scale Domestic Customers

(Unit: Rp./kVA in Demand Charge and Rp./kWh in Energy Charge)

8,500 163 9,500 166 11,000 169 12,000 172

8,500 350 9,500 355 11,000 360 12,000 380

16,200 225 18,100 240 20,000 275 23,000 310

16,200 360 18,100 395 20,000 445 23,000 490

(Note) Demand charge means capacitiy charge and/or fixed charge.

Energy charge means specific charge and/or variable charge.

Source: PLN.

Within 20 kWh

Over 20 kWh till 60 kWh

RemarksDemand

Charge

Demand

Charge

Within 30 kWh

Over 30 kWh till 60 kWh

Contracted Power

Within 450 VA

Demand

Charge

Energy

Charge

Demand

Charge

Energy

Charge

Energy

Charge

Energy

Charge

950 VA

During Jan.1 -

Mar.31

During Apr.1 -

Jun.30

During Jul.1 -

Sep.30

During Oct.1 -

Dec.31

If the average consumed electricity is 30 kWh per month per household applying thetariffs indicated in the above table for domestic users and advance payment (connectionfee) is assumed as the sum of Rp.1,000,000 per household (actually, the advance

payment is negotiable, but most case is set at least as Rp.1,000,000 per customer), themonthly payment for electricity in minimum case within 450 VA at present (during July1 September 30, 2003) may be:

- Energy Charge portion: Rp. 4,800 (=Rp.169kWh * 30 kWh per household per month)

- Demand Charge portion: Rp. 11,000

Sub-total Rp. 15,800


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Furthermore, when comparing between PLN customers and electricity recipients in therural electrification projects, the difference between the advance payment (the houseconnection fee) of PLN and that in the rural electrification projects should be convertedinto monthly payment. Assuming that the house connection fee in rural electrification

projects is Rp.300,000 and depreciation period for facilities is 10 years, the monthly

payment converted from the difference of advance payment of PLN with that in ruralelectrification project may become at:

Rp. 5,800 (=(Rp.1,000,000-Rp.300,000)/10 year/12 months)

Converted advance

payment into monthly

amount to be paid:

Therefore, the total amount of monthly payment may become Rp.21,600/month perhousehold (= Rp.15,800 + 5,800).

If the people in rural areas have greater affordability to pay, PLN recommends the next

charge category of the above table (mostly, PLN recommends this category under thepresent financial states), the amount to be paid can be estimated as follows:

- Energy Charge portion: Rp. 5,500 (=Rp.275kWh * 20 kWh per household per month)

- ditto: Rp. 4,450 (=Rp.445kWh * 10 kWh per household per month)

- Demand Charge portion: Rp. 20,000

Sub-total Rp. 29,950

Rp. 5,800 (=(Rp.1,000,000-Rp.300,000)/10 year/12 months)

Total Rp. 35,750

Converted advance

payment into monthly

amount to be paid:

Of course, the tariff level of PLN will be increased year by year. When the tariffsystem is established for rural electrification project, the higher tariff level will be the

better as possible within the affordability people to pay. And it should be taken thetariff level of PLN into account at that time.

9.6 MANAGEMENT ORGANIZATION FOR RURAL ELECTRIFICATION

The Study Team recommends to establishing a management unit as an organization formanaging the rural electrification project.

The Management Unit is requested a good governance covering (1) to keepaccountability, (2) to train the people in charge so that the Management Unit is alwaysin good states, (3) to keep the financial states being open and aboveboard at all times,and (4) to keep the comprehensive management system from the viewpoint ofestablishment of the monetary pool, (5) decision-making system, and so on.

9.6.1 Accountability

To keep the accountability is one of importance for keeping good governance of theManagement Unit.

As discussed earlier, incentives of the people belonging to the Management Unit is akey matter for successful promotion of the rural electrification projects. To enhance


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(2) To Keep Systematic Cash Management

Most of the villagers may be unfamiliar with a systematic book keeping.However, it is one of the most importances for cash management in anyestablishments.

Then, the people in charge of accounting should be well trained for systematicbook keeping so that they can make best book keeping exhaustively without anyomissions.

(3) To Control Expenditures

All the payment of villagers consisting of house connection fee and monthlyelectricity charge are accounted to spend based on the regulation of theManagement Unit, for example, the house connection fee is for installing thedistribution facilities as cable and/or pole, for preparation of indoor-facilities at

least. And its balance will be kept for replacement of the power facilities. Themonthly electricity charge is for daily operation and maintenance such as wagesfor operators and some incidental use.

Also as discussed earlier, the Management Unit should prepare for making themonetary pool for the future.

Therefore, the expenditures should be controlled to keep to a minimum as much aspossible.

(4) To Create a Moral Sense

The amount of money collected from the villagers will be a huge amount for themwho may not have any experiences to have or to see. Therefore, the people may

behave some dishonest practices on the spur of the moment. This is one of theweak characters of human being.

However, to keep the healthy cash management, people should overcome it, andall the members of the Management Unit dealing with the cash managementshould create their moral sense by themselves to overcome that weak point ofhuman being.

9.6.5 Decision-Making SystemThe Meeting of the Management Unit should be the supreme decision-making organ ofthe Unit. And some important matters such as a large amount of expenditure must not

be decided by the Heads or the Acting Heads own discretion, but should be decided byagreement of all the members of the Management Unit at the meeting.

In this case, following attentions should be paid about following process and/or procedures:

(1) The Head or the Acting Head calls the meeting of the Management Unit, ifsomething happened to be discussed with all the people belonging to the Unit.

(2) The announcement on meeting of the Management Unit to the members is madethrough someone as a secretary or an assistant secretary who is asked by the Head


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The Governmental authorities are mainly consisting of the Ministry of Energy andMining Resources (MEMR) and the State Ministry of Cooperatives and Small &Medium Enterprises (SMOC&SMEs). Each of them has a plan to provide a fund orsome ideas for rural electrification in conformity to the Law.

9.8.1 A Plan of the Ministry of Energy and Mining Resources (MEMR)

MEMR has a plan to establish a Monetary Pool System to provide a funding resourcefor making subsidy for the rural electrification. The basic concept of the Plan is asfollows:

(1) To collect a specified tax to be levied from the existing electricity firms and/orestablishments concerned with a rate of 1 % of their net profit, and this tax revenue itto be a capital fund for subsidy.

(2) To collect a specified tax to be levied from the other existing large scale

establishments such steel industry and/or petroleum as using electricity in bulk with acertain rate of their net profit, and this tax revenue it to be the other capital fund forsubsidy.

(3) The capital fund for subsidy as a monetary fund can be used for electrification inremote and rural areas having no access to the public grids of electricity.

(4) MEMR makes a community apply to the local government for the subsidy, and makesthe local government apply to MEMR for facilitating the subsidy for the communityafter evaluation of proposal applied by the community.

9.8.2 An Idea of the State Ministry of Cooperatives and Small & Medium Enterprises(SMOC&SMEs)

(1) Preconditions of Financing for Rural Electrification

A village based cooperative (= KUD, Koperasi Unit Desa) should be set up forinvestment in construction of power facilities in the rural electrification.

The cooperative is originally a commercial establishment to make a certainscale of profit from its business. However, for the cooperative being still inthe cradle which has no capacity to make commercial profits, there is a subsidysystem from the Government.

The Ministry of State Owned Public Corporation (Ministry of BUMN, BadanUsaha Milik Negara) is dealing with this System. Namely, the cooperative isone of the public corporations.

The said Subsidy System is basically a loan system but not a gift facility. Theterms of the Loan are as follows:

Annual Interest: 6 %.

Grace Period: One year.

Payment Period: 7 10 years after the grace period.


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A basis of the Subsidy system is the Law No.9 1995 Regarding the Small ScaleEnterprises (the Law of PSK, Perusahaan Skala Kecil). Namely, thecooperative belongs to a category of small scale enterprises.

(2) Functions of Cooperative

Because the cooperative has a precondition to make certain scale of commercialprofit as mentioned above, the Government give an administrative guidance topeople to get their commercial profits such as to introduce an electric millingmachines for paddy and/or coffee, etc. so that the local industry can bedeveloped.

When such local industry is developed, the cooperative can get their revenuedue to collection of electricity charge not only from the domestic users, but alsofrom the industrial users. At the same time, the local economic activities can

be developed by establishing and developing of these local industries.

Accordingly, family income may also be increased by the said development ofthe local economy. These are the functions of the cooperatives.

There is a cooperative established based on specified purposes, but in general,the cooperatives can deal with not only the electrification or electric business

but also all the economic activities in the village. Accordingly, in case of usingthe said Loan System, paying back the principals and/or its interest is no need toexpect the revenue due to collection of electricity charges only from thedomestic users.

9.9 CONCLUSION AND RECOMMENDATIONS FOR FINANCIALLY SUSTAINABLE RURAL

ELECTRIFICATION

9.9.1 Conclusion

(1) The financial cost components are composed of the costs specifically required forthe Project Development, Community Preparation, Project Implementation andProject Operation.

(2) The typical rural electrification project is financially NOT feasible.

(3) Official subsidy is required to make rural electrification projects for keeping

financially feasible. The subsidy required could be $202 million/year or greater.

(4) The cost recovery priority is in the order of 1) the daily operation and maintenancecosts, 2) the unscheduled repair cost, 3) the scheduled facility replacement cost, and4) the Capital Cost.

(5) To promote the rural electrification successfully, villagers initiative and incentiveare the most important matters because that the Project Operation Phase, whichmostly forces the villagers alone, is the longest phase and the target itself of therural electrification. For this purpose, the project-dependent tariff system can beregarded as the better selection to strengthen villagers initiative and incentive in

rural electrification projects for making necessary managements by their own hands.


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