CHAPTER 5. UNIVERSAL ELECTRIFICATION POLICY

a. RENEWABLE TECHNOLOGIES & UNIVERSAL ELECTRIFICATION EFFORTS
b. GOVERNMENT ROLES IN UNIVERSAL ELECTRIFICATION
c. PARTNERSHIPS IN UNIVERSAL ELECTRIFICATION

Nearly two billion people - more than one third of the planet’s population - lack access to electricity according to estimates by the United Nations and World Bank. Broken down by regions these figures are even more dramatic - fully 90% of Africans have no access to electricity. With the Earth’s population expected to double by the year 2042, the potential unserved population could rise above five billion. The numbers themselves are startling, but the overall social and environmental impacts could be disastrous.

We consume energy in all aspects of our lives: cooking, heating and cooling, pumping water, producing goods and illumination. When electricity is not available, biomass - firewood, crop residues and animal dung - is most often the fuel of necessity. These fuels are not energy efficient and the requisite high consumption for basic needs contribute to deforestation, soil depletion, and higher mortality rates from smoke and particulate inhalation. These problems will only worsen as the unserved population grows, unless there is an increased emphasis on providing electrification.

Electrification is a key to economic development and growth, a fact underscored by the international community’s use of the rate of electrification as a primary measurement of a country’s overall development. Electricity is the building block of a sustainable community. A government that supplies electricity for water pumps and simple production machinery, provides the means for creating enough local wealth to expand electricity coverage to homes, schools and employment centers. Improving the local standard of living and ability to earn a living provides a reason for citizens to remain in their villages and on their farms. Bolstering remote and rural economies, in turn, stems the migration to urban centers, reducing population pressures on cities and the urban problems that often accompany overcrowding - civil unrest - crime, pollution and health hazards.

Renewable technologies are suited in size and technical scope to off-grid applications.

National polices designed to provide electric service to an entire population, however, have encountered significant barriers. Ensuring an adequate supply of electricity to isolated populations - small villages and agricultural areas, with their relatively low population densities and distance from the main electricity grid - has proven to be a difficult challenge to the energy policy strategist.

Historically, energy strategists have elected two approaches to electrification of isolated areas: (i) to extend the existing grid, or (ii) to distribute diesel generators and subsidize the purchase and transportation of diesel fuel. Grid extensions tend to be very costly and, unless new generating sources are added to the system, extensions can cause a system-wide service degradation. The diesel approach has also proven unsatisfactory. Fuel and transportation subsidies must be continued indefinitely. Diesel units require constant maintenance and are difficult to run efficiently at remote sites. In addition, air, ground and water pollution problems are endemic to the fossil fuels that power diesel generators.

Renewable technologies, on the other hand, offer a real solution because they are suited in size and technical scope to off-grid applications. Renewables, by their very nature, operate using the pollution-free energy sources immediately available in the village and rural agriculture settings. When wind, solar, geothermal and mini-hydro resources are located near remote users, these resources can provide sustainable, long-term levels of electrification to isolated areas.

Electrification projects in remote and rural areas are by their very nature expensive and the populations they serve almost exclusively poor. The energy policy planner seeks to maximize service at a price that is affordable to the local population. From the perspective of the energy strategist, the words “affordable to the local population” express a concept fundamental to successful universal electrification.

From the perspective of the energy strategist, the words “affordable to the local population” express a concept fundamental to successful universal electrification.

Experience has shown that users will not use electricity efficiently and economically unless they pay for service. Payment imparts value. Even in areas in which incomes are low, there is some level at which electric service can be made affordable. Renewable technologies are ideally suited to such a challenge. They can be tailored to meet the needs and incomes of individuals, villages, cooperatives or isolated commercial sites.

The following sections deal with “lessons learned” from past programs that may assist in developing new universal electrification programs, describe the populations commonly served by universal electrification, and discuss emerging universal electrification programs and policies. An appreciation of the history, the target population and new development ideas can assist the energy strategist in defining the most effective types of electrification programs to meet different rural and remote population needs.

What historical “lessons learned” may governments apply in developing a universal electrification program?

During the latter half of the twentieth century - international finance and development organizations have actively supported rural electrification efforts; however, for decades their efforts focused on grid extensions - linking unserved populations to a national transmission and distribution network. Lending institutions have encouraged state-owned utility companies to expand their grids, whether or not such grid extensions were the most logical or cost-effective options. Least-cost planning models, an integral component of American and European energy planning, were not used in the decision-making processes that determined the design of the majority of early rural and remote electrification programs. “Least-cost planning” means an evaluation of all costs associated with each generation or energy option, and a comparison of those costs over a long-term basis (usually greater than ten years). The historical decision to encourage rural electrification through grid extensions has hampered the development of alternative, cost-efficient electrification options, including renewable technologies.

Evidence suggests that people are willing to spend a significant portion of their incomes on higher quality energy services that improve their quality of life.

In many circumstances grid extension is not an economical option, either because of distance from the grid or general low-load densities. In such circumstances, mini-grid systems have often been designed and constructed. These systems have been designed to re-create the grid model on a local scale. In the typical mini-grid system, power is distributed to consumers from a central source located in the community, usually a diesel or gasoline generator. Projects of this type frequently require government subsidization to off-set fuel and infrastructure costs These subsidies have led to inefficient energy use and reliance on non-indigenous fuel sources.

Consequently, many countries have been forced either to raise revenues to cover the costs of subsidies or to face limiting the growth and scope of rural electrification programs. Moreover, those countries which have opted for a diesel fuel electrification option, are confronted by the problems and limitations inherent to diesel generation:

· dependence on foreign fuel markets;
· increased local costs due to high costs of maintenance and repair;
· increased outages due to operations and maintenance problems;
· unreliable and unpredictable transportation of fuel;
· environmental degradation due to fuel emissions;
· retardation of the development of generation options (i.e., renewables);
· retardation of the development of least-cost planning techniques and models; and
· health risks.

Programs that build on the knowledge and abilities of the local community tend to succeed.

Evidence from studies in rural areas suggest 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. Restrictions imposed on electricity prices and subsidies that mask the real costs of power can have the negative effects of restricting people’s choices and of limiting investments that extend services and provide alternative energy forms. Moreover, unnecessary subsidies are often fiscally unsustainable and may actually go to benefit higher-income households. Inappropriate subsidies can lead to excessive demands for electricity, fiscal stresses and inefficient energy use.

To date, all universal electrification programs have required some type of subsidy. The key is to devise policies and programs that are effective in providing the appropriate level of services to the desired population and that address market failures. The policy strategist designing universal electrification policies and programs is generally confronted with the challenge of high start-up costs and the risks and external costs inherent to providing electricity to rural and remote populations.

The lessons learned from past experiences offer the energy strategist valuable insight into what works and what does not. Programs that build on the knowledge and abilities of the local community and that take advantage of local institutions tend to succeed - particularly if these programs allow flexibility in the choice of generation; if they are built around wider development efforts (e.g., road building, irrigation, education); and if they provide for continuous education - training and oversight.

What populations are served by universal electrification

Whom are we talking about? Every policy maker recognizes that proper nomenclature is an essential tool in analysis and communicating. If the goal is to bring electricity to populations currently not served by a grid, the policy analyst will identify the constituents of the target population in order to establish the best mechanism for reaching country objectives.

In general, the population which is not served by the grid are in isolated areas “isolated” in the sense of not being sufficiently near the grid to be connected. For analytical purposes, the remote or off-grid population - the potential recipients of “universal electrification”, can be categorized in three subgroups:

- disbursed families,
- population centers, and
- production centers.

· “Population centers” refers to people sited in sufficiently close proximity to one another that common use of generation facilities is cost-effective. These populations tend to be concentrated in villages - generally organized farming communities of between ten and 500 households, however, larger population groups, towns or even cities, may be sited far from the grid and therefore “isolated”. Moreover - such populations need not be agricultural. Large nomadic population dusters may be included in the off-grid sector. The literature usually uses the term “remote” to describe such population centers, but often, the term “rural” is also applied to villages.

· “Production centers” refers to commercial facilities sited in remote areas isolated from the grid. Such facilities may include mining, manufacturing or agri-business production units. Such centers can usually afford to build their own generation facilities, and may be able to supply electricity to the surrounding worker villages. The term “isolated production centers” will be used for the purposes of this Manual.

· “Universal electrification” is the term used to describe the goal of bringing electricity to all of these isolated populations in a given country.

· “Universal service” refers to providing some minimum level of electricity service to all customers regardless of their ability to pay.

Low-income households in developing countries typically use electricity mainly for lighting, television, radio, and ironing. With slightly higher incomes refrigerators and other appliances become affordable. The biggest sources of demand for electricity in rural areas and towns is usually for irrigation pumping, water supplies, crop processing, refrigeration, and motive power. These uses of electricity are both socially and economically valuable thereby justifying the economic investment in providing these services.

a. RENEWABLE TECHNOLOGIES & UNIVERSAL ELECTRIFICATION EFFORTS

The limitations of centralized (grid-connected) programs, coupled with the growing adoption of Least-cost planning models and a global trend towards privatizing state-owned enterprises, have focused attention of national energy strategists on the use of renewable technologies for universal electrification. In addition, the major advances in design, efficiency and production that have significantly lowered the cost of renewable generation have also captured the attention of the managers of isolated commercial production centers.

Renewable technologies require less maintenance than conventional generation sources, are far less harmful to the environment, and make use of plentiful and free indigeneous fuel sources.

Renewable technologies such as solar photovoltaics, wind (aeolic) power, small geothermal, small biomass and micro-hydro, are clean, efficient and highly adapted to the needs of dispersed populations. They can be installed as part of a mini-grid system or placed in individual homes or enterprises. In some locations, larger geothermal and hydro-power facilities can power isolated production centers at costs considerably more economical than the diesel alternative. Moreover, excess power from such facilities can be used in communities surrounding production centers that are self-generators.

Renewable technologies require less maintenance than conventional generation sources, are far less harmful to the environment, and make use of fuel sources that are indigenous, plentiful and free. See Appendix A for a more detailed description of renewable energy technologies applications in the isolated sectors.

Generation options for the national grid may include commercially available renewable energy technologies such as geothermal, wind farms, hydropower, and biomass electricity, in addition to more conventional alternatives.

What are the primary models for offering universal electrification?

Grid Extensions. Grid extensions continue to be one of the most common means of universal electrification. Because of economies of scale, electricity from large, centralized power plants may be cheaper than that from small generating plants typically used in villages and farms. The problem is that, while the energy itself is inexpensive, considerable costs are usually incurred in transmitting and distributing this electricity to rural areas. To make possible the maximum use of inexpensive grid energy, the policy maker will have to focus on reducing the cost incurred in conveying electricity to the user.

Many analysts have concluded that one of the principal reasons for the high costs of distribution and grid extension is that these systems are usually designed and built by national utilities that tend to focus their activities on the electrification of urban areas. For the electrification of rural areas, national utilities have generally adopted urban standards in their expansion plans. Consequently, systems are oversized, some materials are inappropriate, and costs are further increased because of politics, lack of staff motivation, and bureaucratic delays. Clearly, cheap centralized power can benefit rural populations where it is available. Unfortunately, few utilities have the motivation or interest to incur the expense of expansion to remote areas.

Key variables to consider when assessing the grid extension option include distance and terrain for required line extension, population density of the community to be electrified, and the available capacity and reliability of existing generation sources. Grid extension is often the least-cost electrification option where load density is high (greater than five users per kilometer), consumption per user is high (more than 100 kWh per month), and where the extension distance is short (typically less than five kilometers).

Renewable energy minigrids.

Renewable energy mini-grids are a proven alternative to fossil-fueled mini-grids. Technical options include small hydro, biomass-powered generators, small geothermal, solar photovoltaics (PV), solar thermal, wind turbines, and hybrids consisting of more than one technology (with the possible inclusion of fossil-fuel-powered generation.) All small, community-wide electric systems - be they hybrid, micro-hydropower, photovoltaic, wind, or biomass - are dependent on a local distribution grid to transmit energy from the source to the consumer.

If rural or remote consumers are to have access to electricity at the lowest possible cost, policy strategists need to focus on reducing the cost of transmission and distribution from mini-grids.

Key variables to consider when assessing the renewable mini-grid option include the available resources, the population density for distribution of power, and service and load requirements, including productive uses.

Dispersed renewables energy options.

Dispersed renewables energy options using small-scale, renewable energy systems, including solar photovoltaics and wind turbines, are reliable and cost-competitive options for electrification of households in dispersed or isolated communities.

Key variables to consider when assessing the dispersed renewable energy option include the available resources, service and load requirements, and financing mechanisms which amortize the initial investment.

Diesel generation. Isolated diesel (or gasoline) generators are widely deployed in remote areas for rural electrification because of their relatively low initial costs and simple installation.

Key variables to consider when assessing the diesel option include: · they often operate at well below full capacity, and thus do not achieve maximum efficiency; · they are dependent on transporting fuel, and this dependence results in high cost and unreliable resource supplies; · they require diligent maintenance, regular oversight, and are generally unreliable; and · they generally have negative environmental impacts.

Replacement of diesel by renewable technologies may be an attractive alternative in some cases. However, it is not unusual for certain groups (such as indigenous people or a union group) to have been given diesel concession rights (storage, local sales, transportation to remote areas). In such cases, it may be prudent to develop a substitution strategy that will in some way compensate the diesel stakeholder for the economic loss resulting from a transfer to another technology based electric system or otherwise mitigate those losses.

Incumbent utility companies may view the provision of universal electricity service and rural electrification as a burden.

Awarding rural concessions for energy services

With the privatization and unbundling of the electricity industry in many countries, incumbent utility companies may view the provision of universal electricity service and rural electrification as a burden to be shed. But to others such services may provide a business opportunity. In some countries, federal or state governments have established electric service criteria and then request private sector companies (including affiliates of traditional utility providers) to bid to provide the services (e.g., the state of Massachusetts in the United States). Such criteria may include one or more requirements, for example:

· to use renewably generated electricity (or other environmentally preferable technologies);

· to provide universal service (lifeline rates) for all citizens in the area; or

· to provide some types of electric appliances and/or services through either lease-purchase options or other types of beneficial credit plans.

What are the market barriers and ideas for overcoming these barriers when delivering universal service?

Serving low-income people in grid-connected areas

Use of “lifeline rates”, though not a new idea, can be particularly effective in bringing universal electric service to households easily connected to the grid. “Lifeline rates” are low tariffs for low levels of electricity consumption. They may not include a financial need test and may simply be offered to all residential customers to assure affordability of the minimum amount of electricity determined to be necessary for basic quality of life. This subsidized rate is paid for by a very small fee on all electricity purchased above the lifeline amounts. Lifeline rates can also be used in combination with rural electrification strategies where, for example, rates for the first 35kWh are designed to make service affordable for poor people who use small amounts of electricity primarily for lighting.

Community organizations, familiar with local needs, are often willing to assume responsibility for implementing policies and projects.

Alleviating high start-up costs and risks.

The problem of high start-up costs and risks is related to the perception of the lack of creditworthiness of low-income and rural consumers. Though this perception has not always proven to be true, both public and private financing institutions, acting on this perception, continue to finance as though remote and rural customers were not creditworthy, thereby raising the initial costs of rural electrification programs.

Fortunately, several innovative programs in credit delivery systems offer promising opportunities to ease the credit situation in rural markets. One such solution may be to establish a local member-supported bank to make small loans, such as the Grameen Bank in Bangladesh (a member supported bank mainly comprised of poor families and women). Another is to enlist companies that already lease basic equipment to consumers, communities, and local energy suppliers (e.g., LPG distributors and small power companies). Laws that give incentives to local banks to provide credit may enable universal electrification projects. The existence of a local bank willing to extend credit is a positive signal to the larger. international lending community. The ability to use local currency, even for only a portion of the project costs, reduces currency exchange risk issues. Although not generally favored. the national government can provide guarantees (security) or counter guarantees to local governmental guarantees on locally raised debt. Partnerships with the multilateral development agencies may enable the creation of funds that could serve just this purpose. Electricity companies can also provide credit including spreading the cost of service and connection fees over several years making rural connections and service more financially feasible.

Calculating external and benefits.

The costs of most renewable technologies costs are declining rapidly; however, new projects in remote areas where equipment must be imported and/or transported over long-distances can make initial costs appear high even though long-term life-cycle costs may be quite low in comparison to fossil fuel alternatives. Given the economic potential and environmental advantages of these technologies, initial subsidies for rural electrification using renewables are fully consistent with good public policy and can be handled in a variety of ways, including the following:

· Participatory approaches: Cooperatives, nongovernmental organizations, and local community organizations can be very effective vehicles for providing electric services of all kinds. These organizations are familiar with and understand local needs and are often willing to assume responsibility for implementing policies and projects. The key is to identify the appropriate community social unit or subgroups with common interests and with whom external economic activities can be combined. In Bangladesh, for example, locally managed rural electric cooperative’s records of billing, collection, losses and maintenance are significantly better than that of the main power utility in charge of urban distribution.

· Decentralized power combined with other infrastructure needs: Combining the development of decentralized power with other infrastructure or social needs (e.g., water or telecommunications, health and education services), can often be very cost-effective, stimulate greater community support and leverage funds from a variety of sources. The major barrier to overcome is traditional compartmentalized thinking that says each of these things must be done by a separate entity.

· Credit Financing: Credit financing can greatly expand the number of households able to afford electricity services. In rural Bolivia, the companies operating the rural micro-grids decided to finance the connection charges allowing their customers to pay back the costs in small installments over five years. This scheme enabled the number of households able to purchase electricity service to more than double, reducing both connection and electricity service rates for everyone.

· Lower service standards: The costs of electrification can be significantly reduced by initially working with lower service standards, then, gradually increasing the level of these service standards over time as improved local economic development increases rural customers’ ability to pay. Simplifying wiring codes and using load limiters (circuit breakers) for lower levels of consumption can reduce costs significantly. Using cheaper poles and involving local people in works and maintenance also will reduce service costs. Moreover, participation of the local community not only reduces costs, it enhances consumer satisfaction and helps to provide financially viable investments. Another approach is to focus on providing electricity services (e.g., lighting, refrigeration, battery recharging) rather than kWh of electricity. Though these services may be more limited than what is available in urban areas, this demand-side approach is often better at meeting customer’s needs and facilitating their ability to pay. The types and extent of services can be expanded as demand and resources increase.

· Provide adequate training: The frequent lack of adequate support for training, operation and maintenance can cause many financiers to see investments in non-traditional technologies like renewables as high risk. Rural electrification programs using renewables that include adequate support for training, operation and maintenance can result in greater access to capital and lower interest rates.

To the extent that the expanded availability of electricity can be linked to local economic development, the greater the likelihood of success of the electrification efforts.

b. GOVERNMENT ROLES IN UNIVERSAL ELECTRIFICATION

Begin with establishing universal electrification as a national goal. A goal statement provides concrete direction to all levels of decision makers involved with universal electrification in a country. If such a goal statement is embodied in a comprehensive plan, the comprehensive plan provides focus and direction, sets priorities, offers support, and helps attract investment capital from both within and without the country. It also lays out the acceptable models for development and identifies the geographical areas where concessions could be established. A universal electrification goal is most useful if it is concrete and quantifiable (i.e., establishing numeric goals for the percentage of households to be connected by a certain date).

If national policy goals do not identify universal electrification and if sector policy objectives do not identify the role that renewable technologies can play in meeting that goal, both public-sector and private-sector developers and investors will likely focus their attention on urban centers, where electricity markets are more secure, easier to reach, and more financially appealing. Even with national-level direction and encouragement, private-sector development will only take place when the financial rewards outpace the relative expenses and risks.

Provide a factual basis so national objectives may be determined.

Once a country has established universal electrification as a national goal, strategic planners will focus on the data collection that will provide a factual basis - the foundation on which sector objectives may be established. A paramount element of the factual basis is market identification. For example, collection of demographic data is essential to identifying the location and extent of the markets.

How does the government determine how much electricity is needed in each target market and how the populations in those areas will use and pay for that electricity when it is delivered?

Determine needs and abilities of the rural and village communities.

The first question is how much electricity is needed in each target market and how the populations in those areas will use and pay for that electricity when it is delivered. Ideally, the policy planner will access basic market research regarding the desire and willingness of a community to electrify and the ability of the community or household to support, financially and technically, an electrification program now or in the future. Concomitantly, the policy strategist may identify isolated production centers whose self-generation resources may be extended to surrounding communities.

Look at the resources available for providing electricity to remote areas.

An inventory and evaluation of the country’s indigenous resources involves identifying national resources from all sources and then evaluating the quality of the resource (e.g., strength and average daily amount of sunlight, strength and frequency of wind, etc.). This evaluation includes an assessment of the applicability of any particular resource to the areas in need of electrification. For example, a solar resource in an uninhabited portion of the country will not be particularly useful in providing electricity to a rain forest area. Accordingly. assessment also includes logistical issues associated with site selection. installation and operation. It should be noted that replacement or augmentation of diesel generation (that may only have been operated for four-to-six hours per day) with renewable generation (that provides 24-hour electricity service) has implications that go far beyond mere electricity service. One can expect a qualitative shift in the types of tasks for which electricity is being used as well as doing more of the same types of tasks previously undertaken.

Integrate the renewable technologies into the energy mix.

Technologies such as solar, wind, biomass and small-scale hydropower and geothermal are often well suited for rural areas and may justify more systematic attention by policy makers than they have hitherto received. If a given renewable resource is available through a resource assessment survey. utilization of that resource may be included as an objective of the universal electrification plan.

The accuracy of the information used in the analyses of short-term costs determines the usefulness and equitability of cost comparisons.

How does the government identify project costs in context of universal electrification?

Regardless of the model used to implement rural electrification, the totality of the costs must be considered in the overall analysis.

Sustainable development is based on an accurate economic and environmental evaluation of the relevant alternative systems and generation sources: usually called “least-cost planning”. Least-cost planning means an evaluation of all costs involved with each option and a comparison of those costs over a long-term basis (usually greater than ten years). An analysis which focuses only on short-term costs will not provide the decision makers with all the information needed to make a well informed decision and may inherently favor traditional generation sources. The accuracy of the information used in the analysis determines the usefulness and equitability of cost comparisons.

Least-cost planning is a complex and professionally exacting process. Generally, least-cost planning analyses will be completed by trained professionals employed or contracted by the government. The following is a list of factors that should be considered in this process:

· Resource evaluation of the development potential of renewable resources is fundamental to rational planning. Local or national governments typically initiate these resource evaluation studies - often with the assistance or financial support of multilateral or foreign development agencies. In the areas of hydro, biomass and geothermal, many countries already have well documented studies that can provide valuable information for the least-cost planning process. However, many countries have not archived resource evaluation studies of either solar or wind resources.

· The consumer base also requires consideration.

What are the current and projected demographics of the area?

What is the expected load in the area, and how will the load vary from hour to hour?

What are the expressed needs of the community and how will it use its electricity?

What are the projected demand growth scenarios? What is the user willingness/ability to pay?

· Detailed financial analyses will be required to demonstrate projected costs of installation. Installation and start-up costs are the most expensive components of both rural off-grid areas and in urban on-grid renewable energy project facilities. In order to compare the costs of alternatives, all components of the initial start-up costs must be included, from the building of the facility, to installation of equipment, to internal and external wiring of individual households for electrification.

· The cost of support services for operation, maintenance and repair are essential components of a least-cost comparison. The cost elements of support services include the cost of inventorying spare parts and of operating a regular maintenance programs as well as identification and quantification of on-going operational costs on a life-cycle basis. For example, least-cost planning may recognize that a diesel-fired plant lasts five to ten years and then needs replacement, whereas solar and wind facilities may last 20 years and a geothermal or mini-hydro facility might last well beyond its projected 50-year life.

· The costs of the administrative infrastructure are also a factor. Such costs include education and training at both the professional and consumer level, as well as support services for the technicians and managers.

· Also included are “soft costs” - transaction costs necessary to engage in any commercial transaction, such as professional fees for bankers, lawyers, engineers and developers.

· The cost of obtaining credit for rural electrification projects is among the most troublesome factors, since the associated credit costs are generally quite high.

Regardless of the model used, the totality of the costs must be considered in the overall analysis.

How may governments and utilities assess the cost of universal electrification?

The challenge for least-cost planners is to quantify the value of externalities and include them in an objective least-cost planning process.

Since objective quantification of “benefits” in a cost:benefit equation is extremely difficult, externalities are usually not considered in the least-cost planning process. However, policy and decision makers generally recognize that there is extrinsic value in these aspects known as “externalities” and that value needs to be considered in the overall evaluation of electrification development. Rural or remote electrification projects that otherwise might be minimally feasible, might be very feasible when externalities are factored into the evaluation.

The cost of getting fuel to remote locations is a major cost component in the decision to install diesel-fired mini-grids.

“Externalities” broadly refer to the benefits or costs generated as a by-product of an economic activity that do not accrue to the parties involved in the activity. In this specific context of an electrification project, the term refers to the collateral effects a project may have on the overall economic, social or environmental condition of a region or a country. These collateral effects relate primarily to health and social factors, such as the health care costs observed in regions where air and water quality are below average levels. The cost of mitigating adverse social impacts, such as urban migration, and the social benefits of electrification, such as providing rural populations with more control over their own lives, can also be considered to be collateral benefits derived from electrification projects in isolated areas.

“Grid-extension costs” generally have the following components, all of which must be considered in evaluating alternatives:

· capital and fuel costs of generation;

· capital costs of reinforcing the transmission and sub-transmission networks;

· extension of medium voltage transmission networks;

· establishment of a low voltage distribution network and household connections; and

· indirect costs, such as household wiring.

“True fuel costs” are an essential factor in evaluating nonrenewable energy development in isolated areas. For example, the cost of getting fuel to remote locations is a major cost component in the decision to install diesel-fired mini-grids. This determination entails projections of world fuel prices, transportation costs, and transportation infrastructure improvements.

How does the government promote the commercial viability of projects in rural and remote sites?

Pursue high-value markets for market entry. High value markets result in a higher “ability to pay” for electricity and concomitant project sustainability.

In general, projects can be based on two motifs:

· a development agenda whereby electricity is more likely to be at least partly subsidized and services are available to poorer people; or

· an economic agenda in which market factors play a more prominent role in project development and electricity is purchased with few subsidies.

Both types of projects are important, but the differences should be noted because they affect overall project development, including how the projects are financed and paid for and the level of service available. Projects may be a mix of the two (development and economic agenda) alternatives, and electricity metering can be a useful tool in these projects. Projects based on an economic (cost recovery) agenda usually have an enhanced opportunity to be more sustainable because they result in a higher ability to pay and hence generate revenue streams over the life cycle of the project. Such revenue streams are important, and sometimes essential, to pay for operations and maintenance (“O&M”) costs.

Development projects are often the result of the availability of short-term capital funds (e.g., over a three-year period). Funding for O&M may not be available over the life cycle of the project, thereby creating a less sustainable project environment. In addition, projects in which electricity is made available at no charge are usually much less sustainable than projects where electricity services are paid for, even if not at a full cost recovery level.

Rely on local support. It is important for projects to be compatible with the country’s agenda, but projects that rely exclusively on government support may eventually fail because of the changes inherent to government agendas and because, without local support, proper operation and maintenance is difficult. Government support should be used to promote projects, and government opposition should always be avoided.

Identify an organization for long-term management and oversight.

Long-term management and oversight.

Long-term management and oversight of a project may best be vested in organizations associated with the villages that would transcend political volatility, such as NGOs with long term commitments to villages.

c. PARTNERSHIPS IN UNIVERSAL ELECTRIFICATION

During the upcoming decades, the greatest challenge to the national energy policy strategists will be attracting private-sector investments into rural and remote electrification. These policy strategists will be striving to reach three distinct objectives which may be inherently conflicting:

· to electrify as many communities and households without electricity service as possible in response to government goals that support widespread rural social and economic development.

· to decrease government expenditures in the electricity sector in response to government goals for fiscal stability.

· to promote private-sector investment in the production of electricity in response to government goals to reduce state involvement in the economy and achieve long-term growth through increased productivity and competition.

The question for the policy strategist is how to enlist private-sector investment in universal electrification.

The challenge to the policy strategist is to forge a shared understanding of public- and private-sector perspectives and fit them skillfully together to form a whole, thereby enabling universal electrification.

The challenge is to make universal electrification projects both profitable and less risky - and as soon as possible. Government strategists have an immediate need to partner government and private-sector developers to develop new frameworks enabling joint ventures. These new ventures will invest in commercial operations that can become profitable in a reasonable time (three-to-six years) and that can yield sustainable long-term returns on investments while serving the large need and demand for basic electricity services in isolated areas.

To enable and promote partnerships with private-sector renewable energy developers, policy makers may develop a four-fold strategy: · Facilitate the transfer of expertise and capital. · Promote initiatives that provide remote and rural electrification projects with commercial viability. · Reduce risks to the potential investor. · Formulate a universal electrification plan that allows the rational use of renewable resources.

No private-sector investor will invest in a project until it appears profitable and no private-sector banker will lend money to a project which has unacceptable risks. Rural and remote electrification projects have the reputation of being both unprofitable and high risk.

No single measure can improve the present approach to rural electrification of off-grid communities to one that is commercially viable, environmentally sustainable, and meets both the needs of remote populations and their ability to pay. However, if a combination of measures, when taken together, can reduce operating costs and increase revenues to the level of commercial sustainability, private-sector participation in universal electrification will be a reality. Renewable energy is an integral part of this solution.

What economic measures are available to governments to encourage renewable integration into the energy mix?

Researchers have found that people in rural communities have a greater willingness to pay for electricity and a greater capacity for saving income than is commonly believed by some energy policy strategists.

The goal of universal electrification (and the objective of promoting private-sector investment in universal electrification) can be buttressed by establishing the long-term objectives: (i) of project self-sustainability, and (ii) of pricing based on the cost of service. Project development that does not emphasize long-term sustainability will be avoided by private-sector investors. To this end, project development strategies should take several preliminary steps, including:

· Verify willingness and ability of end-users to pay. Directly related to long-term sustainability is the willingness and ability of consumers to pay for service. Projects should be developed whereby users can contribute to the capital cost of the project. For extremely poor people, a significant component of the project costs may be covered by grants or other external sources of funds, but individuals and communities should be required to pay something, even if it is in the form of in-kind labor rather than money.

· Seek local investors. Local investors should be sought out and brought into projects. Profit will be a key motivator for private-sector participants.

· Organize a method of collecting money for O&M. An administrative procedure for collecting revenue for operations and maintenance needs to be in place.

· Require that pricing be based on the costs of service. Although the costs per household to provide electric service in a remote rural village may be more than in an large urban center, it does not follow that the village customer must pay more for his electricity.

There are several financing options that have proven successful around the world.

· End-user credit. On a local level, financing household renewable energy systems through end-user credit mechanisms is useful for overcoming the “first-cost” barrier, and thereby reaching a broader spectrum of the rural market. Local revolving credit funds are often used to supply credit and provide a self-perpetuating financial mechanism for expanding system use.

· Environmental incentives. One of the major benefits of renewable technologies is the positive effect they have on the environment, particularly in the area of air emissions. Restrictions and limitations on hydrocarbon emissions encourage the use of renewables. Environmental laws which contain emission ceilings and an emissions fine or that impose a tax on emission-producing fuels and facilities may be used to generate funds that can then be applied to lower the start-up costs for renewable-based projects.

· Leasing may prove a viable financing mechanism for supplying household renewable energy systems such as photovoltaics and small wind turbines.

· Subsidies may be established that require grid-connected tariffs to include a component defraying the start-up costs of off-grid projects. A typical approach followed in most industrial countries has been for the government to mandate a requirement (by law, regulation or contract) requiring that a utility expand services in rural areas and towns. Such expansion requirements typically allow utilities to recover their costs through an overall incease in average electricity tariffs. As the costs of service are higher in rural areas, such policies lead to some cross-subsidization from urban consumers. If such a measure is focused (e.g., based on per family income and unavailable to those who can afford to pay), it will not undermine the financial position of the grid-connected generators and distribution companies. Theoretically, as incomes and demand grow, economies of scale will reduce the high costs of start up, resulting in the eventual elimination of the need for the subsidy. At the national level, financial support may come from public revenues, often with multi lateral development bank support (i.e., World Bank, Inter-American Development Bank, etc.). Financial support may also come 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.

Organize administrative procedures for collecting revenue for operations and maintenance needs.

· Tax incentives and investment grants may be appropriate, especially where education and training is required to enable local residents to operate and maintain isolated systems. NGOs are generally willing to participate in providing investment grant programs which promote the use of new and innovative technologies Also, tax incentives may be appropriate in cases where start up costs are high. Since start-up costs include the capital cost of the equipment, tax incentives related to capital investment in equipment used in remote and rural electrification projects (e.g., accelerated depreciation, tax credits, tax holidays and production tax incentives) serve to lower the start-up costs and attract private equity and debt.

The investment costs of rural electrification systems can be daunting when the task is to electrify an entire country. Access to long-term, low-interest capital is restricted normally to large, low risk generation projects, and is generally unavailable to universal electrification projects designated for remote and rural areas. However, with the advent of successful pilot projects and working installations in renewable energy rural electrification projects, the question of longer term financing is again being revisited by multilateral development banks (“MDBs”) as they weigh the risks against the obvious economic and environmental benefits these projects will yield. Depending on the scale of the initiative, financing can take the shape of large MDB projects ranging down in size to local leasing programs for household renewable energy systems.

The common thread running through all of the outlined approaches is the willingness of government, multilateral development agencies, NGO’s, and the private-sector to work together to design mechanisms and opportunities for providing credit that responds to the needs and abilities of the local community.

National commercial and development banks have an important potential role to play as second-tier financial institutions.

To date, national commercial and development banks have been relatively minor players in the area of rural electrification. These institutions have typically perceived the risks of investment in this sector as being too high, and the rates of return as being too low, for their involvement. Policy strategists can overcome such perceptions through a variety of mechanisms, including pre-investment study support, loan guarantees, education and training efforts, the development of infrastructures, and the use of least-cost technologies.

Commentators from the World Bank have observed that the primary obstacle that discourages private-sector companies from providing supplies to rural areas is high start-up costs. Extending an electricity grid to remote villages can be very expensive, especially if only a few households are to be connected.

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, for example, even the poorest people are connecting to the grid when the service is available.

Require that pricing equal the costs of service.

The problem is the perceived lack of creditworthiness of low income consumers in remote and rural areas, combined with the unavailability of long-term credit in nations with the greatest numbers of unserved populations. Rural customers who cannot get affordable credit can seldom pay the high startup costs of improving energy supplies. The government, through partnerships with NGOs, cooperatives, extension services, equipment manufacturers and multilateral development agencies, can address this problem in several ways:

· Link government capital investments for other rural services (e.g., schools, hospitals, government buildings) with capitalization of electricity for the same region. In this strategy, a government subsidy is being offered to ensure stable electricity service for public benefit. The incremental cost of serving others in the immediate region may then be less onerous.

· Bundle development of several rural infrastructure services (e.g., water, telecommunications and electricity) together to reduce transactions costs of financing, construction, training of local people to maintain the systems and general operations and maintenance costs.

· Promote regional infrastructure programs. Economies of sale may be achieved if neighboring countries can cooperate in developing multinational universal electrification efforts.

If project costs cannot be recuperated, subsidies and financial incentives may be required.

Countries may find that if costs associated with the least expensive universal electrification option can not be fully recuperated in the form of a tariff paid by consumers, then subsidies and financial incentives may be the only viable option. No country, so far, has succeeded in providing universal electricity service without some form of public support or cross-subsidies in the tariff structure.

There are two approaches to the commercial viability of universal electrification projects.

· First, remote and rural electrification projects should permit full recovery so that the private sector will be motivated to provide the services; and

· Second, subsidies at the capital equipment level are justified as an investment in the social benefit of the community, i.e., government subsidies at the capital level constitute an investment in the people.

These two approaches may be pursued in parallel. Compelling cases have been made throughout the world that it is a legitimate function of government to promote social and economic objectives through the use of subsidies and incentives in order to meet the goal of universal electrification. However, it is critical that if subsidies or incentives are provided that they be provided in a very focused and targeted way so as to address specific issues related to market failures and for the purpose of stimulating an economy. 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.

Design projects to recover their costs.

Recognizing that, in most isolated electric systems, some form of subsidy may be required initially to keep rates affordable and to promote development, it is especially important that each project be designed, over the long term, to recover its costs. Although the majority of the alternatives for encouraging rural electrification development are one form of subsidy or another, in the long-term subsidies are not healthy for a country and are not sustainable. Subsidies often represent a significant portion of a country’s gross national product, and work against least-cost-planning decision making. Subsidies also discourage efficient use of energy and generally go to higher income households. For example, in many countries where the price of kerosene is subsidized, the families who are relatively wealthy, who can afford to buy more kerosene get a disproportionate advantage. Subsidies are also traditionally provided to farms and commercial enterprises that could afford to pay the true costs.

In a number of countries, such subsidies have recently been greatly modified and in many cases eliminated altogether, as policy makers have determined that they have led to economic inefficiency. Instead of subsidies, countries have been experimenting with longer-term loans granted on a competitive basis to the rural and remote electrification projects. To date, such loans have demonstrated a high economic benefit per dollar invested.

Initially tariffs may not cover present costs but as demand and load increases, full costs will eventually be recovered.

The challenge to the policy strategist is to design a regime in which prices recover the present value of costs over the long term.