| A number of trends in Bank projects have emerged, such as growth in off-grid electrification and the use of renewable energy sources.|
The Bank’s strategy for the energy sector has evolved considerably in the last 15 years. In 1993, two policy papers were published which gave greater emphasis to the role of the private sector and highlighted environmental concerns. A 1996 publication discussed the two billion poor people around the world lacking access to modern energy services, and how the Bank may best meet their needs – and a 2001 sector board paper increased the emphasis on both poverty and the environment. How have these strategy changes been reflected in the rural electrification portfolio? IEG identified 120 Bank-supported projects with rural electrification activities since 1980. A number of trends emerged. Support for off-grid electrification, usually as a subcomponent of a larger project (as in the Southern Provinces Rural Electrification Project and follow-on Rural Electrification Project in Lao PDR) has grown. Most off-grid projects rely upon renewable energy technologies (RETs) which have also been more prominent in the Bank’s lending in the last 15 years. Another trend is the growing number of projects in Sub-Saharan Africa and Latin America, in the case of the latter rural electrification being common in multisectoral community-driven development projects.
Explicit attention to poverty reduction in project design is growing, but remains limited.
Poverty reduction has not been a central focus of rural electrification projects, and there is rarely any explicit consideration of how the poor will be included or any poor-specific activities. For example, whereas three-quarters of rural electrification projects have objectives related to improving energy supply and the same proportion have objectives related to institutional development, only 60 percent have an objective to increase welfare (including environmental benefits and improving incomes). Moreover, excluding the multisectoral projects, only 7 percent of projects have an explicit poverty reduction objective. Similarly, whilst mention of gender in project documents has increased in the last decade, these concerns rarely affect project design. But recent projects have a greater poverty and gender focus.
Bank projects have been generally successful in establishing electricity infrastructure but weak in strengthening supplier institutions.
Bank-supported projects have been successful in creating the physical infrastructure for rural electrification, though technical problems have often meant high system losses—which have reached as high as 50 percent in Albania and India (Rajasthan). These losses drive a wedge between the cost of generation and the cost of supply, thus undermining financial performance. Many Bank projects have components to address system loss, but not all have been successful.
Where the Bank finances a series of projects focused entirely on rural electrification, it can make a substantial contribution to increasing rural electrification coverage: in Indonesia coverage rose from 33 percent in 1991 to 85 percent by 2003, with about 45 percent of these additional connections being paid for with Bank financing under Indonesia Rural Electrification I and II. In Bangladesh, the number of rural connections grew from practically zero in 1980 to over 4 million by 2002, 600,000 of which were made with Bank financing.
There has been less success with institutional development, with the majority of unsatisfactory projects being rated such for this reason. The poor overall performance of the subsector—with just 68 percent of projects rated satisfactory from 1996-2006 (compared to 75 percent for the Bank as a whole)—mainly reflect institutional problems. These problems commonly relate to the lack of financial sustainability of the utility responsible for distribution, as tariffs are set below cost recovery. But the situation is changing in some countries as they introduce higher tariffs, and others are on track to doing so.
The larger share of benefits from rural electrification is captured by the non-poor.
It is widely recognized that the larger share of benefits from rural electrification are captured by the non-poor. IEG analysis shows that this continues to be the case, though the gap closes as coverage expands. Two factors underpin this pattern: which communities get connected and which households can afford the connection once the grid is available.
High connection fees and community selection criteria that emphasize economic returns are barriers to reaching the very poor.
In many countries, communities to be connected to the grid are identified on a “least-cost” basis, favoring larger communities nearer to the existing grid, roads, and towns. The Bank has promoted this approach, which is often necessary to secure the financial viability of the rural electrification program, in a number of countries. For example, the recent Peru Rural Electrification Project changed community prioritization from the government’s “social criteria” to a least-cost approach. While necessary for the financial health of the service provider, there is a clear trade-off with reaching the more disadvantaged. Hence some countries include social variables in their eligibility criteria. In a small number of cases, Rural Electrification Funds have been used to offset the financial loss incurred by private companies extending coverage to less advantaged rural areas.
Although off-grid connections can serve remote communities that may not be connected to the grid for some years, they do not necessarily serve the poor better than does grid extension. Bank support to off-grid electrification is typically through a private business model, so social concerns have to be weighed against financial viability.
In most countries, increases in coverage are coming from extending the grid to new communities (extensive growth) rather than connecting the unconnected in already electrified villages (intensive growth). Once electricity arrives in a village, the connection charge is a hurdle that prevents the poor from connecting to the grid, even though the benefits they would derive, and so their willingness to pay, would exceed the cost of supply. Even in villages that have been connected for 15-20 years, it is not uncommon for 20-25 percent of households to remain unconnected (e.g. in Lao PDR). The absence of credit markets means they cannot borrow to pay the connection charge. Only a very small number of Bank-supported projects have either extended credit to customers (e.g. Thailand Second Accelerated Rural Electrification Project) or allowed the connection charge to be paid over a number of years. Progressive tariff structures have proved to be regressive subsidy schemes in practice, since the poor don’t connect – so better targeted connection charges would be consistent with the Bank’s priority of ensuring the poor benefit directly.
For off-grid schemes, which are more expensive to the consumer than grid electricity (were it to be available), the subsidy provided is often tilted toward the smaller systems likely to be chosen by poorer households. For example, this is the case under the Philippines Rural Power Project. Also, unlike for grid extension, credit or extended repayment periods for installation costs are common.
Consumer education and promotion of productive uses would enhance the benefits of electrification.
The full potential benefits of providing electricity to the poor are not being realized—first by not enabling the poorer households to connect to the grid, and second, by not providing information to consumers so they obtain their maximum benefit. Bank-supported projects that claim to have the objective of bringing rural electrification to the poor have typically neglected to include such components, which would help this objective to be achieved.
The dominant use of electricity in rural households is lighting. All households use it for this purpose, and many use it for little else. Consumer education may enable a greater range of benefits to be realized by newly electrified households. For example, electricity is rarely used for cooking in rural areas. The potential benefits to be gained from displacing firewood or kerosene stoves are not realized in the vast majority of cases.
While rural electrification does not drive industrial development, it can provide an impetus to home businesses. IEG’s analysis shows that the number of enterprises grows as a result of electrification, and that these enterprises operate for more hours. There is therefore a positive impact on household income. However, the broader literature has found these effects to be less than expected, except when there has been a specific program to promote productive uses of electricity. Project components to promote productive uses could, therefore, greatly increase electrification’s benefits. However, a balance needs to be maintained between system expansion and financial sustainability.
Properly calculating willingness to pay can demonstrate good rates of return on rural electrification projects
Accurately quantifying the benefits and consumer willingness to pay for electricity is essential for properly assessing project rates of return. IEG’s review endorses the measurement approaches advocated in ESMAP’s study of rural electrification in the Philippines. The approach measures the benefits from lighting and TV as the willingness to pay for lumens (a measure of the quantity of lighting) in the case of lighting, and hours of in the case of TV. There is a caveat that the shape of the demand curve matters, and that assuming a linear demand curve, most likely results in an overestimation of project benefits. In one notable case, the claimed ERR of 60 percent fell to 12 percent in IEG’s recalculation. It is also evident that some authors of project economic analysis have a weak grasp of the methodology and quality control mechanisms are not in place to stop weak analysis appearing in Board documents. But this view must be balanced with the observation that some project documents, such as that for the Peru Rural Electrification Project, are best practice examples of cost-benefit analysis, with further improvements possible using new approaches being developed by ESMAP.
The ESMAP approach yields a willingness to pay, for lighting and TV alone, of around $0.50-0.70 per kilowatt hour. This figure is already well in excess of the average long-run supply cost.
This study also considers education, health and fertility benefits. While electricity assists in vaccine storage, a more clearly causal positive impact of rural electrification comes from the greater willingness of health and education workers to stay in communities with electricity. This said, more studies are required to better understand how electrification affects health and fertility.
Other benefits are harder to quantify, but many of them are most likely internalized by the household and so reflected in the willingness to pay. The exceptions are public good benefits, such as street lighting increasing security, and the so-called “global benefits” of reduced carbon dioxide emissions, where applicable. Including these benefits puts the benefit for an average household consuming around 30-40 kilowatt hours a month at about US$60 per month per household. This level of benefits is sufficient to ensure an adequate rate of return for most grid extension schemes.
Off-grid schemes fare less well since, at present, they have higher costs but lower benefits. Benefits are further reduced by technical issues, including supply problems. The economic rationale for funding off-grid components alongside grid extension when the latter has the higher ERR is far from clear. Such a decision might be justified on social grounds, but the case is far from proven, especially when much lower subsidies would be required to reach the poor unconnected in electrified villages. An alternative argument to support these investments is that these are mostly small-scale programs to enable learning by doing which, together with general cost reductions and technological developments, will eventually make off-grid more competitive.