Establishing effective institutional structures

On the national level, successful rural electrification programs¹ demonstrated that setting up an effective implementing agency dedicated to rural electrification is one of its most basic requirements. The exact institutional structure, however, does not appear to be critical, as a variety of approaches have been successful. This study identified a few models -- a separate rural electrification authority (Bangladesh); setting up rural electric cooperatives (Costa Rica); allocating rural electrification to a department of the national distribution company (Thailand); delegating it to the regional offices of the utility (Tunisia); and employing a private sector approach to rural electrification (Chile).  In addition, a number of World Bank rural electrification projects are attempting to set up rural electrification agencies in a few developing countries to manage the rural electrification fund, conduct rural electrification planning, provide technical services, and promote rural electrification.

Successful institutions generally have a high degree of operating autonomy to pursue rural electrification as their primary objective, to create standards and to evaluate proposals for investment. Such institutions should be responsible for defining the roles of grid extension vs. off-grid, and developing separate regulatory frameworks including tariff structures and subsidy schemes for grid extension and off-grid options.

The critical institutional issue regarding the promotion of mini-grid renewable energy systems is the “tragedy of common goods” for scarce resources, that is, the ownership and maintenance of the mini-grid systems. The grid-connected renewable energy projects are often developed by utilities or IPPs, while the stand-alone renewable energy systems are usually owned by consumers or in a few cases by renewable energy service companies. The mini-grid renewable energy systems generally require a significant degree of community involvement.  Utilities are usually not interested in off-grid areas and slow to respond when there are technical problems with mini-grids because of the high transaction costs.  Community-based organizations have high sense of ownership and can be much more responsive to problems encountered in mini-grid implementation, but require a significant amount of guidance and training on organization, tariff design, system design and operations.  Appropriate tariff structures and administrative controls are needed for community-based organizations to avoid technical and financial failures. Rural electrification overall, particularly renewable energy mini-grids, is not a profitable business and usually hard to attract private sector investment.

Specifically, successful project design (and sub-project implementation) requires early attention to the following issues²:

• Identifying existing and potential social conflicts at the national and local levels;
• Involving the community in choices and decisions, financing, in-kind contributions and basic operation, as well as monitoring and oversight of operators;
• Including appropriate training, ongoing dialogue and conflict resolution mechanisms from the outset; and
• Applying modern socio-technological solutions (e.g. intelligent meters, energy dispensers, and ICT-based monitoring and evaluation).

For models on local institutional arrangement for renewable energy mini-grids,  view Business Model

¹ Meeting the Challenge of Rural Electrification in Developing Nations, Douglas F. Barnes, editor, ESMAP Discussion Version. (PDF)
² ESMAP2005 – Regulatory and Policy Issues for Grid and Off-Grid Electrification in Latin America.