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C6 - 307
21,rue d’Artois, F-75008 PARIS http : //www.cigre.org
CIGRE 2010
Small-scale rural electricity providers Opportunities and challenges On behalf of SC C6 Advisory Group on Rural Electrification A. N.Zomers* Liander The Netherlands
C.T.Gaunt University of Cape Town South Africa
SUMMARY Privately owned small decentralised power stations with local distribution grids have existed all over the world since the beginning of electrification. In countries with a mature and extended central grid most of these systems have been decommissioned mainly because of financial reasons. In the past decades many governments, national power utilities and donors in developing countries have not been very responsive to initiatives by private and community-based smallscale electricity providers to help electrify rural and remote areas through decentralised solutions. Most of these initiatives have been developed by NGOs and similar organisations, and financially supported by a few donors. At present there is a general understanding that in developed and developing countries universal access to electricity cannot be reached with central grid based systems alone because in rural areas the individual loads are small and distant from the grid, and costs are high. Many governments are focusing the energy policy increasingly on the deployment of locally available renewable energy resources for the electrification of rural and remote areas. The driving forces behind this policy include the emergence of effective decentralised power systems, volatile fossil fuel prices, financial and environmental pressures, and the increased opportunities for support by the donor community. The financial crisis aggravates the difficulties governments and power utilities have in securing sufficient domestic and foreign capital to finance the investments for the electric infrastructure. One of the opportunities to unburden the national budget for the realization of the electric infrastructure is to unleash rural financial resources and entrepreneurial capacity with the support from the donor community. Preliminary results of ongoing activities reveal that local entrepreneurs and village organisations can deliver substantial contributions to electricity services for rural communities through small-scale decentralised power systems, both gridconnected and off-grid. These activities also reveal a number of critical success factors, including the stimulation of local financial resources, the development of entrepreneurial capacity, appropriate legislation and regulation, standard Power Purchase Agreements and feed-in tariffs, and also a national utility with a cooperative attitude. The paper illustrates the challenges faced by governments, electric utilities, local entrepreneurs, and other actors.
KEYWORDS: electricity, rural, enterprises, regulation. *
[email protected]
1. INTRODUCTION The provision of modern energy is a prerequisite for improving the living conditions of communities and supporting social and economic development. This is particularly relevant for the developing world where many rural and remote communities do not have access to electricity. There is a general understanding that in many developing countries universal access to electricity cannot be reached with central grid based systems alone because the individual loads are small and distant from the grid. Many developing countries already feature a limited generation capacity and a weak electric infrastructure. Grid-based rural electrification is a problem for this weak system and it is therefore significant to stimulate decentralised electrification with or without grid connection. The global financial crisis which resulted in a world-wide economic downturn, only aggravates the situation because even at macro level governments and power utilities face difficulties in securing sufficient domestic and foreign capital to finance investments in large scale generation, transmission and distribution. This raises the important question about the future of the electrification of deprived rural and remote areas. If no specific measures are taken, many rural and remote communities in the developing world will not have access to electricity services in the decades to come. Traditionally, the alternatives to the grid connection have mostly been diesel- or petrol-driven generators and, in some cases, small hydro turbines. Major problems include the high costs, volatile fossil fuel prices and the limited affordability of the customer base to pay for the service. Stimulated by economic and environmental pressures and the emergence of effective decentralised power systems, many developing country governments are including in their energy policy the deployment of locally available renewable energy resources. Development banks and the donor community support the implementation of this policy through such mechanisms as the Global Environment Facility (GEF), the Prototype Carbon Fund (PCF) and the Clean Development Mechanism (CDM). Against this background, alternative options for the electrification of rural and remote areas merit particular attention and attract great interest from, for example, the donor community. This paper draws on the results of ongoing initiatives to illustrate the principles, opportunities and challenges faced by governments, electric utilities, local entrepreneurs, and other actors.
2. A SELECTION OF ONGOING ACTIVITIES On a global scale various activities on small-scale electricity enterprises are being organised by development banks, United Nations organizations, NGOs, industries and dedicated foundations. The selection below is only part of it and is based on existing documentation about lessons learned. Even so it allows for a number of generic conclusions about the opportunities and challenges. 2.1.
ESMAP “Energy Small and Medium Enterprises (SME)” programme
In the past, many small-scale electricity and water providers were initiated and implemented by NGOs and similar organisations. With the aim to better understand the opportunities and performance of such service providers in developing countries, a number of research activities has been initiated by the World Bank in the last few years. The Bank, with financial support from donors and in collaboration with the Public-Private Infrastructure Advisory Facility, started the “Policy Framework and Global Mapping Initiative”. The Energy Sector Management Assistance Programme (ESMAP) identifies ways to increase relevant investments through the programme “Scaling up small scale private service providers of water supply and electricity”. The “Energy Small and Medium Enterprises (SME) program" supports governments in creating the proper circumstances for the local private sector in selected developing countries to provide access to sustainable and affordable energy in small towns, peri-urban and rural areas. The program addressed a range of needs
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in terms of pre-electrification, off-grid development, grid densification, and developing and improving efficiency of operation of isolated grids. The focus was on economic and institutional dimensions, and the applied technologies included PV Solar Home Systems, Micro and Pico-hydro, and biomass gasification to replace diesel in isolated grids. Thirteen pilot projects in twelve countries and one regional program in Africa have revealed the many challenges facing SMEs [1], including the need for appropriate technology, legislation and regulatory frameworks, the high transaction costs associated with SMEs and the need for local capacity development, subsidies, and the exposure to external causes of failure.
2.2.
Global Partnership on Output-Based Aid (GPOBA)
GPOBA is a partnership of donors and international organizations with the aim of supporting output-based (OBA) approaches in poorer countries. This initiative provides performance-based subsidies to private providers to the poor of basic services, including electricity. A selection of lessons learned is shown in table 1 [2]. - Small-scale local private providers can fill a gap which in many developing countries is not addressed by public utilities. - Engineering standards applied by utilities often result in a service level that is unaffordable for poor customers, who need low-cost systems adapted to their needs and ability to pay. - Participation and ownership by communities can improve sustainability and customer satisfaction. Apart from financial support, communities need appropriate information and capacity building. - Capacity building for proper operation and maintenance of the system is essential for sustainability, - Providing electricity services to the poor is at odds with policies of full-cost recovery. - Proper regulation and performance-based contracts are essential. Table 1. A selection of lessons learned of the GPOBA programme.
2.3.
EdF Access Program
The programme evolved from an EdF aid cooperation initiative within the framework of a quality public service. At present, and within the context of EdF's Corporate Social Responsibility Policy, the aim is to create in partnership with local entrepreneurs, small locally run companies (RESCOs) to provide rural and peri-urban areas with electricity and other services [3,4]. Rural electrification is seen as an economic activity which can eventually be profitable if based on an appropriate business model and technologies. Some of the lessons learned so far are summarised in table 2. - Initial investment must be covered mainly by grants (80%), start-up costs must be lowered. - Community involvement is essential to maintain high payment collection rate. - Fee for service model is a successful business model for long term quality of service. - It is difficult to transfer management and ownership locally because of lack of skills, low payment and rural location, and low profitability. - Lack of official status and authorisation of RESCOs hinders development and investments. - Provide sufficient capital for training and financing local entrepreneurs. - A change in government policy and an increase in market prices for copper, batteries, fuel etc can lead – if subsidy is not adapted – to unaffordable tariff increases and jeopardise sustainability. - The public partner in a PPP does not always have the authority required to decide and act. - RESCOs have little control over their market and tariffs and are sensitive to cash flow problems. Contrary to an expected 15 % or more over 20 years, actual IRR often reaches only 4,5 to 9%. - The economic benefit is particularly noticeable when the electricity is distributed by grid. Solar technology is too costly to supply power and thus support a manufacturing/transformation activity. Productive customers do not always receive services appropriate to their needs. Table 2. Lessons learned from the EdF Access Program
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2.4.
Alliance for Rural Electrification (ARE)
The Alliance for Rural Electrification (ARE) represents developed country companies and organisations who share the view that renewable energy technologies, utilised in off-grid or mini-grid systems can sustainably meet the energy needs of rural communities in developing countries at an affordable price. ARE believes that private companies can become a key driver in the field of rural electrification. Many companies have demonstrated their capabilities by implementing successful rural renewable energy projects throughout the world. Some of the key lessons learned are summarised in table 3. - An enabling legal and financial framework is a crucial precondition for a successful project . - Rural electrification is not a straightforward process. It requires sophisticated approaches and long term planning and life-cycle costs have to be calculated over 15 years or more. - Rural electrification projects must adapt to local conditions, mobilizing local communities and companies. Consumers must be educated on electricity use, and local installer and technician training is crucial. - Projects must safeguard operations and maintenance. Where, often, electricity consumers cannot afford to cover the full costs, appropriate financing schemes must safeguard the long term operations. - Energy efficiency must be addressed right from the planning of the project. Table 3. Key lessons from projects as collected by ARE [5].
2.5.
Enabling Access to Sustainable Energy (EASE)
EASE is a partnership of NGOs and companies in the developing world, supported by donor countries. The aim is to enable the provision of modern energy services to poor communities through innovative projects and the building of technical, administrative and client-management capacity. EASE and partners provide business support to energy entrepreneurs from planning to operation of enterprises with tens to a few hundred clients. Several projects and a survey of tens of SMEs revealed some key lessons (Table 4) [6, 7]. - Small entrepreneurs are local pioneers in the electricity supply business. Their greatest assets are their cultural and social roots in their communities, their knowledge of the customers, and the flexibility with which they manage their operations. - Some businesses started without any technical or financial support from third parties while others received support from NGO’s and/or donors within the framework of a specific project or programme. - There are sufficient and potentially sustainable opportunities for the provision of electricity services by small entrepreneurs in the rural areas of many developing countries. The most important obstacles to SMEs are the lack of technical, entrepreneurial and management knowledge, and the difficulty of obtaining investment finance in addition to own capital. - SMEs make it unnecessary to locate project managers and larger organisations in rural areas. Small SME entrepreneurs often combine their work with other income-generating activities. - Rural electrification planning should include promotion of productive uses for the various groups of enterprises. Particular attention should be given to the non-productive uses of modern energy in the social sector, such as education and health because of the benefits. - Utilities and development agencies should play a more pro-active role in the promotion of productive use of electricity, offering appropriate “business packages” to local entrepreneurs. Table 4. A selection of key lessons from the EASE programme.
2.6.
Netherlands/German programme Energizing Development
Part of the Energizing Development programme supports private small-scale hydropower facilities (SHP) with distribution systems in Rwanda. To attract private entrepreneurs, calls for proposals were issued in 2005 and 2007. Proposals were received from local businesses, NGOs, a hospital, and local and foreign investors. Of the 20 proposals (100 – 500 kW) submitted, eight reached the stage of contract negotiations. Finally five were contracted of which three were expected to be commissioned in 2009. Seven additional proposals were received during 2009.
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Private hydro power station under construction (Rwanda). Picture: RJ van der Plas.
Apart from the long term sustainability aspect, a major requirement was that a project should lead to new access to rural households and social institutions, and allow the productive use of electricity. Donors provided between 30 and 50% subsidy on the investment costs, together with technical assistance and business support. The government, the national utility and local banks were heavily involved in the programme. The experiences gained during the planning and implementation phase are summarised in table 5 [8].
Technology. No special problems encountered. The average costs: 2500 Euro/kW (incl. distribution). Civil works on average 42%, generation 28% and distribution 30%. Financial. Banks showed a high risk perception and a limited willingness to lend. The return on investments can be high enough to attract private investors, particularly if power can be supplied to the grid and/or large customers. The lack of own funds remains a bottleneck. Only power projects up to a few MWs are suitable for local entrepreneurial and financing capacities. Feed-in tariff for grid connected SHP facilities is often guesswork. In general direct delivery to local consumers is financially more attractive than delivery to the grid. Subsidy: fixed amount per kW depending on complexity: on average 33% to allow for acceptable RoI. Institutional. Lack of legal and regulatory framework and appropriate power purchase agreements. Water use license difficult and often time consuming. Weak regulatory environment requires ad hoc and possibly not optimum agreements on tariffs and rights to develop attractive sites. Capability. In house training and support from the national utility needed because of lacking technical and managerial expertise, and limited knowledge about subsidies, tariff setting, regulation. Particulars. To avoid financial swindle regular audits, transparent management and accounting systems are needed. In two cases the extension of the national rural grid went fast (because of the availability of additional donor funding). A well prepared call for projects is a good option to identify opportunities for privately initiated SHP. Communities and national utility should be involved. Table 5. Summary of experiences of small hydropower (SHP) in Rwanda.
2.7.
Other activities
Other (joint) activities include those of the Shell Foundation, the E8, E+Co, the Global Village Energy Partnership (GVEP), the ABB Access to Electricity Programme, the Foundation Rural Energy Services (FRES), the Decentralised Energy Systems India (Desi Power), and many others. With regard to the development of small-scale electricity enterprises the activities of the donor funded United Nations Rural Energy Enterprise Development (REED) programmes in Africa, Latin America and China are particularly relevant [9]. Supported by program and country partners, they provide initial investment capital (seed capital of several thousand dollars to over $100,000) to assist the establishment of an energy business. The REED model targets innovative clean energy enterprises that have difficulty gaining access to traditional financial institutions. Access to this type of financing is hampered by a number of factors including high risk assessment because of poor customer base and high transaction cost [10]. It is argued that the mismatch between specific financing needs (seed capital and patient growth capital) and available financing opportunities is the real problem faced by small-scale energy entrepreneurs, apart from the need for continued technical
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assistance and management support. Available technology, business models, demand for services and ability to pay are not seen as major problems. Experience also reveals that returns of 10 to 30 % (as demanded by investors) are not possible from the very beginning. A start between 5 and 7% is the rule but growth potential of 15% or more is possible.
3. DISCUSSION 3.1 Opportunities The various programmes are difficult to compare because of their multiple objectives. Some programmes focus on the deployment of renewable energy, or providing poor communities with modern energy, while others just stimulate the establishment of small-scale energy enterprises. Generally speaking, they are unanimous about the potential and benefits of private and community-based small-scale electricity businesses. Two recent papers on a community-based diesel-based micro-grid system [11] and on private small-scale hydro facilities [8] highlight the potential of decentralised electricity systems. However, these small rural electricity providers are not a panacea for all the problems encountered by the governments and power utilities in the developing world. Rather, they complement central grid-based electrification by delivering much needed electricity services to rural and remote areas that would otherwise remain deprived. These initiatives offer the opportunity of utilising local energy resources, capital and manpower, supplemented by subsidies, and reduce the burden on a government's budget, which is particularly relevant because governments face problems in making capital available. As appears from most of the programs, subsidies are needed to cover part of the investment cost, but this does not differ in principle from the experience gained with grid-based rural electrification [12, 13]. For electricity production diesel-based generation should not be excluded but preference is given to the deployment of locally available renewable energy sources: hydro power, wind energy, solar energy, biofuel. Hybrid systems combining diesel-based and PV-based generation together with storage systems revealed substantial benefits in terms of reduced fuel use, emissions and noise pollution as well as availability of power supply [14]. In many developing countries a large potential exists for hydropower development that could contribute to the electrification of rural and remote areas. The electricity production costs of small-scale hydro depend on the installed capacity, the investments costs and the particulars of the site and the type (run-of-river or reservoir). Generally speaking they vary from 4 to 40 US$ct/kWh (capacity greater than 10 MW and less than 5 kW respectively). For these small-scale hydro initiatives to be sustainable, tariffs must reflect costs and productive uses must be promoted. To that end the development of local energy enterprises should preferably be seen as part of a development process in which also funding for end-uses can be made available. Though local entrepreneurs and project developers play an important role in developing initiatives, it requires a political decision to allow the development of local energy resources for electricity generation. A commitment from developing country governments is imperative and they need to develop the “enabling environment” including appropriate regulation and procedures. Until recently many governments have not been very active in this regard, and the main drivers regarding the development of small-scale rural energy enterprises have been NGO’s and similar organizations, United Nations Organizations and the donor community.
3.2 Challenges Technical aspects. The programs suggest that technical problems are relatively few. This does, however, not mean that there are no moot points and discussions about technical issues between project developers, owners and utilities or governments. Utilities are faced with technical problems caused by the behaviour of generators and inverters during network disturbances, unintended islanding and other conditions. There is a
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rather low awareness among project developers and other stakeholders about the problems and costs of connecting generators to rural grids. There are also underestimated limitations in the use of off-grid systems. For example very small generators (5 kW or less) are only suitable for low end uses such as lighting. There are indications that in some regions Solar Home Systems are too small for larger families. To enable effective production, the capacity of installations should be at least 35 kW. Further, most small hydro facilities are vulnerable to fluctuations of water flow and are thus viewed as high risk as regards technical sustainability. In the past many initiatives to electrify rural and remote areas through decentralised solutions have been developed by NGOs and similar organisations. Such small-scale systems often were developed outside formal power system planning, so that rural electricity systems are a patchwork of various standards. The promotion of these small-scale energy providers requires a national regulatory framework, appropriate construction and safety standards, protocols and approval criteria reflecting good engineering practice. This raises the question whether the standards applicable in the formal electricity sector should be applied for small-scale off-grid and grid-connected systems. Regulation and grid codes set the design of small-scale power generation and thus determine the viability of projects to a certain extent. For example the Power Incentives Act of the Philippines states that small-scale hydro plants (10 yrs) are unusual for many local banks. Special solutions include the provision of loans from international financing institutions to governments with the requirement to “on-lend” to local banks. The transaction costs associated with implementing small decentralised electricity projects are relatively high and there is little opportunity for economies of scale, particularly in the case of small hydro systems. Commercial financial institutions are unable or unwilling to cover these costs. Experience shows that grant subsidies on investments of 50% and more are needed for tariffs to be affordable for the poor customer base. These subsidies, and subsidies to users, must be justified by socio-economic or social benefits [18]. “Smart subsidies” are needed to stimulate the market rather than destroy emerging markets. The return on investments is often used for assessment purposes in the planning stage of small decentralised power projects, and it is necessary also to assess the actual sustainability after a few years. The internal rate of return depends on various factors including the share of grants in the total investment, and on the load factor (LF). The lowest LF (as low as 20%) is found with plants only used for lighting. In this case the highest levels of subsidies (60 -80% of the investment) are needed for sustainability. Productive uses and in-feed to local grids can substantially increase the load factor. One case showed that with 43% LF the subsidy was at most 31% [11]. Productive and profitable end-users deserve much greater attention from all stakeholders. Sustainability must be ensured from the very beginning through an acceptable cash flow. From the perspective of financial sustainability “ownership is less important than businesslike management” [16]. Important factors include a high load factor, tariffs adapted to
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inflation, the ability of the customer base to pay for the service, and a high collection rate. Two other issues pose uncertainties for the development and sustainability of private smallscale decentralised power systems: (i) the existence of other heavily subsidized programs, and (ii) uncertainty about the development of the grid in rural areas. In many developing countries the tariff of grid-based electricity is set too low to cover all the associated costs. Even in the case of environmentally friendly and attractive small-scale hydro plants this makes the purpose of the project doubtful. If the grid is (or will be) available within 4 to 5 km, a small-scale hydro plant will, in general, not be financially viable [16]. Such risks could be reduced by improved donor coordination and the development of a transparent and reliable grid extension plan, and mapping of existing and potential decentralised generation sites. A subject of controversy is often the feed-in tariff to be paid by the utility in case of gridconnected generators. For example, Power Purchase Agreements and feed-in tariffs that allow sufficient dependable income are needed by the operators. In many cases, utilities consider in-feed power in rural areas of low value and offer a low capacity and energy purchase tariff, often based on their avoided costs. Grid in-feed creates complex conditions because the issues of grid viability, responsibility and tariffs tend to become confused with the viability of the remote area supply systems.
4. CONCLUSION It is justified to conclude that providing electricity services to rural communities in developing countries is associated with financial, institutional and regulatory barriers. Rural electrification is marked by special features and, being part of a development process, it requires an important contribution and ownership of the government [12]. But governments and power utilities face difficulties in securing sufficient domestic and foreign capital to finance much needed investments in large scale generation, transmission and distribution. Unleashing rural financial resources and entrepreneurial capacity could help governments to meet the electricity needs of rural communities and to overcome budget shortages. The current development policy of most donors and development organisations focus on the alleviation of rural poverty and the deployment of renewable energy resources in developing countries. Against this background the electrification of rural and remote areas offers scope for appropriate domestic and donor funding, together with local private sector investments, although non-traditional approaches are needed. The aim of all support should be the enhancement of emerging initiatives from local communities and individuals, rather than the development thereof by foreign participants. It appears there is a need for research into the incentives for initiatives of entrepreneurs and communities. It is also necessary to ensure the benefits of electrification are widely available and not limited to the most attractive opportunities ('cherry picking'), leaving the remainder of the rural population even less well served. In countries where rural electrification agencies (REA) have been established with funding from government and donors, they develop and apply selection, prioritization and planning criteria for areas to be electrified through grid extension and off-grid solutions. The experience with most of the programmes addressed in this paper reveal that local entrepreneurs and community organisations can deliver contributions to electricity services for rural populations, both off-grid and grid-connected. But the experience also reveals a number of constraints and critical success factors. The most significant constraints on developing small-scale providers include the lack of a sound legislative and regulatory environment, poor entrepreneurial capacity, lack of knowledge and skills, and limited access to financing for both entrepreneurs and end-users. Rural electrification should therefore be seen as a component in rural development plans. For small-scale electrification projects to be successful, assistance to project developers and the engagement of the local community are needed. Because banks and other financing institutions perceive these small-scale initiatives as high risk, risk assessment that addresses local political circumstances, expected load factor, revenue collection, tariff setting and the affordability and willingness to pay of the population, needs particular attention.
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Policies aimed at stimulating investor or community-owned small decentralised power systems will have an impact on utility operations. The operational challenges connected with decentralised power systems are diverse and substantial. New relationships and approaches to technical and other support by national utilities to local initiatives are often needed.
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