Rural electrification: “financial viability” over welfare

1 April 2008

A recent evaluation by the World Bank’s Internal Evaluation Group (IEG) on the welfare impact of rural electrification finds that only seven per cent of dedicated World Bank rural electrification (RE) projects and energy sector projects have an explicit poverty reduction objective. The evaluation follows on from a 1994 IEG study. Encouragingly this report points to the increased use and decreased cost of renewable energy technologies. However the finding that the Bank’s impact on poverty reduction is still limited remains the same.

The report states that “there is rarely any explicit consideration of how the poor will be included or of any poor-specific activities”. It finds that “the full benefits of providing electricity to the poor are not being met” and as in 1994, households that benefit the most from RE are non-poor: “Bank supported projects that claim to have the objective of bringing RE to the poor have typically neglected to include components that would help to achieve this objective”. Reasons for this include:

  • the Bank has promoted an approach which favours communities nearer to the existing grid as a “least-cost” option;
  • the cost of the connection charge prevents the poor from accessing the grid, as in Lao PDR where between 20-25 per cent of households remain unconnected. Only a small number of Bank projects have extended credit to customers or allowed the payment of the connection charge to be staggered;
  • poor consumers often fail to benefit from “lifeline tariffs” due to poor customer information;
  • Bank support to off-grid RE is typically through a private business model which pits social concerns and accessibility against “financial viability”. Because off-grid schemes are more expensive to the consumer than grid-based, they are not necessarily more accessible for the poor. However credit or extended repayment periods for installation costs are more common for off-grid projects; and
  • although mention of gender in project documents has increased greatly in the last decade these concerns rarely affect project design.

The evaluation finds that improved rural electrification does provide benefits to education and health, and in certain cases results in “global benefits” in terms of reduced carbon dioxide emissions.

there is rarely any explicit consideration of how the poor will be included

The IEG identified 120 Bank-supported projects with rural electrification activities since 1980, falling roughly equally into three categories: dedicated projects, energy sector projects with rural electricication components and multi-sector projects with RE components.

Two key developments of the Bank’s RE portfolio are a considerable increase in renewable energy technologies such as solar, wind and hydro, and support to off-grid schemes. From 1996, 46 per cent of RE projects utilised renewable technologies. There have been 31 off-grid projects since 1995, though support for off-grid activities tends to be as a small component of a larger project with an insignificant share of the budget. In the vast majority of cases these activities are often pilot projects. For example, in an RE project in Lao PDR the off-grid component was a mere six per cent, compared with 76 per cent for grid expansion.

Three quarters of these Bank-supported off-grid projects have promoted photovoltaic energy, 47 per cent micro hydro and 31 per cent wind power. The report states that renewable energy technologies are now the least cost option, at least in areas difficult to reach with the grid. If cost reductions continue, “they will be as cheap as conventional methods of power generation by 2020”. However paradoxically it concludes that off-grid schemes are more expensive to the consumer than grid electricity and that they do not necessarily reach the poor better than grid-extension.

Though Bank-supported projects have created the physical infrastructure for rural electrification, technical problems have resulted in high system losses. Unsatisfactory projects are largely due to poor institutional development, often as a result of the lack of financial sustainability of the distributing utility given that tariffs are set below cost recovery.

Andrew Scott of the technology development group, Practical Action welcomed the recognition that access to electricity would contribute to poverty reduction, and that financing schemes for connection charges would provide greater benefit to the poor. However he adds that “the study avoids the question of how the poor can be enabled to access electricity – whether through grid or decentralised systems. It stops short of drawing the obvious conclusion that public subsidies are needed.”