the not-so-sunny side of solar energy markets: a case

THE NOT-SO-SUNNY SIDE OF SOLAR ENERGY MARKETS: A Case Study of Sri Lanka

Kamal Kapadia Energy and Resources Group

University of California, Berkeley Master’s Project

May 20, 2003

Committee Members: Dr. Daniel Kammen, Professor, Energy and Resources Group,

U.C. Berkeley Dr. Ashok Gadgil, Senior Scientist, Lawrence Berkeley National

Laboratory

ACKNOWLEDGEMENTS

This research was initially motivated by work I did with the Solar Electric Light Company (SELCO)

in Sri Lanka and in India. I spent three years working hard at helping SELCO develop the market for

solar home systems in rural areas of these countries. This research, however, is devoted largely to

questioning whether this solar PV-based market model is an appropriate approach for rural

electrification. Signs of intellectual progress or just academic cynicism?

I am grateful to my advisors – Daniel Kammen at Energy and Resources Group, and Ashok Gadgil at

the Lawrence Berkeley National Laboratory for their encouragement, support and feedback.

I am grateful to many people in Sri Lanka: Susantha Pinto and all the staff at SELCO-Lanka, Lalith

Gunarante, Lal Fernando, Asoka Abeygunawardane and the staff at Energy Forum, Jayantha

Nagendran at the DFCC Bank, Salliya Ranasinghe and Indrani Hettiarachchy at SEEDS, Rohanti

Perera at SLBDC, Tilak Siyambalapitiya at Resources Management Associates, Max Tissera and

Kamini Jaysekara and at Ceylon Electricity Board, N. Bandusena at the Ministry of Power and

Energy, Ray Wijewardene, and Mr. Joseph.

I am also grateful to Eric Martinot at the Global Environmental Facility, Anil Cabraal, Mac-Cosgrove

Davies and Jon Exel at the World Bank, and Neville Williams and Harish Hande at SELCO

International.

I am especially grateful to all the rural people whose homes I visited, tea I drank, and solar home

systems I inspected! I thank them for all the things they taught me by simply welcoming me into their

homes and sharing with me their ideas, views, worries and hopes. I can only hope that this research

will be of use to them in some small way.

Cover photo credit: Solar Electric Light Company

I. INTRODUCTION II. BACKGROUND

Electricity in Sri Lanka Rural electrification in Sri Lanka The Energy Services Delivery Project (ESDP) The Renewable Energy for Rural Economic Development Project (REREDP) Structure of off-grid components of ESDP and REREDP Differences between the off-grid components of the ESDP and REREDP

III. ANALYSIS OF THE ESDP AND REREDP

What are the goals of rural electrification? Evaluation of outcomes of ESDP and REREDP in the context of rural economic development ESDP and rural development REREDP and rural development Summary

Why is the market determined to be the most effective mechanism for delivery of off-grid electricity services?

Analyzing the benefits of markets established by ESDP and REREDP Why are renewable energy systems the technology of choice for rural electrification?

Evaluating the economic rationale for renewables in the ESDP and REREDP Analyzing the environmental benefits of the ESDP and REREDP

IV. DISSECTING THE THEORY

The relationship between development and rural electrification The relationship between rural electrification and renewable energy markets

V. LINKING THEORY TO POLICY VI. CONCLUSIONS APPENDIX 1: IS THERE A SUNNY SIDE TO SOLAR HOME SYSTEMS? REFERENCES FIGURES Figure 1. Sri Lanka in Asia Figure 2. Map of Sri Lanka Figure 3. Schematic representation of the ESDP Structure Figure 4. Off-grid component of the ESDP Figure 5. Annual solar sales under the ESDP BOXES Box 1. Description of the ESDP TABLES Table 1. Key differences between off-grid components of ESDP and REREDP Table 2. Median and average incomes in rural and estate sectors in Sri Lanka Table 3. Comparison of resource availability by technology type, costs and installed and planned capacity

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TABLE OF CONTENTS

5 5 6 7 8 9 12 13 13 15 16 18 18 19 21 32 32 33 35 36 37 40 46 48 52 5 5 10 11 27 11 12 22 25

ABSTRACT

This research aims to evaluate the effectiveness of a market-based renewable energy technology

dissemination model in meeting rural electrification needs of developing countries. For this purpose, I

analyze two World Bank/GEF-funded rural electrification projects (the Energy Services Delivery

Project, and the Renewable Energy for Rural Economic Development Project) in Sri Lanka that are

based on this model.

Since the goal of this model is rural electrification, I first examine why rural electrification is deemed

necessary, and then evaluate whether project outcomes meet the goals of rural electrification. Second,

as the market has been selected to be the delivery system of choice, I study the projects to determine

whether the reasons given to support the selection of this particular delivery system are justified.

Finally, I examine why renewable energy systems are the technology of choice, and how technology

choices affect project outcomes.

I find that while these projects offer some benefits to rural people and the rural economy, they also

raise serious doubts about the abilities of largely unregulated renewable energy markets to provide for

rural development needs. These projects are resulting in inefficient technology choices, for which rural

off-grid populations bear the brunt of costs, without receiving economic development benefits that

these projects intend to deliver. I believe that these problems are founded in the underlying theories on

which this model is based. The two main theories – first, that rural electrification leads to rural

development, and second, that largely unregulated markets are an effective and efficient means for

rural electrification – are not sound theories.

I conclude that for electrification to lead to rural economic development, it needs to be placed within a

broader development framework and program. For markets to work for rural electrification, there

needs to be a strong planning and regulatory framework in place. Further, organizations like the World

Bank need to move beyond programs based on supporting markets over state or civil society-led

initiatives, and work towards supporting the integration of activities in these three sectors.

I. INTRODUCTION

Developing effective ways and means to provide electricity to rural people in developing countries

remains an immense challenge. Approximately 300-450 million households still lack access to

electricity services (Martinot et al., 2002). To meet this challenge, multilateral agencies, and

increasingly, developing countries themselves are turning to market-based mechanisms to deliver

decentralized renewable energy technologies to remote, rural populations. Since 1991, 36 World Bank

and GEF-funded renewable energy projects have been implemented in developing countries, totaling

US$ 4.5 billion in value (Martinot, 2003). Over 90% of these projects have an off-grid electrification

component. Many of these support the development of off-grid markets. The World Bank’s Rural

Energy and Development for Two Billion People report states that “energy sector reform (in

developing countries) should include the opening up of the rural energy market…The role of the

government should change from central planning to supporting markets” (World Bank, 1996: 14).

Of these projects, the Energy Services Delivery Project (ESDP) in Sri Lanka is widely perceived to be

one of the most successful. This project supported the development of a commercial market to deliver

solar home systems, and village-hydro systems to off-grid populations. A World Bank-commissioned

independent review of the ESDP states that this project “can serve as an excellent model for other rural

electrification initiatives.” (International Resources Group, 2003). The ESDP ended in December

2002, and there is now a follow-on project in its place - the Renewable Energy for Rural Economic

Development project (REREDP). The REREDP is a $133.7 million project, and will be Sri Lanka’s

second largest World Bank IDA loan (World Bank, 2003). The REREDP is designed to build on the

success of the ESDP. Together, these two projects are intended to electrify 120,000 households, or

about 8% of Sri Lanka’s off-grid population.

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The ESDP typifies a model for rural electrification that is gaining much popularity within the World

Bank and Global Environmental Facility (GEF), as well as within rural electrification agencies in

developing countries. I call this model a market-based renewable energy services provision model,

because its purpose is to create and develop markets to deliver renewable energy technologies to off-

grid populations. The overarching goal, of course is to develop an efficient and effective way to

electrify rural areas. This paper uses the case of the ESDP and REREDP to evaluate the effectiveness

of a market-based renewable energy dissemination model for the purpose of rural electrification.

Since the goal of this model is rural electrification, I first examine why rural electrification is deemed

necessary, and then evaluate whether the ESDP project outcomes meet the goals of rural

electrification, and whether the REREDP is likely to meet these goals. Second, as the market has been

selected to be the delivery system of choice, I study the ESDP and REREDP to determine whether the

reasons given to support the selection of this particular delivery system are justified. Finally, I

examine why renewable energy systems are the technology of choice, and how technology choices

made in the ESDP and REREDP affect project outcomes.

My case analysis shows that the ESDP project has created active markets for solar home systems and

village-hydro systems, provide considerable quality of life benefits for the households purchasing

these systems, and create a limited set of income-generating opportunities. These markets have

generated considerable rural employment. The ESDP has also created a well-functioning framework

for technical quality assurance of SHS and village-hydro systems. The REREDP shows all signs of

continuing to build on benefits, and also introduces a new technology – biomass-based systems in off-

grid areas. Finally, the ESDP has created a pro-active, consultative process of decision-making (albeit

within the framework of the project) by involving all project stakeholders in regular meetings,

discussions and dialogue.

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However, these projects have also raised questions about the abilities of largely unregulated renewable

energy markets to provide for rural development needs. The imperfect nature of these markets,

combined with pre-determined technology choices which are not based on least-cost or integrated

planning processes, have resulted in inefficient technology choices. Further, rural off-grid populations

bear the brunt of costs for these choices, without receiving all the rural economic development benefits

that these projects intend to deliver.

While the ESDP and REREDP serve as cases, my research seeks to show that the outcomes of these

projects in Sri Lanka are representative of the types of outcomes one would expect from any similar

market-based renewable energy dissemination model in developing countries. The problems in the

ESDP and REREDP are largely the result of a mismatch between the underlying theories on which

market-based renewable energy dissemination projects are based, and the realities of how poor, rural

energy economies operate and function. This paper attempts to show that the two main theories – first,

that rural electrification leads to rural development, and second, that largely unregulated markets are

an effective and efficient mechanism for rural electrification, are not sound theories. For

electrification to lead to rural economic development, it needs to be placed within a broader

development framework and program. For markets to work for rural electrification, there needs to be a

strong planning and regulatory framework in place.

In the context of Sri Lanka, I believe that the REREDP can be modified to do both things. The ESDP

has set up an active and involved stakeholder dialogue, which could be transformed into an effective

planning and regulatory institution. This should involve the inclusion and support of civil society

organizations. Such an institution would be responsible for integration of off-grid electrification into

power sector planning and setting of tariffs, as well as integration into broader government and NGO

development programs.

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The theoretical analysis also provides insights on changes needed in the ways multilateral agency

programs for off-grid electrification are designed. Organizations like the World Bank need to move

beyond programs based on supporting markets over state or civil society-led initiatives, and work

towards supporting the integration of activities in these three sectors. Further, making rural

electrification work for rural development also calls for a rethinking of how we measure and value

energy as a development input, and for new research on how institutions can be set up to ensure that

the input – energy and/or electricity – can lead more effectively to the desired outcome – rural

economic development.

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II. BACKGROUND

Sri Lanka

Figure 1. Sri Lanka in Asia. Source. http://www.yourchildlearns.com/asia_map.htm, 2003.

Figure 2. Map of Sri Lanka Source. Maps.com, 2003.

Sri Lanka is a tropical island country in South Asia, with a population of 18.7 million people (Sri

Lanka Department of Census and Statistics, 2003). The country emerged in 2001 from a 20 year-long

civil war. In spite of the war, Sri Lanka is ranked 81st out of 162 countries on the UNDP Human

Development Index (HDI), this is relatively high when compared with other South Asian countries 1.

Sri Lanka also has a high adult literacy rate of 91.4%, but it’s GDP per capita of $3,279 is

comparatively low, about half in value of Turkey’s GDPpc ($6,380), a country which ranks 82nd, or

just one below Sri Lanka on the HDI scale (UNDP, 2003).

Electricity in Sri Lanka

Sri Lanka’s main state-owned utility is the Ceylon Electricity Board (CEB). 60% of the country’s

1.9GW of installed capacity consists of large hydro-power projects, the rest consists of oil and diesel-

based thermal plants. The country is suffering from a prolonged power sector crisis, which is said to

be a result of capacity and financial shortages within the CEB, high oil prices, and a series of failed

1 UNDP HDI Ranks of India = 115, Pakistan = 127, Nepal = 129, Bangladesh = 132 (UNDP, 2003).

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monsoons. Sri Lanka also has a very high average generating cost and tariff. In 2001, the average tariff

rate was US$ 0.05/kWh2, further the average tariff has increased by 176% from 1990 to 2001. Even at

this high tariff, in 2001, the CEB suffered huge losses as average cost of generation that year was

$0.08/kWh. In order to deal with these problems, a power sector reform process has been initiated.

Supported by the World Bank and Asian Development Bank, this process will unbundled the Ceylon

Electricity Board into separate generation, transmission and distribution companies, establish

independent regulation, and encourage private sector participation (Central Bank of Sri Lanka, 2001:

107 - 113).

Rural electrification in Sri Lanka

53% of the rural population in Sri Lanka, or approximately 2 million households, lack access to grid-

based electricity. (Ministry of Power and Energy, 2002). The CEB and World Bank estimate that

meeting growing electricity demands of the whole country through increased generation, and

extension of the grid, will require an additional investment of $2.5 Billion over the next ten years. The

World Bank estimates that the total capital cost of connecting and supplying a rural consumer is about

US$ 800 - $ 850 (World Bank, 2002).

Supplying electricity to this rural population is therefore a pressing challenge. The CEB’s efforts in

this area are severely constrained due to lack of funds. The government of Sri Lanka has declared that

at best, their plans involve extending the grid to 75% of the population by 2007, and estimates that

“only 80% of households can be finally connected to the grid”; the remaining 20% of the population

will have to be served by off-grid technologies (Ministry of Power and Energy, 2002). However,

2 For example, average industrial/commercial tariffs in Sri Lanka were close to $0.09/kWh; this is very high when compared to industrial/commercial electricity tariffs in South East Asian countries, where, for example, average industrial/commercial rate in 2001 were $0.03 in Indonesia, and $0.58 in Singapore and Thailand (Central Bank of Sri Lanka, 2002: 111).

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whether the grid can be extended to 75% of the population over the next five years is doubtful. From

1994 – 1998, the number of new households connected to the grid rose by an average of 3.4% a year

(Ceylon Electricity Board, 1999). If electrification is sustained at this rate, it will be another 25 years

before 75% of the population has access to the grid.

With a view to meeting the electricity needs of the off-grid population, the World Bank and Global

Environment Facility (GEF) have co-funded two sequential projects, the Energy Services Delivery

Project (ESDP), and the Renewable Energy for Rural Economic Development Project (REREDP).

The Energy Services Delivery Project

The Energy Services Delivery Project (ESDP) was a five-year long, $55.3 million project. The Project

financing included a US$24.2 million line of credit from the IDA, and a $5.9 million grant from the

GEF. The project’s stated objectives were to:

“Promote the provisions by the private sector, NGOs and cooperatives of grid-connected and off-

grid energy services using environmentally sustainable renewable energy technologies;

Strengthen the environment for Demand Side Management (DSM) implementation; and

Improve public and private sector performance to deliver energy services through renewable

energy and DSM.” (World Bank, 1997: 2)

This project ended in December 2002, and according to an independent evaluation of the project, “the

Sri Lanka Energy Services Delivery (ESD) Project, a uniquely designed and implemented project, can

serve as an excellent model for other rural electrification initiatives with renewable energy and energy

efficiency components.”(International Resources Group, 2003: ES1). Other World Bank publications

also refer to the success of this model (Martinot et al, 2001; World Bank, 2002).

The ESDP surpassed its goals, and has resulted in the installation of:

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• 18,619 off-grid Solar Home Systems (SHS)

• 21MW of grid-connected mini-hydro capacity

• 3MW grid-connected Wind Energy demonstration project

• 574KW village hydro systems serving 2897 households (International Resources Group, 2003)

Approximately one dozen solar and micro-hydro companies now operate in rural Sri Lanka, assisted

by 6 financing agencies which extending credit for solar PV and mini-hydro installations. There is also

a well-functioning quality assurance system in place. This project has generated considerable

awareness about renewable energy in the country, and is supported by the national and some local

government agencies.

The Renewable Energy for Rural Economic Development Project

The ‘success’ of the ESDP has encouraged the World Bank and GEF to design a follow-on project in

Sri Lanka – the Renewable Energy for Rural Economic Development Project (REREDP)3. The

REREDP is a $133.7M project, this includes a $8M GEF grant component. The REREDP is designed

essentially as a ramp-up of the ESD project, with some additional components such as the inclusion of

a new technology – biomass systems, and more active work with the Ceylon Electricity Board. The

REREDP’s ambitious goals over its five-year life include the installation of:

• 85,000 household SHS and 1000 community, commercial and institutional solar PV systems

• 60-65MW of grid-connected mini-hydro capacity

• 30MW of grid-connected wind energy

• 12-15 MW of grid-connected biomass energy

3 “The new project will build on the success of the on-going World Bank/GEF-financed Energy Services Delivery Project, which helped to commercialize development of renewable energy in Sri Lanka.” (World Bank, 2002)

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This project’s objectives include the invigoration of the rural economy, empowerment and asset

building for the poor and the promotion of rural economic development and well being (World Bank

2002: 30). The project aims to support private sector and community-based development models, and

help develop initiatives for productive use of electricity to increase rural household incomes and

improve the delivery of rural social services, such as health and education (World Bank, 2002: 2).

It should be noted that there have been a number of renewable energy projects before the ESDP,

however these have been mostly one-off, independent of each other, and largely government or NGO-

funded and implemented. About 5,000 solar home systems were installed in Sri Lanka before the

ESDP. There was some private sector activity in the solar home system industry, but sales volumes

were very small (under 30 sales a month, in total), and prior to the ESDP intervention, the companies

were struggling to survive. In 1991, the government of Sri Lanka funded the Pansiyagama SHS

project, where 2,000 SHS were installed, paid for almost entirely by an Australian Aid grant. The

country’s largest grassroots development organization – Sarvodaya also implemented a SHS project

funded by the Solar Electric Light Fund. There was also some small-scale hydro development in the

country prior to the ESDP. This was largely spearheaded by the Intermediate Technology Group

(ITDG), which still plays a very active role in small hydro development in Sri Lanka. In 2000, they

conducted a detailed assessment of small hydro resource potential in Sri Lanka (ITDG-South Asia,

2000). ITDG projects have been largely donor-funded. Biomass-based energy is widely used as

traditional cooking fuel in most of rural Sri Lanka. However, use of biomass (agricultural waste, or

wood) in gasification or combustion systems for producing electricity has only been attempted at a

pilot demonstration scale in a few locations.

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Structure of off-grid components of ESDP and REREDP

31% of the ESDP investment, and 24.5% of the ESDP and REREDP investments are earmarked for

off-grid electrification, in the form of a credit line, project development and capacity building funds,

and technical assistance components. These projects also include grid-connected renewable energy

development, energy efficiency and demand-side management, and capacity building within the

Ceylon Electricity Board, and technical assistance. As the purpose of our paper is to analyze the

effectiveness of the ESDP, and potential effectiveness of the REREDP in meeting the needs of off-grid

populations, our analysis will be focused on the off-grid components only, making references to other

project components only where relevant.

Figure 3 depicts the broader structure of the ESDP, including all components. Figure 4 depicts the off-

grid component of the ESDP, and box 1 explains briefly how the project works. The off-grid

component of the REREDP is structurally very similar to the ESDP, and basic differences in the off-

grid components of the two projects are summarized in Table 1.

10Figure 3. Schematic representation of the ESDP Structure. Source. IRG, 2003: ES-1

World Bank/GEF

SHS consumer Off-grid village hydro cooperative

Micro-credit agency –SEEDS

Ministry of Finance/Central Bank of Sri Lanka

Private hydro-development companiesPrivate solar home system companies

Participating credit institution(e.g. DFCC)

IDA lending rate (find)

6-9%, 15-yr repayment

12%, 10-yr repayment

25%, 1-5-yr repayment x%, x-yr repaymentInstall and maintain SHS

Install, maintain village hydro system

Pays system price (minus GEF grant) to company once customer’s loan is approved


Pays GEF grant to company once system is installed


•Red arrows indicate payments to companies•Black arrows indicate provision of

•Blue arrows indicate flow of credit funds•as in

service/product

Lender Borrower World Bank/GEF













25%, 1-5-yr repayment x%, x-yr repaymentInstall and maintain SHS




service/product

Lender Borrower World Bank/GEF












Lender Borrower

service/product


25%, 1-5-yr repayment x%, x-yr repayment



Install and maintain SHS


25%, 1-5 yr repayment

Box 1. Description of the ESDP.

Figure 4. Off-grid component of the ESDP.

How the off-grid component of the ESDP works: Companies and NGOs publicize and market SHS and village-hydro systems in rural areas.

s to purchase a SHS, or a group of villagers who An individual customer (or household) decidehave been contacted by an NGO or small-hydro company decide to install a village-hydro system.

For SHS, the company collects a down-payment (equal to 20-25% of the cost of the SHS), and introduces the customer to the micro-credit agency.

Once the micro-credit agency decides the customer is credit-worthy, it extends a loan to the customer (loan periods range from 1-5 years, and are charged at a reducing balance interest of 25% per year).

The company installs the SHS at the customer’s residence/workplace. The company then collects the system price (minus the GEF grant) from the micro-credit agency. The micro-credit agency is refinanced for this amount by the DFCC using the World Bank line of credit.

The company also collects the GEF grant directly from the DFCC Bank. The micro-credit agency repays the loan to the DFCC Bank at approx. 12 % interest over 10 years, the DFCC Bank repays the World Bank over 15 years.

Loans for village-hydro systems work very similarly, the customer in this case is an off-grid village hydro cooperative, which charges its members monthly user fees, which it uses to repay the loan, and maintain the system.

The ESDP also supported training programs for technicians, provided grants and loans to the SHS and hydro companies, and funded a very effective awareness-creation program, carried out by the non-profit Sri Lanka Business Development Center.

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Differences between the off-grid components of the ESDP and REREDP

The off-grid component of the REREDP is structurally very similar to the ESDP, although there are a

few key differences. First, the REREDP is a much more ambitious program overall, with significantly

higher number of installations planned for various renewable energy technologies. The GEF grant

structure is slightly different, with grants for larger SHS to be phased out in 2-3 years. The REREDP

also includes one new technology – biomass systems. There is a component focused on the Ceylon

Electricity Board (or its successor, under the power sector reform) that provides support for capacity

building and technical assistance. The most significant difference between the two projects is that the

REREDP has an explicit focus on ‘rural economic development’. Its primary performance evaluation

criterion is “measurable increases in incomes of households than gain access to electricity, assessed

through periodic monitoring and evaluation.” (World Bank, 2002: 2). There is also a cross-sectoral

component to this project that will provide rural enterprises with credit and limited grant support for

larger systems.

ESDP REREDP Total project cost $55.3 Million $133.7 Million Amount in USD allocated for off-grid electrification (% of total project costs)

$17.05 Million (31%) $32.75 Million (24.5%)

SHS installed/planned (% of off-grid investments allocated to SHS)

18, 619 SHS/households (85%)

85,000 SHS/households (86.4%)

Village hydro systems installed/planned (% of off-grid investments allocated to village-hydro)

28 systems of 4-45kW each; serving a total of 1400 households (4%)

100 systems of 4-45kW serving about 5000 households. (3.3% for village hydro and biomass combined)

Biomass target (% of off-grid investments allocated to biomass)

- 25 systems of avg. 40kWe each; serving approximately 10,000 households. (3.3% for village hydro and biomass combined)

Key performance indicators for off-grid component

Target number of installations for each technology-type.

- Improved living conditions, rise of rural incomes, enhanced social and economic activity. - Sustainability of renewable energy as a commercial business - Target number of installations for households, and institutions and enterprises.

Table 1. Key differences between off-grid components of ESDP and REREDP.

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II. ANALYSIS OF THE ESDP AND REREDP

There is little doubt that the ESDP has achieved and exceeded its goals, and there is also reason to

believe that the REREDP will do the same. However, our analysis indicates that there are also

problems with both projects. This section of the paper discusses both the benefits and shortcomings in

these projects, within the framework of three broad questions – first, as these projects are rural

electrification projects, we ask, why electrify? Second, as both are market-based projects for rural

electrification, I explore the reasons for using markets to electrify. Finally, as renewable energy

technologies are being used for off-grid electrification, I look at the justifications for technology

choices made in these projects. Our aim is to analyze, in this context, whether the outcomes and

impacts of the ESDP support the justifications for using markets to deliver renewable energy

technologies for the purpose of off-grid electrification. I also explore the potential impacts of the

REREDP within the same analytical framework.

1. What are the goals of rural electrification?

This question may appear redundant in many ways, however it is relevant in the context of this

analysis, as both the ESDP and REREDP are multi-million dollar interventions designed to achieve

some rural electrification benefits. It is therefore essential to determine what exactly these benefits are,

in order to evaluate these projects.

On the surface, the answer to this question is fairly straightforward - if you pose the same question to

any of the organizations or agencies involved in these projects, or indeed, to any person in a

developing country, they will give you one overwhelmingly unified response: the main purpose of

rural electrification is rural economic development.

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What exactly, then, is rural economic development? Without getting into the details of development

theory discourse, in the context of rural electrification, it has been shown that there is a correlation

between electricity consumption, and GDP and other development indicators, such as infant mortality,

and literacy4 (Goldemberg, 1996). While this theory has been proven to be problematic in its tendency

to insinuate causation (i.e., more electricity leads to more development) when there is only correlation,

there is little argument against the claim that moving from a situation of no electricity to one of access

to electricity is a universally desirable shift, and helps improve the people’s living and working

conditions.

According to the World Bank, “Energy is basic to development. At the level of the individual, modern

energy services can transform peoples’ lives for the better. They can improve peoples’ productivity.

They have the potential to free millions of women and children from the daily grind of water and

fuelwood collection, and through the provision of artificial lighting can extend the working day,

providing also the invaluable ability to invest more time in education, health, and the community.

They open a window to the world through radio, television, and the telephone. In the aggregate, they

are a powerful engine of economic and social opportunity: no country has managed to develop much

beyond a subsistence economy without ensuring at least minimum access to energy services for a

broad section of its population. It is therefore not surprising to find that the billions who live in

developing countries attach a high priority to energy services.” (World Bank, 1996: 3). Douglas

Barnes, Head of the World Bank’s Energy Department has also written extensively on the

development benefits of rural electrification (Barnes, 1988; Barnes and Floor, 1996).

For the purpose of our analysis, I will utilize Munasinghe and Munasinghe’s (1988) succinct summary

of what the benefits of rural electrification are deemed to be. They categorize development benefits of

4 This correlation has been shown to decouple after a certain electricity consumption threshold is reached for developed countries, as efficiency gains in the economy offset increase in consumption (see Smil, 2000).

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rural electrification as growth and productivity benefits (for the household, and agricultural and

industrial sectors), social benefits (which include quality of life benefits such as having electric lights

to study and read by, as well as improved health and sanitation services), and equity and income

redistribution benefits (based on the theory that once the poor have access to electricity, they will be

able to ‘catch up’ with the richer sections of society. The authors acknowledge, however that this issue

is complicated and very hard to quantify). There are also positive impacts on employment, which can

be classified as growth and productivity benefits, and finally, there are a number of more intangible

benefits, such as improved political stability, and reduced inter-regional tensions. (Munasinghe and

Munasinghe, 1988: 306).

Evaluation of outcomes of ESDP and REREDP in the context of rural economic development

For the purpose of our analysis, I will focus on the first two benefits, which, from a rural person’s

viewpoint could be classified as

1. Productivity benefits, or increased access to income-enhancing activities, and

2. improved quality of life.

In the context of renewables, while the technology of choice has changed from centralized grid-based

to decentralized, renewable energy systems like solar home systems, micro-hydro, wind and biomass-

based systems, the basic goals of providing for rural electricity needs remain the same.

In the context of Sri Lanka, this goal is made explicit in the very title of the current rural electrification

project – Renewable Energy for Rural Economic Development Project (REREDP). The REREDP’s

primary sector-related goal is stated to be “invigorate rural economy, empower and build assets for the

poor, promote rural economic development and well-being.” (World Bank, 2002: 30) The project’s

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key performance indicators include “measurable increases in incomes of households that gain access

to electricity, assessed through periodic monitoring and evaluation.” (World Bank, 2002: 2)

Given, then, that rural economic development is the prime goal of electrification projects in general,

and of the REREDP in Sri Lanka specifically, what are the chances that this project will actually

deliver on these goals?

The REREDP, for the most part, is a ramp-up of the ESDP that ended in 2002. As discussed above,

while there are few key differences, such as the inclusion of biomass systems, and provision of credit

and limited grants to rural enterprises5, there is virtually no structural difference in the rural

electrification components of the REREDP and the recently completed ESDP. I therefore examine the

outcomes of the ESDP, and then postulate on possible outcomes of the REREDP.

ESDP and rural development

In terms of income enhancing activities, the outcomes of ESDP are not very promising. They do,

however, provide interesting insight on issues of technology choice, on the relationship between

economic development and electricity, and on opportunities for improved policy and program design.

According to an independent evaluation of the ESDP (IRG, 2003), only 8% of the 100 households for

SHS surveyed have reported some direct economic benefits. These are largely ascribed to the indirect

benefits that result from having electric light, such as sewing and keeping shops open for longer

5 Such loans could also be availed of under the ESDP, but were not described separately in the project appraisal document (World Bank, 1997).

16

hours6. Therefore, no new income-generating activities have resulted from electrification with SHS.

This is hardly surprising, since the average size of a SHS is approximately 50W, and beyond running a

few lights, a black and white TV and/or radio for 3-5 hours every evening, the type of systems being

installed in Sri Lanka do not generate enough electricity for significant productive activities. This is

not a new observation, Nieuwenhout et al (2001: 469), and Karekezi and Kithyoma, (2002) have also

concluded that SHS offer limited opportunities for income-enhancement.

Solar home systems, however, do provide considerable quality of life benefits. The same independent

evaluation of the ESDP has documented many benefits to rural people including better quality of life,

increased safety, better light for schoolwork and other household activities, and longer entertainment

hours (IRG, 2003). Another direct benefit of this project has been the rural employment it has

generated, there are probably over a thousand rural people directly employed by the businesses and

financing agencies involved in this project, and about double that number gain some indirect income

benefits (e.g., small shops selling SHS as a side-business).

Both solar home systems and village-hydro systems are shown to have lower life-time costs when

compared with the average costs of using kerosene lamps, car batteries and dry cell batteries (see table

2). This economic gains argument is more complex than it appears however, and is discussed further

in the section 2 on markets, below.

Given that 85% of the off-grid components of the ESDP project costs, and 86% of the off-grid

component of REREDP project costs are for SHS installations, the question that arises is this: Can we

justify promoting solar home systems as a technology for rural electrification if it only provides

quality of life benefits, and offers little opportunity for income-enhancing activities? In many ways,

6 Note that the report states that 60% of the households surveyed report an increased income, however, this is stated to be “not direct income but an anticipated income from saving money on fuel and batteries in the future.” (IRG, 2003: A-15)

17

the latter (income-enhancement) is actually the means for the former (quality of life benefits). As a

rural electrification intervention, therefore, is it appropriate to support this trade-off between these

means (income-enhancement) and a limited provision of the ends (quality of life benefits)? This is an

important question, not only in the context of Sri Lanka. I return to this issue in Appendix 1, which

provides a brief discussion of the role of solar home systems, and solar PV in rural electrification.

In contrast to SHS users, a larger percent of rural people connected to village hydro systems have

reported direct economic gains – 20% of the 50 households surveyed reported an increase in direct

income after obtaining a connection to a village hydro system. This is not surprising, as a village

hydro system provides each consumer with about 200W equivalent of installed power, or about 93

kWh a month. People have reported using micro-hydro electricity for power tools for carpentry, for

heaters in incubators for poultry-farming, for drying food products, and for community refrigeration

services (World Bank, 2002: 10). This still means, however, that the vast majority of village hydro

users - 80% - have experienced no direct income-enhancing benefits as of the date of the report.

REREDP and rural development

It is very likely that SHS, village-hydro and biomass system installations under the REREDP will lead

to very similar outcomes, as there is no new feature within this project that would make it appear

otherwise, and project stakeholders have also indicated that it is unclear how the REREDP will result

in the types of development benefits that differ from the ESDP in any significant way (personal

communication with project stakeholders). The REREDP does have a provision for extending credit to

rural enterprises for larger systems. However, larger systems also involve much larger loans. Further,

rural health and educational institutions (two of the institutional types identified as potential recipients

of the enterprise loans) have no means whatsoever of generating income required to pay for large

18

renewable energy installations. In the absence of significant donor/grant support, therefore, the

likelihood of rural enterprises availing of these loans is small.

Summary

To summarize, the ESDP has resulted in considerable quality of life benefits for rural people. It has

also generated rural employment in the areas of selling, installing, financing and maintaining

renewable energy systems. However, income-enhancing opportunities have been very small for SHS

users. Village-hydro users have reported some income-generating opportunities, but even here, 80% of

users have not. Further, no aspect of the REREDP indicates that significant income-enhancement

opportunities will be created.

What do these results tell us about technology choice, and about the relationship between

electrification and development? These are questions we will come back to in chapters III and IV. For

now, I proceed to the next step in this analysis, namely, evaluating the effects of using markets to

provide for rural electricity needs.

2. Why is the market determined to be the most effective mechanism for delivery of off-

grid electricity services?

Amongst multilateral agencies, the market is rapidly gaining popularity as the mechanism of

preference for the delivery of renewable energy-based electricity services to remote of-grid

populations. Of course, markets for rural energy services existed before multilateral agency and

government intervention programs started supporting them. Rural people have been using markets for

decades to obtain kerosene lamps, kerosene oil, car batteries, diesel generators and fuel, charcoal and

stoves. Through the 1960s-80s, provision of renewable energy systems to rural populations was

19

largely carried out by NGOs, or government-subsidized programs, where end-users paid very little, or

nothing at all. Such projects, however, were largely one-off, and sporadic, being dependent on the

availability of donor-funds.

Since the 1980s, the focus has changed from an NGO-driven model for renewables-based off-grid

electrification, to promoting market-based mechanisms. This is partly an outcome of the rise of the

Washington Consensus model of development. This change in focus was also a direct response to the

failure of state-owned enterprises to deliver reliable power services in economically viable ways.

State-owned utilities in many developing countries are bogged down by bloated bureaucratic

structures, and financially bankrupt due to the existence of politically motivated subsidies, which

prevent the utilities from recovering the full costs of generation, transmission and distribution. These

facts ring true for the Ceylon Electricity Board. The CEB is in a financial crisis, and has been finding

it increasingly difficult to extend electricity access to rural areas; the rate at which new households are

gaining connections to the grid has remained very low, approximately 3.4% a year (CEB, 1999).

Privatization is considered to help solve some of these problems. A change in ownership of electricity

delivery systems from state-control to the private sector is justified largely on the basis on efficiency

gains. The private sector is inherently more efficient, both at mobilizing and utilizing capital, and will

therefore be more effective.

The World Bank’s document on “Rural Energy and Development for Two Billion People” states that

“provided the background conditions are right, one of the most powerful ways to improve energy

supplies is to ensure that the energy market is determined by consumers’ choices. In particular that

means both that the price of energy should reflect its cost and that regulation of energy industries

should encourage competition and choice.” (World Bank, 1996: 7).

20

It is true that the private sector is more efficient than the state-owned utilities. However, it is essential

to keep in mind the context of rural electrification projects and programs: as I have already discussed,

they are designed primarily for the purpose of rural development, with the aim of improving

conditions for poor people. In this context, central consideration needs to be given to the distributional

aspects of these efficiency gains. For the purpose of our analysis, this involves an examination of what

these efficiency gains mean in terms of the impacts on the designated project beneficiaries – rural

households, and the country as a whole.

Analyzing the benefits of markets established by ESDP and REREDP

From a system life-time cost perspective, both SHS and village hydro systems work out cheaper for a

rural household that was previously using kerosene lamps, car batteries (which are recharged twice a

month at a battery-charging station in the nearest electrified town) and dry cell batteries (for flashlights

and radios). The REREDP document reports that over the lifetime of a SHS, a household’s internal

rate of return on the investment is about 6% (World Bank, 2002); similar IRRs for households have

been calculated by private companies. This is to say, the present value of household expenses on

purchasing and maintaining a SHS over its lifetime (20 years) works out to be smaller than the present

value of what that household would have spent over 20 years on purchasing, replacing and

maintaining kerosene lamps, car batteries and dry cell batteries. However, there are three additional

considerations one needs to take into account. First, neither solar home systems nor village-hydro

work out cheaper than kerosene usage, if the household is not using a car battery. In Sri Lanka, about

85% of the off-grid population is reported to not use car batteries7. Second, the lifetime costs for SHS

are cheaper only so long as the GEF subsidy is in place. This subsidy, however, will be phased out for

household systems with capacities greater than 40W SHS (which constituted 81% of sales in the

ESDP) in about 2 years, after which, this lifetime cost comparison will no longer favor SHS. Finally, 7 Based on a reported figure for car battery users of 300,000 households (World Bank, 1996).

21

the lifetime cost comparison works in favor of SHS, or village hydro systems only if the household or

consumer does not purchase any other source of electricity for the entire duration of the system life

(about 20 years). That is to say, should the household decide to upgrade the solar home system, for

instance, by purchasing more solar panels, their investment would exceed the savings.

Of course, these arguments are not to make a case against SHS or village hydro systems. These

technologies provide light and electricity services that are far superior in value than kerosene lamps

and car batteries, and people are therefore willing to pay more for better services. I wish to raise the

point, however, that the life-time cost comparison does not by any means hold universally, as is

implied in justifications given for promoting renewables, and SHS specifically.

If people are wiling to pay for these systems, let us examine what fraction of the rural population can

afford them. This is relevant in face of the argument that is often made that renewable energy

technologies rarely achieve deep penetration in rural markets due to affordability constraints. In this

context, Sri Lanka provides a counter-example to this claim. Table 2 lists the average, and lowest

income of households purchasing SHS and micro-hydro systems, in comparison to median incomes

for the rural and estate sectors8. The estate sector, comprised of tea and rubber plantation workers, are

generally considered to be amongst the poorest section of Sri Lankan society. 90% of these people,

comprising a total of 247,500 households (or 34% of the total off-grid population) lack access to grid-

based electricity.

22

Sri Lankan Rupees (US$) Median household income in rural population in Sri Lanka (current prices) (Sri Lanka Department of Census and Statistics, 2003)

8,012 (83)

Median household income in rural estate population in Sri Lanka - current prices) (Sri Lanka Department of Census and Statistics, 2003)

6,270 (65)

Average income of household purchasing a SHS (IRG9, 2003) 5,000 (52) Average income of household connected to a micro-hydro system (IRG, 2003)

4,598 (47)

Table 2. Median and average incomes in rural and estate sectors in Sri Lanka

Assuming incomes can serve as proxy for assets (the criteria for loan eligibility), the numbers in the

table 2 indicate that at least 50% of both the rural and estate populations can at least be eligible for

loans for the purchase of SHS and micro-hydro systems. For SHS, this is corroborated by a study

carried out by the largest consumer finance provider for SHS – Sarvodaya Economic Enterprise

Development Scheme (SEEDS) (Hettiarachy, 2003).

However, 26.4% of rural Sri Lankan households are defined as ‘poor’ (that is, these households spend

more than 50% of their expenditure on food, and the average adult equivalent food expenditure is less

than SL Rs. 1,338.48 per adult per month) (Sri Lanka Department of Census and Statistics, 2003). It

would be reasonable to assume that the majority of these rural ‘poor’ households are off-grid, and will

not be able to qualify for loans to purchase SHS10. If electricity is to be one of the inputs for poverty

alleviation (which is the principle mandate of the World Bank), then the REREDP will need to

develop different approaches to address the needs of this population.

In theory, there is a still sizeable market for SHS and village-hydro systems in rural Sri Lanka. Of

course, all markets tend to be imperfect, and this is especially true for rural markets in developing

countries. I analyze what exactly this implies for transaction costs and for issues of technology choice.

9 IRG’s data is based on a survey of 100 SHS households, and 50 village-hydro cooperative households. 10 Data to support this argument is not available. However, the off-grid population, by virtue of its remote locale, is largely that population that also lacks access to roads, irrigated water, and employment opportunities in the vicinity.

23

In a survey, 35 SHS-owning households, and 35 village-hydro connected households were interviewed

to learn how much they knew about the existence of other renewable energy technologies, and their

comparative costs, and whether they knew of the existence of different companies providing the same

technology that they had/were connected to. For village-hydro users, we found that 74% of households

surveyed did not know of any other renewable energy technology, and 82% did not know of any

company or organization offering this technology beyond the organization that had installed their

system. For SHS users, we find that the vast majority did know of more than one SHS company (97%

were aware of more than one SHS company), but 57% did not know of any other renewable energy

technologies, even when prompted. For both technologies, nobody was able to provide an accurate

response on how costs compared between technologies.

These results indicate that this market is based largely on people having very little, or imperfect

information as to what technology choices would work best for them. Further, since all the companies

involved in the ESDP and REREDP are focused on one technology each (that is there is no company

promoting both village hydro and SHS), these companies have no incentive to promote what is

appropriate for a particular region or household, they simply want to sell as many of their products as

they can. So in essence, both the customers and companies are functioning in a context of highly

imperfect and insufficient information.

Another key shortcoming of the ESDP and REREDP is that while target number of installations have

been identified for each sector, this has been based entirely on what the private sector projects their

sales to be, rather than on a least-cost basis founded on a resource assessment of solar, small-hydro,

and biomass capacity. This leads to extremely inefficient technology choices, and the brunt of costs

for these choices are borne by rural people.

24

What exactly are these costs? Table 3 outlines the costs faced by households for each technology type

– SHS, village-hydro systems and biomass energy systems. It also shows the resource availability for

each technology type (in terms of number of households that could technically avail of each system

type, purely on a resource availability basis), and total number of systems for each technology type

installed/planned under the ESD and REREDP.

Solar Home Systems Village-hydro systems

Biomass energy systems

Avg. power (kWh) 7 kWh 86 kWh 86 kWh delivered per household/month Levelized cost/month $5.70 $3.40 $4.00 faced by household Potential identified 2 million households 30,000 households

(ITDG, 2000) 1.5-1.8 million

households (Energy Forum, 2001)

(out of 2M off-grid households) Target no. of 100,000 households 6,500 households 1,000 households households under WB programs (World Bank, 1997, 2002)

Table 3. Comparison of resource availability by technology type, costs and installed and planned capacity.

Table 3 demonstrates that while village-hydro and biomass are by far cheaper options, which provide

access to much larger amounts of electricity per household or installation, neither are being exploited

anywhere close to their full potential. Instead, SHS, by far the most expensive technology, makes up

85% of the off-grid components of the ESDP investments, and 86% of the off-grid component of

REREDP investments. Further, 93% of households that benefited from the ESDP obtained SHS, and

85% of target households for the REREDP are designated for SHS.

As these targets, and corresponding investments are heavily biased towards SHS, no attention is being

paid to whether SHS are being sold to households where other technologies would be the more cost-

effective option for the people and the country. This is highlighted by the fact that biomass has been

25

completely ignored in the ESDP, although this tropical and agriculturally productive country, with

extensive plantation management experience, and large volumes of agricultural waste production has

some of the best biomass resource availability. Indeed, studies have shown that biomass could provide

for the majority of electricity needs of both grid-connected and off-grid populations in

environmentally sustainable and financially viable ways, if it were to receive sufficient investment and

management (Wijewardane and Joseph, 2002; Energy Forum, 2001; Kapadia, 2002). Of course,

biomass-based energy systems are not always easy to operate and maintain, however, in Sri Lanka,

there are working small-scale demonstration systems that demonstrate that it is indeed possible. The

REREDP has begun to acknowledge this potential, although the biomass targets under the REREDP

for off-grid electrification are very small.

A heavy bias towards solar home systems also has certain implications for the country as a whole. The

ESDP has enabled the development of a thriving SHS retail and distribution industry, and rural

employment from this. However, it as also resulted in an import-dependent market in a country where

a negative balance of account that currently stands at Rs. 256,378 Million (USD 2,698M), has been

growing steadily. All SHS components (excluding the batteries) are imported. Further, India is its

closest neighbor with a large local PV market supplied entirely by domestic manufacturing, and

protected by high import duties for PV modules. This makes the establishment of a domestic PV

manufacturing industry highly unlikely.

What are possible reasons for this technology bias? Part of the answer may lie in the fact that these

village-hydro and biomass systems, being mini-grid systems are more difficult to establish and

manage in the context of a market-based structure. They involve the development of village

cooperatives, and much more management and operational input than selling SHS to individual

households. In Sri Lanka, however, the experience with village-hydro cooperatives to date has been

very positive, and there are grassroots NGOs like Energy Forum and Intermediate Technology

26

Development Group have been successfully enabling the development of these energy cooperatives

for micro-hydro and, recently, biomass-based systems. However, being NGOs, their marketing and

outreach efforts are much more limited than SHS vendors. Further, companies involved in the small-

hydro business have a large grid-connected market, with purchase guarantee from the Ceylon

Electricity Board. There is little incentive, therefore to reach out to the remote and operationally

expensive off-grid markets.

This situation, it could be argued, is the way

a market develops, organizations and

companies find their competitive niches, a

use their resources to reach as many

customers as they are able to. However, as

discussed in section 1 of this paper, the

ESDP and REREDP are primarily projects

designed for ‘rural economic development’.

In this context, it is inefficient, and inequitable to set up a market that leads to technology choices that

are not the most efficient or effectives choices for the rural populations that these interventions are set

up to benefit. Imperfect markets also impact the private sector in negative ways. The transaction costs

involved in identifying credit-worthy consumers is huge. This is linked to a poorly functioning credit

market for SHS, which is currently the most weakest link in this project (IRG, 2003, World Bank,

2002). 6 finance agencies extend loans to village cooperatives for village-hydro systems, the fact that

these are group loans makes them inherently less risky. However, in the case of the SHS market, the

viability of this market during the ESDP has hinged entirely on one single micro-credit agency –

Sarvodaya Economic Enterprise Development (SEEDS). This is highlighted by the fact that in the first

two and a half years of this project, there was virtually no consumer finance available, and the project

resulted in the installation of only 600 systems in this time period, or 20 systems per month. After

Graph 1Exponential Growth of Annual Solar Sales

0

5

10

15

20

'98 '99 '00 '01 '02Thou

sand

s of

sys

tem

s so

ld

Figure 5. Annual solar sales under the ESDP. Source. IRG, 2003.

nd

27

SEEDS started providing loans for SHS, system sales increased to the current rate of approximately

1300 per month, as demonstrated in the Figure 5. However, in spite of sustained efforts by project

stakeholders to involve other credit agencies, SEEDS remained the only credit provider for the

duration of the ESDP. SEEDS is structured primarily as a rural micro-credit NGO, and gets easily

overwhelmed by the volume of SHS loans it has to process. As a result, the time to process one loan

for SHS consumer could take up to 6 months (personal communication with solar energy company

employees, 2002). This caused severe cash flow problems for the companies, which therefore use the

GEF grant to prop up their cash flow. One company estimated that the transaction costs of these delays

with the financing agency add $50 per system. This grant, therefore, is mostly used to simply cover the

transaction costs of loan processing.

To complicate matters further, SEEDS is growing increasingly concerned with the fact that 30% of

their loan portfolio is now from lending for SHS, which they rightly consider to be a non-productive

consumer loan. In some ways, this is against the very mandate of what they were set up to do, which is

“to eradicate poverty by promoting economic empowerment for a sustainable livelihood”. SEEDS has

stated that they will not extend more than 800 SHS loans a month under the REREDP. However, if the

REREDP is to achieve its target of 85,000 systems in 5 years, this will require the installation of 1400

SHS a month for the next five years. Since the REREDP started, one more financing agency has

entered this market, this agency, however, is only processing 50 loans per month. It is hoped that other

financing agencies will enter this market as sales volumes grow, however this is yet to materialize. It

is important to note that companies and financing agencies can currently cherry-pick customers, as this

is still a relatively new market. However, as the market gets increasingly saturated, it will also be

increasingly harder to find credit-worthy customers.

Market size may also be constrained as the GEF grant for SHS in the 40-70W range (which make up

81% of the ESDP SHS market) is phased out in the next two years. It was initially hoped that phasing

28

out this grant would balanced out by lower SHS prices, as sales volumes increase, and global prices of

PV panels continue to fall. However, while global PV prices have been dropping at 5-10% a year,

prices of SHS in Sri Lanka have been steadily increasing. This is because the Sri Lankan rupee has

been steadily devalued11, and as all the main components (excluding batteries) are imported and paid

for in US dollars, the devaluation in the currency has more than offset the global PV price decrease,

and actually resulted in an increase in the domestic price of SHS. This increase is price is not

compensated by an increase in real rural incomes, which have risen by only 3.6% per year since

1995/96. (Sri Lanka Department of Census and Statistics, 2003).

Markets are also promoted as a mechanism to remove unsustainable government subsidies for

electricity, which are politically impossible to phase out. However, while getting the government out

of rural electrification may be a good theory, it is virtually impossible in practice. Sri Lanka is a case

in point. In June 2000, the Provincial Council of the province of Uva – Sri Lanka’s poorest, and least

electrified province – announced an additional $100 subsidy for households purchasing SHS under the

ESDP. This program, which was initially greeted with considerable excitement by SHS firms, proved

to be a fiasco for the market. Companies invested large sums to ramp up their infrastructure and

operations in Uva, however, found it exceedingly difficult to compete fairly in this market where the

provincial government showed an open bias towards a single company. To make matters worse, the

companies had to sell SHS at the subsidized price, and then claim the subsidy from the government.

That is to say, until the government paid the companies, the companies carried the $100 subsidy as

payment due on their balance sheets. After six months, it became apparent that the government did not

have the funds to pay the subsidy amount promised, and companies rapidly wound down their

operations in the province, sustaining large losses due to non-payment of the grant by the provincial

government. The companies to date have not recovered this amount. This case demonstrates how a

11 The Sri Lankan Rupee was devalued against the USD by 7.7% from 1999-2000, by 17.9% from 2000 – 2001, and by 7.1% from 2001 – 2002 (Sri Lanka Department of Census and Statistics, 2003).

29

market for rural electrification, if not carefully coordinated with government activity in the field, can

lead to large inefficiencies and losses.

Finally, institutions like schools, health centers and small enterprises, which are designated as a target

beneficiary group in the REREDP have no means to participate in this market. The educational and

health sector provides free or highly subsidized services, and is always strapped for funds. Small off-

grid enterprises rarely generate enough revenue to pay for a solar, or hydro system large enough to

provide sufficient power that can be used for productive purposes. A solar-powered water pump, for

instance, powered by a 1kW PV array would cost on the order of $10,000.

To summarize: a market-based approach for off-grid electrification has some benefits: it has generated

considerable employment, and over the life-time of the two projects, it will help offset the import of

$161,000 worth of kerosene12. It has also resulted in thousands of households gaining access to basic

levels of electricity services for lights, televisions, radios and small household appliances, as well as a

small increase in income-generating activities. A thriving new industry has developed, that employs

about two thousand people directly and indirectly. On the downside, however, it has resulted in the

creation of yet another an import-dependent industry in a country struggling to reverse its negative

balance of trade situation. Further, the imperfect nature of this market has resulted in high transaction

costs, and inefficient technology choices that result in rural people paying very high costs for small

amounts of power. Micro-hydro systems (and biomass systems in the REREDP) can offer the

opportunity for income-generation, however, solar home systems, which constitute the bulk of the

ESDP and REREDP off-grid investments do not offer any significant income-generation opportunity

for the purchasers. In short, a market-based system for off-grid rural electrification in Sri Lanka, based

mostly on solar home systems, with minor investments in micro-hydro and biomass systems, could

12 12 Total kerosene offset is $161,000 per year for ESDP, and $749,000 per year for REREDP at $.26/liter, compared with imports of $1.1M/yr for SHS in the ESDP and $5.1M/yr in the REREDP.

30

lock the off-grid population into a development pathway where they bear the bulk of the costs for an

essential development input (electricity), but where the majority of households do not reap any

significant income-augmenting benefits.

This is not to argue that the state was providing a better service, nor to argue against markets per se.

Indeed, the Ceylon Electricity Board, as discussed, is facing serious financial problems, and the grid

was being extended to only 3.4% of the population every year (incidentally, the REREDP will provide

electricity services to 1% of off-grid the population per year), this is likely to get even smaller as the

marginal costs of reaching households increases exponentially with every extra mile in remote rural

areas. However, replacing a poorly functional and inefficient state sector with an inefficient and

inequitable market mechanism, where the brunt of costs for expensive technologies is borne by rural

people is not the solution. What, then, is a solution? We provide some recommendations in chapter IV.

31

3. Why are renewable energy systems the technology of choice for rural electrification?

There are two fundamental arguments for utilizing renewable energy technologies for remote, off-grid

applications: the first is an economic rationale, and the second is an environmental justification.

Evaluating the economic rationale for renewables in the ESDP and REREDP

The reason why 60% of rural Sri Lanka still does not have access to grid-based electricity is

considered to be primarily a function of the huge costs involved extending the grid. CEB and World

Bank estimates put the costs of extending the grid to only 75% of the population at $1-1.2 billion

(World Bank, 2002). The REREDP document justifies solar home systems on the following basis:

“The cost of off-grid solar home systems compares favorably with the cost of grid expansion for

remote areas. The solar component under this project would provide electricity to nearly 87,000

households at a total investment cost of about US$ 28.0 million, i.e. US$ 330 per household. The

marginal cost of providing peak energy to the rural consumer is about US$ 500 per kW and the cost of

extending the grid to the marginal rural consumer in Sri Lanka is about US$ 300 per consumer.”

(World Bank, 2002: 61).

It acknowledges that SHS do not provide the same quality of service, but justifies the promotion of

SHS on the basis that most rural consumers are low-intensity consumers using less than 40kWh per

month. It should be pointed out, however that even 40kWh a month corresponds to a solar PV array of

260 Watts; however the larger systems (80W and over) make up only 5% of sales in the ESDP, and

even an 80W system will provide, at best, 12kWh of electricity per month. In other words, the tools of

economics have been used to compare apples (12kWh of SHS electricity) to oranges (40kWh of grid-

based electricity). If one were to compare apples (40kWh of grid power for off-grid households) with

32

apples (40kWh from a PV system, which would be a 260W SHS), the SHS would cost $2,100, as

compared with the $850 per household for connecting it to the grid.

This, of course, is not to make an argument against renewables per se. However, economic

justifications such as the one used above lead to inefficient and inequitable technology choices as

discussed in the section 2.

Analyzing the environmental benefits of the ESDP and REREDP

The GEF grant in the ESDP and REREDP is justified on the basis of environmental benefits, namely,

it is important for developing countries to meet their growing energy needs in environmentally

sustainable ways. However, it is acknowledged that this can be more expensive than the least-cost

alternative available, so the GEF proposes to subsidize the ‘incremental cost’ of the clean project.

Since the installation of a renewable energy system offsets a corresponding quantity of carbon dioxide

emission (from the burning of kerosene and/or fossil fuel-based power plants), it is thought that the

country can accrue these ‘carbon benefits’, and ultimately develop projects for the Clean Development

Mechanism.

It is important to put this environmental argument into perspective. First, in terms of carbon emissions,

Sri Lanka’s per capita emissions stand at 391 metric tons Co2/year (to put this in context, the US

annual per capita emissions in 1996 stood at 19,674 metric tons Co2) and according the World

Resources Institute (2003), this ranks the country 112/153 in terms of a descending ranking of all

countries’ per capita annual Co2 emissions rate. This is not to argue against any environment-

improving investments. The GEF covers the incremental cost of the SHS as calculated as the cost

difference between using kerosene and car batteries, vs. a SHS. This works out to approximately,

$2.3/W. As the GEF pays for the offset that is accrued, this offset is technically ‘retired’. In essence,

33

by the end of the REREDP, Sri Lanka will have the equivalent of 100,000 SHS of ‘retired’ credits. In

total the REREDP plans to offset 1.2M tons of CO2. Should there be a market for carbon credits in

another five years, rural Sri Lankans will have invested large sums of money for carbon reductions

they will be unable to sell or utilize under the CDM. If micro-hydro and biomass technologies were to

be exploited to their full potential, then the same reduction in carbon could be achieved at a much

cheaper price to the country and its rural people (as demonstrated in table 3).

Finally, in the context of Sri Lanka, environmental benefits from installing solar home systems,

biomass systems and village-hydro systems in rural areas would be offset many times over if the

country proceeds with its plan to build a 300MW coal-fired plant (to be ramped up to 900MW over the

next decade). The Ceylon Electricity Board has been campaigning vigorously for this plant to be built,

in face of increasing capacity shortages, and high electricity tariffs. Coal power, they argue, is the

cheapest way to provide for the growing electricity needs of the country. This project has been stalled

for many years on environmental grounds, but as the power crisis grows ever larger, and as people

face ever-increasing electricity bills, the pressure to build this plant has been increasing. If this plant

were to be built, the environmental benefits accrued in the ESDP and REREDP would be completely

insignificant in comparison to the environmental costs of this project.

34

IV. DISSECTING THE THEORY

What does this analysis mean? These projects and programs were designed to deliver rural economic

development benefits in efficient and effective ways. As I have shown, there are several benefits –

several thousand households enjoy a far better quality of life with their solar home systems and

village-hydro power. Further, while SHS do not contribute significantly to productive economic

activities, both village-hydro, and, in the context of the REREDP, biomass-based systems at least offer

the potential for increasing economic productivity. However, the ESDP experience shows that even

this potential is not being realized. Why is this so?

Our analysis also indicates that the markets established by the ESDP and REREDP are highly

imperfect. As a result, rural people bear the brunt of high transaction costs, and inefficient technology

choices get made. How do we get around this?

Finally, while environmental benefits are accrued, this is not happening on a least-cost basis because

the market is unable to make informed choices about least-cost options. Further, there is a fundamental

inequity in the issue of ownership of carbon credits. How can we rectify this?

These problems are not unique to Sri Lanka. Rural markets in developing countries have largely

similar characteristics when it comes to problems of imperfect information and high transaction costs.

Solar home systems are being actively promoted in most World Bank/GEF rural electrification

projects, justified largely on the same basis as they are for Sri Lanka. In Indonesia, Bangladesh,

Argentina, the Philippines and Namibia, Burkina Faso, Uganda, SHS are the only renewable energy

technology being promoted by World Bank/GEF programs, through the development of markets very

similar to the ESDP and REREDP SHS markets in Sri Lanka. This analysis, while specific to the Sri

35

Lankan case, is also relevant to other market-based off-grid electrification programs based largely on

SHS.

At this stage I wish to emphasize that the purpose of this paper is not to make a case against renewable

energy systems, or markets per say. Quite to the contrary, I acknowledge there is a state failure in

providing for the electricity needs of rural areas, and strongly support the belief that all countries need

to pursue development pathways that are environmentally sustainable.

I do believe, however, that both renewable energy technologies, and markets can be made to work in

more effective and efficient ways. However, to do this requires a rethinking of the basic theories that

govern the ways in which we design projects such as the ESDP and REREDP. Based on this revision

of underlying theory, we can then make policy and program design recommendations. I focus on two

basic theories – the theories underlying our understanding of the relationship between development

and rural electrification, and the theories framing our understanding of relationship between rural

electrification and renewable energy markets.

The relationship between development and rural electrification

Although the primary goal of rural electrification is rural economic development, there are plenty of

examples where this causality does not hold. That is, rural electrification is a prerequisite for rural

development, but does not necessarily imply that development will follow. This is true no matter what

the technology (grid vs. off-grid renewables), or delivery system (market vs. state) is. This, of course,

is by no means new theory. Bose, in her socio-economic study of electrification and development in

India discusses the complexities involved in making electricity work for development. While

acknowledges that the “potential impact of rural electrification on an underdeveloped, largely agrarian

economy is widely acknowledged to be nothing short of revolutionary”, she also points out that these

36

outcomes do not always materialize (Bose, 1996: 2). The World Bank has also acknowledged that

rural electrification does not always deliver the expected benefits (Barnes, 1988).

Several authors have discussed the importance of integrating rural electrification into broader rural

development policy and programs. Munasinghe and Munasinghe (1988) discuss the need for an

“integrated rural development approach’, and Douglas Barnes at the World Bank points out that “rural

electrification must be placed in the context of integrated rural development programs to have a

substantial impact in the countryside.” (Barnes, 1988: 26). It is well established, therefore, for

economic development benefits to flow, rural electrification needs to be integrated into a broader

development plan that gives equal importance to other development inputs such as water, health

facilities, education, roads, access to markets. This is even more relevant in the context of off-grid

populations, which are the most marginalized of rural people, and therefore least likely to have access

to many of these inputs.

In the context of the ESDP, it allows us to understand why 80% of users of village-hydro systems,

which deliver enough power for income-generating activities, have not reported the development of

any income-enhancing activities. It also provides a useful framework for thinking about changes

needed in policy and program design for Sri Lanka, which I address in chapter IV.

The relationship between rural electrification and renewable energy markets

The reliance on markets for delivery of energy services is justified on an efficiency gains argument. It

is also seen as a means to ‘depoliticize’ electrification, because the experience in developing countries

to date is that unsustainable subsidies are crippling the energy sectors, and these are politically

difficult to remove in the context of a state-owned electricity delivery system.

37

However, our research in the context of Sri Lanka has shown that rural markets are highly imperfect,

and result in a reallocation of costs and benefits, and in inefficient technology choices, in ways that do

no not always benefit the rural consumer. Further, the promise of electricity to off-grid populations has

always been a powerful political tool, and attempts to step around this issue leads to unwanted

surprises, as happened in Uva Province in Sri Lanka. Again, the fact that rural markets are imperfect,

resulting in high transaction costs, is by no means new theory, and has been used extensively to

explain credit, labor and capital market failures in rural areas of developing countries.

In the context of Sri Lanka, the REREDP has not adequately addressed this issue. The REREDP

project appraisal document refers to the role of the CEB, and a need to strengthen its capabilities.

However, the establishment of a well-functioning regulatory and integrated planning process for off-

grid electrification should precede project implementation. Such a regulatory and planning process

would enable for technology choices to be made in much more efficient ways. It would also enable

prices to be set in ways that do not penalize off-grid consumers, and that make use of cross-subsidies

effectively. Further, instead of weakening the market, it would strengthen it, as private players would

have a clear sense of where the market lies, and an efficient cross-subsidy-based pricing mechanism

would mean that many more rural people could afford renewable energy systems.

Dependency on markets also brings up the issue that subsidies are inherently inefficient and there is a

pressing need to make rural electrification economically efficient. It would be useful to remind

ourselves at this point that most rural electrification programs in developed countries were subsidized.

Indeed, in developed countries, huge investments in rural electrification were made, under the belief

that electrification was so fundamental to economic development that investments were justified even

if they could not be recouped directly through tariffs. Rural electrification was much more a social

contract between the state and its people, than an economic decision. For example, in Ireland, an

ambitious rural electrification scheme was established in 1946 to provide electricity to 400,000

38

isolated rural dwellings. 98% of this rural population was connected to the grid, and a subsidy of

“Pounds 9.5 million up to this date was never recovered” (Shiels, 1984: 47). In 1954, the UN

Department of Economic Affairs stated that “for a number of reasons, the economics of rural

electrification schemes cannot be judged on the same basis as those of ordinary commercial

enterprises, and that it accordingly appears necessary for the governments concerned to accept the

main responsibility of promoting rural electrification and for bearing the financial burden involved

through one or other of the various methods described in this report.” (UNDEA, 1954) While a GEF

Grant exists for off-grid electrification in Sri Lanka, this grant, or subsidy, is justified purely on

environmental grounds. Further, the REREDP stresses that the renewable energy business needs to be

commercially sustainable by the end of the project lifetime (World Bank, 2002: 31)

What lessons do these theories provide for the design of rural energy projects and programs, and for

Sri Lanka, more specifically?

39

V. LINKING THEORY TO POLICY

To ground this theory into practical policy recommendations, we turn our attention back to Sri Lanka.

The two central question are:

a) how do we integrate this off-grid electrification program – the REREDP - into a broader rural

development plan?

b) How can we make the market work in more effective and equitable ways?

The first step would be to integrate the REREDP into the broader electrification plan for the country.

The REREDP project has a component that involves coordination with the CEB. However, it is

unclear to the project stakeholders, as well as the CEB and Ministry of Power how actual integration

can take place. I propose that there is the urgent need to develop an integrated resource plan for the

country. This should take into account both grid, and off-grid needs, and plan for both grid extension

and renewable energy installations on a least-cost basis. In the context of the off-grid market,

renewable energy technologies are already known to be cheaper than grid extension for most of the

country. In the context of grid-connected renewables, a renewable portfolio standard could be set to

integrate renewables (like mini-hydro, biomass wind energy) into the mix. An integrated plan would

achieve two things: First, it would ensure that renewable energy technology choices are made in more

cost-effective ways than the ESDP and REREDP currently do. Second, it would allow for the

development of pricing mechanisms where cross-subsidies from grid-connected consumers could be

effectively utilized to buy down the high costs for off-grid renewable energy installations. Reducing

prices faced by rural consumers would greatly increase the market size that private companies could

reach.

In the context of power sector reforms, there is agreement that independent regulation of the power

sector is necessary to prevent the exercise of monopoly power by companies, and to set tariffs.

40

However, while a market-based mechanism has been established for electrification of off-grid

households, the regulatory mechanism that exists for off-grid electrification is weak at best. Its only

function is to provide quality assurance to customers, and this function is carried out by the

Administrative Unit of Development Finance Corporation of Ceylon (DFCC), which is the

administrative and financial management agency for the World Bank/GEF projects in Sri Lanka.

Having a bank perform even this limited technical quality assurance role for rural consumers is neither

efficient for the bank, nor for consumers. There is a need for a new institution that could effectively

and adequately play the role of regulator for off-grid renewables-based electrification. Ideally, this

institution would also perform the function of enabling off-grid electrification to work more

effectively for rural economic development. It should be an agency that is both connected into the

policy process, as well as connected to grassroots agencies and organizations working on different

aspects of rural development – eg. health, education, water.

What sort of organizational form would such an agency take? Such an organization would ideally have

representatives from the state and civil-society organizations. Relevant state agencies are the Ceylon

Electricity Board, and the Ministry of Power and Energy. Amongst civil society organizations, three

prominent organizations could play vital roles in regulating rural electrification, and enabling it to

work better for rural development: Energy Forum, an NGO devoted to the promotion of appropriate

and renewable energy sources for rural development, Sarvodaya, Sri Lanka’s largest grassroots-based

NGO, which also runs SEEDS – the first micro-credit organization to extend loans to rural consumers

for SHS (and still the largest), and the Sri Lanka Business Development Center (SLBDC), a non-profit

that played a pivotal role in creating awareness about renewable energy technologies during the ESDP

program. All these organizations have played important roles in the development and implementation

of ESDP.

41

Energy Forum has played a central role in educating provincial and district-level policy makers and

politicians about the pros and cons of renewable energy technologies. Currently, this organization is

attempting to develop projects that are focused on more productive uses of renewable energy. Their

research and lobbying activities were one of the key reasons why biomass-based energy was included

in the REREDP.

Sarvodaya could also play an extremely important role in regulation of the off-grid sector, and in

connecting electricity to the broader development process. Sarvodaya is Sri Lanka’s largest, and oldest

local grassroots development NGO, with four decades of experience in rural development and

humanitarian work; its activities include education, housing, agriculture and enterprise development,

microfinance, and humanitarian and peace-related project. They operate in a third of all villages in Sri

Lanka. As the single largest financier of SHS, it is in their interest that systems installed keep working,

and prices remain low.

The Sri Lanka Business Development Centre (SLBDC) is a non-profit consulting company established

with the participation of both public and private sectors to develop, strengthen and stimulate private

sector business and industry in Sri Lanka. SLBDC played a key role in the ESDP by conducting

independent awareness programs about renewable energy technologies and the ESDP in villages

across the country. It also worked on educating financing agencies and government representatives

about this project. SLBDC has an enterprise development program that provides direction and

assistance to individuals in establishing and developing micro and small enterprises.

These organizations are strong civil society organizations, but function largely independently of each

other, and independent of the Ceylon Electricity Board, of the Ministry of Power, and of private

companies. The purpose of a regulatory organization would be to first, connect the NGOs with the

state energy planning and policy-making institutions. A separate regulatory agency with members

42

from Energy Forum, Sarvodaya, SLBDC, the CEB and Ministry of Power could form the framework

organization that could guide further developments in off-grid electricity and energy provision.

Bringing such an organization into being would create a working example of a partnership between

the state, civil society and private sector, something that is always talked about, but rarely

implemented. This may not be as easy as it sounds, however, the reason why I am optimistic about this

idea for Sri Lanka is because the ESDP has actually established a very productive procedure of

involving all project stakeholders (solar and small-hydro companies, the financing agencies, some

civil society organizations, and the CEB) in a meeting every quarter to discuss progress, problems and

new ideas. Establishing a regulatory organization would involve formalizing these meetings to create

an entity with clearly defined responsibilities and activities.

There are also important policy lessons for multilateral agencies and governments:

The REREDP design and goals indicates that multilateral agencies recognize the importance of

connecting rural electrification with rural economic development. However, designing projects based

primarily on the establishment of largely unregulated rural markets for renewables will not deliver

desired benefits. Projects design needs to focus on supporting and providing direction for integrating

off-grid electrification efforts into broader electrification plans, and into rural development programs.

In the context of providing a development input like electricity to largely poor people, we need to

break through the current schism in thinking about market over state, vs. state over market. We have to

recognize that both offer advantages and problems, and replacing an inefficient and financially

insolvent state structure with an unregulated and inefficient market mechanism is not an effective

solution for meeting the electricity needs of off-grid populations. As long as rural economic

development remains the goal of rural electrification, we need to recognize and support the role of

43

civil society and grassroots organizations that have been working tirelessly to improve the lives of

rural people. I have identified three such organizations in Sri Lanka, however, such organizations are

not limited to Sri Lanka alone. For example, Energy Forum is an offshoot of the Intermediate

Technology Development Group, an organization that “helps people to use technology in the fight

against poverty.” (ITDG, 2003) ITDG was founded by Dr. E. F. Schumacker of the ‘small is beautiful’

philosophy fame, and operates in other countries in Latin America, East Africa, Southern Africa and

South Asia. Committed grassroots organizations working on energy and development exist in many

developing countries. While different countries will no doubt require different approaches, I believe

that strengthening and supporting local grassroots-based civil society and state organizations should

precede, or at the very least go hand in hand with the establishment of rural renewable energy markets.

Multilateral agencies also need to move away from technology-bias, for instance, the role of solar

home systems in rural electrification projects needs to be carefully evaluated. I provide a brief analysis

of this issue in Appendix 1.

I also propose to multilateral agencies that one useful starting point for taking a more integrated view

of electricity and development is to rethink the ways in which we value electrification benefits. To

date, our only means for measuring the success of an electrification project is to measure the amount

of power installed or delivered (eg, in kW, or kWh), to include a metric for measuring reliability of

power supply, and then measure, or evaluate economic and social changes in people’s lives and

livelihoods. Some studies report positive impacts, some report little change (Barnes, 1988, World

Bank, 1995). However, these metrics are fundamentally problematic as they attempt to make a big

leap between electricity in itself, and development. It is not electricity per say that leads to

development, but the services it provides – lights, energy for pumping water, power for storing

vaccines and medication in health clinics. I propose a new way of valuing electricity in the

development process – one that involves measuring these ‘energy services’. That is to say, we should

44

value energy in terms of how much service – pumping water, village industry development, running

health clinics, it enables. ‘Energy services’ is not a new concept for thinking and planning for the

energy needs of developed countries, but has not yet been applied to off-grid electrification.

The reason why new metrics of evaluation are important is because it forces us to think of rural energy

needs as embedded in a much larger project of rural development. That is to say, if our measures of

‘success’ are linked to other inputs, such as water, health facilities, industry, the only way to achieve

this success is by making linkages at a planning, institutional and organization level between

electricity and these other development inputs.

I also recommend that GEF grants can be utilized more effectively to create, support and develop the

planning and regulatory capacity for off-grid electrification. Direct subsidies for technologies could be

reduced, or completely eliminated if cross-subsidies from urban consumers, combined with longer-

term financing for off-grid populations were introduced. GEF grants for installing renewable energy

systems at schools and health facilities could then be combined with cross-subsidies from urban

consumers to cover the incremental costs (as compared to what the institution would normally pay if it

were connected to the grid).

45

VI. CONCLUSIONS

The ESDP and REREDP in Sri Lanka make for a fascinating case study of the benefits, and limitations

of market-based approaches to meeting off-grid electricity needs in environmentally sustainable ways.

The ESDP has created active markets for solar home systems and village-hydro systems, leading to

considerable quality of life benefits for the households purchasing these systems, as well a limited set

of income-generating opportunities. These markets have generated considerable rural employment.

The ESDP has also created a well-functioning framework for technical quality assurance of SHS and

village-hydro systems. The REREDP shows all signs of continuing to deliver these benefits, it also

introduce a new technology – biomass-based systems in off-grid areas. Finally, the ESDP has created

a pro-active, consultative process of decision-making (albeit within the framework of the project) by

involving all project stakeholders in regular meetings, discussions and dialogue.

However, these projects have also raised questions about the abilities of unregulated renewable energy

markets to provide for rural development needs. The imperfect nature of these markets, combined with

pre-determined technology choices which are not based on least-cost or integrated planning processes

have resulted in inefficient technology choices. Further, rural off-grid populations bear the brunt of

costs for these choices, without receiving all the rural economic development benefits that these

projects intend to deliver.

I believe that these problems are founded in the underlying theories on which both the ESDP and

REREDP are based. I have shown that the two main theories – first, that rural electrification leads to

rural development, and second, that largely unregulated markets are an effective and efficient

mechanism for rural electrification are not sound theories.

46

For electrification to lead to rural economic development, it needs to be placed within a broader

development framework and program. For markets to work for rural electrification, there needs to be a

strong planning and regulatory framework in place. In the context of Sri Lanka, I believe that the

REREDP can be modified to do both things. The ESDP has set up an active and involved stakeholder

dialogue, which could be transformed into an effective planning and regulatory institution. This should

involve the inclusion and support of civil society organizations. Such an organization would be

responsible for integration of off-grid electrification into power sector planning and setting of tariffs,

as well as integration into broader government and NGO development programs.

This analysis also provides insights on changes needed in multilateral agency programs for off-grid

electrification. Organizations like the World Bank need to move beyond programs based on supporting

markets over state or civil society-led initiatives, and work towards supporting the integration of

activities in these three sectors. Further, making rural electrification work for rural development also

calls for a rethinking of how we measure and value energy as a development input, and for new

research on how institutions can be set up to ensure that the input – energy and/or electricity – can lead

more effectively to the desired outcome – rural economic development.

At the end of the day, providing power to the people is not about technology, or markets, or even

energy. It is about enabling historically marginalized groups of people to gain access to what most of

us see as our rightful entitlement – the ability to make choices that enable us to improve our lives, and

the lives of our families. As academics and policy makers, until this becomes the true core upon which

we build all programs and policies, providing power to the people will remain a catchy but empty

metaphor, with its real meaning subverted by our current practices that are based purely on its literal

interpretation.

47

APPENDIX 1: IS THERE A SUNNY SIDE TO SOLAR HOME SYSTEMS (SHS)?

Schematic of a SHS. Source. SELCO.

This short section focuses on the debates surrounding solar home systems (SHS)

as an appropriate technology choice for off-grid electrification. Over the last two

decades, SHS have gained considerable popularity as an off-grid electrification

option amongst multilateral agencies, non-profits and more recently, developing

country governments. These systems typically range from 10W – 80W.

their global study of SHS fall in the range of 35-54W. In the same study, it was determined that 93%

of the systems installed were used for powering lights alone, or for running lights, DC television

radios for a few hours every day.

According to Nieuwenhout et al (2002), about half of all installations covered in

s and

here are approximately 1.3 million solar home systems installed in developing countries

ed for off-

ever,

ar

d

EREDP

biomass systems combined.

T

(Nieuwenhout, 2002). To put this in context of other renewable energy technologies install

grid electrification, as of 2000, over 50 million households are said to be served by small-hydro

village-scale mini-grids, and 10 million households by biogas systems (Martinot et al, 2002) How

SHS have recently begun to dominate the multilateral agency-driven off-grid electrification effort.

There are currently 36 World Bank/GEF renewable energy projects, the majority have solar home

system components, and in some countries, the off-grid electrification components involve only sol

home systems and no other technology. Currently approved GEF projects could result in another

600,000 when complete. India and China are proposing the installation of over 10 million SHS an

solar lanterns each, over next 10 yrs. 300,000 SHS are planned to be installed in South Africa in, and

600,000 in Argentina (Martinot et al, 2002). In Sri Lanka, 87% of the REREDP project costs

associated with off-grid electricity provision is allocated to solar home systems; further, the R

target for SHS is 85,000 households, compared with a 15,000 household target for village hydro and

48

Solar home systems are excellent replacements for kerosene lamps and car batteries. The provide

onsiderable health benefits by displacing harmful emissions from kerosene lamps, the luminosity and

ng

ral

rnatives

abraal et al, 1996 and 1998, World Bank 2002, Miller and Hope, 1999). However, as I have already

ems then an effective technology for rural electrification? For Africa, research has

own that solar PV offers limited benefits for rural electrification (Karekezi and Kithyoma, 2002;

e

c

quality of light is immensely better, making it much easier to carry out household chores and readi

and studying activities. Depending on their size, they also provide enough power to run a small black-

and white television, and radio or cassette player for a few hours a day. They can provide for very

limited income-enhancing opportunities such as keeping shops open, or carrying out activities such as

basket weaving or sewing, for a few extra hours every evening, and charging cellular phones for ru

communications businesses. If they replace car batteries, they help save much time and effort involved

in hauling acid-filled, short-lived car batteries to battery charging stations every few weeks.

SHS are also promoted as a more cost-effective technology choice when compared to the alte

(C

discussed in the context of the ESDP, justifying SHS on an economic least-cost basis is a tricky issue.

Comparing solar home system costs to the cost of grid extension is unfair as they both provide very

different services.

Are solar home syst

sh

Mulugetta et al, 2000) argue that in the context of Africa. Villavicencio (2001) argues that solar home

systems do not contribute to sustainable development, as it does not, amongst other things, enable th

diversification of income-enhancing opportunities. Foley (1996) argues that the value of PV lies in the

immediate satisfaction of small-scale electricity needs, but is not even a good choice as a pre-

electrification option as large-scale investments in PV will slow rather than advance conventional

electrification, if it absorbs large amounts of investment capital for infrastructure.

49

At this point it would be useful to make a distinction between the businesses that have been installi

SHS, and the multilateral agency-funded, and government-led rural electrification i

ng

nterventions and

rograms that support the development of SHS markets. Private sector actors, in the business of

ittle

ards

ct

l of off-grid

lectrification involves enhancing rural incomes in significant ways that go beyond the few income-

against

,

s

p

selling, financing and servicing SHS have been doing so since the 1980s, and it was a decade before

the first multilateral and government programs actively started supporting SHS market development.

These rural distribution businesses are in many ways no different from businesses selling other

appliances such as televisions, car batteries, diesel generators, sewing machines, and a host of

consumer goods and energy services in rural areas. They perceive the existence of a market in the face

of government failure to extend the grid, and sell SHS to people who can afford them. There is l

‘right’ or ‘wrong’, therefore, in businesses selling SHS. In some countries, the absence of stand

and quality checks allows for businesses to sell sub-quality products and service, which is a problem.

By and large however, this problem is one of quality control in the context of a rural consumer produ

business sector, and not an issue of an ineffective rural development initiative.

The question about the role of solar home systems in rural electrification becomes pertinent in the

context of multilateral agency and government intervention programs. If the goa

e

enhancing opportunities described above, then one could argue that SHS in the 40-80W range are

indeed not an effective technology for rural electrification. This is not, however, an argument

solar PV technology per say. In the absence of an integrated resource plan for off-grid electrification

supporting an inefficient market to promote SHS is a problematic approach, as our analysis shows.

However, if there were to be an integrated resource and rural electrification plan for every developing

country, this will likely reveal that there are many places where solar PV is the most economical

option when compared to costs of grid extension, and in the absence of small-hydro, wind or biomas

potential. Such a plan would also ensure, however, that for places where cheaper options are available,

they can be pursued, and for areas where PV is the least-cost option, the installation provides an

50

energy service equivalent to the other technologies. Further, integrating off-grid electrification into a

broader electricity pricing mechanism could enable the development of an effective combination of

cross-subsidies and grants to ensure that the most geographical isolated people do not end up pay

the highest costs for their electricity.

Solar PV can especially provide benefits to rural schools, hospitals, and community centers in remote

areas where other resource options are

ing

not available. Again, an integrated resource plan would enable

ese installations to be identified and adequately funded. Current market-based delivery mechanisms,

ural

g country is no different from any consumer product distribution and service

usiness, and is therefore neither right nor wrong. However, current multilateral and government rural

not

,

th

where the rural household or institution is expected to pay a significant portion of the costs of a

system, make it impossible for this sector to obtain these services outside of small, ad-hoc NGO-

funded projects.

I conclude therefore that solar home systems installed as an outcome of private sector activity in r

areas of developin

b

electrification programs promoting SHS for rural electrification fall short of meeting their own goals:

providing electricity on a least-cost principle, in ways that enhance rural productivity. This does

mean that there are no applications for solar PV. However, these applications can only be identified

and adequately funded or financed in the context of an integrated rural electrification planning process

and a comprehensive electricity tariff-setting mechanism.

51

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Countries. Westview Press: Boulder.

Barnes D. Floor W. 1996. Rural Energy in developing countries: A Challenge for Economic

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Bose S. 1993. Money, Energy and Welfare: The State and the Household in India’s Rural

Electrification Policy. Oxford University Press: New Delhi.

Cabraal A. Cosgrove-Davies M. Schaeffer L. 1998. Accelerating sustainable photovoltaic market

development. Progress in Photovoltaics: Research and Applications 6 (5): 297-306.

Cabraal A. Cosgrove-Davies M. Schaeffer L. 1996. Best Practices for Photovoltaic Household

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