Off-Grid Regulation: How to Provide Cost-effective and Sustainable Rural Energy Services in Remote Areas of Developing Countries?

Leonardo Webinar – 29th May 2009

Dr. Xavier LEMAIRE, Research Fellow

Centre for Management under Regulation, Warwick Business School

Sustainable Energy Regulation Network/REEEP

Summary

1. Status of off-grid regulation and rural electrification in developing countries

2. Emerging forms of rural decentralised electrification & case studies

3. Main features of off-grid regulation framework

Part 1. Current Status

Status of off-grid regulation and rural electrification in developing countries

Emerging forms of rural decentralised electrification & case studies

Main features of a off-grid regulation framework

Electrification rate by region

Number of people without electricity is far from decreasing…

High disparity between continents

Why rural electrification is lagging in some part of the world? (1) Historical reasons/demographic impact (2) Lack of financial resources/“political commitment”

Rural inhabitants far from decision-makers

Bias in favour of extension of the grid (1) + (2) Priority to urban areas Remote areas with low density : out of reach

Self-perpetuating logic

Due to limited resources, demographic trend, political pressure, … “conventional” utilities tend “naturally” to focus on electrification of areas with high density/high income where they can sale electricity produced with conventional energy sources

“Conventional” utilities “naturally” ignore areas difficult to reach, where income can be very low and electricity has to be produced by decentralised systems

High operating costs / logistic difficulties Systems with RET out of their field of knowledge

(Poor) regulation/ (weak) institutions and policies for centralised system and ignore small decentralised generation anyway

Rural inhabitants “in the dark” OR unregulated electrification of remote areas by small private investors

Privatisation/unbundling/transparency/tariff = de-politicisation of the electricity sector

Vicious circle resulting of lack of regulation

power reform? Lack of investment

in network and rural areas Poor maintenance

Poor quality of service/pricing Lack of control

Unauthorised Connection

/ Low energy tariff

= Non efficient energy appliances

Lack of financial return for electric companiesIncrease of consumption = increase of financial gap

Priority power generation in urban areas

Consumption subsidised

Part 2. Cost-effective delivery models Status of off-grid regulation and rural

electrification in developing countries Emerging forms of rural decentralised

electrification & case studies Main features of an off-grid regulation

framework

New forms of electrification

Against the bias in favour of centralised systems, mini-grids

& home systems can be implemented in different ways.

Different typologies according to: The technology used The form of ownership The delivery model

Matrix quite complex – we will focus on regulation of some combination of technology/ownership/delivery model

Source: World Bank/ESMAP, 2008.

Particular interest of utilities with solar

Reduction of the cost / Wp of more than 80% since the 1980s of the solar panels from the manufacturers. Current growth rate of the photovoltaic market + 40%/year BUT photovoltaic panels only part of the cost (40/50%) against batteries (20%) and installation costs (30-40%)

Cost decreasing but still quite high initial investment (500-1000 US$ for a 50 Wp system) if it has to be borne by end-users.

Solar interesting in remote areas/scattered houses for low loads compared to: Candles, paraffin - quality of light with PV is superior Diesel generators - mechanical parts and cost of fuel Connection to the grid - high costs of extending the grid and connection

Grid PV compete with conventional energies?

How rural areas could benefit from new technologies?

Paradox of solar energy: in rural areas of developing countries where it could be very useful – solar remains quite expensive

Design institutional and regulatory framework Public-private partnership Overcome barriers of up-front costs

Access to specific sources of funding Rural electrification subsidies

Reduce costs of installation & maintenance Clear definition of who is responsible of systems and monitoring

Find good combination old & new technologies Integrated energy services

Long-term commitment of public authorities Stable regulatory framework Maximise the positive impact of new modern energies

Change of paradigm for renewable energy

Source: Annual Rev. Ener. Envt, 2002

Toward a new generation of projects?

1) First generation of projects funded by aidtransfer of technology passivity of receptors

Renewable systems were given Not maintained by local beneficiaries of aid

2) New generation of projectsEnergy just a technical problem?

Social needs (not just kWh!) To provide a service (not just to sell & install a product)

Maintenance of systems even if the cost is low has to be borne by the end-users Clients selected = purchasing power Selection of local entrepreneurs

Market-driven (and not just donor-driven) Institutions and organisation of the market Regulation

Far larger scale than previous projects Economies of scale and density Standards

Large-scale dissemination and regulation (Un)regulated competitive private sector (regulation / quality) “dealer sales model”

Kenya +200,000 SHS BUT quality? Sri Lanka (micro-credit), China, Vietnam, Indonesia, India, Bangladesh

Regulated rural energy services concessions (regulation / price + quality)

“fee for service model” Photovoltaic

South Africa currently 35,000 / target: 300,000 SHS; Zambia Hybrid

Morocco (+80,000 target: 150,000), Argentina (+70,000), Peru, Bolivia, Dominican Republic (+5,000?), Benin, Togo, Cap Verde, Namibia, Senegal,…

TOTAL world wide +2,400,000 households

Cash sales models in Kenya Advantages of direct sales

Base of 100’s of owner shops who can or not install the system

More than 200 000 SHS installed but very small systems 10-14 Wp

Limits Only a minority (5% of rural inhabitants) can afford to buy

directly a system without credit People buy the cheapest components – size too small so

customers not satisfied Installation is not properly done leading to low system

performance from the start and lack of maintenance leads to early system failure

Credit sales model in Indonesia E.g. company called Sudimara Energi

More than 30,000 systems installed Company install 50 Wp systems and provide maintenance

contracts by trained technicians so systems function and provide reliable electricity

Credit reimbursed in 4 years – more than 95% repaid Costs systems remain low as manufactured in Indonesia

Main lessons Loan and maintenance by the same company who install

the system and has a direct interest to keep them running to keep customers satisfied and get them pay the credit

Fee for service – Utility model (“ESCOs”)

1. Government gives a subsidy to an enterprise to buy PV solar systems & install them in the houses of their clients

2. Clients pay a monthly fee to get the small utility to maintain the PV solar systems for them.

This kind of scheme helps to solve the question of up front cost and the question of maintenance unlike a simple loan

It helps also to centralise decisions and aggregate environmental benefits of individual systems (bulk purchase, CDM), facilitate also enforcement of standards and codes of practices and therefore lower costs of systems for users

Rural Concessions in South Africa

Rural electrification in South Africa Massive rural electrification effort since 1994, end of apartheid.

More than 2.5 million households connected to the grid BUT more than 1.5 million households in remote areas unlikely to be connected.

Concessionaire fee for service with solar photovoltaic has been adopted in 1999 to install more than 300,000 Solar Home Systems.

Currently 5 concessions, only 34,000 SHS. Subsidies for extension stopped while other PV projects (schools, health centres).

Project initially monitored by the national regulator, now Department of

Mineral and Energy.

NuRa Concession in Kwazulu Natal The biggest and most successful concession Very large concession of 10.000 Km2 with 11.000 Solar Home Systems Multi energy stores (LPG + Solar electricity) Economies of scale and more than 70 jobs created

BUT loose proximity with clients and delay in maintenance good human resource management Software + system of reporting + GPS

Complaints mainly linked: To small size of the systems (no colour TV! no cooking!) Cost of the fee (4-8 US dollars) even subsidised remain high for rural people Understanding of the contract? Question of ownership of the systems

Difficulties linked to : Lack of coordination with grid authorities Differentiated fees due to non-homogeneous interpretation of free tariff

Fees can vary according to the policy of the municipalities who give or not a subsidy (Free Basic Electricity for first 50 kWh/month) (since 2007 Free Basic Alternative Electricity of 55 R)

Lack of continuous support No more/limited subsidies to buy new systems and increase the number of systems managed

Part 3. Conclusions

Status of off-grid regulation and rural electrification in developing countries

Emerging forms of rural decentralised electrification & case studies

Main features of an off-grid regulation framework

Appropriate regulation for off-grid Light-handed approach

Avoid over-regulation: regulation of small utilities <> large utilities Licensing procedures & control

Protect small utilities against encroachment/expansion of large utilities or compensation

Long-term integrated socio-economic comparisons Lifetime of the project: 20/30 years (life-cycle project) Renewable systems compared to hybrid solutions or connection to the network

Rising operating costs and risk linked to conventional energies Least cost planning (demand versus supply) energy efficiency

Consumer awareness What RE can do and cannot do compared to grid connection

Level of expectation of end-users Energy efficiency measures

Adapted standards High standards = high costs Compromise with what is really needed

Importance of correct tariff setting High inflation in some countries Annual revision Taxes, custom duties at the same level as conventional energies or less

Tariff to cover at least operating costs without subsidies Subsidies only for % of capital costs > or = the one given for grid-connection

Harmonisation of tariffs on a whole country?

Case of Bolivia: Recognition of the impossibility of implementing conventional regulation

Working paper from ESMAP/World Bank, 2006

Before 2000, all operators of isolated village mini-grids above 300kW installed generating capacity were required to acquire concessions

BUT Concessions could only be granted to entities that were shareholder companies / 2/3 of mini-grids operated by

cooperatives The reporting requirement and technical standards were too costly to satisfy by small cooperatives Better to have “light-handed” regulation than to have multiple unlicensed operators (security,…)

Partial intermediate solution Raise the threshold of regulation to 500 kW peak demand Allow cooperatives to maintain their legal status for an initial period of 7 years Discussion to lower reporting and technical requirements for all mini-grids with less than 2,000 users.

A possible proposed final regulation Systems above 1 MW

Regulated as before Systems between 300kW and 1 MW

Fewer reporting requirement and less stringent service standards Systems under 300 kW

No obligation for operators except to register themselves and provide a yearly update of basic information

Appropriate planning and design of rural delivery schemes Technology neutral with an “optimal” combination of: Centralised systems – grid Decentralised / mini-grid systems / Individual systems Market open to new entrants with new technologies

Focusing on sustainability in the long term of delivery of energy services (and not just kWh)

Appropriate level of financing of the operators Maintenance of the energy systems selection of operators: not lowest bid Long-term homogenous & stable regulatory framework

Reduction of costs for end-users and funding agencies Organisation capable of evaluating local needs

Subcontracted to consultants Rural electrification plan and strategy Organisation to monitor and evaluate the scheme

Delegated/subcontracted to local NGOs,

Technology neutral: combination of various technologies

Not just one source of energy, but a combination of energies * Electricity

Small hydro / wind / biogaz / geothermal (when available) Solar photovoltaic

Intensity of solar radiation (5-6 kWh/m2) Low density of population in some areas Flexibility of the investment

+ diesel generation as a complement (for productive use) and not necessarily main source: high operational costs / difficulty of supply of fuel and repair mechanical parts in remote areas Rising costs of energy & risk

* Heat / cooking LPG, biomass, SWH, solar cooking,…

Individual needs & productive use Precise evaluation of energy needs and their evolution Fees and income generated locally, spatial location of energy needs

SHS ideal for basic needs/low loads: light, radio, TV, mobile phone Solar for use with low/medium loads: solar pumps, schools, health centres… Conventional energies for productive use / peak demand

Combination of mini-grid

& individual systems

Minimum costs

Source: WordPower, 2000

Long term comparison of total costs

High operating costs

Diesel systems Solar Home Systems

High investment costs

Low operating costs

Low investment costs = genset

N+20 or even N+30 N+20 or even N+30

$

$

batteries

Long-term integrated comparisons

Life cycle costing

Implement institutions to solve the questions of high investment costs in rural areas and long-term maintenance

N+20

$

Reduction of up front costs

1. Support mechanisms to reduce up-front costs / creation of rural funding agencies (subsidies, integrated planning)

Spread up front costs

2. Creation of organisations to spread the up-front costs and maintain systems

- “Banks”: Micro-credit / revolving credit / loan

- Utilities: Fee for service / ESCOs,…

Institutional arrangement

Rural electrification agency / fund

(Function of) independent regulator

ESCOs ESCOs

FUNCTIONS

Defines rules for competition (tariff for RE); Integrated planning; Standards

Operational measures (energy surveys) and funding/bundling (loans, grants) notably CDM

Install, collect fees AND guarantee functioning of sustainable energy systems

Variety of approach possible for institutional design. But all functions needs to be covered and clear definition of who is responsible of what

Delegation / sub-contracting?

ESCOs

Control standards and tariffs Control standards and

tariffs

x x x x xxx x x xx x x x x xx xxx xx x xxx x xx end-users

Same entity responsible for installation AND maintenance of a system

Regulation by the national electricity regulator with a specialised department

OR Regulation by the government entity that provides installation subsidies

complaints

?

?

Central role of rural electrification agency

Integrated planning Energy surveys Socio-economic comparisons

Regulation Tariff Standards and codes of practices

Funding Interlocutor of international agencies Bundling small scale projects (Clean Development Mechanisms)

Monitoring and evaluation

Rural agencies Central interlocutor of local utilities (and end-users) Importance of permanent trained and dedicated staff Importance of financial resources – own budget Operating autonomy with rural electrification as primary objective

Small versus Large companies?Status : Interest of having separate entities for rural electrification for decentralised system. Cooperatives or local private companies or associations reactive; their survival linked

to fees - National public utility? Grid ! Very small companies (e.g. Zambia, Pacific) 50-150 clients each 900 US dollars/SHS 2-4/5 jobs Only photovoltaic

Specialised technicians Low maintenance

Cost of systems remain highProximity with the clientCustomer basis limitedFragile-only highest income

Large companies(e.g. South Africa, Indonesia) 11,000 -30,000 clients each 550 US dollar/SHS + 70 jobs Multi-energy

LPG, paraffin,… Other RE and diesel

Reduction of costs?Logistic difficultiesComplexity management

- Local stores - System of reporting

Min break-even point?

Code of practices, standards, training

Regulators can refer to already existing materials in other countries: photovoltaic solar heater installations

Regulation of the market has a tremendous impact for limited cost Avoid sub-standards products or installation Guarantee consumer satisfaction

Important to monitor / regulate effectively the market Periodic control Staff specialised on rural electrification

Specialised department of the regulatory body Or can be left to the rural electrification agency Or subcontracted (regulation by contract)

Awareness and training are fundamental part Regulators, technicians, end-users Get local institutions involved (universities, NGOs,…)

Tariff setting Kind of tariff

Flat tariff for individual systems Metering systems when connected to collective central system

Offer: importance of cost recovery for sustainability of business Operating costs of utilities

Needs to be covered ! public subsidies for investment costs only ! Importance of creation of provision/batteries fund for solar

Part of investment costs? If yes, utilities can expand to new customers If not, continuous public subsidies are needed for expansion

Demand: tariff that can be afforded by end-users Survey of structure of incomes % of the inhabitants of an area to be reached

Procedure for annual revision Inflation rate Rate of exchange / US dollar (imported components) Capacity of payment of end-users (income of inhabitants not necessarily indexed to inflation)

Elements of conclusion

New institutions / new way of thinking Market-driven (and not just donor-driven) Training is crucial (at every level)

… with regulation for new actors Adapted to small companies = introduce new actors Limit the power market of existing utilities Rural electrification depoliticised (independence and transparency)

… framed by a real long-term energy strategy/policy

Long-term commitment of the government Energy + industrial policy + local development

Nurse a market = create jobs locally and nationally / local expertise

References to go further Electrification and Regulation: Principles and a Model Law Discussion Paper No. 18 by Kilian

Reiche, Bernard Tenenbaum, and Clemencia Torres de Mästle. World Bank, Energy and Mining Sector Board, July 2006. World Bankhttp://siteresources.worldbank.org/INTENERGY/Resources/EnergyPaper18.pdf

Decentralised Rural Electrification, C. De Gouvello et Y.Maigne, Systemes Solaires, 2002.

Integrated Rural Energy Utilities – A review of literature and opportunities for the establishment on an IREU, REEEP – Restio Energy, July 2008.

NuRa Indepth Case study – Integrating further?, REEEP – Restio Energy, March 2009.

Financing Off-grid PV, by J.P Ross, Centre for Resource Solutions, 2001.

Rural Electrification in the Developing World: A Summary of Lessons from Successful Programs, by Douglas Barnes and Gerard Foley, Esmap – World Bank, 2004.

…

Solar photovoltaic softwares, standards,…

SERN

For more information, our webpage: please click SERN on the REEEP website http://www.reeep.org/

Group on off grid regulation and rural electrification in the member part where you can find the references used in this presentation (membership = just need to create a password)

Contact:Dr Xavier LEMAIRECentre for Management under RegulationWarwick Business School CV4 7AL Coventry (UK)

Xavier.Lemaire@reeep.org