Grid Extension: The Community-Based Approach

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Overview - Key Messages

  1. Around 1.5 billion people in the developing world today still live without access to electricity. Rural populations are disproportionately affected by this phenomenon, especially in Sub-Saharan Africa where rural electrification rates are merely above 10%.
  2. Utilities lack incentives to engage in rural electrification due to its low perceived profitability. Therefore, a variety of alternative institutions have been designed, partly promoted by governments, to accelerate the process of rural electrification. These options include on a macro-level the creation of a separate division within the utility, the creation of a rural electrification agency/ fund or the creation of private companies and SMEs. On a micro-level rural electrification cooperatives have been employed in combination with one of the macro-level approaches.


Rural Electrification in the Developing World: Limits and Challenges

A staggering amount of 1.5 billion people in developing countries today do not have access to electricity with the grand majority of them to be found in South Asia and Sub-Saharan Africa (World Bank, 2010a). In the latter 587 million people did not have access to electricity in 2009. This constitutes more than half of the population of Sub-Saharan Africa in which rural areas are still disproportionately affected regarding the lack of electricity. While in urban areas, for instance, electrification rates are close to 60% in rural areas merely above 10% of the population enjoy the same privilege (IEA, 2010; IEA, 2008).

No. of people in Sub-Saharan Africa without access to electricity in million [1]

2000 2005 2009
Total 508.9 547 587
Urban

120
Rural

465


Alternative rural electrification projects, e.g. off-grid installations, which might provide an opportunity to lower the costs of electrification also often do not constitute a viable option since it is complicated and costly for utilities which are characterized by their highly centralized nature to operate several more decentralized projects on a village level (Foley, 1992b).
Utilities in developing countries which are often already struggling to provide electricity to consumers that have already been connected to the grid often show little interest in engaging in rural electrification (REEEP/UNIDO, 2006). However, in many of these countries rural electrification has become an undertaking increasingly important to the government which often tries to promote the latter through the provision of subsidies (USAID SARI, 2004). This financial assistance by the government which provides a first step to overcome the financial constraints associated with rural electrification is further complemented by a variety of alternative institutional options which have been designed to facilitate the process of rural electrification and ensure full dedication to this process.


These options include, at a macro-level:
• the creation of a separate department within the utility responsible for rural electrification only,
• the creation of an entirely new institution like rural electrification agencies
• the creation of private companies as well as small- and medium-sized businesses.


On the micro level a possible option is the formation of local electricity cooperatives which aim at facilitating the implementation and operation of rural electrification projects by including the local communities in the process (Foley, 1992b). Most rural electrification projects that employ this micro-level approach usually do so in combination with one of the macro-level options. These combined approaches are employed for rural electrification via grid-extension as well as for decentralized off-grid solutions.
These approaches all benefit from the shared commonality of constituting a separate body solely responsible for rural electrification. Yet, each approach displays some advantages as well as disadvantages and should be carefully fitted to the circumstances in which it operates.


On the Macro-Level: Institutional Approaches to Rural Electrification

Key Messages

  1. The existing three approaches have all been tested in different developing countries and have all proven to entail some advantages and disadvantages.
  2. Creating a separate division within a utility saves time and money by building on existing resources but faces the danger of minimizing independence. In many developing countries utilities already face financial constraints limiting the feasibility of this approach.
  3. The REA approach is becoming increasingly widespread in developing countries, including Sub-Saharan Africa. Establishing clear responsibilities and mandates has proven to be advantageous but is also a slow and cumbersome process often delaying effective implementation.
  4. Private companies decrease the burden on public budgets but do not have the capacity to develop an overall electrification strategy making an additional institution a necessary complement.


Creation of a separate division within the utility

Creating a separate division within the utility responsible for rural electrification seems to be the simplest, fastest and least-costly approach. It does not require any new legislation to be passed and avoids many complications and delays often experienced when setting up an entirely new institution. It also builds on already existing competencies and know-how and allows human resources to be used most efficiently (Foley, 1992b).

Additionally, utilities often have the advantage of having easier access to financial provisions. In many countries, for instance, cross subsidies are in place supposed to help lower costs for rural consumers by charging urban and industrial consumers higher tariffs and utilizing the profit to cover higher costs in rural areas thereby lightening the cost burden on rural consumers. However, in some countries, e.g. in Tanzania, only the national utility TANESCO has access to this cross-subsidy mechanism (AEI, 2009). This gives national utilities like TANESCO a financial advantage in carrying out rural electrification.

Despite these advantages, however, this approach does not avoid many of the pitfalls described above. While it creates a separate division more dedicated to achieving rural electrification it has only proven viable in countries in which the utility was able to fulfill its other tasks efficiently. In most developing countries, however, this is often not the case. Many utilities experience financial and technical constraints (Foley, 1992b). In some countries utilities even find themselves in such a dilapidated state due to politicization, mismanagement and corruption that they are facing complete bankruptcy (USAID SARI, 2002). It can, therefore, be likely assumed that a separate division responsible for rural electrification would not be exempt from these problems and its overall effectiveness would suffer greatly as a result of that.

Even in cases in which the financial difficulties of the utility are less severe it has proven difficult to maintain the autonomy of such a division and ensure that resources will not be diverted to other priority areas. Yet, in those countries in which the utility was working rather efficiently from the start and did grant the separate division a sufficient degree of autonomy this approach was employed successfully, e.g. Algeria and Malaysia (Foley, 1992b).
A similar approach is the delegation of the responsibility for rural electrification to one of the regional offices of a utility as it was done in Tunisia (Barnes & Foley, 2004).


Creation of a Rural Electrification Agency (REA) / Rural Electrification Fund (REF)

The setting up of rural electrification agencies is becoming an increasingly popular approach in many developing countries including countries in Sub-Saharan Africa. The institutional arrangements of these agencies, however, vary on a case-by-case basis. While in some circumstances the REA manages the financial means available to the agency, in others only a REF with a secretariat exists. In the majority of cases both exist as two separate legal entities, however, with the REA assuming tasks such as providing technical assistance and expertise as well as planning, coordinating and monitoring rural electrification projects while the REF coordinates donors, banks and manages funds (World Bank, 2010a).
The benefits of setting up a rural electrification agency are that it avoids many of the challenges faced by the separate-division-within-the-utility approach mentioned above. It clearly delineates the responsibilities of the utility and the responsibilities of the agency which leads to the establishment of a more autonomous institution with the sole focus on rural electrification (Foley, 1992b).
This helps to establish a clear mandate for each institution which leads to greater transparency and reduces an overlap in activities. These mandates and responsibilities are also generally institutionalized in specific acts which constitute the foundation of these agencies and which further provide clear regulations, e.g. regarding the amount of subsidies provided by the agency (ASER, 2011).
Another advantage of the REA approach is that by handing over responsibility for rural electrification to an agency other than the national utility the likelihood of engaging private companies (at least in countries with a liberalized electricity market) greatly increases. This increases competition and could result in increased efficiency and in consequence to the acceleration of rural electrification. Additionally, private capital and investment reduce the burden on public budgets in financing rural electrification (Niang, 2006).
Yet, this approach also creates problems such as delays in operation due to delays in setting up the institution itself as well as a lack of funding. In many cases it can take years before the passing of the legislation to set up the institution and before a functioning institution is in place due to a lack of capacity. Moreover, since rural electrification agencies are often partly government funded they also often lack autonomy and can suffer from political intrusion (EUEI PDF, 2010).
Nevertheless, this approach still holds potential for success depending on the context and has been employed in a variety of countries such as Thailand, Jamaica, Bangladesh, India, etc. (Foley, 1992b). In recent years, the REA approach also became more prominent in Sub-Saharan African countries and a variety of countries, e.g. Uganda, Tanzania, Kenya, Senegal, etc. have established REAs within the past 5-10 years (Niang, 2006).


Creation of private companies/ small- and medium-sized businesses

The engagement of private companies in the rural electrification process has been difficult and experience has shown that it needs to be accompanied by regulatory support and management of the overall rural electrification process by state authorities. In the majority of cases this approach was employed following the general liberalization of the electricity market and the privatization of previously state-owned companies. Thereby large state-owned companies were partitioned into smaller units with separate responsibilities for generation, transmission and distribution and the different units became privatized. These newly privatized companies can then engage in rural and peri-urban electrification through a bidding process for pre-defined projects which are either established by public authorities or which have been requested by the communities, e.g. in the case of Chile or Cameroon. Based on pre-developed criteria the public authorities then award the contract to the “best” bidder (Jadresic, 2000; Devex, 2010).
An advantage of this approach is that it generally brings in private capital which reduces the burden on the public budget (Niang, 2006). On the other hand, however the experiences with private companies show that they only engage in the implementation of individual rural electrification projects and do not assume responsibility for the overall planning and coordination of the rural electrification process. Consequently, the establishment of a central agency to engage in these tasks still remains necessary.
In general, this approach has been employed in a variety of countries, e.g. Chile, India and Cameroon, with mixed successes. While in Chile the rural electrification rate rose from 53% to 76% within a period of 7 years (1992-1999) and this approach was generally considered as successful, in India’s state of Orissa private companies often quickly incurred large losses of profit due to theft of electricity, unpaid bills, lack of meters, etc. and therefore quickly chose to withdraw from the rural electrification business. This difference in outcomes seems in large part to be due to the lack of regulatory support in Orissa but also to a lacking service orientation of the companies themselves (Jadresic, 2000; Harper, 2000).
An example of a country in which newly established small- and medium-sized businesses that were not previously part of a state-owned business took on the task of rural electrification is Zambia. In Zambia, however, these businesses were used for the promotion of off-grid installations creating local companies to market solar home systems (SHS) which before had been distributed for free. In many cases rather than setting up entirely new businesses many international donors like the World Bank have also favored the support of existing businesses by assisting in the development of viable business models and providing loans and subsidies (Cruickshank & Yadoo, 2010). These companies, however, focus on solar home systems only which as an overall strategy cannot be regarded as a fully effective rural electrification model and is not to be compared with grid extension.


On the Micro-Level: Community-based Approaches to Rural Electrification

Key Messages

  1. Rural energy cooperatives cannot engage in the rural electrification effort on their own and have to co-exist with one of the macro-level approaches. The central agency on the macro-level manages and coordinates different rural electrification projects and supports existing cooperatives.
  2. Cooperatives are formed by the consumers which they will serve and are based on democratic principles.
  3. With the support and under the supervision of the centralized agency cooperatives engage in the day-to-day operation and maintenance of the distribution network.


Rural electric cooperatives

The rural cooperative approach first emerged in the US in the 1930’s where the first Rural Electrification Administration was founded in 1935 and the first Rural Electrification Act was passed in 1936. The special feature of this approach is that rural cooperatives are usually formed by the consumers that will be served by them which increases incentives to ensure the success of rural electrification projects (GENI, 2008).
The general concept is that the consumers buy electricity in bulk from the utilities and distribute it within a pre-defined area. As a part of this process consumers also assume responsibility for the maintenance and operation of physical assets as well as for the financial management of rural electrification projects, e.g. by engaging in bill collection and ensuring the payment of bills and loans to the utility (Foley, 1992b).
In order to establish such a system the most common approach generally employed is to establish a central organization first which chooses the areas to be electrified as well as assists in setting up the cooperatives and channeling (donor) funds to install the supply network. In general, this has been done by one of the macro-level institution mentioned above, in the majority of cases by a REA/REF.
Once the area to be electrified has been chosen and the cooperative established the distribution network has to be installed. This is usually largely funded by the supporting agency but in many cases cooperatives also have to contribute a certain percentage of the costs in advance. Afterwards the cooperative assumes responsibility for the operation and maintenance of the equipment and ensures that fees are paid in a timely manner. By combining the measures of pre-payment and management of the installations which reduces costs for the supporting agency the cooperative repays the initial investment loan over an extended period of time (Foley, 1992b). In some cases ownership of the equipment is passed on to the cooperative after all payments have been made, e.g. in the case of Bangladesh. There the transfer of assets has yielded largely positive results and has demonstrated the importance of local ownership (NRECA, 2002). While this has worked well in Asia, projects in other sectors in African sectors have shown that asset transfer and ensuring local ownership is not a straightforward and easy task to achieve. Best practices in this regard would, therefore, have to be examined on a separate note.
With regard to existing examples of cooperatives asset transfer has not seemed to constitute a problem but a variety of other problems have been encountered. Cooperatives, despite their willingness to operate a rural business often encounter similar problems as utilities and private companies, meaning relatively small profit margins. This makes it problematic to ensure that sufficient capital for maintenance of the equipment and re-investment can be saved. Even in cases in which capital is saved, e.g. in a village fund, cooperatives are often convinced to allow their utilization to remedy more pressing issues within the village (Foley, 1992b).
In order to monitor these developments and ensure the financial survival of the cooperative the centralized institution plays an important role in monitoring the cooperatives performance as well as providing advisory services after the establishment of the cooperative (Foley, 1992b). Additionally, the centralized institution also continuously has to provide trainings for managers and operators since know-how and capacity are generally very low upon establishment of the cooperative and have to be built over time (Nygaard, 2009).
This shows that similarly to the private companies approach cooperatives cannot engage in rural electrification without the support of a centralized organization which provides expertise and engages in coordination and planning.
Cooperatives, in general, are very similar to private businesses in the way they function. Boards are usually elected democratically by the owners of the corporation’s equity and the board appoints management and staff. In most cases board members are unpaid (Barnes & Foley, 2004).
In the case of the South Lalipur cooperative in Nepal, for instance, the secretary is the only full-time paid member of the board which consists of a chairman, a vice-chairman and a treasurer otherwise. Moreover, the cooperative employs two overseers, 12 technicians and one social mobilizer.
The social mobilizer assumes the task of collecting fees from the families and advising families on how timely and accurate payment can be achieved (Cruickshank & Yadoo, 2010).
The cooperative approach has been employed in a variety of countries and practical experiences highlight its advantages as well as disadvantages.


Putting Cooperatives into Perspective: Advantages and Disadvantages of the Cooperative Approach

Key Messages

  1. Cooperatives have proven to be very effective in extending the scope of electrification, improving efficiency and improving service quality for consumers.
  2. The largest disadvantages that cooperatives face are their lack of revenue and their difficulty to remain autonomous.


 Advantages
 Disadvantages
Scope of electrification
 • Often absence of motivated agents to engage in rural electrification since returns are low in rural areas  Cooperatives provide a viable alternative since they are willing to contribute to projects improving local living conditions despite marginal revenues (NRECA, 2002)
• Widen scope of electrification by providing an alternative institutional arrangement to engage in rural electrification for areas that might otherwise never be considered for electrification efforts (Foley, 1992b)
Efficiency
 • Progress on electrification is much faster due to the involvement of customers who are eager to be connected to the electricity grid (NRECA, 2002)
• Most successful in improving distribution efficiency (mostly be preventing theft of electricity) (Cruickshank & Yadoo, 2010)
Costs and Financial Viability
 • Reduce costs and bureaucracy (Foley, 1992b)
 • Poor revenue and profitability indicators due to low consumer density and low average electricity use
• Small businesses which have poor economies of scale
• Financially tied to growth level and economic viability of their surroundings (NRECA, 2002)
• Over-ambitious programs due to political pressure and poor financial control often result in financial difficulties, e.g. in the Philippines (Foley, 1992b)
Service Provision and Customer Relations
 • Service quality provided by cooperatives is often better than that of public utilities since management can more easily be held accountable and consumers are generally better informed about their rights (NRECA, 2002)
 • Fees collected for maintenance are often diverted to more pressing issues within the village if saved in village fund  obstructs maintenance effort and thereby provision of services to consumer (Foley, 1992b)
Overall Economic Development
 • Keep money and jobs within the local community, thereby adding to overall economic progress
• Empower the community leading them to get involved in other projects apart from energy as well (NRECA, 2002)
Other
• Often are managed top-down and consumer participation is low leading to same problems that utilities face, e.g. corruption, low revenue collection, poor service quality (NRECA, 2002)
• A large amount of factors need to be present simultaneously to ensure the success of cooperatives, e.g. a sufficient degree of autonomy and freedom from political interests, strong leadership

Making Cooperatives Work: Lessons Learned from Successful Programs

Key Messages

  1. Many preconditions have to be fulfilled simultaneously for cooperatives to be functional. These preconditions are partly relevant to all rural electrification programs in general and partly to the cooperative model in particular.
  2. Precondition relate to the policy and economic level.


As the case studies have illustrated cooperatives can be a well-functioning and cost effective mechanism to drive rural electrification. Yet, countries in which less salient results have been achieved with the model, e.g. the Philippines or some states in India, have shown that many conditions have to be fulfilled simultaneously to ensure that the optimal results can be achieved when employing a cooperative model. Generally these conditions fall into two broad categories with one category outlining general economic and policy factors being essential to any rural electrification approach and the other describing factors particularly important to the cooperative approach.

Among the factors indispensable to any successful rural electrification approach are:

• Policy Preconditions
• Institutional set-up
• Autonomy
• Financing: Subsidies and Tariffs.

Having leaders who are dedicated to the cause of rural electrification and can commit themselves to this cause on a long-term basis is an important policy precondition (Barnes, 2005). Considering that rural electrification is a long-lasting process institutions need to be ensured the appropriate policy and financial support in order to engage in it. One way of doing so is by establishing an institutional set-up in which one agency fully dedicates its financial and human resources to the cause of rural electrification. This agency also has to be able to act autonomously and politically independent (Foley, 1992b). In addition to that the agency also needs to provide sufficient financing as a start-up capital for cooperatives but should simultaneously ensure that subsidies are well-targeted. Tariffs are also important with regard to financing. In many countries, however, tariffs are set by institutions independent from the rural electrification process and orienting towards pleasing political constituencies making them far too low for cooperatives or utilities to cover their operating costs (AEI, 2009; Barnes & Foley, 2004). In order to avoid such problems institutions undertaking rural electrification should be involved in the setting of tariffs.

All of these conditions also need to be fulfilled when employing a cooperative approach. Additionally, institutional set-up and autonomy are two factors particular to the cooperative approach as well since not only the supporting agency needs to be ensured autonomy but also the cooperatives. This is especially important since in many countries cooperatives are often viewed as political stepping stones, using cooperative funds to finance political campaigns. Institutional set-up in this case refers to the set-up of the cooperative. It is essential for cooperatives to be based on democratic principles with members electing their boards democratically and being fully involved in decision-making processes (NRECA, 2002).

Other success factors particular to a cooperative approach are:

• Local ownership
• Leadership
• Capacity Building.


Local ownership is an important characteristic of successful cooperatives on two levels. Members of the cooperative need to be involved in the cooperative on a financial level providing a certain percentage of initial investment as an incentive to ensure the functioning of the cooperative. Members also need to be involved in the daily routines and O&M of the cooperative to perceive as sense of ownership as the case of Burkina Faso has shown (Nygaard, 2009). In order to do capacity building is important since in many rural areas residents often do not possess the necessary skills to run a cooperative. As a result constant trainings need to be provided at the staff and management level (Abdallah, 2007). Increasing the professionalism of management through training also aids in ensuring that cooperatives are under strong leadership. As the case of the Philippines has shown strong leadership is of great importance and can secure the survival and thriving of cooperatives even in corrupt political environments (NRECA, 2002).


Further Information


References

  1. ↑ Source:IEA World Energy Outlook, 2002/2006/2010


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