ENERGY & SUSTAINABLE DEVELOPMENT

1. IRADe Energy Conclave 2006 ENERGY & SUSTAINABLE DEVELOPMENT Rural Electricity Services:Institutional Arrangements for Sustainability Salman Zaheer The World Bank New Delhi July 28, 2006

2. Structure of Presentation • Three Major Challenges of Rural Electrification and how some countries have addressed them • High Cost of Electrification • Policy & Regulation • Supervision & Service Quality • India’s approach • Evolving World Bank Engagement

3. Rural ElectrificationChallenges and Impacts

4. Rural ElectrificationChilean Experience

5. Rural ElectrificationChilean Experience Results and Lessons • Coverage: 53% => 76% in 7 years with private financing • Service quality and financial sustainability achieved • Cost of expansion 30% lesser than program estimates • Instilling commercial incentive for improving access and service was the key feature of the program; • Demand driven nature supports future financial viability • Competition for viable rural businesses kept costs down, reduced fiscal burden, attracted private financing

6. Rural ElectrificationBangladesh Experience

7. Rural ElectrificationBangladesh Experience Results and lessons • Since 1980 67 PBSs serving 3.5 million customers established • Connections increased from 0.7 million in 1992 with over 0.5 million new connections being added now (vs 0.2 m in 1990s) • Sound technical and commercial performance achieved due to community involvement and despite higher than urban tariff • Other than the larger PBS’, most PBSs operate at a loss and depend on operating cross-subsidy from REB • In recent years increasing politicization and pressure to dilute economic criteria • REB-PBS model needs updating • Growing gap between demand and supply an additional problem

8. Rural ElectrificationThailand Experience

9. Rural ElectrificationThailand Experience Results and lessons • Access:10% in 1972 => 80% in 1992; 97% villages electrified • Villages contributed substantially to capital cost (based on paying capacity) to ensure rapid electrification • 25% villages contributed 30% of project cost, including from individuals and local development funds • PEA financed a major part of the program through internal resources (in some years 40 – 70%) and raised commercial loans for some schemes • Strict use of financial criteria in prioritizing schemes helped make the program sustainable • Sound technical, commercial and financial performance achieved

10. Rural ElectrificationGuatemala Experience

11. Rural ElectrificationGuatemala Experience Results and lessons • 122,000 new rural connections made between May 1999 and May 2002 • Commercial incentive to serve rural consumer ensured; • Output based aid helped ensure utility performance before receiving subsidy; • A criticism against the program has been that subsidy was made available only to existing discoms thereby restricting alternate supply providers

12. Rural Electrification India : RGGVY

13. Rural ElectrificationIndia: Challenges ahead • Aggressive connection targets • 100% households by 2012 => creates supply-side pressure • Uncertain financial sustainability • Limited consumer mobilization or participation • Tariff rationalization during program implementation • Slow pace of franchisee development • Regulation, Monitoring & Evaluation – procedures/entities not in place • Limitations of heavy-handed “cost plus” regulation • High potential for mis-targeted and “leaked” subsidies • Link program to broad rural development outcomes – farm & non-farm incomes; health services & education • Capacity building at all levels – local government, village level, and district committees • Overall power scarcity - Bold political leadership to balance sector’s economic & social objectives for long-term sustainability

14. RE Challenge - Transitioning from vicious cycle, where customer is a liability……. • Supply rationing • Inadequate O&M • Poor supply & service quality • Rising Incentive for theft & collusion • More electricity needed to meet increasing demand • BUT… • Low cost recovery • Declining ability to contract new power • FURTHER DETERIORATION IN: • Tariff collection • Financial condition • Ability to contract additional power

15. ……to a virtuous cycle, where customers progressively become assets……. • Enhanced prospects for attracting credible service providers/franchisees • Assured supply to full cost paying customers • Rationing for subsidized customers or mechanisms for targeted subsidies • Increased economic activity, employment & local incomes • At least self-sustaining O&M costs recovered from customers • Mechanisms for self-regulation – benchmarking, etc. • Increased prospects for contracting additional power from grid and local sources • Maintain service quality and financial viability

16. World Bank Program being identified…selective & strategic • State-level power reform – key bottleneck in sustainable sector development • Capacity building for governance & regulatory effectiveness • Rural energy services – for inclusive growth • Village Energy Security Program - cooking & lighting options • Distributed Generation to improve “last mile” electricity services • Power Transmission System Development • Link power generation (including clean hydro) with load centers • Promote competition - attract investment into generation • Generation expansion and emission reduction • 1,500 MW of hydropower (out of plan 16,000 MW) and 1,000 MW of thermal plant R&M (out of potential 20,000 MW) • Strengthen institutional capacity and show case good practices

17. THANK YOU!