47022 N O V E M B E R 2 0 0 8 Operational Guidance for World Bank Group Staff Designing Sustainable Off-Grid Rural Electrification Projects: Principles and Practices The Energy and Mining Sector Board ACKNOWLEDGEMENTS CONTACT INFORMATION This Note was prepared by Ernesto Terrado, Anil Cabraal and Questions and comments should be addressed to Anil Ishani Mukherjee. The Note has benefited immensely from Cabraal (acabraal@worldbank.org). the review and comments of both World Bank staff and exter- nal experts, and has been cleared by the Energy and Mining To order additional copies, please contact the Energy Help Sector Board. Special thanks go to the internal and external Desk (energyhelpdesk@worldbank.org). This Note is avail- peer reviewers, Douglas F. Barnes, Jim Finucane, Christophe able online at http://www.worldbank.org/energy. de Gouvello, Subodh Mathur, Kilian Reiche, and Dana Rysankova. Editorial support was provided by Norma Adams. N O V E M B E R 2 0 0 8 Operational Guidance for World Bank Group Staff Designing Sustainable Off-Grid Rural Electrification Projects: Principles and Practices The World Bank, Washington, DC The Energy and Mining Sector Board CONTENTS ABBREVIATIONS AND ACRONYMS...............................................................................ii FOREWORD .....................................................................................................................1 EXECUTIVE SUMMARY....................................................................................................2 CONTEXT AND BACKGROUND.....................................................................................3 CRITICAL FACTORS IN PROJECT DESIGN.....................................................................6 Comparing technology options................................................................................6 Social safeguards and environmental considerations..........................................9 Productive and institutional applications.............................................................10 Enhancing affordability ..........................................................................................11 Business models for off-grid service: central role of the private sector...........................................................................14 Regulating off-grid service ....................................................................................17 International co-financing assistance...................................................................17 GUIDELINES FOR OFF-GRID PROJECT DESIGNERS..................................................19 REFERENCES ..................................................................................................................22 i TABLES Table 1. Quantifying Electrification Benefits for a Typical Household in Rural Philippines ........................................................4 Table 2. Examples of Small-scale Productive Applications in Off-grid Areas.....................................................................10 Table 3. Subsidy Levels for Grid-connected Customers...........................................11 Table 4. SHS Subsidy Levels in Selected World Bank Projects................................12 FIGURES 1. Technology Options for Off-grid Electrification ....................................................7 2. Elements of a Sustainable Off-grid Electrification Project ................................19 BOXES Box 1. Building on Success in Sri Lanka ......................................................................5 Box 2. Solar Battery Charging Stations in Nicaragua: Solution for the Poorest?...............................................................8 Box 3. The Rural Payment Affordability Pyramid.....................................................13 Box 4. Medium Term Service Contract: Output-Based Aid Model in Bolivia................................................................16 Box 5. Sustainable Solar Market Package in the Philippines ................................16 ABBREVIATIONS AND ACRONYMS ASTAE Asia Sustainable and Alternative Energy Unit CIF Climate Investment Funds CODE Committee on Development Effectiveness ERD Decentralized Rural Electrification (Guinea) ERTIC Decentralized Infrastructure for Rural Transformation (Bolivia) ESCO Energy Service Company ESD Energy Services Delivery (Sri Lanka) ESMAP Energy Sector Management Assistance Program GIS Geographic Information System GPOBA Global Partnership for Output Based Aid IDTR Decentralized Infrastructure for Rural Transformation (Bolivia) IEG Independent Evaluation Group (formerly Operations Evaluation Department) IESRM Integrated Energy Services for Rural Mexico IPP Independent Power Producer kW kilowatt ii kWh kilowatt hour LED Light Emitting Diode LV Low Voltage MSC Medium Term Service Contract MV Medium Voltage MW megawatt PERMER Renewable Energy for Rural Markets Project (Argentina) PERZA Off-grid Rural Electrification Project (Nicaragua) PIR Rural Infrastructure Project (Honduras) PMU Project Management Unit PPIAF Public Private Infrastructure Advisory Facility PV Photovoltaic REDP Renewable Energy Development Project (China) RERED Renewable Energy for Rural Economic Development (Sri Lanka) RERED Rural Electrification and Renewable Energy Development (Bangladesh) RET Renewable Energy Technology RPP Rural Power Project (Philippines) SBCS Solar Battery Charging Station SHS Solar Home System SSMP Sustainable Solar Market Package TEDAP Tanzania Energy Development and Access Project W watt WHS Wind Home System Wp watt peak FOREWORD All countries--whether industrialized, middle income or low income--place a high priority on providing their citizens access to electricity. Despite this policy and the expenditure of billions of dollars, more than 1.5 billion people, mainly in Sub-Saharan Africa and South Asia, remain without access to electricity services today. To meet their lighting and other basic energy needs, many households continue to depend on expensive fossil fuel­based sources, such as kerosene, which are energy inefficient and polluting. Fifteen years ago, grid extension, diesel-powered minigrids, and mini-hydropower generators were, for the most part, the only electrification options available to rural communities. With the commercial maturation of various small-scale, renewable energy­based 1 technologies-- from solar photovoltaic systems to small wind generators and micro hydropower--along with the evolution of innovative service delivery models, off-grid or stand-alone service provision has emerged as a viable alternative for increasing electricity access, especially in remote and dispersed communities. More recently, the dramatic rise in fuel prices has further increased the economic attractiveness of these technology options. Among the multilateral development banks, the World Bank is the leading financier of off-grid electrification, with projects across some 25 countries benefitting over 1 million households. But the long-term sustainability of off-grid electrification depends on more than technology. It requires effective prioritization and planning to enable economic choices of technology, appropriate infrastructure to ensure that services are provided over the long run, and sustainable financing to make these capital-intensive technologies affordable. Drawing on some 15 years of experience in designing and implementing off-grid electrification projects in developing countries around the world, this Note offers World Bank staff and others interested in off-grid rural electrification projects guidance and insights into fundamental design principles for sustainability and sound practices for effective decision-making. Jamal Saghir Director, Energy, Transport and Water Chairman, Energy and Mining Sector Board Sustainable Development Vice Presidency EXECUTIVE SUMMARY Context The evidence is clear that access to electricity has marked welfare improvements. There are 260 million rural households in the developing world without access to electricity. A significant portion of this population resides in small or dispersed communities or far from the national grid. Over the course of the past 12 years, the World Bank has supported a number of projects that provide electricity to such communities using approaches that are independent of a national or regional grid (off-grid). Experience from these projects offer guidance on designing sustainable off-grid electrification projects to serve dispersed and poorer communities using technology options that have attained commercial maturity over the past 15­20 years. Purpose of the Based on practical knowledge and international experience accumulated via past and ongoing World Bank operations, this Note Guidance Note aims to provide World Bank staff and others interested in off-grid electrification with useful guidelines for designing sustainable off-grid projects. Given the unique features of projects and country situations, the note does not seek to prescribe solutions for success. Rather, it offers basic design principles and sound practices for effective decision-making. Organization of This Note is organized into three sections: (1) a Context and Background section, summarizing the rationale for off-grid the Note electrification and its complementarity with grid-extension investment; (2) a discussion of Critical Factors in Project Design, analyzed by technology choice, social safeguards and environmental considerations, opportunities for productivity and institutional applications, affordability, appropriate business models, regulatory actions, and opportunities for international co-financing; and 2 (3) Guidelines for Off-grid Project Designers. Key Message To maximize the chances of sustaining operation of off-grid electrification projects over the long term, their design must ensure that all key actors along the "value chain"--consumers, service and technology providers, financiers, and government--benefit. Government To increase the likelihood of sustainability, off-grid electrification projects must be consistent with a country's rural electrification Ownership plan for the region. Off-grid electrification must complement grid expansion. The government's recognition of the role of off-grid options is important; its support, including its subsidy commitment, and use of light-handed and simplified regulation, is essential. If the government is to have a significant implementation role, the implementing agency should appoint competent and dedicated project management staff. If access to financing is necessary and there is reluctance in lending, options such as partial guarantees, or access to longer term credit lines should be supported. Technology Project design must not be technology driven. A cost-benefit analysis of alternatives (including grid extension) must be carried out Choices to determine the least-cost solution. Technology choices must be based on practical considerations. The final choice must be left up to the service provider, who usually has other investment parameters to consider. Delivery For off-grid projects that rely on private-sector participation, the simplest delivery mechanism or business model in line with local Mechanisms and realities should be applied. Whatever business model is chosen, care must be taken to ensure that users have access to quality Consumer products and services at affordable prices and access to qualified repair service and spare parts over the long term. Service Community Maximizing the awareness and involvement of the beneficiary community early in the assessment phase is vital to the success of Awareness off-grid project implementation. Key activities include promotional programs, regular meetings with community leaders, and focus-group meetings. Productive and Productive and institutional applications that improve lives and livelihood opportunities help those who cannot afford individual Institutional household connections or systems. From the perspective of private-sector providers and investors, such applications increase the Applications economic attractiveness of the total business package for the community. International Opportunities for international co-financing should be explored given the need for specialized demand studies, training of service Co-financing providers and other vital preparatory activities, as well as the need to improve affordability of electricity services. Where subsidies are provided, obtain the government's upfront commitment to pick up the subsidy slack when external grant co-financing ends to ensure that implementation momentum is not lost. CONTEXT AND BACKGROUND Over the past two decades, World Bank investment to improve access should assign priority to grid projects and other programs have made impressive intensification--rather than off-grid electrification--as gains in improving electricity access in developing such projects have lower costs per connection and countries. Yet nearly 1.6 billion people across the are relatively easier to implement (IEG 2007). In developing world--more than 300 million households reality, government decisions for electrification in both urban and rural areas--remain without investments are based on many country-specific electricity (IEA 2006). Of the nearly 260 million factors, including equitable regional development, unserved rural households, many reside in isolated and are rarely either grid or off-grid decisions. communities far from the national electricity network. Depending on a country's income level and stage of These so-called "off-grid" communities are generally electricity infrastructure development, such decisions small and dispersed, consisting of low-income often involve trade-offs between financial viability households--characteristics economically unattractive and equity (World Bank CODE 2007). to potential private-sector energy providers or even government electrification programs that must prioritize Designing sound off-grid electrification projects is far the allocation of scarce resources.1 Unserved from an exact science. The combination of high cost of consumers are also found in concentrated rural service; poor customers; and newer, less familiar 3 communities close to the grid and already electrified technology options often makes it a more complex task cities or towns. The electrification approaches and than preparing a conventional energy project. costs required to reach these three classes of unserved Nevertheless the evidence is clear: remote communities populations differ significantly, with off-grid consumers provided any type of decentralized electricity supply have requiring more unconventional approaches.2 marked improvements in welfare (Barnes 2007). The push to privatize electricity generation and The benefits of rural grid electrification, which have distribution in developing countries during the 1990s been extensively studied and are well known, are has, in some ways, exacerbated the problem of reaching similarly realized in off-grid situations, even though the those living in off-grid areas. Private distribution utilities, amounts of power made available by decentralized driven by bottom-line considerations, have concession systems are relatively smaller and the services provided contracts that limit their service obligation to households more basic. For individual households, the main located a relatively short distance from the grid. Utilities advantage is the shift from traditional to modern lighting have little incentive to connect customers located beyond systems, typically from kerosene lamps to the superior- this limit because unit connection costs are higher and quality electric lighting. Poorer community members customers, who are generally poorer, can only be benefit indirectly from the power provided to schools, charged tariffs that are below the marginal cost of health centers, water-supply systems, and service. communication facilities. Where community conditions are favorable, off-grid electrification stimulates the A recent report by the World Bank's Independent creation of microenterprises that increase overall Evaluation Group (IEG) argued that Bank investments economic benefits. For these reasons, some off-grid The forms of energy needed in off-grid areas are not limited to electricity. In the rural areas of developing countries, including already 1 electrified areas, thermal energy from fuelwood for household cooking and use in small industries is by far the most predominant form of energy. Other World Bank initiatives, often related to forestry projects, are addressing the fuelwood supply-demand imbalance that many developing countries currently face. It is not possible to disaggregate the gross figures of unserved urban and rural populations precisely according to these three classes of 2 unserved populations and thus estimate the total size of the off-grid market. Whether an unserved community belongs to the off-grid or grid-extension group is a function not only of distance but also of load density; thus, the size of individual communities must first be determined. In addition, unserved rural communities may be undercounted. In some countries, a community is counted as electrified once the low-voltage (LV) line has been built through it and a minimum number of connections made (for example, in the Philippines, 25 connections categorize a community as "electrified," regardless of the number of households that remain unconnected). Moreover, it has been argued that many unconnected consumers in areas already served by the grid could be classified as off-grid since the temporary solution to their "pre-electrification" status may be off-grid technologies, such as individual PV systems. A useful indicator is the national electrification rate: If this rate exceeds 80 percent, it is highly likely that only truly off-grid communities remain without electricity. electrification projects have benefit-cost ratios that may investments complement grid-extension projects. exceed those of grid extension. In many World To this end, countries should adopt a rural- Bank­supported projects, the economic analysis of electrification planning framework that first compares photovoltaic (PV) and other renewable energy­based, the cost-effectiveness of the various investment off-grid service mechanisms has consistently shown options when delivering reasonable levels of service, robust economic rates of return when gains in consumer and then factors in considerations of social equity and surplus (resulting from access to higher-quality, lower- balanced regional development. The spatial-analysis cost illumination with electricity compared to traditional approach being piloted in Kenya is one such example.4 fuels) are added to the avoided fuel costs.3 Other grid expansion decision-making approaches include multi-objective criteria (Indonesia), or revenue In 2002, a World Bank study estimated the requirements per km of power line (Bangladesh). socioeconomic benefits that a typical unserved rural More development work is needed to improve such household in the Philippines would gain from grid decision tools. electrification (Barnes et al. 2002). The results, summarized in table 1, show that the benefits would In World Bank operations, off-grid electrification be substantial relative to the low income level of the investments may be small components or rural population. A similar study in Bangladesh subcomponents of larger rural energy or multisectoral 4 reached the same conclusions (Barkat 2003). projects. An example of the first type is the US$260- million Rural Electrification and Renewable Energy From a broader planning viewpoint, the question is Development (RERED) Project in Bangladesh. not choosing between grid extension and off-grid Initiated in 1997, the RERED Project allocates about electrification but deciding how and when off-grid $230 million for rehabilitation, grid extension, and grid intensification in selected rural areas, while $30 million is earmarked for off-grid electrification. This Table 1. Quantifying Electrification Benefits project is supporting the installation of 8,000 SHSs for a Typical Household in Rural Philippines monthly. The $47-million Rural Infrastructure Project (PIR) in Honduras, which invests in roads, water and BENEFIT BENEFIT VALUE CONSUMER CATEGORY (US$/MONTH) TYPE sanitation, and rural electrification, exemplifies the second type. About 75 percent of the rural Less expensive and 36.75 Household expanded use of electrification component is for grid-extension lighting investments, with 25 percent for off-grid systems. Less expensive and 19.60 Household In Sri Lanka, several renewable-energy and energy- expanded use of efficiency projects fall into this category (box 1). radio and television Improved returns on 37.07 Wage earner In certain cases, projects may be dedicated entirely to education and off-grid electrification. Most of these are so-called wage income "last-mile" projects. In Mexico, for example, where an Time savings for 24.50 Household electrification rate of 97 percent has been achieved, household chores some 3.5 million people in the rural areas of southern Improved productivity 34.00 (current Business states remain unserved because of distance from the of home business business); 75.00 (new business) grid, small size of communities, and general poverty. The recently initiated, US$98-million Integrated Source: Barnes et al. (2002). Energy Services for Rural Mexico (IESRM) Project is a For PV, for example, the economic rate of return with consumer surplus ranges from 27 to 94 percent for projects in Bolivia, China, 3 Indonesia, Philippines, and Sri Lanka. Kenya is considering a geographic information system (GIS)-based, spatial-analysis planning approach to expand electricity access. For a 4 projected load over 10­15 years, the analysis determines the least-cost grid rollout plan to meet the government's national- and rural- access targets. As part of the analysis, the least-cost off-grid rollout plan is configured for loads considered economically too small or remote to be connected to the grid. Because results can be viewed spatially, the approach may be effective in getting key stakeholders-- from policy makers to communities--on board (Columbia Earth Institute 2007). dedicated off-grid project that uses a variety of BOX 1: Building on Success in Sri Lanka renewable energy technologies (RETs). Over the past decade, the Renewable Energy for Rural In the Pacific Islands, the US$9.5-million Sustainable Economic Development (RERED) Project, launched in Energy Financing Project for the countries of Papua 2002, and its predecessor Energy Services Delivery (ESD) New Guinea, Solomon Islands, Vanuatu, Fiji, and Project have helped thousands of poor rural households Marshall Islands focuses on off-grid electrification in Sri Lanka to switch from poor-quality kerosene lamps using mainly solar PV. Approved in 2007 and to more efficient electric lighting. The ESD Project, financed by the Global Environment Facility (GEF) initiated in 1997, provided private-sector firms, and International Finance Corporation (IFC), this nongovernmental organizations, and cooperatives small, project draws on the results of an earlier, smaller output-based grants and medium- and long-term activity that successfully provided solar home-lighting financing for SHSs and village micro hydropower in off- kits on commercial basis to 2,500 teachers as part of grid areas, as well as grid-connected mini-hydropower schemes. The US$45 million project resulted in an effort to improve teacher retention in remote electricity provision for over 22,000 off-grid households areas of Papua New Guinea. Under the project's and private-sector investment in 30 MW of grid- financing mechanism, the GEF grant was used to connected, renewable-energy power plants. Building on extend the loan tenure to make monthly payments this success, the RERED Project, with $75 million in IDA affordable, rather than using it upfront to reduce the credits and $8 million in GEF grants, has supported 5 purchase cost. Increased market volume and supply private-sector investment in an additional 85 MW of competition resulted in a 50-percent reduction in the grid-connected, renewable-energy electricity generation, cost of the kits. more than 100,000 SHSs, and independent micro- hydropower grids. In 2007, an additional US$40 million Historically, World Bank staff has played a key in IDA financing was provided to support another role in advising and assisting clients in the early 50,000 off-grid connections and 50 MW of renewable- conceptualization and design phase of off-grid projects, energy, electricity-generation investments. often in relation to preparing broader rural-electrification Implementing the private sector­led renewable energy or energy-sector lending. They have helped clients to program has created a vibrant local industry of suppliers, conduct analyses, enabling them to make appropriate developers, financiers, consultants, and trainers. By June investment decisions and assess the technical, 2008, some 120,000 households were using SHSs, with economic, financial, and institutional options for 750 new installations occurring monthly. Nearly 6,000 implementation. Today, off-grid electrification is an households are obtaining electricity from micro-hydro increasingly important area for World Bank energy- minigrids that communities own, operate, and manage. sector lending. A recent review of 120 World Bank One hundred MW of mini-hydro and biomass electrification projects shows that, over the past decade, based­powered grid-connected plants are in operation nearly half had off-grid components, compared to only and contributing 4 percent of electricity to the national 13 percent a decade earlier (IEG 2007). grid. Another 25 MW are under construction. Details are available at www.energyservices.lk. Based on practical knowledge and international experience accumulated via past and ongoing World Bank operations, this Note aims to provide World Bank staff and others interested in off-grid principles and best practices for effective decision- electrification useful guidelines for designing making. sustainable off-grid rural electrification projects. Given the unique features of projects and country situations, the note does not seek to prescribe solutions for success. Rather, it offers basic design CRITICAL FACTORS IN PROJECT DESIGN alone, wind-power plants.7 Less common are biomass-based power plants, such as small gasifier- Designers of off-grid electrification projects are engine systems or, for larger loads, direct combustion responsible for a range of critical decisions that affect systems with steam turbines. Figure 1 illustrates the sustainability. These decisions include technology general decision-making steps in off-grid project choice, ensuring affordability, social safeguards and design and the typical technology choices. environmental considerations, as well as taking advantage of opportunities to initiate and enhance Diesel generators ranging from 5­10 kW portable productive activities and institutional applications. systems to MW-capacity power plants have been the Project designers must also consider ways to use traditional solution to decentralized electrification appropriate business models, determine necessary needs. They can provide larger amounts of power at regulatory actions, and explore opportunities for much lower investment cost per kilowatt than international co-financing. hydropower or wind-based alternatives. For off-grid applications, the two main drawbacks of diesel are 1) Comparing technology options the high cost of fuel and its transport to the remote site and 2) the need for regular, skilled maintenance Once it is established that connecting an unserved of equipment. The latter drawback also applies to 6 community via grid extension is not justified, the next certain RET systems, such as biomass gasifier step is to determine which decentralized technology engines. For these reasons, along with environmental or mix of technologies is suitable.5 Implicit in the considerations, World Bank­funded off-grid projects overall process is the upfront collection of baseline have generally avoided the use of diesel generators. data on energy consumption, income, and willingness Recent skyrocketing oil prices have dramatically to pay among the various sectors in the community increased recurring fuel costs and greatly diminished and information on the availability of local energy the low capital-cost advantage of the diesel option. resources. Where customers are few and dispersed Nevertheless, in many situations, diesel minigrids may and their main electricity use is domestic lighting, still offer the most practical solution.8 For example, individual systems, usually SHSs, are used. Where the Decentralized Rural Electrification (ERD) Project in water resources are available, pico-hydro systems of Guinea has 11 private concessions successfully less than 5 kW have also been used for individual operating isolated diesel minigrids, delivering 4­5 homes, small farms, or clustered households located hours of daily service to their respective communities near the river. For other World Bank projects, wind (Mostert 2008). In Cambodia, estimated 600­1,000 home systems (WHSs) are being piloted.6 rural electricity enterprises are supplying some 60,000 rural households with electricity, typically Where most customers are concentrated enough to using 100-kW diesel generators (Australian Business be economically interconnected into a microgrid or Council for Sustainable Energy 2005). minigrid, a centrally located generating system-- diesel generator, RET, or hybrid diesel-renewable--is However, RETs that use wind, hydropower, and the preferred solution. In World Bank off-grid projects, biomass face strict limitations imposed by site the most commonly used RET systems are run-of-the- specificity and seasonality of resources. For example, river micro- or mini-hydropower plants and stand- micro- and mini-hydropower plants can only be built In this context, "decentralized" refers to not being connected to the central electricity network. Some decentralized options for 5 concentrated customers are centrally located (i.e., within the village) generation systems connected to isolated minigrids. A WHS is a commercially available, compact wind-turbine system that can deliver a monthly amount of energy comparable to a large 6 SHS, depending on the average wind speed. An example is the Southwest Windpower Air X, which has a 1-m rotor diameter, a rated capacity of 400 W, and delivery of an estimated 38 kWh per month at a wind speed of 5.4 m per second. The system is priced at about US$600. World Bank projects in Argentina, Mexico, and Mongolia include WHS pilot components. Most countries define micro-hydro, mini-hydro, and small-hydro capacities as up to 100 kW, 100­1,000 kW, and 1­10 or 30 MW, 7 respectively. For example, diesel minigrids may be preferred in locations that lack hydropower resources; have an uncertain wind regime, concentrated 8 demand, and productive loads too large for PV; and where diesel supply is not too difficult to obtain and local persons can be trained as technicians for basic operation and maintenance. FIGURE 1. TECHNOLOGY OPTIONS FOR OFF-GRID ELECTRIFICATION DISTANCE DISPERSION FROM GRID SIZE OF TYPE OF DEMAND LOAD DECISION: DECISION: OFFGRID MINIGRID OR GRID EXTENSION INDIVIDUAL OR OFFGRID? SYSTEMS? CONCENTRATED: DISPERSED: SOME PRODUCTIVE MAINLY HOUSEHOLD LOAD LIGHTING INDIVIDUAL MINIGRID SYSTEMS 7 RESOURCES AVAILABILITY COMMUNITY ORGANIZATION INCOME LEVEL EQUIPMENT AVAILABILITY DIESEL SHS RET* WHS DIESEL/RET PICO- HYBRID HYDRO BATTERY *RET: WINDPOWER, SOLAR PV, HYDRO, BIOMASS GASIFIER, BIOMASS DIRECT COMBUSTION at sites where hydropower resources meet minimum in situations where all customers live near the station requirements for head and flow rates on a year-round since the battery must be transported to and from the basis. In certain cases, reaching such locations is station for charging about once a week.9 The SBCS extremely difficult for project staff and equipment was conceived as a technology for the poorest of the providers. Wind-power systems require average wind poor--those who could not afford to purchase SHSs. speeds of at least 4 m per second for small turbines. The idea was to allow such households to charge their To gain confidence in the continued availability of the batteries only when they could afford to, without any resource, site monitoring of wind speeds must be regular payment commitment. As explained in later conducted for at least a year prior to building a turbine. discussions on delivery mechanisms, fundamental Biomass-based systems must be assured a constant problems with the concept have been encountered in supply of the appropriate type of biomass fuel over the practice (box 2). project life. In several past World Bank­supported projects, meeting this condition has proven difficult. Seasonal and daily resource variability adds significantly BOX 2: Solar Battery Charging Stations in Nicaragua: to the cost since the off-grid generating source must be Solution for the Poorest? designed to meet the energy demand when resource availability is lowest. For example, a micro-hydropower In indigenous communities of Nicaragua's remote 8 plant large enough to supply demand during the dry Atlantic Zone, seven solar battery charging stations season would have to dump the energy generated in (SBCSs), each with a 2-kW capacity, were installed in the other months unless optional loads could be added 2006. Each SBCS served some 50 households, and at that time. each family was provided a battery and lighting kit. The Nicaraguan government bore the capital cost of the To circumvent the problem of intermittent resources, stations and initial battery expenses. Beneficiary wind and even small hydro systems are sometimes communities were trained to operate, financially manage, and maintain the stations. Each family paid a hybridized with diesel generators. Such hybrid monthly fee of US$5 to cover weekly battery charging systems are used in cases where interruptions in and contribute to a fund for buying replacement electricity supply cannot be tolerated (e.g., cold batteries. storage of foodstuff in remote communities). PV systems have also been used in hybrid systems with The original concept was to allow families to charge diesel and wind but the significantly higher cost of PV their batteries only when they had available cash (much may make such combinations uneconomic, except like the retail buying of cooking oil or firewood), but the when the electricity is used to reduce expensive fuel concept proved unworkable in practice. To sustain the consumption. Hybrids with diesel generators are station business, each user family had to commit to possible only where diesel fuel can be reliably regular monthly payments, which became a major transported to the site and users can afford fuel costs stumbling block for this off-grid approach. Although that may escalate over time. community organizations managed SBCS operations well, the users--mainly poor subsistence farmers-- eventually could not afford the monthly fees. Several World Bank projects have piloted the use of centralized battery charging systems powered by solar The Off-grid Rural Electrification Project (PERZA) has PV, known as the solar battery charging station (SBCS). addressed this problem by working to raise farmers' The SBCS can charge several batteries simultaneously incomes. For example, the Project has developed a with the use of modern automatic charge controllers. customized microbusiness services program that assists A typical station with a 2-kW capacity can serve the in the bulk transport and marketing of crops and needs of about 50 households if the battery is used livestock and advises on agricultural matters. It has also mainly for domestic lighting. The SBCS is suitable only arranged for non-cash payment for battery charging. With the advent of LED and its smaller power requirements, smaller and lighter rechargeable batteries can be used, thus reducing the difficulty of 9 transport. The World Bank Lighting Africa initiative supports such applications. Stand-alone batteries continue to be used in the Irrespective of technology choice, attention must be unelectrified fringes of urban grids or rural minigrids of paid to ensuring that the products provided to many countries. Households transport the batteries for consumers are reliable and deliver promised service charging to grid- or minigrid-connected charging levels. In past instances where quality was stations run by private merchants as a side business. compromised to reduce investments costs, there were For diesel or hydro minigrids in off-grid electrification, serious negative consequences in terms of consumer adding battery charging stations makes economic sense satisfaction. The resulting non-payments and as they have close to zero marginal cost when demand reputational risks discredited the technologies and is lowest (e.g., daytime for a micro-hydro system). projects. Adequate attention must also be given to ensuring that consumers have convenient access to The predominant technology used for individual maintenance services and spare parts. In some past households in off-grid projects is PV, mainly as SHSs. projects, quality systems were installed without providing Typically, a SHS consists of a 10­100 Wp solar PV for longer-term maintenance, which harmed the panel, a low-maintenance deep-cycle or modified reputation of the project and technology.12 automobile battery to store the solar energy collected in the daytime, a controller to regulate battery charging, In practice, when an energy service company (ESCO) cabling, and low-wattage DC lamps.10 In World Bank or private implementer is awarded an off-grid projects, some 1.3 million PV systems for homes and concession or market package, the desired service 9 community centers have been installed or are planned outcome for end users must be the only defined for installation, with a total capacity of more than 60 objective. In accordance with the principle of MW at a total investment cost of about US$680 million. technology neutrality, the choice of technologies must be left to the service provider. If a project objective Over the past few years, advances in white Light is to promote RETs, appropriate subsidies must be Emitting Diode (LED) technology have made LED provided in order to level the playing field. But even products commercially available for lighting applications, in that case, the service provider, who often has other and reliability and quality have gradually improved. investment parameters to consider, must make the Assembled into mechanically or solar powered lights, final choice. such products might be considered when products cheaper than SHSs are needed to provide basic Social safeguards and lighting services.11 environmental considerations The predominant role of PV systems in off-grid Off-grid systems may use such products as lead-acid electrification is not the result of a technology bias by batteries and compact fluorescent lamps (CFLs), which planners. PV is the only technology that can function must be recycled or disposed of safely. Off-grid virtually anywhere despite geographic variations in the electrification projects should coordinate with national resource (i.e., solar radiation intensity or number of recycling programs. In locations without such days without sunshine). In most areas of developing programs, arrangements must be made to educate countries, the solar resource is more than sufficient users and require project implementers to recycle and throughout much of the year to enable PV systems to ensure safe disposal of any hazardous waste. Mini- and function usefully. There is usually no need to conduct a micro-hydropower projects should adhere to national solar radiation measurement program during the pre- guidelines or regulations regarding watershed investment phase. PV systems are modular and rugged; protection, land use, and land acquisition or adopt they require little maintenance (mainly periodic cleaning World Bank guidelines appropriate to the scale of of the glass panel), although arrangements must be intervention. Where minigrids are used, national made to obtain spare parts and repair services. electrical codes appropriate to the scale of the power In recent years, demand for portable solar lanterns, the smallest PV system (about 10 W), has surged, mainly because of affordability. 10 The World Bank Lighting Africa initiative supports market development and quality improvement of such small, low-cost lighting products. 11 The World Bank's Renewable Energy Toolkit (REToolKit) website provides information and examples of technical standards and references for 12 qualified products used in current projects; details are available at www.worldbank.org/retoolkit. system should be adopted. Examples of standards and Table 2. Examples of Small-scale Productive specifications for solar PV, small wind, and micro-hydro Applications in Off-grid Areas minigrids can be found in the REToolKit. The website of the Sri Lanka RERED Project also provides sound PRODUCTIVE TYPICAL PEAK TECHNOLOGY APPLICATION POWER REQUIRED practices applicable to off-grid electrification.13 Cell-phone charging 5 W PV Productive and institutional applications Electric fencing (grazing management) 20­100 W PV Many off-grid communities have economic activities that Water pumping require energy or have a strong potential for initiating (fish farming) 0.5­3 kW PV, wind-electric such activities but are constrained by a lack of modern Grinding energy supply. Economic activities are often related to (corn and wheat) agricultural production and processing, fishing or fish and milling (paddy) 0.5­3 kW wind, PV/diesel hybrid, farming, livestock raising, water pumping, or small- micro hydro Refrigeration cottage industries. Many require only small amounts of (dairy products, fish, 0.5­10+ kW wind, PV/diesel hybrid, power (from 100 W to 3 kW), which could be provided meat) micro hydro by stand-alone RETs. Off-grid project designers must 10 Micro-irrigation 1­3 kW PV, wind-electric, micro hydro take advantage of any opportunity to initiate or enhance productive activities as they significantly increase the Ice making 2­10 kW wind-electric, micro hydro prospects for long-term project sustainability. The key Source: Adapted from Weingart and Giovannuci (2002). ingredients are providing small private entrepreneurs or community organizations technical assistance and financing (table 2). by small diesel or gasoline engines; they not only indicate significant potential for utilization but also a The cost of a micro-hydro system built to serve a small high willingness to pay for electricity service. community's electricity needs may be sometimes justified only when productive loads--especially daytime loads-- Institutional or community applications are another are large enough to supplement the nighttime important market segment for off-grid electrification. household loads. If not, SHSs or other individual For example, the operations of schools, clinics, and systems may be the least-cost alternative. The key is to community centers can be significantly enhanced by ensure that the potential productive application is likely electric lighting, refrigeration, educational television, to happen once the micro-hydro plant is built. This computers, communication and simple entertainment means identifying the likely local participant for the systems that require small amounts of power. In some microbusiness early on and assisting that individual in World Bank projects, public- or donor-funded developing a business plan and identifying financing institutional applications have been used to offer a modalities. In many unsuccessful projects, the decision "critical mass" of business for PV market packages to build an expensive micro-hydro plant was based on offered for bidding.14 The winning bidder is given the consultant studies whose over-optimistic evaluation of right to access grant assistance to sell SHSs to potential productive applications proved impractical to households in the package area and a contract to install implement. These types of projects fare much better specified PV systems in selected institutions. An where already-existing productive activities are powered important feature of this model is the requirement to Details are available at www.energyservices.lk; "forms and specifications" links to various useful documents: environmental assessment TOR, 13 environmental and social assessment and management framework, certificate of compliance (environmental and social assessment), post- completion environmental audits TOR, physical-asset verification form for village hydro projects (for environmental consultants), and guidelines on treatment of wooden poles. In the Philippines Rural Power Project, this type of initiative is known as the Sustainable Solar Market Package (SSMP) or Project ACCESS. 14 Communities are clustered into viable business packages for PV installations consisting of households and public centers; PV installations and maintenance in public centers are paid for by the government or other private donors, while a partial grant makes household systems affordable. The contractor is obligated to provide services to a minimum percent of households in the area. SSMP contracts are competitively awarded. This approach is now being considered in Tanzania and Zambia. provide long-term maintenance and services that meet generally poorer and more dispersed. At the same specific service standards. The relatively large unit size time, technologies for decentralized service, of the institutional installation and its assured nature configured as individual units or minigrids, have (as opposed to individual households, who may not opt higher investment costs but lower fuel and operating to sign up) greatly increase the package's attractiveness costs compared to diesel and other fuel-based supply to private-sector bidders. The paid-for requirement to systems. Even so, the resulting energy cost may service the institutional applications also creates the exceed consumers' ability or willingness to pay. In infrastructure to support retail sales in the same area. such cases, subsidies can help off-grid consumers afford the high upfront cost of access. A recent study has categorized these types of actions as systematic and pragmatic approaches (de Gouvello Subsidies for off-grid populations are justified on social- 2008). The systematic approach "analyzes the equity grounds; that is, the need for remote or poor technologies used in the production processes of dwellers to achieve a level of parity with households in goods and services in a specific rural area. It identifies concentrated areas that benefit from subsidized grid- the bottlenecks, [determines] whether the use of extension infrastructure costs and lifeline tariffs (table 3). electricity can contribute to diminishing or removing There is also the expectation that the welfare gains the limiting factors, evaluates the costs and gains, from off-grid interventions are higher than the long- and provides guidelines to induce the proposed term costs (Barnes and Halpern 2000). 11 change in the processes. The pragmatic approach, on the other hand, follows an opportunistic tactic, Market imperfections--potential investors' lack of taking advantage of pre-existing opportunities resulting information on specific opportunities, unavailability of from the ongoing or planned implementation of another long-term financing for the project type, and inability to project or program.15 It is implemented when conditions collect tariffs that reflect the true cost of service--often are ripe for a quick-win project that would provide prevent already economic off-grid projects or those rapid revenue-enhancing gains, facilitated by access to electricity." The study argues that, to succeed, rural electrification programs should aim to generate new Table 3. Subsidy Levels for Grid-connected revenues and directly affect livelihoods. Customers Enhancing affordability COUNTRY GRID- CONNECTION SUBSIDY LEVEL (% OF CONSTRUCTION AND CONNECTION COSTS)1 To increase affordability, off-grid project designers Costa Rica must consider the role of subsidies, consumer financing, 20­30 low-cost technology options, and policies and Chile 70­80 business practices. Honduras 85 Role of subsidies China 85­90 Like grid-based rural-electrification programs, off-grid Mexico ~95 programs may require subsidies, although operations Tunisia 100 are fully commercial in certain countries (e.g., solar PV in China and Kenya; several PV company operations Philippines2 100 (plus a portion of fuel and operating costs) in India; micro-wind in China and Mongolia; and Source: Various World Bank reports. pico-hydro in Laos and Vietnam). Compared to grid- 1 Excludes subsidy for lifeline tariffs below the marginal cost of connected customers, off-grid populations are electricity supply. 2 Diesel gensets. For example, education ministry programs to improve school facilities or health ministry programs to upgrade rural health centers. 15 close to economic in lifecycle cost comparisons with Zambia--provide subsidy support through rural conventional alternatives from being implemented. electrification or rural energy funds that transparently Appropriately designed subsidies for off-grid cover the subsidy portion of electrification costs. electrification enable the proposed physical interventions Both grid and off-grid investments are eligible to to occur sustainably by providing otherwise uninterested receive support. investors, equipment dealers, and service providers the needed financial incentives and support. Role of Financing The key is to design subsidy mechanisms that are Subsidies might be complemented or substituted by efficient (focused on the most economic projects), encouraging or supporting microfinance institutions, targeted (can reach poor consumers), and effective commercial or development banks, or even leasing (are made part of implementation programs that work) companies to offer consumer and/or trade financing (Barnes and Halpern 2000). For example, it is (box 3). Such arrangements can increase considered more effective to subsidize access (e.g., affordability by spreading first costs over several the upfront costs to consumers or business costs in years. Since financing off-grid electricity products the area) than operating costs. Subsidy instruments may be unfamiliar to the financing entity, credit tested for off-grid electrification are varied and enhancement, such as a partial risk guarantee, as in 12 designed to match the type of delivery mechanisms the Philippines, may help reduce the perceived risk to chosen for specific technologies.16 Table 4 illustrates the lender. Some dealers have attempted to offer the level of subsidies provided for SHSs in selected dealer financing; however, working capital constraints World Bank projects. The wide variation reflects and lack of experience in credit-facility management system costs, willingness-to-pay levels, and have limited the success of such efforts. government attitudes toward subsidy support.17 Successful off-grid lending programs involve a strong Various countries--for example, Bolivia, Laos, Nepal, partnership between the microfinance institution and Papua New Guinea, Philippines, Tanzania, and an energy company. The effectiveness of that Table 4. SHS Subsidy Levels in Selected World Bank Projects COUNTRY PROJECT PV SYSTEM APPROXIMATE SIZE (WP) SUBSIDY RANGE (% COST) China REDP 15­500 15­22 Bangladesh RERED 20­70 12 Argentina PERMER 50­100 up to 50 Tanzania TEDAP 20­50 13­21 Sri Lanka* RERED 10­60 10­25 Philippines RPP 20­100 20­60 Mexico IESRM 50­100 up to 90 Source: Sources: Various World Bank reports. *In Sri Lanka, the capital subsidy for micro-hydro minigrids is US$400 per kW or about 15­20 percent of investment cost. To ensure that SHS subsidies target the poorest consumers, the product dissemination practice has been to skew the subsidy provided per watt 16 of capacity toward the smaller systems. For World Bank projects in China and the Philippines, the most popular SHS has been the 20-Wp unit. The SHS subsidy in China is US$1.5­2 17 per Wp, compared to $12 per Wp in the Philippines, reflecting that country's higher product cost. The unsubsidized unit cost in China is $9 per Wp, compared to $20 per Wp in the Philippines. BOX 3: The Rural Payment Affordability Pyramid Even in poor off-grid areas, market segments often can Cash (2-3%) support private sector­led microenterprises for electricity- service provision if the population base is large enough. Cash and micro-credit (5-20%) Typically, 2­3 percent of residents can afford cash payment for the service. With microcredit, the customer Cash, micro-credit and base can reach up to 20­30 percent of residents. micro-rental (20-50%) Microleasing may expand the market to 40­50 percent. Longer-term, fee-for-service arrangements could further Long-term fee-for-service reduce monthly obligations, thus reaching more poorer (50-70%) segments. The base of the pyramid to the right represents the poorest of the poor, which may require fully subsidized social programs or small systems that offer limited Social Programs service (e.g., a white LED lantern costing US$5­10). For PV projects including systems for schools, clinics, 13 and other community establishments, some benefits are effectively extended to those who cannot afford to purchase their own systems. Source: Adapted from Hansen (2006). partnership depends on a clear understanding of the Saharan Africa, the Lighting Africa initiative builds on roles and responsibilities of each partner and their the philosophy that small, modern lighting products competency and capacity (Winiecki et al. 2008). can be marketed at prices similar to or lower than those rural households typically pay for kerosene by Role of Technology limiting services to lighting, taking advantage of LED technological advances and cost reductions, and One technical option to enhance affordability is to tapping into Africa's existing distribution and retail provide smaller, lower-power systems that offer a infrastructure. lower quantity of service (e.g., reduced hours of lighting), without compromising quality (Cabraal et al Attention to the quality of both products and services 1996). For example, a solar lantern costing US$50- can also lead to reduced costs, as warranty repair 75 can provide 3­4 hours of lighting daily. A 50-Wp and replacements can be expensive. Moreover, SHS costing US$600 can operate four lights for 3­4 satisfied customers help expand businesses and hours and power a radio or television for a few hours hence reduce the relative share of overhead costs. daily. Under the Renewable Energy Development Project (REDP) in China, where consumers had Role of Policies and Business Practices limited financial capability and lacked access to financing, most purchased low-cost 10- and 20-Wp Reducing the capital cost is another way to improve SHSs (US$80-160) initially and larger 45-Wp systems the affordability of capital-intensive off-grid (US$400) after their incomes increased. In Sub- technologies. In some countries, duty structures bias consumers against off-grid technologies, encouraging private investors/operators. If so, the business model further consumption of kerosene and other less suitable involves calculating a tariff roughly commensurate alternatives that may be subsidized or exempt from with consumers' ability and willingness to pay and, the value added tax and other duties (IFC 2007). if necessary, providing sufficient capital subsidy to Such countries as Kenya and Tanzania have recognized assure the investor/operator a reasonable profit. the value of off-grid technologies, such as solar Additional support involving technical assistance, PV, and have exempted them from import duties. site surveys, feasibility studies, and capacity-building Since certain components of off-grid power systems may be provided to the investor during the project have multiple uses (e.g., batteries), fiscal authorities development phase. Since establishment of minigrids are sometimes reluctant to grant duty exemptions, are premised on the development of productive which can be abused. One option for governments loads, the community or relevant individuals may to consider is to grant exemptions only for off-grid also require related technical and financial assistance. equipment that has met prescribed quality standards. Larger-volume procurements or orders that are Micro-grid systems in isolated areas are unlikely to predictably and regularly placed with suppliers may attract private-sector interest. A prevalent business receive discounts. Building long-term relationships model in such cases involves organizing the community with suppliers may be beneficial, as some will offer to become the owner and operator, providing 14 supplier credits and help reduce working capital maintenance, tariff collection, and management requirements. Project procurement rules should services. Understandably, such a community-based permit taking advantage of such incentives. A larger- model requires substantial technical assistance in scale operation will also reduce the share of costs design and feasibility studies, training, and social attributed to management, sales, and overhead. organization, as the Nicaragua case illustrates (box 2). Business models for off-grid service: As part of its rural electrification program, the central role of the private sector government may offer funding and invite proposals from private-sector or nongovernmental organizations. World Bank­supported off-grid electrification projects Alternatively, the government may establish a rural principally aim to improve electricity access for energy fund and offer to support such investments on populations in remote areas that are unlikely to be a first-come, first-served basis. In either case, it is reached by grid extension within a reasonable time sound practice for the government to subsidize a frame. Intertwined with this goal are the objectives portion of the capital cost, while the community or of having players other than governments implement private sector covers the balance investment cost and the work, mobilizing additional human and financial full cost of operation and maintenance. In setting up resources, and reducing pressure on already community-owned and -managed, micro-hydro grids overextended utilities. Alternative players could in Sri Lanka, the communities borrow from banks to include private-sector companies or individuals, supplement a subsidy of about 15­20 percent of the nongovernmental organizations, or community-based capital costs (box 1). organizations (for examples, see Gunaratna 2002). The key is to develop a system of incentives A third approach is one where a public utility or sufficiently attractive for these players to do business government-contracted ESCO operates a small, in off-grid areas. isolated microgrid. In this case, tariffs are regulated (e.g., set at a level equivalent to the lifeline tariff of For isolated minigrids, system location and scale, rural grid customers). The utility or ESCO operator is income profile of potential customers, and available provided a subsidy from a cross-subsidy fund or other subsidies dictate whether the enterprise can attract public source of capital and perhaps a portion of operation-and-maintenance costs. This model is off-grid technologies, PV was determined the most now being applied in China to operate more than cost effective for many remote areas with dispersed 700 centralized, PV microgrids, each with a customers. This model was considered suitable, 10­150 kW capacity. The Philippines has used given Argentina's long experience with concessions such an approach for many years to fund its for concentrated electricity markets. Thus, the isolated diesel operations. requisite regulatory framework and procedures for dispersed markets could be easily added to the For individual systems, most World Bank experience existing system. has centered on commercial dissemination of SHSs, starting in 1996 with the first PV rural-electrification The Senegal Rural Electrification Project, initiated in lending operation in Indonesia. Today, several 2003, used a similar concession model with exclusivity projects feature PV as a component of a broader rights. But in this case, the total subsidy was energy or infrastructure operation or dedicated off- predetermined. The winning bidder for a concession grid electrification effort (Energy and Mining Sector area was the firm that offered to provide the most Board 2007). The largest such effort to date is connections in the first three years; the firm was located in remote areas of northwestern China, also required to make a minimum number of where, at project end in June 2008, sales of more connections beyond 20 km from the grid (de Gouvello than 400,000 systems had been achieved, and Kumar 2007). One non-Bank project widely 15 benefiting 2.5 million people. considered a successful example of the concession system is the Morocco project, with a target of The business models for commercial PV dissemination 180,000 SHSs, initiated by the National Electricity may be classified as 1) dealer (direct sales or open Office in 2002. Today, the main concessionaire, market) and 2) fee for service (ESCO). In the Total EDF Maroc Solaire (TEMASOL)--a joint dealer model, the consumer purchases the system subsidiary of EDF (Electricité de France) and Total-- either with cash or financing. Beyond warranty operates in 24 provinces with 53,000 customers service, the consumer assumes responsibility for (TEMASOL 2008). all operational and replacement costs. In World Bank projects, the dealer model often features The model used in the World Bank­supported microfinance assistance, which addresses the Decentralized Infrastructure for Rural Transformation issue of high upfront costs.18 In the fee-for-service (IDTR) Program in Bolivia can be viewed as a hybrid model, the consumer is provided electricity service, of the above-mentioned models. Known as the the level of which depends on system capacity. Medium Term Service Contract (MSC), this model The company, which retains ownership of the adds mandatory local-market development and 2­5 equipment, is responsible for maintenance and years of operation-and-maintenance services to the providing replacement parts over the life of the dealer-model requirements for participating companies. service contract. The model can also be considered a revision of the traditional ESCO concession scheme, whereby the An early fee-for-service example is the concession exclusivity term is reduced to only 2­5 years and model applied in the Renewable Energy for Rural opened to a broader menu of ownership options Markets Projects (PERMER), initiated in Argentina in (box 4). 1999. Franchise rights to rural-service territories were granted to concessionaires that required the Variations on the above-described models include the lowest subsidy to provide households and public leasing model--pioneered by Soluz in non-Bank centers service in the concession areas. Although projects in Honduras and the Dominican Republic-- concessionaires could choose from a wide range of which falls between the two categories. A SHS is An exception is the China project, which lacked rural-credit facilities; in this case, consumers were used to paying cash, and no microfinancing 18 was introduced. The issue of high upfront costs was addressed by driving down costs in various ways, particularly with low retail margins, using "plug-and-play" systems that required no installation and focusing on smaller, more affordable units. Initially, consumers bought small systems (10­20 Wp); subsequently, as their incomes rose, they bought larger ones (40­100 Wp). provided to the consumer via a direct lease or lease- The dealer model usually allows accredited dealers to-own agreement. The sustainable solar market to sell anywhere in the country. But in certain World package (SSMP) used in the Philippines combines a Bank­supported projects (e.g., PIR in Honduras and tendered contract for institutional installations with PERZA in Nicaragua), subsidies are provided only incentives and the non-exclusive opportunity to sell for sales in designated priority areas, although SHSs to households in the area (box 5). microfinance assistance is less restricted geographically. BOX 4: Medium Term Service Contract: Output-Based Aid Model in Bolivia In 2003, the Decentralized Infrastructure for Rural Transformation (IDTR) Program was initiated in Bolivia. This 10- year, US$60-million effort aims at increasing rural access to electricity and information and communication technologies via decentralized public-private partnerships that benefit from performance-based subsidies or output based aid (OBA). For PV market development, the Program adopted the Medium Term Service Contract (MSC), an approach between traditional concessions (of longer duration) and the dominant SHS dealer or credit-line model (competition in the market without exclusive areas). The MSC model is thought to fit Bolivia's "last-mile" market conditions: increasingly difficult-to-reach rural markets in extremely remote areas. 16 In 2005, 14 service contracts, ranging from 350 to 2,200 future SHS users in size, were successfully bid out in a one-stage, multi-lot tender. To minimize subsidies the government had to pay private providers, each area was awarded to the qualified bidder promising to service the largest number of users at a given total subsidy per area, with well-defined performance indicators. Price caps were set to prevent monopoly pricing, while minimum user requirements per area were fixed to prevent excessive unit subsidies. Out of 11 pre-qualified consortia, two bidders were awarded the SHS tender, and subsidy contracts for all 14 service areas were signed. An intensive road show in 2005 was essential in attracting enough bidders. After an initial delay, implementation started in July 2006, and more than 1,000 SHSs were installed by the end of that year. Both providers maintained their original targets despite changes in Bolivia's investment climate and regional shortages of SHS equipment supply. Source: Reiche, Rysankova, and Goldmark (2007). BOX 5: Sustainable Solar Market Package in the Philippines The Sustainable Solar Market Package (SSMP) is a contracting mechanism that provides for the supply and installation of PV systems, along with a maintenance-and-repair contract (e.g., 5 years with an option to extend) in a defined rural area. Applications in schools, clinics, and other community facilities are bundled with requirements and incentives for commercial sale to households, businesses, and other nongovernmental customers. Funding for the public and community-services facilities is provided by the government or other donors, while a grant is used to help household consumers defray the cost of SHSs. They either obtain a loan from a partner microfinance institution or pay cash for the balance of the SHS payment. By bundling applications in a defined area, the SSMP approach addresses key affordability and sustainability issues of past PV projects: standardization, reduced transaction costs, larger business volume, and reduced risk. In the Philippines, 7 SSMP contracts benefiting 76 villages are currently being implemented, with preparation of more packages under way to benefit 400 villages. Source: Philippines Department of Energy (2007). There are no clear-cut rules for determining which SHS- Regulating off-grid service dissemination model is appropriate for a given project in a particular country. The dealer, ESCO, and MSC The government is responsible for ensuring off-grid models have their comparative advantages and customers do not pay excessive tariffs or suffer from disadvantages. The dealer model is easier to launch, poor-quality service, regardless of the service-provision requiring only the accreditation of several participating mechanism used. At the same time, the regulatory dealers and establishment of a microfinance support requirements developed for traditional grid extension system, as needed. Competition in all phases of are inappropriate for off-grid markets. Where possible, implementation could, in theory, lead more quickly to reporting and service-quality standards in smaller off- cost reductions and better service for consumers. grid systems in rural areas should be set lower than Conversely, because the model is fully market driven, for the main power grid so that costs can be reduced, the pace of coverage is hard to predict or control. tariffs lowered, and electricity services made more The ESCO model has the potential to achieve faster affordable for rural users (Reiche, Tenenbaum, coverage and obtain lower equipment costs due to and Torres 2006). volume transactions. At the same time, it requires more complex regulatory procedures that are often hard to For SHS service, the "natural" regulator is the establish in many countries. Lack of competition once government agency that provides subsidies for territory is acquired may suppress innovation and lead system purchase and installation. Regulatory actions 17 to lower-quality service, and cost savings from volume involve accreditation of participating companies, procurements may not be passed on to consumers. settings and enforcing standards (preferably adopting The MSC hybrid model combines most of the above- internationally accepted standards)19, verification of described advantages of the dealer and ESCO models, installations, and random monitoring of system while avoiding some of their limitations (e.g., via performance--actions that World Bank­supported emphasis on post-sales maintenance requirements and projects usually require of counterpart government reduced exclusivity term). Compared to the dealer agencies. For isolated minigrids or microgrids, model, however, it takes more time to prepare (since it simplified methods for graduated regulation have is usually tendered), and improvised adjustments are been proposed, depending on system capacity and more difficult to make. Like the concession model, size of the population served. A key principle is to he MSC hybrid model requires that a competent, avoid over-regulation. For example, it is generally transparent, and effective regulatory system be in agreed that service-quality standards should be lower place to assure service quality. for operators of systems below 300 kW. Operators in this lowest-size category would have no obligation Country conditions are important determinants of other than to register once and provide an annual model choice. In countries where the potential SHS update of basic information. Operators would be market is economically attractive in terms of scale allowed to set tariffs corresponding to the cost of and geography and where there are enough qualified providing service in the specific areas. prospective competing companies, the dealer model (with attention paid to after-sales service) may be International co-financing assistance appropriate. Where universal access is the national goal or the market is unattractive (e.g., small and Designers of off-grid electrification projects must be highly dispersed communities, consisting of uniformly aware of opportunities provided by international poor households located in difficult-to-access terrain), grant-financing facilities. Since its creation in 1993, the ESCO or MSC hybrid model may offer a better the Global Environment Facility (GEF) has been the approach. In many countries, SHS market features traditional co-financier of World Bank off-grid are mixed, which may call for a combination of models. electrification projects through grants provided for The REToolkit offers guidance on procedures for setting and enforcing standards, including use of products with proven experience in other 19 World Bank projects, or products with quality certification and labeling such as PVGAP (www.pvgap.org) or Golden Sun (www.cgc.org.cn/eng/news_show.asp?id=4). RETs that are ready for practical deployment but face Energy Sector Management Assistance Program market barriers. Grant assistance is well-appreciated (ESMAP). The World Bank­managed Asia by recipient governments as it not only reduces the Sustainable and Alternative Energy Unit (ASTAE) and subsidy burden but provides a level of comfort to Public Private Infrastructure Advisory Facility (PPIAF) planners still unsure of the effectiveness of could also provide grant financing for technical- renewable-energy alternatives for electrification. assistance activities related to off-grid electrification. More recently, the Global Partnership for Output The Clean Development Mechanism (CDM) of the Based Aid (GPOBA) has become an important Kyoto Protocol may offer opportunities for enhancing source of grant assistance for off-grid electrification. the financing of off-grid projects through carbon GPOBA's goal is to apply output-based approaches credits for renewable-energy systems or even to support the delivery of basic services to the poor, conventional systems whose practices mitigate not only for electricity but also for water, sanitation, emissions (e.g., switching to CFLs). In principle, all telecommunications, transportation, health, and technologies that avoid or significantly reduce fossil education. The most common grant applications are fuel­based generation are eligible for CDM credits.20 one-off, transitional, and ongoing subsidies. One-off In practice, however, the volume of avoided carbon subsidies involve capital subsidies aimed at emissions must be sufficiently high to offset the 18 increasing access to services. Transitional subsidies transaction costs of CDM processing, possibly help to fill the gap between what the user is able or making many smaller off-grid projects ineligible. willing to pay and the cost-recovery level of the tariff. It must also be noted that carbon credits are not Ongoing subsidies are required where there is a provided upfront to help with investment costs, but perpetual gap between affordability and cost become effective a year after the installation has recovery, including consumption costs. A recent become operational. Recently, Bangladesh signed example is the Bolivia Decentralized Electricity for contracts for the purchase of emission reductions to Universal Access Project, which obtained US$5.2 be achieved by its large solar PV dissemination million in grants from GPOBA to finance, on an program for remote off-grid areas. The program output basis, the installation of 7,000 PV systems for targets about one million SHSs installed by 2015, rural households, schools, clinics, and micro and totaling more than 50 MW and avoidance of 84,000 small enterprises. In addition, the GPOBA provides tons of CO2 per year at full implementation. technical-assistance grants for project design and evaluation and disseminates lessons learned. The Climate Investment Funds (CIF), approved by the World Bank Board of Executive Directors in July Off-grid electrification projects inherently require 2008, is a potential funding source for off-grid and more preparation resources than conventional grid- renewable-energy projects in developing countries. based projects. Often one must first determine the The CIF is expected to comprise of two trust funds-- willingness-to-pay profiles of communities via surveys, the Clean Technology Fund and Strategic Climate conduct resource measurements (e.g., site-specific Fund. The Clean Technology Fund will provide wind regimes), organize and train potential service financial resources for projects and programs in providers and community leaders, and promote developing countries that contribute to the business models to prospective companies. A key demonstration, and lead to large-scale deployment challenge for off-grid project designers is potential of low-carbon technologies (World Bank 2008a). service providers' lack of capacity, making training in The Strategic Climate Fund, broader and more such basic skills as business and financial flexible in scope, will serve as an overarching fund management imperative. Such studies and activities for various programs to test innovative approaches to may be eligible for grant financing provided by the climate change (World Bank 2008b). The CIF is Details are available at http://carbonfinance.org. 20 currently under development and donor resources · The conception and implementation of the are being mobilized. off-grid project must be consistent with the overall rural electrification plan for the region. GUIDELINES FOR The project should not be influenced by such OFF-GRID PROJECT DESIGNERS ad-hoc factors as one-time availability of donated renewable-energy equipment or pressure exerted To maximize the chances of sustaining operation of by local politicians, which can be unsustainable. an off-grid electrification project over the long term, fundamental project design principles must be · Project design must not be technology driven. observed, as follows (figure 2): A cost-benefit analysis of alternatives must be FIGURE 2. ELEMENTS OF A SUSTAINABLE OFF-GRID ELECTRIFICATION PROJECT 19 LEAST COST DESIGN PRACTICAL TECHNOLOGY CHOICES GOVERNMENT OWNERSHIP Good Demand Data Subsidy commitment APPROPRIATE DELIVERY MECHANISMS Competent and SUSTAINABLE Dedicated PMU OFFGRID PROJECT Access to spares and Light-handed and repair service over simplified regulation long term Training to CONSISTENT providers, users, WITH RURAL Government staff ELECTRIFICATION PLAN MAXIMIZE EXPLORE COMMUNITY OPPORTUNITIES FOR OPPORTUNITIES FOR AWARENESS/ PRODUCTIVE INTERNATIONAL INVOLVEMENT APPLICATIONS COFINANCING carried out to determine the least-cost solution. must obtain implementing agency commitment for Choice of technologies must be based on practical appointment of competent PMU staff and that such considerations (e.g., technology maturity, year- staff will devote their time to the project. round adequacy of resources, ease of operation and maintenance, continuity of [biomass] feedstock · For off-grid projects that rely on private-sector supply, and access to spare parts and service). participation, the simplest delivery mechanism or Data on energy consumption and income and business model (or mix thereof) commensurate with willingness to pay across various sectors in the local realities should be applied. The design must community should be collected upfront and reflect the capabilities of the service providers, factored into the technology-selection process.21 adequately address their risks, provide technical When implementation is awarded to an ESCO or assistance, ensure appropriate technical standards private implementer, the desired service outcome and performance requirements, establish access to for end users must be the only defined objective; adequate financing, and ensure the timely choice of technologies must be left up to the service disbursement of funds. provider, who usually has other investment parameters to consider. · The government must put in place light- handed regulatory measures that simplify 20 · Early in the assessment phase, efforts must be operations for private-sector participants made to maximize community awareness, and limit the cost of doing business, while involvement, and support, which are vital to adequately protecting consumers. Whatever project success. Starting at project inception, business model is chosen, care must be taken to target communities can be reached via ensure that users have access to quality equipment promotional programs, regular meetings with and products and qualified repair service and community leaders, and organization of focus- spare parts over the long term. The REToolKit group meetings. provides examples of technical standards and references to specific products that have been · Both the government and implementing agency tested and used in various World Bank projects must take full ownership of the project. over the past decade. Because off-grid electrification is generally more difficult to implement than traditional grid-extension · Appropriate training should be provided to projects, persistent and concerted effort is required participants of off-grid projects at various by the government and World Bank teams. levels, including government staff, potential service providers, and consumers. Government · One must obtain the government's upfront staff requires training at a broader level, from basic commitment to pick up the subsidy slack when technical aspects to electrification planning. external grant co-financing ends to ensure that Small private companies, who may already have implementation momentum is not lost. Grant technical expertise, need instruction in business and co-financing by international donors for the cost of financial management, marketing, and project hardware is often provided on a declining basis procedures. Community-based providers may and ceases at project closure. For continuity, need basic training in equipment operation and consideration should be given to making off-grid business. Consumers require guidance in system projects eligible for accessing rural energy funds.22 selection and operation and choosing the service level best suited to their needs. Sufficient project · Competence of the local Project Management resources should be allocated for this purpose. Unit (PMU) is critical to project success. One World Bank staff preparing off-grid projects may find it useful to consult the REToolKit website, which offers a wide range of materials and tools 21 that are useful in making technology choices and developing general project-design strategies. For example, the Philippines created a Missionary Electrification Development Fund and formulated a subsidy rationalization policy specifying the 22 terms for providing off-grid systems assistance from the fund (Philippines Department of Energy 2004). · One should maximize opportunities for productive and institutional applications that complement the provision of household service. Institutional and community applications that improve livelihood opportunities and generate new revenue (e.g., information and communication technologies) help those who cannot afford individual connections or systems. Such considerations are especially important for micro- hydro and other RETs for isolated grids, which have high capital costs and may not be economically justified on the basis of providing lighting and other household uses alone. From a private-sector provider or investor perspective, such applications increase the economic attractiveness of the total business package for the community. · Opportunities for international co-financing 21 should be explored. Such funding sources might include the World Bank's Global Environment Facility (GEF) or Global Partnership for Output Based Aid (GPOBA), the Clean Development Mechanism (CDM) of the Kyoto Protocol, bilateral donors, or a country's sectoral ministries (e.g., health or education). Given the need for specialized demand studies, training of service providers, and other vital preparatory activities, staff should take advantage of opportunities to obtain grants for such purposes. REFERENCES23 Australian Business Council for Sustainable Energy. Columbia Earth Institute. 2007. "National 2005. Renewable Energy in Asia: The Cambodia Electrification Coverage Planning: Investment Costing Report--An Overview of the Energy Systems, Estimation Model: Kenya." Draft final report of Renewable Energy Options, Initiatives, Actors and Energy Group submitted to the World Bank, Opportunities in Cambodia. Carlton, Victoria: Washington DC. Australian Business Council for Sustainable Energy. Available at www.bcse.org.au. de Gouvello, C. 2008. Maximizing the Productive Uses of Electricity to Increase the Impact of Rural Barnes, Douglas F. (ed.). 2007. The Challenge of Electrification Programs. ESMAP Formal Report No. Rural Electrification: Strategies for Developing 332/08. World Bank, Washington, DC. Countries. Washington, DC: Resources for the Available at esmap.org/filez/pubs/ Future. 618200840844_technical_april08.pdf. Barnes, Douglas F., and Jonathan Halpern. 2000. de Gouvello, C., and G. Kumar. 2007. "OBA in Subsidies and Sustainable Rural Energy Services: Senegal: Designing Technology-neutral Concessions 22 Can We Create Incentives Without Distorting for Rural Electrification." OBA Approaches, Note No. Markets? 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Available at Available at www.worldenergyoutlook.org/2006.asp. www-wds.worldbank.org/external/default/ main?pagePK=64193027&piPK=64187937&theSit IEG (Independent Evaluation Group). 2007. ePK=523679&menuPK=64187510&searchMenuPK Welfare Impact of Rural Electrification: A Reassessment =64187283&siteName=WDS&entityID=00000926 of Costs and Benefits. Washington, DC: World Bank. 5_3961214152456. Available at go.worldbank.org/ZE4B692E10. All weblinks confirmed as active on August 14, 2008. 23 IFC (International Finance Corporation). 2007. Weingart, J., and D. Giovannuci. 2002. A Guide to Selling Solar: Lessons from More than a Decade of Developing Agricultural Markets and Agro-enterprises. IFC's Experience. Washington, DC: International ESMAP Report. World Bank, Washington, DC. Finance Corporation. Available at www.ifc.org/ Available at go.worldbank.org/1DBLU3WAQ0. ifcext/sustainability.nsf/AttachmentsByTitle/ p_SellingSolar/$FILE/SellingSolar.pdf. Winiecki, Jacob, Kristen Cortiglia, Ellen Morris, and Sonali Chowdhary. 2008. Sparking Strong Mostert, W. 2008. Review of Experiences with Rural Partnerships: Field Tips from Microfinance Institutions Electrification Agencies: Lessons for Africa. Draft and Energy Companies on Partnering To Expand report, March. World Bank, Washington, DC. Access to Energy Services. Washington, DC: Small Enterprise Education and Promotion (SEEP) Philippines Department of Energy. 2004. Network and Sustainable Energy Solutions. Streamlining and Rationalizing the Grant of Subsidies Available at www.seepnetwork.org and in the Electrification of Missionary Areas Using Solar www.sustainable-solutions.com. Photovoltaic Systems. Manila: Philippines Department of Energy. Available at World Bank. 2008a. "Clean Technology Fund." www.doe.gov.ph/popup/DC%202004-05-005.pdf. June. World Bank, Washington, DC. Available at siteresources.worldbank.org/INTCC/Resources/ 23 ------. 2007. Accelerating Community Electricity Clean_Technology_Fund_paper_June 9_final.pdf. Services Using Solar (Project ACCESS) Using the Sustainable Solar Market Package Concept. ------. 2008b. "Strategic Climate Fund." June. Manila: Philippines Department of Energy. World Bank, Washington, DC. Available at Available at www.rpp.com.ph/documents/ siteresources.worldbank.org/INTCC/Resources/ SSMP2%20Brief_Dec07.pdf. Strategic_Climate_Fund_final.pdf#Strategic_Climate_ Fund. Reiche, K., B. Tenenbaum, and C. Torres. 2006. Electrification and Regulation: Principles and a Model World Bank Committee on Development Effectiveness Law. Energy and Mining Sector Board Discussion (CODE). 2007. Management Comments on the Paper No. 18. World Bank, Washington, DC. Independent Evaluation Group (IEG) Report "Welfare Available at http://siteresources.worldbank.org/ Impact of Rural Electrification: A Reassessment of EXTENERGY/Resources/336805-1156971270190/ Costs and Benefits." World Bank, Washington, DC. EnergyElecRegulationFinal.pdf. Available at siteresources.worldbank.org/ EXTRURELECT/Resources/code.pdf. Reiche, K., D. Rysankova, and S. Goldmark. 2007. "Output-Based Aid in Bolivia: Balanced Tender Design for Sustainable Energy Access in Difficult Markets." GPOBA Approaches, Note No. 12. Available at www.gpoba.org. REN21. 2008. Renewables 2007 Global Status Report. Paris and Washington, DC: REN21 Secretariat and Worldwatch Institute. Available at www.ren21.net. TEMASOL (Total EDF Maroc Solaire). 2008. Concession de l'energie solaire. Available at www.edf.fr/html/global_compact/pdf/ access_maroc_va.pdf. Websites of interest: Asia Sustainable and Alternative Energy: www.worldbank.org/astae Carbon Finance Unit: carbonfinance.org China General Certification Center www.cgc.org.cn/eng Energy Sector Management Assistance Program: www.esmap.org IDTR (Bolivia) www.idtr.gov.bo 24 Global Environment Facility: www.thegef.org Global Partnership for Output Based Aid: www.gpoba.org Public Private Infrastructure Advisory Facility: www.ppiaf.org PVGAP www.pvgap.org Renewable Energy Toolkit: www.worldbank.org/retoolkit RERED (Sri Lanka) www.energyservices.lk RERED (Bangladesh) www.idcol.org/energyProject.php RPP (Philippines) www.rpp.com.ph The Energy and Mining Sector Board The World Bank 1818 H Street N.W. Washington, D.C. 20433 USA