37481 ENERGYWorkingNotes ENERGY AND MINING SECTOR BOARD NO.4 MAY 2005 Energy and Poverty: Myths, Links, and Policy Issues Jamal Saghir SUMMARY TABLE OF CONTENTS Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 Bringing modern energy services to the poor is an Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3 enormous challenge. Today 1.6 billion people lack Context: Myths about Energy and Poverty . . . . . . . .3 access to electricity, and 2.4 billion rely on Energy's links with Poverty Reduction . . . . . . . . . . .6 traditional biomass fuels for cooking and heating. Status: Big Gaps Remain in Access By 2030, if present trends continue, 1.4 billion to Modern Energy . . . . . . . . . . . . . . . . . . . . . . . . .8 people will still lack access to electricity--only 200 Energy Policies for Poverty Reduction . . . . . . . . . .10 million fewer than today. And more than 2.6 billion The World Bank's Role . . . . . . . . . . . . . . . . . . . .18 will still rely on traditional biomass fuels--an even References . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22 larger number than today. Energy's strong links with poverty reduces poverty in other ways. By powering lights and modern equipment, electricity helps improve health Contrary to myth, poor people pay a high price - care and education for poor people and makes it in cash or in labor - for the energy they use. more likely that women will read and children will Moreover, they spend a much greater share of their attend school regardless of their income level. Modern household income on energy than do wealthy energy also lightens women's work and reduces the people - not only because their incomes are so environmental damage from the use of traditional much smaller but also because the fuels they use fuels, which has such far-reaching effects on poor are so much less efficient than modern fuels. people's health and livelihoods. In modern times no country has managed to These strong links with poverty reduction - through substantially reduce poverty without greatly income, health, education, gender, and the increasing the use of energy. Modern energy has environment - suggest that the energy sector needs to the biggest effect on poverty by boosting poor work with other sectors to ensure that the poor benefit people's productivity and thus their income. It also as much as possible from greater access to energy. Energy and Mining Sector Board · The World Bank Group www.worldbank.org Jamal Saghir (jsaghir@worldbank.org) is Chair of the Energy & Mining Sector Board and Director, Energy and Water in the Infrastructure Vice Presidency of the World Bank. This paper benefited from the contributions of Sachin Agarwal, Doug Barnes, John Besant-Jones, and Kyran O'Sullivan. The author presented an earlier version of this paper at the 9th International Energy Forum in Amsterdam on 22-24 May 2004. 2 Energy and Poverty Where are the gaps in access? In urban areas extending electricity access to the poor is a matter first and foremost of getting the policies right. In the past 25 years the world has extended access to The infrastructure is generally already in place, so energy electricity and modern fuels to more than 1 billion companies need to make relatively little new capital people. Even so, large gaps in access remain. Four investment. Extending the grid to a new peri-urban area out of five people without access to electricity live in occupied by the poor does require some capital rural areas of the developing world, mainly in South expenditure, but much less relative to extending supply to Asia and Sub-Saharan Africa. new rural areas. But even with the lower capital costs and higher incomes in urban areas, poor people still Today most of the people without access live in rural often cannot afford the connection fees or monthly rates. areas. But over the next three decades, when almost 95 What is needed are supportive regulatory policies that percent of the population growth is expected to occur in make service expansion to the urban poor sustainable. urban areas, widening gaps in access may emerge in the developing world's cities. Substantially reducing the The situation in the energy sector calls for tough public number of people without access to electricity will policy choices and sustained commitment. And the therefore also require targeting efforts to urban areas. energy business is such that these choices require a delicate balancing act: provide enough subsidies and Tough public policy choices financing to make modern energy accessible to the poor, yet avoid distorting energy markets by favoring In most developing countries, efforts to develop one fuel over another or stifling the markets through innovative ways to deliver modern energy services to counterproductive pricing and subsidy policies. the poor confront formidable institutional and regulatory barriers. These barriers affects rural and urban areas Public policies ostensibly aimed at helping the poor often alike. Other barriers, and therefore policy solutions, end up doing the opposite. Selling fuels at subsidized differ sharply between rural and urban areas. prices does poor people little good if they cannot obtain the ration cards required. Even taxing the fuels used by In rural areas, remoteness and low density demand the well-off hurts the poor, by causing the price of fuels raise the costs of electrification to nearly prohibitive they use to rise. To be sustainable, programs to increase levels. The main policy solutions are subsidizing capital access to efficient fuels need to harness private costs for rural grid electrification or developing off-grid entrepreneurship. For example, when improved stove solutions. Both require careful design and skillful programs simply gave away the cook-stoves, they implementation. Nevertheless, because of the costs faltered. But when the programs involved local private involved, rural access to electricity in low-income manufacturers and dealers, they became sustainable. countries will not increase appreciably in the foreseeable future. How best to design and implement policies for expanding access to energy is a question requiring To meet their cooking needs, the rural poor will close attention to the lessons from experience. They continue to rely on biomass fuel. So increasing the show the importance of removing institutional and efficiency of biomass fuel use as well as promoting regulatory barriers, designing subsidies carefully, modern cooking fuels such as LPG, should be priorities. ensuring local involvement in the design and delivery Energy Working Notes 3 of energy services, and protecting the poor during Ending energy deprivation will not be easy. It calls reforms. Policies like these, while not enough to end for tough public policy choices and sustained energy deprivation, are certainly necessary for doing commitment. The energy business is such that these so, and furthermore they can also improve the choices require that policy makers strike the right performance of the energy sector as a whole. balance: for example in providing enough public subsidies and financing to make modern energy The Role of the Word Bank accessible to the poor, yet avoiding distorting energy markets by favoring one fuel over another or stifling The World Bank supports research to better markets through counterproductive pricing and understand the causes of low quality and lack of subsidy policies. energy services and how to design better policies that can remedy these. It finances projects aimed at How best to design and implement policies for providing increased access and improved services expanding access to energy? Experience already and it engages in partnerships with other organizations points to some good lessons. It shows the and with government and the private sector to importance of removing institutional and regulatory address these challenges. barriers, designing subsidies carefully, ensuring local involvement in the design and delivery of energy services, and protecting the poor during reforms. INTRODUCTION These policies are not enough to end energy deprivation, but they are certainly necessary for For the poor, the priority is the satisfaction of such basic doing so. human needs as jobs, food, health services, education, housing, clean water and sanitation. Energy plays an Moreover, no one way of applying these policies important role in ensuring delivery of these services. will work under all the widely varying social and economic conditions around the world. Recognizing --World Energy Council and FAO (1999, p. 21) this, the World Bank undertakes research in this area. Where it sees appropriate opportunities, Today 1.6 billion people in developing countries lack it remains open to providing investment and access to electricity, and 2.4 billion still rely on development policy lending. It also forges alliances traditional biomass fuels. This deprivation in energy and partnerships with organizations, governments has enormous impacts on the lives of poor people. and public and private stakeholders to help provide Strong links between the energy sector and poverty modern energy to the poor. reduction--through income, health, education, gender, and the environment--underscore the importance of the energy sector in social and economic CONTEXT: MYTHS ABOUT ENERGY development. They also underscore why it is important AND POVERTY that policy makers and developers in the energy sector must work closely with colleagues in other sectors in Myths about energy and poverty abound. Among tackling energy deprivation. the more pervasive is this: For poor people who use biomass energy, that energy is free and so 4 Energy and Poverty they are insensitive to changes in energy prices. Energy services also cost the poor more because Another myth is this: When the poor must pay for using such fuels as wood and kerosene for cooking their energy, that energy is cheap compared with and lighting is less efficient than using modern fuels. the modern energy used by wealthier households. Adding to their cost, the poor often must buy And yet another: When modern energy is first fuelwood and charcoal in small amounts. When introduced in an area, its cheap and easy comparative efficiencies and transaction costs are availability will prove to be a panacea, kick- taken into account, the delivered energy for cooking starting enormous socioeconomic development. often ends up being more expensive for poor people than for the better-off. Neither free nor cheap In rural areas where wood is scarce, poor people Figure 1: Household energy may pay for fuelwood or shift to less efficient energy expenditures by income level, sources such as crop residues or dung. It is not Hyderabad, 1994 unusual for a rural household in a developing 20 country to spend an hour or more a day collecting wood or other fuels.1 That often means forgoing other productive activities. So the traditional fuels 15 Electricity used by poor people are not free; to the contrary, income LPG they come at a high cost in cash or in labor. Kerosene household 10 Wood Moreover, poor households spend a much greater of share of their income on energy than do wealthy households. The cash income of the poor is so ercentageP small that the meager amounts of energy they use 5 account for an important part of their cash expenditures. In the Indian city of Hyderabad, for example, poor households spend 10­15 percent of 0 1 2 3 4 5 6 7 8 9 10 their income on energy, while wealthy households spend less than 5 percent (figure 1). Poor people in Income decile rural areas spend a smaller share of their income Source: ESMAP 1999. on energy, but it is still significant. In rural India poor households spend as much as 8 percent of their very small incomes on energy, most of it on kerosene for lighting (figure 2). A study in the hill areas of Nepal showed that even in areas with fairly good supplies of wood, women needed to spend more 1 than an hour a day collecting fuels. In areas where wood was more scarce, the chore lasted about two and a half hours a day (World Bank 1996). Energy Working Notes 5 Figure 2: Household energy expenditures by income class, rural India, 1996 160 9 140 8 7 120 income 6 100 month 5 per 80 household of 4 upeesR 60 3 ercentageP 40 2 20 1 0 0 1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10 Income decile Income decile Electricity Kerosene (market) Dung Charcoal LPG Kerosene (ration) Straw Wood Source: ESMAP 2000. Necessary but not sufficient Energy services are consumed in the process of for development providing other goods and services, thus the demand for energy is derived from the demand Economies that have replaced human and animal for other goods and services. For example, in a labor with more convenient and efficient sources of rapidly developing agricultural region, the energy and technology have grown faster. Indeed, introduction of electricity will help raise the in modern times no country has managed to productivity of local agro-industrial and substantially reduce poverty without greatly commercial activities by supplying motive power, increasing the use of energy. Without ensuring refrigeration, lighting, and process heating. Higher minimum access to energy services for a broad productivity, in turn, will lead to higher earnings, segment of the population, countries have not been which will create greater household demand for able to move beyond a subsistence economy. But electricity. But when development efforts fail merely introducing cheap, easily available modern because of poor crop pricing and marketing energy is not enough to ensure socioeconomic policies, improving electricity supplies alone progress. Other factors are also crucial. will have little effect on local welfare. 6 Energy and Poverty Thus when policymakers assess the prospects for by providing lighting that extends the workday and policies focused on improving energy supplies, they powering machines that increase output and it also need to consider sources of energy demand raises the productivity of small businesses and shops such as local health and education programs, and powers telecommunications. macroeconomic and pricing policies, and complementary infrastructure such as roads, water All this is reflected in the strong correlation between supplies, and sanitation. energy consumption and national income. Most economic activity would be impossible without energy, even the small and medium-scale ENERGY'S LINKS WITH POVERTY enterprises that are the main source of jobs for the REDUCTION poor. The kind of economic growth that creates jobs and raises incomes depends on greater and more Clearly energy for the sake of energy is not useful. efficient use of energy. Its utility lies in facilitating human development. The energy sector has strong links with poverty Contributing to better health reduction through income, health, education, gender, and the environment. These links suggest Modern energy helps improve health in many ways. that the energy sector needs to focus increasingly By powering equipment for pumping and treating on working with other sectors to ensure that the raw water, it helps ensure a clean water supply, poor benefit as much as possible from greater reducing the incidence of waterborne diseases, access to energy supplies. especially in slums. By boosting agricultural production and household incomes, it helps reduce Increasing income the malnutrition that is such a big factor in child mortality. And by allowing households to switch to Perhaps the most important way the energy sector kerosene or liquefied petroleum gas (LPG), it can improve the lives of poor people around the enables the poor to avoid cooking with biomass world is by helping to increase their meager fuels like wood and dung, whose emissions cause income. To begin with, modern energy can greatly respiratory ailments that are the fourth leading increase their productivity. Petroleum fuels power health risk in developing countries (WHO 2002, motorized transport that speeds the movement of p. 69).2 goods between outlying areas and markets--and power agricultural activities that help expand crop Modern energy also helps improve health indirectly. production. Electricity enables poor households Electricity enables health clinics to refrigerate to engage in activities that generate income-- vaccines, operate medical equipment, and provide Studies of women that were non-smokers, in India and Nepal who were exposed to smoke from fires using biomass fuel, found 2 that their death rate from chronic respiratory disease was similar to that of male heavy smokers (World Bank 1996, p. 2). The World Health Organization estimates that 20 percent of the 10.9 million deaths of children under five in 1999 were due to acute respiratory infections (Bruce, Perez-Padilla, and Albalak 2000). Although the extent to which cooking smoke contributes to acute respiratory infections is not yet clear, it is generally accepted that there is a link between indoor air pollution and such infections in children. Energy Working Notes 7 treatment after sunset. It allows the use of modern school, compared to 50 percent of those living in a tools of mass communication needed to fight the household without electricity. spread of HIV/AIDS and other preventable diseases. And through its benefits for education, it leads to Improving women's quality of life higher literacy among women, which translates into better health for children. Increasing access to energy brings disproportionate benefits for women - in health, education, and Supporting education productive activities - since in many parts of the world it is they who spend more time than men For poor people everywhere, access to modern cooking and collecting water and fuel. Modern energy services frees time for education--time that cooking fuels free women from the burden of would otherwise be spent collecting traditional fuels collecting and carrying large loads of fuel-wood or in other menial work. It also frees children to and from exposure to smoke from primitive cooking attend school, by boosting productivity and thus stoves. And modern energy for lighting and motive allowing adult labor to substitute for child labor. For power enables women to develop cottage industries both adults and children, electric lighting in homes that can increase their incomes. enables them to study after their daytime activities. And in rural areas, modern energy helps retain A survey of women's time use in rural India teachers by improving their quality of life. shows how access to electricity can benefit women. The probability that a woman will read is strongly A survey in Nicaragua illustrates the relationship related to whether the home has electricity. between education and household electricity use Indeed, regardless of income level, virtually (Table 1). It was found that the percentage of a no reading takes place in households without family's children that attend school is highly electricity. About 11 percent of the sample reported correlated with the availability of electricity. Among spending some time reading on the day of the rural households in Nicaragua, 72 percent of survey - and these women reported doing so for children living in a household with electricity attend about an hour a day on average. Averaging this Table 1. Nicaragua 1998 PERCENTAGE OF CHILDREN NUMBER OF HOUSEHOLD PERCENTAGE LITERACY ENROLLED IN SCHOOL MEMBERS WHO ARE LITERATE IN HOUSEHOLD REGION WITH NO WITH NO WITH NO ELECTRICITY ELECTRICITY ELECTRICITY ELECTRICITY ELECTRICITY ELECTRICITY Atlantic 77 40 3.02 2.23 74 46 Central 77 46 3.02 2.27 74 50 Pacific 73 62 3.79 3.1 77 62 Total 72 50 3.37 2.51 73 53 Source: World Bank, 2002; Barnes and Kulkani, 2005. 8 Energy and Poverty time across all the households shows that higher- Reducing environmental harm income women spend more time reading than lower-income women. But among lower-income Poor people are both the agents and the victims of women, those in households with electricity have a environmental damage. Fuel-wood gathering can much greater likelihood of reading than those in lead to land degradation, biomass combustion to households without electricity. Moreover, lower- indoor air pollution, dirty fuels to outdoor air pollution income women have a lower literacy rate than and, through greenhouse gas emissions, global higher-income women and so would have a lower warming. In all these cases poor people both possibility of reading. Thus the high-quality lighting contribute to the environmental damage through their made possible by electricity appears to make it actions and suffer from its consequences. And in all more likely that women will read in the evening these cases the energy sector has a significant part to regardless of their income level (figure 3). play in reducing the environmental damage and its harmful effects--by introducing renewable energy Figure 3: Household income, Electricity, sources, supplying modern cooking fuels, substituting and time spent reading by women, cleaner fuels for dirty ones, and increasing energy rural India, 1996 efficiency. 0.35 0.30 STATUS: BIG GAPS REMAIN IN ACCESS TO MODERN ENERGY y) daa 0.25 Both the costs associated with using traditional fuels and (hours 0.20 Electricity the benefits of introducing modern energy services underscore the importance of ensuring that people have eadingrt No Electricity 0.15 access to modern energy. How much progress has the spen world made in extending access to energy services? imeT 0.10 Advances over the past 25 years have been 0.05 remarkable, with more than 1 billion people in 0.00 developing countries gaining access to electricity and <9 9-18 18-32 32-42 42-60 >60 modern fuels. But as impressive as this accomplishment Households by monthly income (thousands of rupees) is, large gaps in access remain. While (mostly urban) higher-income households now have access to modern Source: Energy Sector Management Assistance Programme energy, the world's poorest (mostly rural) households do (ESMAP), Energy Survey 1996. not. Some regions lag further behind than others. While problems of access are now far greater in rural than in urban areas, the rapid growth expected in urban populations in the next decades could lead to growing gaps in access to electricity in cities. Energy Working Notes 9 Rural areas are far behind urban areas five people without access to electricity live in rural areas in access to electricity of the developing world, mainly in South Asia and Sub- Saharan Africa. According to the International Energy Agency, 1.6 billion people--around a quarter of the world's Continuing reliance on traditional fuels population--lack access to electricity. Moreover, under today's energy policies and investment trends Large gaps also remain in access to modern fuels in energy infrastructure, projections show that as such as kerosene and LPG. Nearly 2.4 billion people many as 1.4 billion people will still lack access to in developing countries still rely on wood, agricultural electricity in 2030. residues, and dung for cooking and heating (table 2). And projections show that without greater efforts to In Sub-Saharan Africa only 8 percent of the rural address this problem, the number will grow to 2.6 population has access to electricity, compared with 51 billion by 2030. percent of the urban population (figure 4). A similar disparity exists in South Asia, where only 30 percent of All these people must contend with the burdensome the rural population has access, compared with 68 disadvantages of using traditional fuels. As noted, percent of the urban population. Indeed, four out of cooking with fuels such as biomass is far less efficient Figure 4: Share of population with access to electricity by region, 2000 100 80 tnecr 60 Pe 40 20 0 North Africa Sub-Saharan Latin America East Asia South Asia Middle East Developing World Africa countries Total Urban Rural Source: International Energy Agency 2002. 10 Energy and Poverty than cooking with modern fuels such as kerosene almost 95 percent of the growth in population is or LPG. Women and children must spend hours expected to occur in urban areas. Fast population gathering biomass fuels. And biofuels burned growth, rapid urbanization, and rising demand for in poorly ventilated homes and inefficient stoves electricity will exert tremendous pressure on cause harmful indoor pollution, with serious infrastructure, creating strong demand for new consequences for human health. investment. In the Middle East and North Africa, for example, the World Bank expects demand for electricity to grow by an average 6 percent a year Table 2. People relying on biomass for cooking and heating in developing to 2010 (World Bank, Middle East and North Africa countries, 2000 Region 2004). Unless appropriate steps are taken to meet that growing demand, the urban poor will COUNTRY MILLIONS PERCENTAGE OF OR REGION POPULATION surely lose ground in access to electricity. China 706 56 Indonesia 155 74 ENERGY POLICIES FOR POVERTY Rest of East Asia 137 37 REDUCTION India 585 58 Rest of South Asia 128 41 Latin America 96 23 Projections for the next three decades show that Middle East and North the problems of access to modern energy will Africa 8 1 not vanish--and indeed may grow--if steps are Sub-Saharan Africa 575 89 not taken soon to address key issues in the energy All developing countries 2,390 52 sector. In most developing countries efforts to develop innovative ways to deliver modern energy Source: International Energy Agency 2002. services to the poor face formidable institutional and regulatory barriers, and conventional energy strategies generally allow poor people little say. Urban access to electricity Tax and other policies can make it difficult for poor people to move up the energy ladder to Almost 91 percent of the world's urban population cleaner, more efficient fuels. And energy reforms has access to electricity. Indeed, in some parts of designed and implemented without local the world almost the entire urban population has involvement can end up hurting rather than access: in North Africa, East Asia (including China), benefiting the poor. More often than not, it is the Middle East, and Latin America the share is at one or more of these issues that pose the biggest least 98 percent (International Energy Agency obstacles to extending access to modern energy 2002). So the problem of providing access to services to the poor. electricity is primarily a rural one. The energy policies that have proved to be Access to electricity will remain scarce in rural effective in addressing these issues can improve areas. But it is expected to become more difficult the performance of the energy sector as a whole, in urban areas too. Over the next three decades benefiting both rich and poor and both rural and Energy Working Notes 11 urban consumers. But for some energy issues the favoring one fuel over another, sending consumers best policy choices for the urban poor may differ the wrong signals, and creating disincentives for from those for the rural poor. Moreover, the entrepreneurial solutions to energy supply. Another magnitude of the change that public policy problem is the use of top-down approaches that must bring about differs substantially between allow users, particularly the poor, little say in how rural and urban areas. energy services are designed and delivered. Rural areas often lack any infrastructure for What does experience show about how best to tackle providing energy services. So here, energy policy these issues? Sound sector policies provide the basis must conceive the entire energy infrastructure for improving access to energy for rural and urban network, develop new energy businesses, and populations. Energy sector reform should include ensure that the business model is economically opening up energy markets. Macroeconomic policies sustainable and financially replicable. should avoid discriminating against or favoring particular energy technologies. Price-distorting By contrast, most urban areas have energy subsidies and taxes should be eliminated--though a providers that already serve better-off populations. need remains for well-thought-out, intelligently Thus, the main energy policy issue in urban areas implemented subsidies that genuinely benefit the is to support or improve the energy infrastructure poor and yet avoid creating disincentives for energy and provide adequate regulatory guidance so as companies. The use of direct cash support to to ensure that energy providers extend services to mitigate the impact on the poor of subsidy phase out the urban poor. allows the commercialization of utilities, through the elimination of cross subsidies. This approach requires Breaking down institutional and a solid institutional infrastructure for delivery of a well regulatory barriers targeted subsidy mechanism. Other policy issues are common to both rural and Regulatory policies should allow rival technologies to be urban settings. Poor institutional and regulatory selected on the basis of their economic merits and frameworks can create serious obstacles to the regulatory or market barriers should not discriminate delivery of modern energy services. Policies may against any technologies. Also essential is to ensure the impede the flow of private finance to the energy participation of local communities, investors, and sector and discourage innovation in service delivery consumers in the design and delivery of energy services. methods. In many countries, for example, it is not Decentralized approaches, including systematic local permitted for local private or cooperative capacity building, need to be part of the solution. generation and distribution enterprises to enter the market. Regulatory frameworks often raise the All these measures will work to ensure a better largest barriers to decentralized options for energy choice of affordable energy for both rural and supply, including alternative energy technologies for urban consumers, so that informed consumers can locations not served by electricity and fuel choose the most cost-effective solution based on distribution networks. Poorly formulated taxes and their own preferences. subsidies often undermine energy service markets by 12 Energy and Poverty Extending access to the rural poor-- Subsidy design is an area where more work is an expensive proposition needed. Even so, it is becoming increasingly clear that operating costs should not be subsidized Once a sound institutional and regulatory as a way to promote rural grid electrification. framework is in place, the most important energy Experience around the world suggests that issue is probably cost. Energy is an expensive subsidies for capital costs are more sustainable business. Installing a microgrid in a community and beneficial than those for operating costs. can cost tens of thousands of dollars. Output-based aid (OBA) is an approach being used to promote the effective use of public funds The costs become almost prohibitive in rural areas, for the delivery of infrastructure services. Under where the remote locations and low density demand this approach, governments delegate service raise the costs and reduce the profitability of delivery to a third-party under contracts that tie supplying energy. The training, technical assistance disbursement of public funding to the services or and capacity building that are needed to support outputs actually delivered to targeted groups. rural electrification schemes add to the costs. All Governments use such performance-based these costs mean that energy companies would subsidies where policy concerns, such as the have to charge high connection fees and monthly affordability for particular groups of users, justify rates to recover their investments--fees that the public funding to complement or replace user fees. poor cannot afford to pay. Recent examples of World Bank supported output- based aid projects include an electricity access But technological and commercial innovations project in Mozambique. can lower the costs of producing energy and financing and managing services. And better A good rule of thumb is to make grant subsidies credit mechanisms, lower-cost equipment, and available to energy service companies for appropriate service standards can reduce the investments in infrastructure access and, as initial cost of obtaining energy. necessary, some form of cross-subsidy from better- off energy users to lower the costs of the most Subsidizing capital costs for rural grid vulnerable populations. electrification To avoid unproductive capital expenditure, care High capital costs are the chief disincentive to must be taken to ensure that the capital cost supplying grid electricity to rural areas, so where subsidies are not too high when the service rates grid electrification is the chosen option, this issue are likely to be too low. In situations such as these, needs to be tackled first. One solution is subsidies. energy companies have been known to make Subsidies involve some serious drawbacks but they capital investments and extend the grid but fail can enable the rural poor to gain access to modern to supply power through the extensions. energy. The challenge is to design better subsidies and efficient ways to provide them. From the regulatory point of view, the need to explicitly differentiate tariffs according to the quality of power supply is important. Although the cost of Energy Working Notes 13 supply to rural areas is higher, most often the quality Extending access to the urban poor-- and availability of electricity is very poor and cannot mostly a policy issue justify a high price; more importantly, the lack of differentiation between quality and tariffs is an In sharp contrast to poor rural residents the urban obstacle to the private provision of services. poor live next door to modern energy services. Thus energy companies need to make little or no Developing off-grid solutions new capital investment to extend access to them. Expanding access to the urban poor is thus more a Most rural electrification programs have focused matter of regulatory policy than of cost. Extending on connecting rural areas to national or local the grid to periurban areas occupied by the poor grids. But grid-supplied electricity is not always the does require some capital expenditure, but much least-cost option, and planners need to consider less than extending supply to new rural areas. other possibilities. Sometimes energy companies neglect the urban In remote or inaccessible areas where grid supplies poor simply because they do not give them priority. are impractical for cost, technical, or institutional At the same time there are genuine business reasons, people generally meet their need for obstacles to serving the poor, such as low energy power and lighting through LPG, kerosene, dry cell purchases and unpaid bills. Regulators and urban and car batteries, and, occasionally, small diesel or energy companies working in close cooperation and gasoline generators. In addition, photovoltaic formulating supportive regulatory policy may make it systems are proving to be increasingly competitive easier for the companies to serve the urban poor. on cost and service quality criteria with these For example, regulators could allow energy conventional energy sources. companies serving urban markets to charge different rates, using subsidized rates for poor customers and Promising new approaches to providing electricity charging higher rates for affluent, high-volume services to new rural customers far from the grid are customers to make up the lost revenue. beginning to emerge (box 1). Among recent off-grid electricity programs, most of the successful ones Public-private partnerships can strengthen the have involved a fund for providing loans and institutional and financing arrangement for expanding subsidies to rural communities, private entrepreneurs, access. For example, the Agreement of Guidelines or nongovernmental organizations that develop a (Acuerdo Marco) in Argentina has been effective in viable business plan for providing rural electricity blending the efforts of the energy companies and service. After the initial subsidies for establishing the the national and provincial governments, electricity service, the business must demonstrate that overlapping with other social assistance plans it can maintain financial viability while continuing to (Chisari, Estache & Waddams Price, 2001). serve the rural population. Financing the up-front costs of connections Both the urban and rural poor are often deprived of access to modern energy services because they 14 Energy and Poverty Box 1. Approaches to providing off-grid electricity The dealer model centers on developing dealers that can sell equipment (usually for photovoltaic systems) to people living in rural areas far from the grid. Developing countries usually have existing retailers that serve rural areas, but they are typically weak and undercapitalized and serve limited territories. Programs based on this model have tried various ways to strengthen dealer networks, with mixed results. In Indonesia such a program failed in part because it was implemented just before the financial crisis. But it had become evident that participating retailers preferred to sell photovoltaic systems for cash rather than providing them on a lend-lease basis. In Sri Lanka a project started out successfully, but multinational companies soon took over the local retailers that the project was assisting. The concession model is aimed at minimizing subsidies and encouraging private sector participation. The model depends on regulation by contract more than by market forces, but it helps to ensure that projects achieve large-scale economies. In Argentina, for example, a World Bank­financed project is using competitive bidding to award franchise rights for rural service territories to the concessionaires offering to provide service for the lowest subsidy. Concessionaires can choose from a range of off-grid technologies, though photovoltaic systems are expected to be the most cost-effective choice in many cases. Users pay a connection fee and monthly service tariff (set by the government), and the government pays the concessionaires a declining subsidy determined by their contract. The retailer model involves a decentralized approach to providing electricity to households without access to grid service. A community, organization, or entrepreneur develops a business plan for meeting local demand for electricity, then submits the plan to a project committee (see EAA, RAEL, and ERG 1999). If the committee approves the plan, it grants a loan or subsidy (depending on the situation) for developing the business. The retailer uses a fee-for-service arrangement to recover costs, repay the loan, and earn a profit. This approach ensures significant local involvement and consumer choice. In this model, as in others being pursued, two key aims are to control transaction costs and realize scale economies. cannot afford the up-front costs of aquiring service While up-front costs pose large burdens for poor and because they cannot afford the per-unit rates that people in rural and urban areas alike, the high capital are charged once they have a connection. Moreover, costs of providing rural energy service mean that the in some cases they are also charged disconnection rural poor face even greater difficulties in paying the and reconnection fees. initial costs. The fee for connecting to grid electricity in developing countries ranges from $20 to $1,000. And Clearly, financing mechanisms are needed to bring a solar home system costs from $500 to $1,000, the up-front costs within reach of the poor, as well depending on the system. Such costs are prohibitive for as well-targeted, well-planned subsidies to make rural consumers with relatively low incomes and little monthly energy consumption affordable. In addition, access to long- or even short-term credit. energy companies should be discouraged from charging high disconnection and reconnection fees. There are two ways of dealing with these high initial costs of rural energy service. The first is to lower Identifying sound credit and financing mechanisms system costs through design innovations. Power is difficult and designing well-targeted subsidies is demand in rural areas of developing countries even more so. typically ranges from 200 to 500 watts. But many distribution companies design systems capable of delivering 1000 to 3000 watts--which means Energy Working Notes 15 heavier wires, larger transformers, and generally more harmful health effects is to provide improved stoves expensive distribution system components. The entire that are more efficient, emit less smoke, and vent system can be lightened to supply the actual level of smoke outside the home. demand at less cost. Similarly, while many development agencies promote a standard household In the late 1970s to early 1980s developing photovoltaic system of 50 watts, experience from country governments, donors and NGOs supported China and Kenya suggests that many people start off improved stove programs. The most successful by purchasing more affordable photovoltaic systems programs in that period followed several principles. of 12 to 20 watts (EAA, RAEL, and ERG, 1999). They included focusing efforts on regions where there were biomass fuel shortages or where such The second way to lower initial costs is to spread them fuels were commercially available; providing over time by ensuring access to credit for both subsidies for supporting services rather than for the consumers and suppliers of energy services. In many stoves themselves; ensuring significant interaction developing countries moneylenders charge consumers between stove designers and users; relying on rates of more than 100 percent per year putting any mass-produced stove components to reduce costs; energy system out of reach for the rural poor. Electricity and basing programs on a long-term government companies can provide credit by spreading payments commitment rather than on short-term international over several years and including the charge on regular donor interests. electricity bills. Some NGOs make credit available for the installation of microgrid systems based on Increasing evidence that indoor air pollution has renewable energy technologies. These and many more caused large increases in illness and even death credit options can ease the financing of initial service in both rural and urban areas has lent greater costs for rural consumers. urgency to the task of developing effective programs for disseminating improved stoves. The rural poor may also have difficulty paying for Initially most such programs were aimed at energy services because their income is seasonal. improving energy efficiency and thus conserving Dependent primarily on an agrarian economy, they scarce fuel-wood resources. Relatively simple, can find themselves strapped for money during the inexpensive stoves can reduce the fuel needed for off-season. Energy companies serving such cooking by as much as 30 percent. In cities where customers should be encouraged to allow them people rely heavily on wood and charcoal and a more flexible payment schedule. energy prices are relatively high, fuel-efficient stoves can reduce the aggregate demand for Introducing improved stoves for better wood, easing pressure on the surrounding land health and greater fuel efficiency and conserving poor households' scarce cash income. In rural areas more efficient stoves can More than half the population in developing release some of the time spent gathering fuel- countries still rely on traditional biomass fuels for wood for productive and domestic activities cooking and heating--and thus are subject to all (Barnes, Krutilla & Hyde 2005). the health risks posed by biomass combustion. One way to reduce indoor air pollution and its 16 Energy and Poverty But improved stove programs have not always been Box 2. Taxing fuels used by the rich successful in developing countries. Program failures in inadvertently hurts the poor the 1970s and early 1980s taught important lessons. One is that governments should promote private LPG and kerosene prices in Haiti have historically been among the highest in the Caribbean. These high prices sector initiatives to develop and market improved meant that only a small fraction of the population could stoves in rural areas. Another is that programs must afford these fuels, forcing the poor to depend on be carefully targeted to those who will benefit the charcoal for cooking. most. The Chinese National Improved Stove Program, the largest ever undertaken (disseminating 120 million LPG and kerosene prices have historically been stoves to rural households) succeeded in part because related to the price of charcoal. As wood resources disappeared from rural markets as a result of it focused on areas with the greatest fuel-wood deforestation, the price of charcoal approached that shortages (Smith et al 1993). of alternative commercial fuels, and by 1990 there was almost no price difference. Because of the strong Removing obstacles to interfuel substitution demand for charcoal, its price rose until it reached the price of alternative cooking fuels, including LPG and Urban households, as their incomes grow, tend kerosene. But it did not exceed the price of those fuels because, if it had, people would have switched from to substitute more efficient modern fuels (such as charcoal to LPG or kerosene. As a result of this LPG) for traditional fuels (such as wood). Apart relationship, taxes on LPG and kerosene meant higher from efficiency, this interfuel substitution can have prices for charcoal. If liquid fuels had been taxed lightly important welfare benefits too. For example, it rather than heavily and priced to reflect their economic can help reduce indoor air pollution and alleviate cost, consumers would also have paid less for charcoal. pressure on wood resources around urban areas. To encourage interfuel substitution, it is important subsidized prices but in practice poor people not to impose taxes on modern fuels or to hinder found it difficult to obtain ration cards. Various their distribution. A tax on modern fuels schemes of this type for targeting subsidies have encourages many middle-income people to been tried in many countries but there is little continue to rely on wood beyond the point at evidence that they have worked well and, once which they would normally have switched fuels. established, are very difficult to reform. Another This increases the demand for wood and thus its way to help the poor use more efficient fuels may price. Because the prices of modern fuels set a be to provide them credit for purchasing "cap" on the prices of traditional fuels used by appliances such as stoves. This strategy may prove poor people, taxes on modern fuels can more effective and sustainable than subsidizing the inadvertently hurt the poor (box 2). fuel itself, because it avoids distorting the market. However the lessons of the Deepam scheme in Restrictions or bottlenecks on the import and Andra Pradesh in India are cautionary in this distribution of transition fuels such as coal and regard. While the high up-front cost of LPG kerosene also should be eliminated, because they cylinders was a significant barrier to LPG use, a make it difficult for the poor to substitute these government program to subsidize LPG cylinder more efficient fuels for traditional fuels. purchase did not bring about the anticipated For example, India used to ration kerosene at increase in LPG consumption by poor households. Energy Working Notes 17 The low incomes of the poorest groups severely severe that a trade off against efficiency needs to be constrained their ability to purchase LPG refills made, if only in the short run. so their consumption remained low (Rajakutty et al, 2002). Poor households also feel the indirect effects of higher fuel prices through increased prices of other goods and services that are affected by higher fuel Figure 5: Energy prices in Haiti prices. A recent study of household energy use in 40 y Yemen (ESMAP, 2005) found that if the price of diesel were raised to its economic price equivalent icienc eff to its import parity price (in 2004 diesel was priced 30 at just 43% of its import parity price) the indirect end-use impact on households would be far greater than for de the direct impact because poor households 20 purchase very little diesel for direct use. The study adjust, found that raising diesel prices to import parity LPG levels would mean that the estimated percentage gigajoule Kerosene per changes in total household expenditure of the 10 Charcoal poorest households would be 5% through the dollars increased cost of non-energy goods and services, U.S. and just 0.4% due to the increased cost of diesel. 0 1970 1975 1980 1985 1990 The alternative to direct subsidies on fuels, where Source: ESMAP 1991. the impacts of higher oil prices on the poor are really substantial, is to consider general income subsidies such as cash transfers to poor Protecting the poor during periods of high households. To be effective such schemes must oil prices have good targeting mechanisms so that the intended beneficiaries (the poor) receive the A recent analysis (ESMAP, 2005) of the impact of the income support and leakage to others is minimal. impact of higher oil prices on low income countries and on the poor pointed out that at the level of Protecting the poor during reforms protection for households, where oil price rises will be felt most directly, governments must balance short term Policy reforms like those discussed here can improve support of subsidies, whether targeted or across the the energy sector's overall performance. But without board, with the longer term need to let the market enough local involvement in designing and work in order to force the discipline of higher prices implementing energy reforms, policy makers run on the choice of fuels and energy use practices. the risk of failing to protect the interests of the poor. Determination of the actual severity of the impact of Even well-meaning energy reforms that will probably higher prices on the poorest groups in society will benefit the poor in the long run can cause them reveal whether the problem in terms of equity is so immense difficulties in the short run. Because energy 18 Energy and Poverty accounts for such a large share of cash expenditures Accepting the limitations of energy policies by the poor, and their cash incomes are so small, even modest changes in energy expenditures pose Government interventions in the energy sector, a real hardship. whether in urban or in rural areas, will need to vary depending on local needs and conditions. Similarly, the privatization of inefficient energy Policy choices also must take into account the companies can lead to better service and lower relationships among interventions. For example, cost of power supply by reducing system losses. it would be counterproductive to promote fuel However private service providers need incentives subsidies while also expecting consumers to take to serve poor households or otherwise the benefits measures aimed at conserving energy, such as of reform will accrue mainly to wealthier purchasing more efficient appliances. No set of households that already have service. Thus it is interventions can be effective in the face of other vital to protect the interests of the poor during conditions that prevent them from working. In short energy reforms. Lifeline tariffs for a small amount means that a narrow focus on any one policy may of monthly consumption, zonal subsidies for low do more harm than good. income neighborhoods, service obligations in concession agreements and in the regulatory framework and the phasing in over time of higher THE WORLD BANK'S ROLE tariffs are all policy options that can protect the poor during reform. The World Bank's energy practice is increasingly focusing on the important role that the energy In Eastern Europe unlike other regions, the socialist sector can play in improving poor people's lives system gave almost all households access to and in reducing poverty. reliable, subsidized electricity. So the welfare gains from increased access--one of the most immediate The World Bank contributes to the development of and tangible benefits of power sector reforms--is energy services for the poor through a variety of not a consideration in those countries. In this region instruments. sector reform involving restructuring and change in ownership of electricity companies is closely linked Analytical and advisory services to a fall in welfare as subsidies were reduced. Electricity spending as a share of income increased, The World Bank promotes and finances research especially for the poor, while consumption remained into the links between energy and poverty and the same or declined. A lesson learned is the in assessing the benefits and limitations of energy necessity of scheduling tariff increases to coincide programs in reducing poverty. Governments with service quality improvements and mitigating draw on these studies to design reform policies the effect of electricity tariff increases by improving and investment projects that promote access to access to and efficiency in the use of clean energy services. alternatives such as natural gas (Lampietti, 2004). Energy Working Notes 19 Investment and adjustment lending Partnerships The World Bank supports investments aimed at Partnerships are critical to advancing knowledge about improving access to energy services and increasing policies that work in expanding access to energy and their affordability. Illustrative projects approved in to achieving their broader application. The World 2004 include ones in Cambodia, the Philippines, Bank often partners with the regional multilateral and southern Africa. Descriptions of all Bank development banks in energy infrastructure projects, financed projects can be found on the World as a joint sponsor and investor. Bank website by searching under "Projects and Operations". The World Bank is also engaged in other partnerships for research and knowledge sharing, In the Cambodia project, the World Bank's including the Global Village Energy Partnership investment of $40 million leverages $150 million (GVEP), the Energy Sector Management Assistance of total investment. The project includes a rural Programme (ESMAP), and the Public-Private electrification component that supports grid Infrastructure Advisory Facility (PPIAF). extension to cover low- and medium-voltage lines and electrification for rural households. Launched in Johannesburg during the 2002 World Summit on Sustainable Development and promoted In the Philippines, the World Bank's investment by the World Bank, GVEP seeks to bring partners of $150 million leverages $233 million of total together to meet the challenge of scaling up access investment. This project targets rural electrification, to energy. The initiative will provide a central through investments in the existing grid supply clearinghouse for information and promote the system and support to small power generation, dissemination of knowledge. In addition, it will decentralized grids, and stand-alone systems promote a network of practitioners - energy based on renewable energy technologies. In professionals, entrepreneurs, governments, addition, the project is aimed at reducing market consumers, and nongovernmental organizations - barriers to the commercialization of renewable to develop best practices and lessons learned from energy technologies by building capacity in projects as well as information on construction, relevant public and private entities. financing, and new technologies. The Bank's investment of $450 million in the Southern ESMAP, a global technical assistance program, was African Power Market Project aims to increase the established in 1983 under the joint sponsorship of availability and reliability of low-cost, environmentally the World Bank and the United Nations friendly energy in the region by helping to prevent the Development Programme. The program helps build development of uneconomic generation schemes and consensus and provides policy advice on by fostering conditions attractive to private investment sustainable energy development to governments of in generation. By ensuring that power systems are developing and transition economies. It also developed cooperatively rather than individually, the contributes to the transfer of technology and project could save the region more than $1 billion knowledge in energy sector management and the over 16 years. delivery of modern energy services to the poor. 20 Energy and Poverty PPIAF is a multi-donor technical assistance facility aimed at helping developing countries improve the quality of their infrastructure through private sector involvement. Launched in 1999, PPIAF was developed as a joint initiative of the governments of Japan and the United Kingdom, working closely with the World Bank. PPIAF channels technical assistance to developing country governments on strategies and measures to tap the full potential of private involvement in infrastructure and identifies, disseminates, and promotes best practices on matters relating to private involvement in infrastructure in developing countries. REFERENCES 22 Energy and Poverty REFERENCES ------. 2005 "Household Energy Supply and Use in Yemen" World Bank, Washington, D.C. Barnes, Douglas F., Kerry Krutilla, and William Hyde. 2005. The Urban Household Energy International Energy Agency. 2002. World Energy Transition: Energy, Poverty, and the Environment in Outlook 2002. Paris. the Developing World. Washington, D.C.: Resources for the Future Press. Smith, Kirk, S. Gu, K. Huang, and D. Qiu. 1993. "One Hundred Million Improved Cookstoves in China: How Bruce, Nigel, Rogelio Perez-Padilla, and Rachel Was It Done?" World Development 21(6): 941­61. Albalak. 2000. "Indoor Air Pollution in Developing Countries: A Major Environmental and Public Lampietti, Julian. Power's promise: electricity reforms in Health Challenge." Bulletin of the World Health Eastern Europe and Central Asia, World Bank, 2004 Organization. Rajakutty, S., Masami Kojima, V. Madhava Rao, EAA (Energy Alternatives Africa), RAEL (Renewable Jayalakshmi, D.P.R. Reddy, Suman Chandra, V. Appropriate Energy Laboratory), and ERG (Energy Annamalai, and Nagaseshna. 2002. "Promoting and Resources Group). 1999. "Field Performance Clean Household Fuels among the Rural 94 Access of Evaluation of Amorphous Silicon (a-Si) Photovoltaic the Poor to Clean Household Fuels in India Systems in Kenya: Methods and Measurements in Poor: Evaluation of the Deepam Scheme in Andhra Support of a Sustainable Commercial Solar Energy Pradesh." South Asia Region Internal Discussion Paper Industry." ESMAP Technical Paper 005. World Bank, Report No. IDP-183. Washington, D.C.: World Bank. Energy Sector Management Assistance Programme, Washington, D.C. United Nations University and World Institute for Development Economic Research Price Discussion ESMAP (Energy Sector Management Assistance Paper No. 2001/75. 2001. Chisari, Omar O., Programme). 1991. "Haiti Household Energy Estache, Antonio, and Waddams Price, Catherine, Strategy." World Bank, Washington, D.C. Access by the Poor in Latin America's Utility Reform, Subsidies and Service Obligations, Helsinki. ------. 1999. "Household Energy Strategies for Urban India: The Case of Hyderabad." World Bank, WHO (World Health Organization). 2002. The World Washington, D.C. Health Report 2002: Reducing Risks, Promoting Healthy Life. Geneva. ------. 2000. "Energy for Rural Development in India: The Case of Six States." Draft Report. World World Bank. 1996. Rural Energy and Development: Bank, Washington, D.C. Improving Energy Supplies for Two Billion People. Washington, D.C. ------. 2005 "The Impact of Higher Oil Prices on Low Income Countries and on the Poor" World World Bank, Middle East and North Africa Region. 2004. Bank, Washington, D.C. "Road Map for Scaling-Up Energy." Presentation during World Bank Energy Week 2004. Washington, D.C. Energy Working Notes 23 World Energy Council and FAO (Food and Agriculture Organization of the United Nations). 1999. The Challenge of Rural Energy Poverty in Developing Countries. London: World Energy Council. Web Sites World Bank Group www.worldbank.org/ Energy Sector Management Assistance Programme (ESMAP) www.esmap.org/ Global Partnership on Output-Based Aid (GPOBA) www.gpoba.org/html/gpoba_aboutoba.asp Public-Private Infrastructure Advisory Facility (PPIAF) www.ppiaf.org/ Working Notes The Working Notes series of the Energy and Mining Sector Board are intended to complement the Energy and Mining Sector Board Discussion Papers. Working Notes are lightly edited notes prepared by World Bank staff on topical issues in the energy sector. Working Notes are available electronically at www.worldbank.org/energy. Comments should be emailed to the author(s). Disclaimer The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors and should not be attributed in any manner to the World Bank, to its affiliated organizations, or to members of its Board of Executive Directors or the countries they represent. THE WORLD BANK GROUP ENERGY AND MINING SECTOR BOARD The World Bank 1818 H Street N.W. Washington, D.C. 20433 USA www.worldbank.org/energy