Note No. 214 June 2000 Promoting Private Investment in Rural Electrification—The Case of Chile Alejandro Reform of the energy sector and reform of subsidies ideally go hand in hand. Structural, ownership, Jadresic and regulatory reforms aimed at making services more efficient should lead to a rethinking of both the delivery mechanism and the level of subsidy. Chile, one of the earliest and most thorough energy reformers, has also been one of the more innovative in restructuring its subsidy schemes. It has seen electrification as a key measure in alleviating poverty in rural areas—in 1992 about 47 percent of its rural population had no access to electricity. Its rural electrification program includes subsidies designed to be consistent with the broad principles of energy reform—decentralization of decisions to the regional and community level, competition (between technologies as well as suppliers), and a requirement that all partners in the process—users and private companies as well as the state—contribute to the financing of expansion projects. The short-term result: an increase in rural electrification of about 50 percent in the first five years of the program. In the 1980s Chile liberalized its markets, priva- or cross-subsidies from tariffs set above cost in tized state-owned electricity companies, and urban areas. Lack of funding and pressure from allowed the private sector the key role in invest- other priorities made electrification slow. ment. Before selling the electricity companies, the state split them into generation and transmission By the early 1990s more than 1 million people— companies and distribution utilities. The distribu- almost half the rural population—still had no tion utilities were divided according to the areas access to any source of electricity (figure 1). By in which they operated, but no exclusive distrib- contrast, 97 percent of urban households had ution rights were granted. The National Energy electricity supply. The lack of access was con- Commission (Comisión Nacional de Energía, centrated in a few regions where most of the CNE) was created as the main policymaking and rural population lives. It affected mainly lower- regulatory body. A new electricity law established income families, since the wealthier could usu- free entry and competition in generation, a nonex- ally afford to install generators or pay for clusive concession system for distribution, and a extension of the distribution grid. pricing scheme based on marginal costs, with generation charges reviewed every six months To increase rural access to electricity, Chile and distribution charges every four years. launched a rural electrification program in 1994. The design of the program is compatible with the Rural electrification in Chile had traditionally been overall electricity sector reforms—that is, based the domain of the state-owned power companies, on competition, private investment and decen- which followed centrally developed plans and tralized decisionmaking. The goal was, with the relied on subsidies from the central government help of a subsidy, to turn rural electrification into The World Bank Group ▪ Private Sector and Infrastructure Network Promoting Private Investment in Rural Electrification—The Case of Chile FIGURE 1 ELECTRICITY COVERAGE IN CHILE, 1952–92 Percentage of households 100 Urban But where the costs of this solution are too high, 80 alternative technologies are considered. These Total alternatives, mainly for self-generation in iso- lated communities, include: 60 ▪ Photovoltaic solutions for isolated rural dwellings. ▪ Hybrid systems that reduce fossil fuel depen- 40 dence and operating costs. Rural ▪ Small hydroelectric power stations, indepen- dent or combined with other energy sources. 20 ▪ Experimental solutions based on wind power and biomass systems, which would require a 0 resource assessment program before being 1952 1960 1970 1982 1992 applied. Source: Chilean National Statistics Institute, census data. To ensure sustainability, all costs over the life of the projects are considered in the appraisal, as well as organizational schemes for operating and an attractive business opportunity. The state, pri- maintaining the projects. vate investors and users would all contribute to funding. The program in action The state’s contribution—the subsidies and the The central government’s tasks of providing cost of managing the program—is delivered funds and technical assistance and coordinating through a special fund set up to competitively the program are handled mainly by the CNE. The allocate a one-time direct subsidy to private CNE prepared a planning and management electricity distribution companies to cover part model for the technical units of the regional gov- of their investment costs in rural electrification ernments that would lead the process. It also cre- projects. Bids are conducted annually. To apply ated methodological tools to ensure efficient for a subsidy, companies present their projects allocation of the state subsidies, based on to the regional governments, which allocate the national and international experience. And it funds to those scoring best on several objective prepared preinvestment studies to generate ini- criteria: cost-benefit analysis, amount of invest- tial project portfolios for each region. ment covered by the companies, and social impact. The central government allocates the The target was to reach 75 percent rural cover- subsidy funds to the regions on the basis of two age by 2000, and 100 percent after 10 years (the criteria: how much progress a region made in program is expected to run until 2004). It was rural electrification in the previous year and estimated that the state would have to invest how many households still lack electricity. about US$150 million, which would allow elec- Regional governments also allocate their own trification of roughly 110,000 rural dwellings. resources to the program. The state does not end up owning or operating any facility. Communities in areas lacking electricity supply generally propose the rural electrification pro- If technically and economically feasible, the first jects, supported by local distribution companies choice is to provide service at the standards interested in providing the service. A community offered by the distribution grid (220 volts effec- presents a project to its municipality, which then tive monophasic alternate voltage and 50 hertz asks the distribution company to prepare a tech- frequency, with twenty-four-hour availability). nical proposal, at no cost to the municipality, or FIGURE 2 RURAL DWELLINGS OBTAINING ELECTRICITY AND RURAL ELECTRICITY COVERAGE IN CHILE, 1992 – 99 Dwellings (thousands) Coverage (percentage of households) 25 80 20 70 15 Dwellings Coverage 10 60 5 0 50 1992 1993 1994 1995 1996 1997 1998 1999 Note: Data for 1999 are estimates. Source: Chile, National Energy Commission 1999. contracts for this service with an independent the grid. These expenditures, nearly 10 percent consulting company. Once the proposal is pre- of the costs of each project, are initially financed pared, the municipality lists the project in a pub- by the distribution company and repaid by the licly accessible register. users over time. Once the project is operating, the users have to pay the regulated tariffs. Using the prescribed criteria and tools, the ▪ The distribution company is required to invest regional planning agency evaluates the projects, at least the amount calculated using a formula analyzing their economic and financial costs and set by the government—to avoid cheating. benefits and calculating the contribution of the The company also must operate the projects. company and the subsidy required. Only pro- ▪ The state has to provide a subsidy for the invest- jects with a positive social return but a negative ment costs that is no more than the (negative) private return are considered for subsidies. The net present value of the project, which in any program allows a 10 percent real rate of return case has to be smaller than the total investment. on investment, similar to that used for setting tar- iffs for the projects, over a thirty-year horizon. Grants from international organizations have also been used in the program, especially for After being analyzed, the projects are submitted experimental projects based on self-generation to the head of the regional government in a port- systems using alternative energy sources. folio of all those meeting the minimum require- ments. The head of the regional government then Once a project has been implemented, the dis- presents a proposal to the regional council, which tribution company takes care of operation, has to allocate the state funds among the projects, management, and maintenance, recovering its taking into account the number of beneficiaries, costs through the tariffs charged consumers, the unit cost, and the financing needs. The re- which are set by the CNE. gional government then allocates the funds to the companies that presented the projects selected. Results The responsibility for financing the projects is The program has increased the coverage of elec- split up as follows: tricity systems in rural areas from 53 percent in ▪ Users have to cover the costs of the in-house 1992 to 76 percent at the end of 1999, exceed- wiring, the electric meter, and the coupling to ing the 75 percent target set for 2000. And it has Promoting Private Investment in Rural Electrification—The Case of Chile shown that it is possible to create market incen- Most of the projects have involved extension of tives that lead to efficient private solutions to the grid, a solution that usually means a lower cost rural electrification—an important lesson at a per connected dwelling and a higher quality of time when so many developing countries are service. But several projects have relied on alter- reforming their power markets and privatizing native technologies, primarily one-house photo- their state-owned electric utilities. voltaic systems. These systems have been installed in isolated areas in the northern part of An innovative aspect of the program has been the country (for nearly 1,000 dwellings), which the use of competition. It has successfully intro- has some of the strongest solar radiation in the duced competition at several levels: among com- world. The nonconventional technologies gener- munities, for financing for their projects; among ally provide electricity at a higher cost and poorer distribution companies, for implementation of quality (lower voltage, fewer hours of service). their projects; and among regions, for the funds But they have been an attractive alternative where provided by the central government. extending the grid is too costly because of the dis- tance from the existing grid or the high dispersion The state has contributed the most funding to the of dwellings. Both these causes have increased program, investing US$112 million in rural elec- the marginal cost of rural electrification in Chile. trification in 1995–99, something less than what In 1995 the average state subsidy per dwelling was estimated at the beginning of the program. amounted to US$1,080; in 1999 it reached For their part, the companies have helped define US$1,510.This outcome is nevertheless consistent Viewpoint is an open the projects, invested resources, and undertaken with the program’s goal of maximizing rural elec- forum intended to the commercial risk, and continue to own and tricity coverage within budget constraints, which encourage dissemination of and manage the installations. Private investment in mandates first implementing the projects with the debate on ideas, the program so far has totaled US$60 million. highest impact per unit of investment. At the same innovations, and best Companies have participated in the program as time, however, it allows a growing role for non- practices for expanding the private sector. The a strategic move to protect their existing distrib- conventional technologies in rural electrification views published in this ution area and discourage entry by competitors. projects, as improvements in these technologies series are those of the From the companies’ perspective rural electrifi- reduce their costs and make them increasingly authors and should not be attributed to the cation is a riskier business than traditional distri- competitive with conventional solutions. World Bank or any of its bution. Customer payments are generally low affiliated organizations. while operating and maintenance costs are high References Nor do any of the con- clusions represent compared with those in urban areas. But com- Chile, National Energy Commission. 1999. “Programa de electrifi- official policy of the panies expect consumption to increase as users cación rural” (Rural electrification program). Santiago. World Bank or of its realize the potential for income generating activ- Executive Directors or the countries they ities such as fishing and forestry. represent. Alejandro Jadresic (jadresic@ctcreuna.cl), As hoped, users have participated in identifying former minister of energy of Chile (1994–98) To order additional copies please call and defining the projects—helping to establish 202 458 1111 or contact the needs and priorities in each region—and in This Note is based on a chapter in Energy Suzanne Smith, editor, financing the investments. Regional governments Sector Management Assistance Programme Room F11K-208, The World Bank, 1818 H have promoted the program among communi- (ESMAP), Energy and Development Report Street, NW, Washington, ties, provided basic assistance in preparing the 2000: Energy Services for the World’s Poor D.C. 20433, or Internet address ssmith7@ projects, decided which would be implemented, (Washington, D.C.: World worldbank.org. The and allocated resources accordingly. They have Bank, 2000). series is also available also coordinated and monitored the implemen- on-line (www.worldbank. org/html/fpd/notes/). tation of the projects. Essential in involving Printed on recycled regional authorities is the fact that success in the paper. program has become a key political achievement.