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p. 27 of 30 BACK | NEXT Introduction Regional Energy Context Energy Policy Issues Structural Reform Energy Efficiency Energy Pricing Energy and Environment Rural Energy Development Introduction Rural Energy Systems Traditional Energy Sources Commercial Energy Options Renewable Energy Systems Regional Cooperation and Energy Development Conclusions and Recommendations

Bank Policy Initiatives for the Energy Sector : Energy Policy Issues : Rural Energy Development

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Commercial Energy Options

69. There are many complexities and biases in evaluating rural electrification (RE). Although power subsector lending has accounted for about 75 per cent of the Bank's overall energy lending, only a modest portion is devoted directly to the electrification of DMC rural areas, where 70 per cent of the people live. The electrification ratio in many DMCs is still low.¹ The main difficulties with RE are that its (i) nonmonetary benefits are not widespread or strong enough to warrant waiving of conventional evaluation criteria; and (ii) unit costs are comparatively high because of long distances, low load factors and wide dispersion of load. The RE contribution is maximized when it is applied to end uses that use electricity or where use of electricity has an advantage over alternative energy forms or both. Such end uses are usually associated with mechanized productive activities such as pumped irrigation and agro-industries. Experience in RE through grid supply suggests that this option succeeds when in conjunction with other rural development activities that provide economic loads to the RE system. Therefore, the Bank will, encourage an integrated development approach.

70. Electricity constitutes only a small proportion (less than 10 per cent) of the total energy used in electrified rural areas, even though electricity tariffs charged are usually below the LRMC. Even the subsidized tariff seems to impose on low-income households costs that are higher than those of fuel substitutes as these in most rural situations, have subsidies as well. This factor, together with high initial connection costs, renders RE unaffordable to a large segment of the rural population. Governments may decide, as a matter of social policy, to provide subsidies to targeted groups which cannot afford to pay the economic price of electricity, on the clear understanding that such subsidies will be gradually phased out in a time bound manner. Cross-subsidization of rural consumers by urban consumers needs to be discouraged and, instead, the utility needs to be provided with direct cash injections from tax revenues to meet the costs of financially non-viable electricity supply extensions. Such cash injection is a must in the case of economically non-viable supply extensions pursued purely for social reasons. The Bank would give priority to assisting RE schemes that are economically and financially viable and not considered for investment by the private sector. When RE schemes that are economically sound but financing will be to determine the quantum of rural electrification that the utility can cover without adversely affecting its own overall financial viability, and to stage or schedule RE works accordingly.

71. In nonelectrified areas, kerosene is used extensively for lighting, and diesel for pumping and agricultural machinery. While the use of such fuels may have to continue, the focus of Bank interventions will be to ensure that these are supplied in an environmentally sound and sustainable manner and used with optimum efficiency. The power grid will be extended only if it is a lower cost option than decentralized generation based on diesel, minihydro, solar, biogas and wind energy, with all costs accounted for in economic terms in an unbiased manner. On the other hand, the supply of electricity to the power grid from renewable energy sources, where feasible, will be encouraged. The Bank will therefore carefully review the feasibility of selecting suitable technologies and sites using its TA resources in respect of all these rural energy supply options. Decentralized electricity systems for rural areas may lend themselves to supply and distribution by small-scale private sector IPPs. The Bank may encourage them, in addition to the development and management of renewable energy sources by rural communities on a cooperative basis.

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