Business models for rural electrification
Even though a socio-economic analysis of a project may demonstrate that it has a net benefit and is hence desirable for a country to implement, it does not follow that the project can generate the cash flow needed for implementation, or that project risk is distributed in a way that is acceptable to all parties supposed to participate. Public support of different kinds (investment subsidies, tax exemption, guarantees, etc.) can be necessary to overcome such hurdles. Another factor that may impact on the financial viability of the project, the distribution of risk and the assurance of successful operation and maintenance is the business model chosen. Consequently, these aspects must be covered by the project feasibility study. In the following the most common alternatives are briefly mentioned.
Another important aspect, related to the business model, is the development of healthy customer – utility relations. A poor track record in this area can be very damaging, leading to behaviours such as poor payment morale, theft and vandalism, see for example. Taking care to build good relations with the customers from the start of the project and to provide them with timely information at crucial stages of project design and implementation, and start-up of operations will be a good investment.
For a grid extension:
the following business models are common:
- The national utility, that often owns the transmission grid anyway. This is a common solution that is easy to administrate for the authorities. However, the perceived distance between the customers and the service provider can be big, and national utilities may have a frayed reputation as regards customer relations and corruption. Also, a distant rural grid may not receive the necessary attention for effective management in a large organization.
- A local public utility, usually meaning the local government or local government owned utility company, can own and manage the local distribution grid. They are close to the users, sometimes too close as the power supply may easily become politicized in this model. Local public authorities may find it difficult to disconnect non-paying customers and institutions, and typically lack the necessary technical skills. Normally, local public authorities are better suited to supervising the relations between the utility and customer than to be the utility.
- Local private utilities have been tried and are usually more effective in collecting money and operating the system. However, it may be difficult to interest private entities in a business they perceive to be risky and to give meager returns.
- A local cooperative for management of a local grid has often been successful in keeping political influences at bay if they are supported by well-managed central organizations basing their actions on technical and economical evidence and criteria. As mentioned, it takes considerable effort to assure the viability of local cooperative utilities.
For isolated grids:
the same business models have been tried:
- The national utility is a common operator of isolated grids in many countries. In some countries this work relatively well, in other they are singularly ineffective in managing the usually diesel-based supply. Part of the reason may be application of national tariffs that do not cover the cost of supply. Otherwise the same comments apply as above.
- A local public utility, usually meaning the local government, can own and manage the local distribution grid. The same comments apply as above, and often they struggle to keep diesel engines working.
- Local private utilities can better provide the technical skills required for operating the system, and given supportive policies, they can work well. However, the same comments apply as above.
- A local cooperative can work, provided it is possible to establish the necessary technical skills. When generation is included more technical disciplines must be mastered, increasing the challenge to assure adequate technical capabilities in a grass-root organization in a rural area. Otherwise, the same comments as above apply.
For stand-alone systems:
a greater variation of business models has arisen:
- Local public utilities have not been known to engage in this area.
- Local private utilities have been extensively involved in stand-alone system electrification, in what is usually called a fee-for-service approach, as people do not pay for the kWh but for the use of a specific system. There is thus normally a fixed monthly charge, independent of actual consumption. Examples are South Africa, with six concessions for PV electrification, and Lao PDR. In South Africa the concessions were tendered out to private companies, attracting consortia with partners such as EDF and Shell. In Lao PDR the authorities support and develop regional Energy Service Companies (ESCOs) to provide systems and maintenance services. In the Lao PDR case the systems are provided on a hire-purchase basis, i.e. ownership of the systems eventually passes to the user. These public-private partnerships usually entail exclusive right to a subsidy for the concessionaire, but not exclusive right to market access.
- In some places (e.g. Morocco, the Caribbean, Oceania, Kenya, Tanzania) dealer based approaches for making systems available have been tried, either as cash sale with or without a subsidy, or as credit sales or leasing schemes. The advantage of this approach is that rural entrepreneurs can be enabled to participate, creating fine-meshed commercial networks for distribution of systems. As the economy develops, the business must become self-sustaining from the point of view of the dealers, possibly with the help of a subsidy element to make systems affordable. Credit schemes are also usually important to overcome the financial hurdle of first cost, which is even higher than for grid connection. When preparing projects based on dealer participation, it is important to remember that dealer credit to finance build-up of stock close to the market can be just as important as credit to end-users.
- Microfinance institutions have sometimes engaged in provision of photovoltaic (PV) systems, notably the Grameen Shakti Solar PV Program in Bangladesh. This is a variety of a dealer network drawing on already existing fine-meshed infrastructure for rural credit.
National utilities are rarely involved in electrification schemes based on stand-alone systems, even though it happens. In countries where subsidies or grants are widely applied in rural electrification, national utilities sometimes perceive stand-alone systems as a threat, competing for the same subsidies that they wish to apply to their core business, grid based electricity.
Stand-alone systems are often used for electrifying the most distant, sparsely populated areas with the poorest populations. Introducing modern energy services in such areas is a real challenge, and it can usually not succeed without a significant subsidy element and long-term public support. South Africa’s government has turned its back on its off-grid electrification concessionaires, and consequently these enterprises have not developed as was hoped.
Winther, Tanja. The impact of electricity. Development, Desires and dilemmas. Berghan Books, 2008. ISBN 978-1-84545-495-1.
NRECA International, ltd. Experiences in Cooperative Rural Electrification and Implications for India. Prepared for the Asian Development Bank, June 2002.