. 2 1469 Viewpoint Note No. 214 July MTX 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, Jfdrlesic 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 ahove cost in lized 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 whiclh 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 (Comisi6n Nacional de Energia. 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 etitry and comiipetition in geineration, 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 gencration 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 subsicly, to turn rural electrification into WM_________ 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 Urb a n But where the costs of this solution are too high, 80 alternative technologies are considered. These alternatives, mainly for self-generation in iso lated communities, include: 60 * Photovoltaic solutions for isolated ruLral dwellings. * Hybrid systems that recduce fossil fuel depen- 40 Rural dence and operating costs. * Small hydcroelectric power stations, indepen- 20 dent or combined with other energy sources. 2 Experimental solutions hased on wind power and biomass systems, which would require a a resource assessment program before being 1952 1960 1970 1982 1992 applied. Source: Chilean National Statistics Institute, census data. Tc 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 contribtute 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 clistribution companies to cover part model for the technical units of the regional gov- of tlheir 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 ancl 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 funCds to the regions on the basis of two agc by 2000. and 100 percent after 10 years (the criteria: howi 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 woould allow elec- Regional governments also allocate their own trification of roughly 110,000 rural dwellings. resources to the program. The state cloes not endi 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 priovide service at the standards interested in providing the service. A community offered by the distribution gricd (220 volts effec- presents a project to its municipalityv which then tive monophasic alternate voltage and 50 hertz asks the distribution company to prepare a tech- freqiuencv, 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 i5 Dwellings Coverage 10 60 o 50 1992 1993 1994 1995 1996 1997 1998 1999 Note: Data for 1999 are estimates. Source: Chile, National Energy Conunission 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. henefits 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-ycar 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 govemment 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 sh own that it is possible to create market incen- Mlost of the projects have involved extension of tives that lead to efficienit private solutions to the grid, asolution that usually mieans a lower-cost rurLl electrification-an important lesson at a per connected dwelling and a higher quality of time xxwhen so many developing countries are service. BLut several projects have relied on alter- reforming their power markets and privatizing native technologies, priimarily one-house phloto- their state-owned electric utilities. voltaic systems. These systems have been installed in isolated areas in the northlern part of An innovative aspect of the program has been the country (for nearly 1,000 clwellinigs). wlviclh the use of competition. It has successfully intro- has some of the strongest solar racliation in the cducecl competition at several levels: among corn- 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 (lowxer voltage, fewer hours of selrice). their projects; antI among regions, for the funds But they have heen an attractive alternative wlhel-e provided by the central government. extencling the grid is too costly because of the clis- tance from the existing grid or the high dispersion The state has contributed the most funding to the of dwellings. Both these causes have increasecl program, investing USS112 million in rural elec- the marginal cost of rural electrification in Chile. trification in 1995-99, sometlhing less than what In 1995 thie average state subsidy per dwelling was estimated at thie beginning of the program. ami)unted to UTSS1,080; in 1999 it reached For their part, the companies have helped clefine IUSS1,510.This outcome is nevertheless consistent Viewpoint is an open the projects, invested resources, ancl untdertaken i with the program's goal of maximizing rural elec- forum intended to the commercial risk, and continue to own and tric'ty coverage witlhin budget constraints, wxxicll encourage manage the installations. Private investment in mandates first implementing the projects with the sisseminadion of ard debate on ideas, the programn 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 a strategic move to protect their existing distrib conventional technologies in ruLral electrification the private sector The views published in this Ltion area and tliscourage entry by cornpetitors. projects, as improvements in these teclhnologies series are those ofthe From the companies' perspective rural electrifi- reduce their costs and make them increasingly authors and should not cation is a riskier business than traditional distri- competitive xxwitlh conventional solutions. be attributed to the World Bank or any of its bution. Customer payments are generally low affiliated organizations. vvhile operating and maintenance costs are high References Nor do any of the con- compared with those in urban areas. But com- clusionrsrepresent Chile, sL iOnal l'nei-gy Cni sailiossn. 1999.) I'-grgll.n l d lectrifi- officialpolicyofthe panies expect consumption to increase as users caci6n1 rLir.il I'cUil cIlcC(trifiC i( l 91 ItrIn I). S>aili 1I World Bank or of its realize the potential for income generating activ- Executive Directors or ities SILch as fisliing and forestry. the countries they represent. AlejandroJadresic (jacl5ic@ctcreuna.cl), As hoped, users have participated in identify'ing former minister ofen)zergy q/ Chile (1994-98S To order additional ancl defining the projects-helping to establish copies please call 202458 1111 or contact the needs ancl priorities in each region-antI in 77.his Vote is based on a chapter in Energy Suzanne Smith, editor, financing the investments. Regional governments Sector MlIanagemnent Assistance Program me Room F11 K-208, The World Bank, 1818 H have promoted the program among communi- (FS1IAP), Energy and Development Report Street, NW, Washington, ties, provided basic assistance in preparing the 2000): Energy Services for the NWorlt's Poor D.C.20433rInteret projects. decided wlhich woould be implemented (Wasbington, D.C... World address ssmith7a worldbank.org. The ancl allocated resources accordingly. They' halve Bank, 2000). EL. N A1 seres is also avai able also coortlinated andI monitored the implemen on- ine (www.worldbank. orgl'html/fpd/notes/). Lation of the projects. Essential m ivolvig 8 Printed on recycled regional authorities is the fact that stucccss in the paper program has become a key political achievement.