Providing access to electricity for the unserved: a free-market solution.

AuthorBallonoff, Paul
PositionReport

The traditional problem often called "electricity development" is to improve and expand services from an established monopolistic electricity supplier. The lack of an effective dominant utility, however, is a defining condition for the 1.4 billion people without access for electricity, the so-called unserved. Therefore, the issues that arise are different from those of traditional utility service as a mandated monopoly. This 'article shows how free markets can help resolve the problem of serving the unserved.

The free-market approach and empirical examples in this article may appear counterintuitive compared to the traditional solution to the access problem when a preexisting legally franchised monopoly supplier exists. In much of the developing world such franchised monopoly supply companies do exist and are often government owned mad operated, but they are unreliable. Independent small distribution and supply companies offer an alternative and may come to exist, but in some countries, such as India, private free-market suppliers of electricity are illegal. Unlike the franchised monopoly supplier, such spontaneous companies can exist only if they provide a reliable supply. Typically, such insurgent companies charge higher prices than their government competitors yet are paid, while the government monopoly is often not paid at all.

The presence of such insurgents in developing economies contradicts nearly all of the classical doctrines of utility regulation. The licensed supplier may have a legal monopoly but has none of the properties of a natural monopoly. The presumably less expensive (and heavily regulated) network costs per unit of output do not necessarily induce consumers to voluntarily buy the regulated monopoly provider's electricity. Even in the presence of such a network and despite government programs to "help poor people" by setting low prices--consumers turn to more expensive but reliable alternatives, such as kerosene, which have no natural monopoly technology attached to them.

Many countries have by now experienced the effects of energy development projects that did not adequately consider reliability in the design of operational systems. The credibility and effectiveness of development advice will depend on the willingness to recognize and deal with reliability issues and their costs.

Resilient Self-Sustaining Energy Development

People in the developed and much of the developing world have access to electricity usually through a local distribution company, which may also provide the supply. Yet, the World Energy Outlook 2010 (OECD/IEA 2010: 56) estimates that 1.4 billion people are not connected to grids and 2.7 billion people use biomass for heating and cooking. Many of those have kerosene as a principal source of light and heat. Moreover, world electricity demand is expected to increase by 2.2 percent annually, with 80 percent of that demand coming from non-OECD countries. If we also consider transport, the effect on demand for electricity generation can be even more profound. Aggressive scenarios assume that 75--80 percent of all vehicles will be electric by 2035 (OECD/IEA 2010: 218). Moreover, the developing world may be consuming about 50 percent more electricity annually than OECD countries. Even in the low carbon scenarios, which assume aggressive energy efficiency programs, a substantial amount of traditional energy will still be used. Part of the growth in electricity demand in the developing world would likely come from conversion from kerosene to electricity. These facts, and others, mean that a free-market energy policy may achieve resilient growth while serving the unserved.

The pattern of presently served electricity markets in developing countries is well documented. Typically, a single monopoly distribution company provides retail delivery services. Probably that company is still or was recently owned by the government. There is an existing high-voltage transmission system, which is almost certainly 'also a monopoly and probably owned by the government. There are established sources of generation, which if not already organized for wholesale competition are being pushed in that direction. The size and density of these established markets provide a comparatively low average cost for delivery and generation of electricity, which may induce some monopolistic behavior. The traditional ease for electricity regulation stems from dealing with that possibility.

It may therefore be counterintuitive that the provision of energy and electricity to the 1.4 billion unserved is instead a comparatively competitive market. The costs and unit prices encountered are much higher, because the technologies used lack economies of scale, the fuels are higher cost, and they are often small systems that are comparatively capital intensive per unit of output. High capital costs and other reasons can prevent established grid systems from expanding to serve these markets. Thus, these markets generally lack the monopolistic characteristics of established natural monopoly networks. These differences can govern not only the immediate- and medium-term economic solutions but also the kinds of regulatory issues that may arise. Such differences explain why maW of the solutions discussed in this article are not simply copies of the traditional forms found in more established and natural monopoly markets.

Many examples exist of effective creation of electricity services in off-grid applications in the developing world. Most often those examples of nontraditional solutions are not even documented in official statistics. For example, Soluz, Inc. (www.soluzusa.com) developed and operates off-grid solar energy distribution systems in Honduras and the Dominican Republic on a wholly commercial basis. In Afghanistan, self-capitalized local electricity distribution and supply companies help deliver reliable supply, as I witnessed in 9.009 during a USAID-funded Economic Governance and Growth Initiative project. Those companies operated profitably with high collection rates at prices similar to the highly subsidized yet unreliable and insolvent government company to about 2,000--3,000 consumers located immediately adjacent to or even concurrently with territories of the government company. A similar phenomenon has been documented widely in post-conflict countries (Schwartz et al. 9.004: 7). In Bangladesh, Grameen Shakti financed over 285,000 small Solar House Systems by the end of 2009 at "the same cost of kerosene," on a commercial basis for individuals and communities (Rabbi 9.009: 12). Competitive forces driving energy development are also visible across sectors. Telecommunications towers in the rapidly growing mobile phone industry in India are combined with solar PV systems (Hamilton 2010: 34). A study by Global Village Energy Partnership (GVEP) International (Rai and McDonald 2009: 10, 17, 31) demonstrated substitution of LPG for more polluting biomass sources in Sudan, with similar activities improving cookstoves using renewable energy distribution channels, in India, Latin America, and Africa. Consistent with "all these examples and many others, a University of Manchester study of electrification in developing countries found that competition in provision of distribution and of supply is the key driver of electrification (Zhang and Kirkpatriek 2002: 1).

Reliability Leads to Customer Confidence

If competition drives expansion of electrification, how can private entities survive when 'all of their customers are presumed to be poor? The answer is surprisingly simple: People, including poor people, buy, and are only willing to pay for, the availability of electricity on demand. In the absence of reliable grid power systems, consumers may substitute other sources, such as diesel or gasoline-driven small generation sets to provide reliability or even a large portion of the actually delivered total supply. Very often in more remote areas with many poor people, an alternative supply of lighting comes from kerosene, which is relatively expensive and also highly polluting. That many of these consumers are poor implies that a common presumption that poor people cannot pay for electricity is false. Instead, the facts demonstrate that even poor people are willing to pay for reliable lighting, which is what kerosene represents.

According to the World Bank (2009: 13), a rural household in India "consumes an average of 4 liters of kerosene per month for lighting." In rural Afghanistan, kerosene lamps account "'for approximately 86 percent of lighting" even though "this lighting source is...

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT