NOVEMBER 2008 Operational Guidance for World Bank Group Staff Designing Sustainable Off-Grid Rural Electrification Projects: Principles and Practices The Energy and Mining Sector Board ACKNOWLEDGEMENTS CONTACT INFORMATION This Note was prepared by Ernesto Terrado, Anil Cabraal and Questions and comments should be addressed to Anil Ishani Mukherjee. The Note has benefited immensely from Cabraal ([email protected]). the review and comments of both World Bank staff and exter - nal experts, and has been cleared by the Energy and Mining To order additional copies, please contact the Energy Help Sector Board. Special thanks go to the internal and external Desk ([email protected]). This Note is avail - peer reviewers, Douglas F. Barnes, Jim Finucane, Christophe able online at http://www.worldbank.org/energy. de Gouvello, Subodh Mathur, Kilian Reiche, and Dana Rysankova. Editorial support was provided by Norma Adams. NOVEMBER 2008 Operational Guidance for World Bank Group Staff Designing Sustainable Off-Grid Rural Electrification Projects: Principles and Practices The World Bank, Washington, DC The Energy and Mining Sector Board CONTENTS ABBREVIATIONS AND ACRONYMS ............................................................................... ii FOREWORD ..................................................................................................................... 1 EXECUTIVE SUMMARY .................................................................................................... 2 CONTEXT AND BACKGROUND ..................................................................................... 3 CRITICAL FACTORS IN PROJECT DESIGN ..................................................................... 6 Comparing technology options ................................................................................ 6 Social safeguards and environmental considerations .......................................... 9 Productive and institutional applications ............................................................. 10 Enhancing affordability .......................................................................................... 11 Business models for off-grid service: central role of the private sector ........................................................................... 14 Regulating off-grid service .................................................................................... 17 International co-financing assistance ................................................................... 17 GUIDELINES FOR OFF-GRID PROJECT DESIGNERS .................................................. 19 REFERENCES .................................................................................................................. 22 i TABLES Table 1. Quantifying Electrification Benefits for a Typical Household in Rural Philippines ........................................................ 4 Table 2. Examples of Small-scale Productive Applications in Off-grid Areas ..................................................................... 10 Table 3. Subsidy Levels for Grid-connected Customers ........................................... 11 Table 4. SHS Subsidy Levels in Selected World Bank Projects ................................ 12 FIGURES 1. Technology Options for Off-grid Electrification .................................................... 7 2. Elements of a Sustainable Off-grid Electrification Project ................................ 19 BOXES Box 1. Building on Success in Sri Lanka ...................................................................... 5 Box 2. Solar Battery Charging Stations in Nicaragua: Solution for the Poorest? ............................................................... 8 Box 3. The Rural Payment Affordability Pyramid ..................................................... 13 Box 4. Medium Term Service Contract: Output-Based Aid Model in Bolivia ................................................................ 16 Box 5. Sustainable Solar Market Package in the Philippines ................................ 16 ABBREVIATIONS AND ACRONYMS ASTAE Asia Sustainable and Alternative Energy Unit CIF Climate Investment Funds CODE Committee on Development Effectiveness ERD Decentralized Rural Electrification (Guinea) ERTIC Decentralized Infrastructure for Rural Transformation (Bolivia) ESCO Energy Service Company ESD Energy Services Delivery (Sri Lanka) ESMAP Energy Sector Management Assistance Program GIS Geographic Information System GPOBA Global Partnership for Output Based Aid IDTR Decentralized Infrastructure for Rural Transformation (Bolivia) IEG Independent Evaluation Group (formerly Operations Evaluation Department) IESRM Integrated Energy Services for Rural Mexico IPP Independent Power Producer kW kilowatt ii kWh kilowatt hour LED Light Emitting Diode LV Low Voltage MSC Medium Term Service Contract MV Medium Voltage MW megawatt PERMER Renewable Energy for Rural Markets Project (Argentina) PERZA Off-grid Rural Electrification Project (Nicaragua) PIR Rural Infrastructure Project (Honduras) PMU Project Management Unit PPIAF Public Private Infrastructure Advisory Facility PV Photovoltaic REDP Renewable Energy Development Project (China) RERED Renewable Energy for Rural Economic Development (Sri Lanka) RERED Rural Electrification and Renewable Energy Development (Bangladesh) RET Renewable Energy Technology RPP Rural Power Project (Philippines) SBCS Solar Battery Charging Station SHS Solar Home System SSMP Sustainable Solar Market Package TEDAP Tanzania Energy Development and Access Project W watt WHS Wind Home System Wp watt peak FOREWORD All countries—whether industrialized, middle income or low income—place a high priority on providing their citizens access to electricity. Despite this policy and the expenditure of billions of dollars, more than 1.5 billion people, mainly in Sub-Saharan Africa and South Asia, remain without access to electricity services today. To meet their lighting and other basic energy needs, many households continue to depend on expensive fossil fuel–based sources, such as kerosene, which are energy inefficient and polluting. Fifteen years ago, grid extension, diesel-powered minigrids, and mini-hydropower generators were, for the most part, the only electrification options available to rural communities. With the commercial maturation of various small-scale, renewable energy–based 1 technologies — from solar photovoltaic systems to small wind generators and micro hydropower—along with the evolution of innovative service delivery models, off-grid or stand-alone service provision has emerged as a viable alternative for increasing electricity access, especially in remote and dispersed communities. More recently, the dramatic rise in fuel prices has further increased the economic attractiveness of these technology options. Among the multilateral development banks, the World Bank is the leading financier of off-grid electrification, with projects across some 25 countries benefitting over 1 million households. But the long-term sustainability of off-grid electrification depends on more than technology. It requires effective prioritization and planning to enable economic choices of technology, appropriate infrastructure to ensure that services are provided over the long run, and sustainable financing to make these capital-intensive technologies affordable. Drawing on some 15 years of experience in designing and implementing off-grid electrification projects in developing countries around the world, this Note offers World Bank staff and others interested in off-grid rural electrification projects guidance and insights into fundamental design principles for sustainability and sound practices for effective decision-making. Jamal Saghir Director, Energy, Transport and Water Chairman, Energy and Mining Sector Board Sustainable Development Vice Presidency EXECUTIVE SUMMARY Context The evidence is clear that access to electricity has marked welfare improvements. There are 260 million rural households in the developing world without access to electricity. A significant portion of this population resides in small or dispersed communities or far from the national grid. Over the course of the past 12 years, the World Bank has supported a number of projects that provide electricity to such communities using approaches that are independent of a national or regional grid (off-grid). Experience from these projects offer guidance on designing sustainable off-grid electrification projects to serve dispersed and poorer communities using technology options that have attained commercial maturity over the past 15–20 years. Purpose of the Based on practical knowledge and international experience accumulated via past and ongoing World Bank operations, this Note Guidance Note aims to provide World Bank staff and others interested in off-grid electrification with useful guidelines for designing sustainable off-grid projects. Given the unique features of projects and country situations, the note does not seek to prescribe solutions for success. Rather, it offers basic design principles and sound practices for effective decision-making. Organization of This Note is organized into three sections: (1) a Context and Background section, summarizing the rationale for off-grid the Note electrification and its complementarity with grid-extension investment; (2) a discussion of Critical Factors in Project Design, analyzed by technology choice, social safeguards and environmental considerations, opportunities for productivity and institutional