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Rural Electrification in Developing Countries: Conflicts between Local Technological Innovation and the National Electrification Policy by K. Yamaguchi and A. Watabe

Rural Electrification in Developing Countries: Conflicts between Local Technological Innovation and the National Electrification Policy by K. Yamaguchi and A. Watabe

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Kaoru Yamaguchi and Akihiro Watabe, “Rural Electrification in Developing Countries: Conflicts between Local Technological Innovation and the National Electrification Policy,” Increasing the rate of rural electrification is one of the most pivotal issues for developing countries. However, many developing country governments fail to expand rural electrification due to financial and technological constraints and thus, rural households are often left waiting for years to gain access to electricity. These situations create incentives for rural communities to employ local technologies to gain renewable energy with available resources such as biomass, village hydro, and micro-hydro. Thus, through innovation local rural communities are able to have access to a supply source of electricity prior to national electrification. Yet such incentives depend on both how and when rural communities anticipate the government will implement electrification plans. This paper examines non-trivial policy questions on how to promote rural electrification and the well being of rural households. A model is presented for determining when to employ local technologies to produce energy versus waiting for national electrification. The authors pay attention to the potential conflicts between the policy goals of national electrification and rural communities’ incentives for developing local renewable energy technologies. Lastly, the authors detail the four primary factors that can influence local communities’ incentives and provide Myanmar as a case study for their model. (This article by Kaoru Yamaguchi and Akihiro Watabe, “Rural Electrification in Developing Countries: Conflicts between Local Technological Innovation and the National Electrification Policy,” appeared in The Journal of Energy and Development, volume 33, number 1).
Kaoru Yamaguchi and Akihiro Watabe, “Rural Electrification in Developing Countries: Conflicts between Local Technological Innovation and the National Electrification Policy,” Increasing the rate of rural electrification is one of the most pivotal issues for developing countries. However, many developing country governments fail to expand rural electrification due to financial and technological constraints and thus, rural households are often left waiting for years to gain access to electricity. These situations create incentives for rural communities to employ local technologies to gain renewable energy with available resources such as biomass, village hydro, and micro-hydro. Thus, through innovation local rural communities are able to have access to a supply source of electricity prior to national electrification. Yet such incentives depend on both how and when rural communities anticipate the government will implement electrification plans. This paper examines non-trivial policy questions on how to promote rural electrification and the well being of rural households. A model is presented for determining when to employ local technologies to produce energy versus waiting for national electrification. The authors pay attention to the potential conflicts between the policy goals of national electrification and rural communities’ incentives for developing local renewable energy technologies. Lastly, the authors detail the four primary factors that can influence local communities’ incentives and provide Myanmar as a case study for their model. (This article by Kaoru Yamaguchi and Akihiro Watabe, “Rural Electrification in Developing Countries: Conflicts between Local Technological Innovation and the National Electrification Policy,” appeared in The Journal of Energy and Development, volume 33, number 1).

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THE JOURNAL OF ENERGY AND DEVELOPMENT

Kaoru Yamaguchi and Akihiro Watabe, “Rural Electrification in Developing Countries:

Conflicts between Local Technological Innovation and the National Electrification Policy,”
Volume 33, Number 1

Copyright 2009

RURAL ELECTRIFICATION IN DEVELOPING COUNTRIES: CONFLICTS BETWEEN LOCAL TECHNOLOGICAL INNOVATION AND THE NATIONAL ELECTRIFICATION POLICY
Kaoru Yamaguchi and Akihiro Watabe* t is well recognized that a lack of electricity supply negatively impacts the standards of living in developing countries and further deepens poverty conditions, particularly in rural areas. The majority of people in the rural areas has

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*Kaoru Yamaguchi, Senior Economist with The Institute of Energy Economics, Japan (IEEJ), holds a Ph.D. in public policy from The George Washington University and a M.A. in environmental and resource policy from the same institution. At IEEJ, the author’s responsibilities include participation in various international conferences, such as the International Energy Agency and the Asia-Pacific Economic Cooperation (APEC), as an observer and/or delegate representing Japan’s Ministry of Economy and Trade, as well as project leader and manager of seminars, policy formulation, and energy modeling on new and renewable energy issues in the Association of Southeast Asian Nations (ASEAN) region. Akihiro Watabe, Professor of Economics at Kanagawa University (Japan), also is a Senior Economist (part-time) with the Strategy and Industry Research Unit of IEEJ. The author earned a Ph.D. in applied economics and regional science from the University of Pennsylvania. Dr. Watabe has been a visiting scholar, fellow, lecturer, and/or scientist at The East-West Center (Honolulu), RAND Corporation, Asian Institute of Technology (Bangkok), and Resources for the Future, Inc. His recent research is focused on energy and sustainable development. Aside from chapters in eight edited volumes, his articles have appeared in the Journal of Institutional and Theoretical Economics, International Review of Law and Economics, Environmental Research Quarterly (in Japanese), Journal of Clean Technology and Environmental Sciences, and Journal of Environmental Economics and Management, as a sampling. An earlier version of this paper was presented at the First U.N. Global Compact Academic Conference on Innovation and Diffusion of Environmentally Sound Technologies held in Istanbul, Turkey, in May 2004. The authors would like to thank Paul Kleindorfer, Jacob Park, and conference participants for valuable comments and discussions. The Journal of Energy and Development, Vol. 33, No. 1 Copyright Ó 2009 by the International Research Center for Energy and Economic Development (ICEED). All rights reserved.

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severely restricted access to electricity so the use of electrical appliances, medical equipment, lighting, and the like is similarly limited.1 Rural electrification however, is implemented at a very slow pace in developing countries, although electricity supply is one of the highest priorities in their rural communities and is perceived as being more important than economic growth.2 Governments of many developing countries are trying to increase electrification rates in both urban and rural areas under national electrification plans. Moreover, electricity is one of the most expensive forms of energy due to costs of power generation, transmission, and building necessary infrastructure. As part of development, electrification in urban centers generally is given higher priority over that in rural areas. Meanwhile, the promotion of renewable energy sources and the transfer of lowcost renewable energy technologies from developed to developing countries have been among the pivotal issues in sustainable development since the 2002 World Summit on Sustainable Development held in Johannesburg. Advantages of developing renewable energy for rural areas stem from topography and low population density, namely, it is generally more efficient and less costly to supply electricity in rural areas than a centralized large-scale system, such as the extension of the national grid. Furthermore, harmful pollutants are greatly reduced from renewable energy sources compared to fossil fuels. In many developing countries, government-led development and technology are still dominant in the energy sector. Under the expectation for governmentled development, therefore, there is little chance for the technologies of renewable energy to emerge from the private sector unless the government subsidizes the expansion of these technologies. Furthermore, for such subsidization, it is essential that the government receive financial and technological assistance from developed nations. When rural electrification is directed by the public sector, rural communities will expect the government to be involved in the development of local energy technology and will wait for it until it becomes available. Hence, if the implementation of national rural electrification policy is either unexpected in the near future or limited to only some areas, of necessity, rural communities must forego the expectation or wait for it, which can be unpredictable time-wise. On the other hand, these somewhat ‘‘gloomy’’ conditions could provide rural communities with the incentives to engage in local technological innovation to expand their energy supplies. More succinctly, they will deliberate whether to initiate local electrification projects by establishing decentralized, small-scale renewable energy systems such as biomass, village hydro, and micro-hydro. Indeed, such local projects could have the potential to supply electricity in a fast, inexpensive, and environmentally sound manner compared to a national electrification plan.3 Hence, if the government’s effort to expand electrification to rural areas is limited due to financial and technological reasons, the enhancement of

National planning and economic development agencies could utilize our process and findings in project and policy evaluations. for example. we analyze factors influencing the . yet. rural communities must rely on their assessment of the likelihood of electricity supply under the national electrification policy. present alternatives for financing. We then present the primary factors that would motivate rural communities to undertake innovation projects. European Bank for Reconstruction and Development. To do so.. private lending. Thereafter. are potentially involved in rural electrification in developing countries. Although our study delineates the policy issues of developing-country governments. A difficulty arises because rural communities are uncertain about a number of aspects of national electrification. conclusions will be offered. We first formulate a basic model for the local technological innovation for renewable energy. risk sharing. and the like. These issues are inevitably linked with the assistance from and roles of intermediaries such as the World Bank. Finally. e. An empirical study of Myanmar is offered in the following section. Thus.RURAL ELECTRIFICATION IN DEVELOPING COUNTRIES 107 self-supportive electrification of rural communities could be a possible policy alternative. the purpose of this paper is to examine very real policy questions on how to promote rural development through electrification and increase the well-being of rural households. the incentives for self-supportive technological innovation depend upon how rural communities anticipate the government will implement the electrification plan and rural development. In addition to multinational intermediaries. As such. Asian Development Bank. In the next section. This paper is organized as follows. the U. including small projects. Theoretical Background This section examines theoretical aspects on local technological innovation for renewable energy. African Development Bank.g. national agencies. this paper also aims to assist the effective policy making and implementation of such intermediaries by providing measurable policy criteria of rural electrification projects. we shall give attention to the potential conflicts between the policy goals of national electrification and rural communities’ incentives to develop local technological innovations in the field of renewable energy. Thereafter. Agency for International Development and Japan’s International Cooperation Agency. including how long they must wait for the policy to be implemented and the degree to which electrification possibly could be subsidized by developed countries or external agencies. we formulate the basic model for local technological innovation to examine the conditions where rural communities are induced to develop incentives for self-supportive electrification. we shall discuss the primary factors obtained in the previous section and suggest policy recommendations. rural electrification projects. and Inter-American Development Bank. public funding. Thus.S.

propositions. the rural community does not know precisely how long it takes for the electricity supply to be made available under the national plan. Model: When a rural community decides whether or not to launch a renewable energy project for electricity supply. g2 and r are exogenous parameters. rather than waiting for the national plan. village hydro. they need to determine the optimal type of renewable energy technology among such available technologies as biomass. The technical derivation of the analysis. W2 = the welfare of rural households under the national rural electrification. among other factors. and population density. wind. Simply put. They will rely on their assessment of the likelihood that the government provides the electricity at some future date. ‘). the proofs of lemmas. The renewable energy for rural electrification we have in mind is decentralized small-scale technologies such as biomass. In addition. we will use the following notation and assumptions for the analysis: a = the level of technology for selected renewable energy: a ³ a where a is the technology of the lowest cost level required for any renewable energy. Meanwhile. For optimal planning. . Looking to the uncertainty of the national rural electrification plan. Furthermore. I’’(a) ³ 0. g2 = the growth rate of the national rural electrification. the community would have been better off waiting for the national electricity supply. g1. and solar as well as how much to invest in the project based on the topography. micro-hydro. where F(t) is differentiable for all t 2 [0. they need to plan how quickly they must develop the technology for rural households to gain access to electricity. C’’(a) ³ 0. we will employ the following assumption on the likelihood that the national rural electrification plan is implemented. or isolated micro-hydro.108 THE JOURNAL OF ENERGY AND DEVELOPMENT incentives for such innovation by rural communities. g1 = the growth rate of rural electrification by the rural community. technology development should be completed prior to the time the electricity supply would be provided under the national rural electrification plan. they will face uncertainty regarding the national rural electrification plan. I(a) = sunk costs of developing rural renewable energy: I’(a) > 0. W1(a) = the welfare of rural households when rural renewable energy is developed with the technology level a. climate conditions. C(a) = operating costs of rural renewable energy: C’(a) > 0. and r = the discount rate of the rural community where W2. The rural community’s assessment at time t = 0 of the probability that the electricity is provided by time t is F(t). and corollaries will be provided in the Appendix. village hydro. Otherwise. when the rural community considers the development of local renewable energy.

c is assumed to be zero. Once the type of renewable energy is selected. then Assumption 1 below formally shows these conditions. The marginal welfare of households with respect to the technology level is B. that is. the total willingness to pay for the electricity less the expenditures on the electricity. higher technology) is a constant. as a result. there are no scale economies. Hence. The higher the level of technology. the higher technology yields higher energy efficiency. Both sunk and operating costs. Assumption 1 : @IðT . aÞ @ 2 IðT .4 Also. the higher are both sunk and operating costs. rather than the scale of using the energy sources. I(a) = 0 for the time t > 0).. W1(a) and W2. The marginal sunk cost of the timing of the project completion decreases with the technology level. the community will determine the optimal technology level and the timing of the development. while using the same volume of renewable energy sources. I(a) is assumed to be borne only at the outset of the project (i. B. Denote T by the time of technology development (i. and it grows at an increasing rate as the rural community tries to complete the project earlier. dW1 ðaÞ = B: da Note also that dW1 ðaÞ = B implies that W1 (a) = Ba + c where c is a constant.e. the time of project completion). the availability of renewable energy sources. For the welfare of rural households. or the availability of renewable energy sources. Without da losing the essence of the analysis. the volume of electricity generation depends on the technology to transfer renewable energy sources into electricity. I(a) and C(a). sunk costs are regarded as total capital expenditures to construct power stations. These isolated small-scale renewable systems do not require large capital investments and. aÞ @ 2 IðT. We assume that an increment in the number of households with access to electricity by introducing one more unit of higher energy efficiency (i. the higher technology can generate more electric capacity and thereby increase the number of households served in the rural community. the size and the number of power stations to be constructed are all reflected in sunk costs I(a). aÞ > 0 and < 0..e.e. For procedures to develop the plan. that is. i. a higher technology bears higher marginal sunk costs for an earlier completion of the project. To simplify the analysis. <0 @T @T 2 @T@a . Furthermore. depend upon the level of technology. such as the volume of harvested biomass and rainfall... is limited by nature and thus. we use consumer’s surplus as the criterion of the welfare of the rural household. climate conditions.e. population density. Operating costs include the additional grid extension within the community in the future.RURAL ELECTRIFICATION IN DEVELOPING COUNTRIES 109 which normally generates less than 50 kilowatts (kW) of electricity and can supply up to several hundred households. we assume that the rural community first determines the type of renewable energy based on the topography.

The present values of sunk costs and the economic surplus at the time of launching the project are calculated by using the discount rate of the rural community. with the probability 1 – F(T). and the optimal technology level will depend on the discounted marginal economic surplus with respect to the technology level relative to the marginal sunk cost of the technology level. The derivation of the first-order necessary conditions of equation (1) and the detailed explanation of its relation to the lemmas are provided in the Appendix. For the optimal completion time T* and the optimal technology level a*.110 THE JOURNAL OF ENERGY AND DEVELOPMENT After completion. At the outset of planning the project. since urban areas generally are given a higher priority than rural areas. We therefore employ the following assumption on the discount rate of the rural community.T* ¼ ‘: Lemma 1 implies that if the economic surplus with the technology of the lowest cost level is non-positive at the time of technology development. The optimal completion time will depend on the discounted marginal economic surplus with respect to the timing of technology development relative to the marginal sunk cost of completion time. the discounted social welfare of developing rural renewable energy is expressed by: ‘ ð T SW1 ¼ eÀðrÀg1 Þt ðBa À CðaÞÞð1 À FðtÞÞdt À IðT. aÞ: ð1Þ The optimal completion time T* and the optimal technology level a* in order to maximize SW1 in equation (1) can then be determined. equivalently. which determines the national electrification rate. Therefore. the economic surplus will be yielded based on the assessment on the likelihood that the electricity will not be supplied by the national plan by time T. The discount rate reflects the social time preference of the rural community. Furthermore. Assumption 2: r > max {g1. the project generates W1(a) – C(a). for developing countries it seems plausible to assume that the rural community attaches a higher value on the near future than the government. the technological . the discount rate will not be smaller than the electrification rate planned by the community. that is. Ba – C(a) of the economic surplus at the time of development. where the government’s electrification plan is reflected by the social time preference of the government. g2} Given the notation and the assumptions above. we obtain the following lemmas. T. the national rural electrification rate is lower than overall electrification rates. Lemma 1: If Ba £ C(a). Also.

. i. the optimal level of technology is the lowest level. the higher technology level leads to more economic losses. renewable energy technology will never be developed by the rural community if either the economic surplus with the lowest technology level at the time of technology development is non-positive or the technology level is above the threshold level. the technology level being higher than the threshold level will lead to the negative economic surplus (i.e.e. the optimal technology is the lowest level.. Lemma 2 implies that if the economic surplus with the technology of the lowest cost level at the time of technology development is positive (i.. Lemma 3: If B £ C9(a). the optimal level of technology is greater than the lowest level a and less than the threshold level a. there is the threshold level of technology that makes the economic surplus negative for the selected technology level being higher than the threshold level. Otherwise. However. the economic surplus with the lowest technology level must be positive.RURAL ELECTRIFICATION IN DEVELOPING COUNTRIES 111 innovation will never take place (i.e. The reason is that it is complex to draw the conditions for such incentives without specifying F(t). the growth rate of national rural electrification.. there exists the threshold level of the selected technology a 2 fa j Ba À CðaÞ ¼ 0g such that T* < ‘ for a < a and T * ¼ ‘ for a £ a. i. the optimal technology level is greater than the lowest level and less than the threshold level. Hence. Thus. . To examine the incentives for developing renewable energy and its earlier development.e. the technology level selected will be below the threshold level. From Lemmas 1 through 3. the economic surplus does not increase with the technology level).. However. Thus.e. Ba > C(a)). The intuition behind this is that the economic surplus varies with the technology level. if the marginal economic surplus is positive (i. Otherwise. they should select the highest technology because selecting a higher technology level generates more economic surplus. i. so that the selected technology level must be below the threshold level. Lemma 2). if the marginal economic surplus is non-positive (i. Further. T* = ‘).e. Assumption 3: The waiting time for the electricity supply under the national rural electrification plan t is exponentially distributed with parameter g2. we employ the following assumption on F(t). the rural community should select the lowest technology. the economic surplus is increasing with the technology level). the technological innovation will take place. Lemma 2: If Ba > C(a).e.. for the development of renewable energy technology.e.. a* = a.. a < a* < a: Lemma 3 implies that the marginal economic surplus at the technology of the lowest cost level is non-positive.

i. and (iv) if the rural community becomes less shortterm focused (i. The reciprocal of the parameter g2 is the mean of exponential distribution.. For the exponential distribution.e. the development of the renewable energy technology will be slower and the technology level chosen will be lower. they will try to complete the development earlier and they will choose the higher level of technology — the lower discount rate will yield a higher economic surplus for future generations. the probability that the next project will be completed between time t1 and time t2 is characterized by the exponential distribution. >0 @B @g1 @g2 @r @a* @a* @a* @a* > 0. the governmental effort to expand electrification to the rural areas adversely affects the incentives for developing renewable energy technology by the community. Using Assumption 3. the probability density function of t is expressed by f(t) ¼ g2 eÀg2 t for t ³ 0 with parameter g2 > 0. and it is equal to the average time of completing projects between t1 and t2. .5 @T * @T * @T * @T * < 0. they develop the technology earlier and introduce a higher technology that can increase the number of electrified households.. there are no new projects completed by the government by time t1. projects will be completed faster between time intervals. lower discount rate). we conduct the comparative statics analysis. Suppose a rural electrification project by the government has been completed in a region and. (ii) if the rural community plans to expand renewable energy technology faster.e. > 0. after its completion. < 0. Then. <0 @B @g1 @g2 @r The intuition behind the results of comparative statics analysis is straightforward: (i) if the marginal welfare of the technology level increases.112 THE JOURNAL OF ENERGY AND DEVELOPMENT The use of the exponential distribution relies on the property of the distribution. (iii) if the government plans to increase the national rural electrification rate. The results of the comparative statics analysis given below show how the external factors of local technological innovation for renewable energy affect the optimal completion time as well as the optimal technology level. < 0. Hence. > 0. the rural community develops the renewable energy technology earlier with the higher technology level. The cumulative distribution function of f(t) is: F ðtÞ ¼ 1 À eÀg2 t : ð2Þ The detailed analysis of the incentives for developing renewable energy by using equation (2) is given in the Appendix. if the growth rate of national rural electrification increases.

the rural community predicts how long they must wait for the electricity supply to be available based on their assessment of the national rural electrification plan and the resulting social welfare by waiting. the maximized expected social welfare of developing renewable energy technology SW1* is obtained by substituting the optimal completion time T* and the optimal technology level a*. we summarize the results of the analysis in the following propositions. the incentives for developing renewable energy technology will be diminished. even though the project generates positive social welfare. the rural community may not always launch the project. or (iv) the rural community becomes less short-term focused. a*Þ: ð3Þ T* Next. (ii) the community itself plans to hasten the electrification. consider the expected social welfare of waiting for the national rural electrification plan.RURAL ELECTRIFICATION IN DEVELOPING COUNTRIES 113 From Lemmas 1 through 3 and the comparative statics analysis. The probability that the government will supply the electricity . they may wait for the electricity supply provided by the national rural electrification plan. SW1 * ¼ ‘ ð eÀðrÀg1 Þt ðBa* À Cða*ÞÞð1 À FðtÞÞdt À IðT *.e. From the analysis of the previous section. Choice Between the Development of Local Technology and Waiting for the National Plan: The previous subsection examined the optimal timing and technology level of developing renewable energy technology and how economic factors influence the incentives and earlier development for local technology by the rural community. Proposition 2 (Incentives for Earlier Development): The rural community plans an earlier development of renewable energy technology if (i) the marginal welfare of the selected technology level becomes higher. they will be better off not initiating the innovation. However. Proposition 1 (Incentives for Developing Local Technology): The rural community will have incentives for developing renewable energy technology if the economic surplus at the lowest technology level is positive and if it is greater than the marginal sunk costs with respect to the optimal timing of developing the technology. given that the optimal level of the technology is below the threshold level. (iii) the government lowers the rate of expansion of rural electrification. Thus. into equation (1). i. When making a decision on whether or not to develop renewable energy technology.. given the first-order necessary conditions found in the Appendix. Instead. If the national rural electrification plan is expected to extend to the rural community by the time T* and will generate higher social welfare.

(ii) the economic surplus of developing the technology is sufficiently close to the marginal sunk costs with respect to the completion time. the growth rate of rural electrification by the rural community must be greater than that of the national rural electrification plan for SW1* ³ SW2*. unless r takes a negative value. as: SW1 * ¼ and SW2 * ¼ eÀðrÀg2 ÞT * W2 ð1 À eÀg2 T * Þ: r À g2 ð6Þ eÀðrÀg1 þg2 ÞT* ðBa* À Cða*ÞÞ À IðT *. no matter how soon the rural community gets access to the grid the community will never initiate the project unless the associated economic surplus significantly . then the value of r .g2. is almost zero. however. we do not expect conditions (ii) and (iii) to be satisfied. Analytically. it is equivalent to T * ffi 0. F(T*). 1À F(t) ¼ eÀg2 t . we make a comparison of SW1* given in equation (5) and SW2* given in equation (6). respectively. Condition (iii) also implies that for g2 ffi 0. In practice.114 THE JOURNAL OF ENERGY AND DEVELOPMENT to the rural community by time T* is F(T*). Condition (ii) is equivalent to the condition where the probability of the electricity supply provided by the government by time T*. Hence. the rural community will launch the renewable energy project. The criticality of condition (i) relies on the magnitudes of g1 and g2. Nonetheless. if the government plans to raise the rate of rural electrification. If g2 ³ g1. Proposition 3 implies that if any of the three conditions (i through iii) is satisfied. or (iii) g2 is sufficiently close to zero. the discounted social welfare of waiting for the national rural electrification plan is expressed by: SW2 * ¼ ‘ ð eÀðrÀg2 Þt W2 FðT *Þdt: ð4Þ T* From Assumption 3.g1 + g2 will not be close to zero or it will be reduced to zero from the above. Then. F(T*) ð¼ 1 À eÀg2 T* Þ is almost zero. this contradicts Assumption 2. Proposition 3: Suppose that SW1* ³ 0. Thus. Hence. a*Þ r À g1 þ g2 ð5Þ For the strategy of whether a community should develop its own renewable energy technology. it is condition (i) that is relevant for the development of renewable energy technology. In other words. SW1* ³ SW2* if (i) g1 > g2 and r is sufficiently close to g1 . Thus. equations (3) and (4) are rewritten.

rather than developing its own technology. that can influence the incentives for local technological innovation to promote rural electrification with renewable energies. Postulating that the magnitudes of W1(a) and W2 are not sufficiently different. For policy implications. the rural community will be more likely to wait for the electricity supply from the government. listed above as corollaries 1 through 4. Corollary 1 (Waiting Time for the National Rural Electrification): As the average waiting time for the electricity supplied by the national rural electrification becomes shorter. we will discuss the four primary factors. Corollary 2 (Local Technology): The utilization of available local technology keeps the level of technology lower and it reduces the overall costs of the electricity supply relative to the welfare level so that it will provide the incentives for developing renewable energy technology. the higher g2 implies the lower eÀg2 T * such that F(T*) ¼ 1 À eÀg2 T * is close to one. we will first discuss the potential policy dilemma of each factor and thereafter suggest policy recommendations for rural electrification. Corollary 4 (Foreign Subsidies): Foreign subsidies are essential for rural communities to introduce advanced technology. Thus. that is. and it affects the incentives for local technological innovation. Corollary 3 (Tariffs): Regulated low tariffs can dilute the incentives for developing local renewable energy technology. Policy Implications of Energy Supply and Rural Development From the results of the analysis in the previous section dealing with the choice between development of local technology and waiting for the national plan.RURAL ELECTRIFICATION IN DEVELOPING COUNTRIES 115 exceeds the welfare of waiting for the national plan (see also the result of the comparative statics). Put another way. each factor confronts a policy dilemma of energy supply for rural areas. we will state the following corollaries from Propositions 1 through 3 in terms of the factors that influence the incentives for developing renewable energy technology. The governmental effort will increase the . Policy Dilemma — Waiting Time for National Rural Electrification: The average waiting time for the electricity supply from the government depends on the national rural electrification plan. W1(a) must outweigh W2 for developing the technology. Corollary 1 shows that the governmental effort to increase the growth rate of rural electrification will adversely affect the incentives for selfsupportive electrification in rural areas.

Policy Dilemma — Tariffs: A tariff affects the incentives for technological innovation through the magnitude of the welfare. Meanwhile. but still useful. then the higher the relative social time preference will be of the rural community. the higher the growth rate of the national electrification. although rural areas are not electrified evenly under national planning. Furthermore. low-cost local technological innovation often conflicts with advanced technologies imported from overseas. On the other hand. Lemmas 1 through 3 also imply that the effective utilization of local technology will be necessary for moving rural communities into electrification. the growth rate of national electrification. the rural community keeps waiting for the grid extension as their relative social time preference becomes lower. although technology transfers from developed to developing countries often face significant incompatibility between the imported technology and the recipient environment. g1. It is well known that tariff regulation increases the social welfare of the energy markets by lowering a tariff from a monopolistic level to a competitive level. the basic need for electricity is lighting and state-of-the-art electronically controlled renewable energy is not necessary for this purpose.6 In rural communities. Such technology does not require sophisticated electronic equipment. it is generally an advanced.g1 + g2. only mechanical parts that are available in local markets and reduce overall costs of the electricity supply. Policy Dilemma — The Level of Local Technology: Information and technology available in rural communities lag far behind advanced technologies. From Proposition 3. Given the discount rate of the rural community. the government’s effort also negatively affects the incentives for local technological innovation through the relative social time preference of rural communities. the higher expectation will weaken the incentives for local innovation although some rural areas will remain non-electrified for an even longer period. Hence. the higher the growth rate of the national rural electrification yields the conflict between the incentives for local technological innovation and a policy goal to increase rural electrification at a faster pace. If the technology is imported with international assistance.8 Thus. affects the relative social time preference of the rural community. state-of-the-art technology and requires relatively high skills and very expensive materials from overseas. g2. and the growth rate of local rural electrification. r. As a result.7 The knowledge of inexpensive and even outdated.116 THE JOURNAL OF ENERGY AND DEVELOPMENT expectation that the electricity supply will be available in the near future. Thus. the attitude to disregard local technology for foreign technology is likely to militate against the knowledge of the effective utilization of locally available technologies that are necessary for local innovation. Corollary 3 shows that a lower tariff will have the rural community postpone the local innovation or . r . technology is essential to the technological innovation.

it is often set lower than LMC to residential customers. this raises the possibility of generating the problems of moral hazard. incremental social welfare. The recipients may lack the means to keep the expensive and valuable facilities in good conditions unless they are compensated for the necessary expenditures. Hence. foreign subsidies are equivalent to the case in which the level of technology is above the threshold level. battery charging stations with solar photovoltaic panels or micro-hydro. however. the beneficiaries would lose proper incentives for local technological innovation. Policy Recommendations: The electricity supply under the national electrification plan is not evenly distributed among all rural areas and many households remain without electricity for years. With the expectation for foreign subsidies. yields the conflict between social welfare gains in electrified urban areas and incentives for local technological innovation in non-electrified rural areas. the lower tariff remedies the magnitude of social welfare loss and poverty. and the level of local technology affect the incentives for local technological innovation in renewable energy. sunk costs. which is similar to the case of public goods supply.g. Before making selfefforts. In short. harming public finance. In practice. foreign subsidies yield a conflict among the incentives for local technological innovation. however. In principle. foreign subsidies enable rural communities to introduce the advanced technology that generate incremental social welfare. we inevitably observe social welfare loss. In addition. The subsidies can reduce the overall costs of renewable energy. The lower tariff. we found that rural communities’ perspectives for the national electrification plan and the expectation for foreign subsidies. Meanwhile. regardless of the national grid network or renewable energy. it increases the deficit. Policy Dilemma — Foreign Subsidies: In relation to the model. and moral hazard. the tariff should be set equal to the long-run marginal cost (LMC) of electricity supply. Furthermore. which can . they would opt to rely on outside sources as free riding. foreign subsidies are typically for the supply of renewable energies. the tariff regulation gives rise to the problems of segregating nonelectrified rural areas from electrified urban areas in subsidization. Specifically. More importantly. The lower tariff stems from a subsidy only for households that can access electricity services. the tariff regulation can entail a trade-off between social welfare gains and the public debt due to the scale economies of the national grid network. in particular. the level of a tariff. highly regulated tariffs generate additional social welfare loss as well as impacting the public debt.. Consequently. nonetheless. e. therefore.RURAL ELECTRIFICATION IN DEVELOPING COUNTRIES 117 wait for the national electrification plan.9 Although such a tariff provides households with higher consumers’ surplus than the LMC level. which require high sunk costs with relatively low operating costs.

12 This strategy is less expensive than constructing additional infrastructure for a national grid system. heating. the government first needs to clarify the regions needing electrification. it is important for rural communities to develop the energy technologies that are most compatible with available resources such as biomass. research on Zambia by A. thereby. therefore. nonetheless. in a move to replace electricity supply. The importance of rural electrification utilizing renewable energy is also addressed by D. generating more carbon dioxide and nitrogen oxide emissions as well as increasing the risk of exposure to indoor air pollution. rural. and it can achieve a more rapid rate of electrification in an environmentally sound manner. diesel. available energy sources. The government then should examine electrification plans for urban. if any. Meanwhile. the subsidization policy leads to negative effects on the environment and health by increasing the consumption specifically of fossil fuels.10 Such low tariffs enable low-income households to be connected to the electricity grid. such as charcoal. the surplus obtained by removing subsidy from a tariff can be allocated to the technology development of rural electrification by the rural community. Furthermore. their population density. and isolated regions by adopting the best policy strategy for the delivery of the electricity supply by the choice of technology scales and energy types. Mehlwana also suggests that the need for . subsides for tariffs. fail to achieve efficient resource allocations by making the prices less than marginal costs. For the national electrification plan as a whole. charcoal. diesel. the government should assist rural communities develop an optimal form of renewable energy technology with an effective assessment of local technology since the assessment needs to recognize the multiplicity due to the economic variations of each rural community. should be removed.13 A policy of less subsidy and the effective utilization of local technology can lessen the financial burden of the government’s rural electrification plan. however. To create desirable environments for promoting rural electrification. M. First. and technology. village hydro. given an abundant resource potential. In relation to subsidies for tariffs. some developing countries implement policies for subsidizing energy fuels. Arvidson found that tariffs are unrealistically low due to political considerations of equity. topography. and micro-hydro. Weisser where. and cooking. renewable energy can undercut the costs of power generation by decreasing the costs of transporting fossil fuels to rural areas. and kerosine are energy inefficient in such applications as lighting.118 THE JOURNAL OF ENERGY AND DEVELOPMENT provide the electricity supply more rapidly than the government does. we suggest the following policy recommendations. Also.11 Second. Clearly. they reduce the capacity for maintenance and further grid extension. and they will tend to raise the costs of operation. This reduces the government’s debt and eliminates the so-called urban-rural division while keeping rural communities from weakening the incentives for local technological innovation. and kerosine. These policies. In relation to our study.

Empirical Findings This section examines empirically the four primary factors that influence the incentives for local technological innovation and the potential conflicts between the national rural electrification policy and such incentives. Yamaguchi and A. Under such circumstances. To do so. the government carefully should design a policy to help initiate self-supportive electrification by rural communities. Some areas are more easily accessed and endowed. Also.RURAL ELECTRIFICATION IN DEVELOPING COUNTRIES 119 electrification of rural households in a sustainable manner is extremely important in disseminating technologies and in attempting to increase the number of households supplied with electricity. A key issue here is how rural communities and the government share risks associated with investments for the development of technologies.14 Rural electrification in developing countries is not an easy task for a number of reasons. However. monitoring the recipient countries by donor agencies will mitigate the problems. In short. it is desirable that the selected policy will provide the electricity supply in the most rapid and environmentally sound manner and that electrification can be sustained financially in the long run. and the partnerships between governments and international assistance/finance agencies will help to maximize the utilization of external aid. the government must make a long-term assessment on the economic welfare and social costs generated by electrification with the primary economic and technological factors along with the geographical and natural factors. K. and even smallscale renewable energy cannot be developed by local efforts alone although rural communities have incentives to do so. we selected Myanmar as a case study in which we will verify the significance of the primary factors for self-supported rural electrification. Additionally. Moreover. the public-private partnerships as well as the partnerships with the international community will be effective means to help promote rural electrification. There is a key role for the government to establish successful public-private partnerships between local ‘‘inventors’’ and local communities for rural electrification with the government as a financial mediator.15 Another solution will be international assistance despite the problem of morally hazardous behaviors and ‘‘free riding’’ addressed in the discussion of foreign subsidies. Watabe showed the significance of the public-private partnerships in promoting renewable energy projects in rural areas of developing countries. . Based on the availability of data. the local technology levels vary across rural regions. technology and markets for renewable energy in developing countries still are very immature. Some of them may fail to satisfy the minimum condition for local technological innovation. The topography and climate conditions vary across rural regions. when planning rural electrification by the government.

Consequently. In comparison with other Asian countries where the annual economic growth rates between 1975 and 2001 of South Asia and East Asia are. Although R&D expenditures would not directly measure the technology level of rural communities in our applications. The actual implementation of the electricity supply is the responsibility of Myanmar Electric Power Enterprise (MEPE) under the direction of MEP. If the growth rate of household electrification remains at the same level. As of 2005.18 Although the electrification rate increased from about 7 percent to around 12 percent for 14 years with an annual growth rate of 3. this long waiting time for electricity from the government will positively affect incentives for local technological innovation to gain access. Local technological development has been slow for decades. following the result of our analysis. they must double the electrification rate.17 The supply of electricity is regulated by the State Peace and Development Council through the Ministry of Electric Power (MEP).9 percent. and industry (9 percent). they can reflect the element of local technological innovation as the status quo.120 THE JOURNAL OF ENERGY AND DEVELOPMENT The Primary Factors in Myanmar: We first begin with the characteristics of Myanmar’s economy. respectively.4 percent and 5. the economic growth of Myanmar is quite low at 1. 2. the statistics of the household electrification rate include both urban and rural communities. Being isolated from the developed bloc for many years.1 percent of the GDP and researchers in R&D per million people during 1990-2005 numbered 17. followed by the service sector (31 percent). the rate of rural electrification was expected to be much lower than that indicated by the statistics. for example.4 percent. and engineers have little chance to access advanced technologies. The Level of Local Technology: The technology level is usually measured by research and development (R&D) expenditures. If the Myanmar government plans to electrify all households in the next 30 years. about 7 percent in 1987 and rising to 12 percent in 2001. it will take about 20 years for electrification to double and 45 years to reach the 50-percent level. This means that the majority of the households.8 percent during the same period. which contributes 60 percent of the GDP. The Growth Rate of National Rural Electrification: The official household electrification rate in Myanmar is very low.19 Furthermore.16 The share of the rural population is about 72 percent.027. therefore. all expenditure is disbursed by the governmental budget with no prospects of profits. Hence. the gross domestic product (GDP) per capita was about $1. will be left without electricity for years if they wait for their supply from the government. Myanmar has little access to advanced technologies and does not have the financial resources to purchase them. about 90 percent of households were still left without electricity in 2001. which was many fewer than other . and most of rural households are engaged in the agricultural sector. MEPE is a public enterprise owned by the government. R&D expenditures during 2000-2005 were about 0. especially rural households.

the more foreign capital inflows and the higher the total factor productivity will be.21 This means the tariff in the unofficial market is about 0. due to the absence of a prosperous economy.5 Myanmar kyats per kilowatt-hour (kWh).90. Incentives for Local Technological Innovation in Myanmar: The fundamental cause and effect of the incentives for local technological innovation for rural electrification arise from their economic performances. information and technology in a local context have been sustained in Myanmar. urban households alone will get the benefits of inexpensive electricity. however. Given the present low electrification rate of the country. the national electrification plan will be enhanced possibly by international assistance.23 We conjecture that rural communities in Myanmar will have to make efficient use of local technology available in the communities to promote rural electrification.20 Ironically. rural households in Myanmar cannot realistically expect to have the electricity supply in the near .000 kyats per dollar. In relation to the four primary factors for local technological innovation under a prosperous economy.25 cents per kWh is extremely low. Tariffs: The tariff is presently set at a very low level.22 From the result of the analysis. More specifically in the context of rural electrification. Myanmar is a likely candidate for innovation in self-sustainable rural electrification. The lower tariff. The ODA per capita in 2005 was $2. we use the Official Development Assistance (ODA) as one measure of foreign subsidies data to address the issue. The more prosperous the economy.26 kyats per dollar. the rate in the unofficial market in 2003 was nearly 1.25 cents per kWh. Foreign Subsidies: There are a number of cases in which foreign subsidies were granted to Myanmar. In spite of several changes in tariffs to catch up with inflation. These negative conditions have led the individuals either to use old technologies or to invent new ones. there are no sound data available on the total amounts of foreign subsidies and the usage of the subsidies. the rate of increase in tariffs has been far behind the rate of inflation. However. one of the largest ODA recipients in Asia. As such. The exchange rate of the currency is fixed to about 6. 0. as the growth rate of the national electrification will be higher. Considering that the residential tariffs in other Asian countries are about 6 to 10 cents per kWh. which seems more realistic. which is about onefourth that of Indonesia. is due to subsidization and is only applied to urban households. Thus.RURAL ELECTRIFICATION IN DEVELOPING COUNTRIES 121 developing countries. mainly kerosine and diesel oil. Consequently. tariffs will be less regulated and advanced technology will be introduced from the international community. The current residential rate is 2. the lower tariff will not be expected to eliminate incentives for rural households in local technological innovation. however. in the case of Myanmar. for years to come. whereas the rural households must continue to pay for expensive fuels. a lower tariff fails to provide incentives for local technological innovation. Hence.

But inexpensive local technology is essential to the innovation process. Nonetheless.24 Hence. Although. and foreign subsidies are essential in introducing advanced technology (although there are moral hazard problems). the growth rate of national rural electrification. Advanced technologies are unavailable due to the lack of foreign subsidies and low incomes in Myanmar. That household survey shows that 37 percent of the households had access to electricity in 1997. A household survey conducted in 1997 by the Central Statistical Office of Myanmar supports this view. however. Regardless of the level of welfare reflected by the tariff. all of the other factors positively affected such incentives in Myanmar. with the exception of regulated tariffs. that is. the rural communities can initiate local innovation if the supply of power is not forthcoming in the near future. that seems not to deprive rural communities of incentives for local technological innovation due to the long waiting time for the national electrification plan. thus. the expected waiting time for the electricity supply. The growth rate of the national rural electrification and regulated tariffs adversely affect the incentives for innovation. will be dominant over the effect of the regulated tariffs on incentives for innovation in Myanmar. Myanmar engages in the effective utilization of local technology for renewable energy development.122 THE JOURNAL OF ENERGY AND DEVELOPMENT future under the national electrification plan. An empirical study of Myanmar showed that. 1 . When the implementation of a national rural electrification policy is either not anticipated in the near future or expected to be limited to some areas. A Study on Introducing Renewable Energies in Rural Areas in Myanmar (Tokyo: Japan International Cooperation Agency. that is. 2003) and PT PLN (Persero). the tariff in Myanmar is set at a very low level. We found that there are four primary factors that can affect incentives for technological innovation and each factor yields certain policy dilemmas for rural development under national rural electrification. of necessity. NOTES Japan International Cooperation Agency.25 Conclusions This paper examined the rural communities’ incentives for local technological innovation for renewable energy and a policy dilemma with the national electrification plan. a public policy to help initiate self-supportive electrification of rural communities should be enhanced as it would play a significant role in improving the social welfare of rural households. the household electrification rate in 1997 was 9 percent and this rate is the share of electrification supplied by the government. 28 percent of households were supplied electricity from local nongovernmental sources. before the local innovation would be completed.

’’ Technological Forecasting and Social Change. cit. For the Indonesian case. 10-13. Meier. for all households in Myanmar to have access to electricity. The derivation of the comparative statics will be provided by the authors upon request.: Resources for the Future. September 1999. it will take at least another 65 years.C. Kerry Krutilla. cit. 617-25. pp. Daniel Weisser. and Margaret Greenwood. Douglas F. 8 9 7 6 Mohammed Saad. . 2004).. For example.’’ in Bridging the Gap: Sustainable Environment: The Proceedings of the First UN Global Compact Academic Conference (Philadelphia: University of Pennsylvania Press. 2001). Hyde. November 2002. cit. Anders Arvidson.’’ Renewable Energy for Development.’’ International Journal of Project Management. op. Barnes. Zambia. 63-77. 16 This figure is an estimate from purchasing power parity. 1-3. 67-74. pp. D. ‘‘Strategies for a Sustainable Future: A Decade of Rural Electrification in South Africa (1991-2000). pp. Japan International Cooperation Agency. 127-40. January 1994. op. household electrification rates of Indonesia and Myanmar in 2002 were 53 percent and 18 percent.RURAL ELECTRIFICATION IN DEVELOPING COUNTRIES 123 PLN Statistics 2002 (Jakarta. Kerry Krutilla. ‘‘On the Economics of Electricity Consumption in Small Island Developing States: A Role for Renewable Energy Technologies?’’ Energy Policy. ‘‘Electrification of Low-Income Households in Developing Countries– Experiences from a Pilot Project in Ndola. 4 5 3 2 T. Docras Kayo. it will take 45 years to reach 50percent electrification of households in Myanmar. 15 Kaoru Yamaguchi and Akihiro Watabe. 4-5. pp. and Margaret Greenwood. 11 12 10 Douglas F. pp. Monga Mehlwana. For example. op. September 2002. pp.’’ Renewable Energy for Development. ‘‘Power Sector Reforms in Zimbabwe: Will Reforms Increase Electrification and Strengthen Local Participation. pp.’’ Energy Policy. ‘‘Technology Assessment: Some Questions from a Developing Country Perspective. January 2004. the rate includes the households in urban areas so that the rural electrification rate is considerably lower than that indicated by the statistics. 2005). Barnes. 13 14 Daniel Weisser. Germany: Lit Verlag. respectively. and William F. Conducting the comparative statics analysis is straightforward. and William F. Svetlana Cicmil. op. 45-51. 959-65. Mohammed Saad. 2003). ‘‘Technology Transfer Projects in Developing Countries-Furthering the Project Management Perspectives. cit. we estimate that it will take about 15 years to reach almost 100-percent electrification of households in Indonesia. Mini Hydropower for Rural Development (Hamburg. The Urban Household Energy Transition (Washington. ‘‘Public-Private Partnerships to Promote Renewable Energy Supply in Rural Areas of Asian Developing Countries. Svetlana Cicmil. Hyde. Susantha Goonatilake. pp. Indonesia: PT PLN. Furthermore. September 2001. given the present average growth rate of electrification for the last decade. pp.

Japan International Cooperation Agency. cit. Myanmar Electric Power Enterprise. where only 18 percent of the population has access to electricity. cit. cit. 1999). cit. Human Development Report 2007/2008 (New York: Palgrave Macmillan. 2007). he showed that private-sector investments will be inevitable since the government cannot fully finance infrastructure in power-sector development. To increase rural electrification. cit. United Nations Development Program. Report of Electric Power Supply (Yangon. Myanmar Electric Power Enterprise (MEPE). op. He analyzed power-sector reforms in Zimbabwe. 19 20 21 22 23 24 18 Japan International Cooperation Agency. Myanmar Central Statistical Organization (CSO). op. 25 Docras Kayo. op. op. 2003). United Nations Development Program. Myanmar: CSO.124 THE JOURNAL OF ENERGY AND DEVELOPMENT 17 United Nations Development Program. cit. op. op. Report of 1997 Household Income and Expenditure Survey (Yangon. . Myanmar: MEPE.

i. Then. The first-order necessary conditions of equation (1) are: @SW1 @IðT .e. thereby. respectively. in (A1). if B £ Ba £ C(a). if B > there exits an a such that Ba > C(a) . the optimal technology level will depend on the marginal economic surplus with respect to the technology level since the technology level will affect the welfare of the rural households and operating costs. Meanwhile. @SW1 @T > 0 since @IðT . CðaÞ a . In (A2). aÞ > 0. if > 0 for all a.. the optimal completion time is infinite. The intuition for the solutions of (A1) and (A2) is that the optimal completion time will depend on the economic surplus of the project at the time of technology development. T* = ‘ for all a. CðaÞ is ina creasing in a. aÞ ¼0 ¼ ÀeÀðrÀg1 ÞT ðBa À CðaÞÞð1 À FðT ÞÞ À @T @T ‘ ð @SW1 @IðT . i. Proof of Lemma 2: The convexity of C(a) implies that CðaÞ is increasing in a.e. the Hessian matrix of SW1 is negative definite). from equation (2). aÞ ¼ 0: ¼ eÀðrÀg1 ÞT ðB À C 0 ðaÞÞð1 À FðtÞÞdt À @a @a T ðA1Þ ðA2Þ The optimal T* and a* are obtained by (A1) and (A2) and there are interior solutions for T* and a* such that 0 < T* < ‘ and a < a < ‘. Proof of Lemma 1: Since C(a) is an increasing convex function... a Hence. @SW1 @a < 0 since @IðT . if Ba £ C(a). i. As a result.e. aÞ < 0 by Assumption 1. Thus. from equation (2). @SW1 @T CðaÞ a . Lemmas 1 through 3 are followed by the analysis above. if B £ C’(a). there is no @T interior solution for T. Hence.RURAL ELECTRIFICATION IN DEVELOPING COUNTRIES Appendix 125 The First-Order Necessary Conditions for SW1 Maximization Problem Given in Equation (1) To maximize SW1 in equation (1) with respect to the completion time T and the technology level a.B £ CðaÞ a for all a..e. a* = a. It should be noted that the second-order sufficient condition is assumed to be satisfied (i. the lowest level of technology will be @a selected by the rural community. we partially differentiate SW1 with respect to T and the a.

For a £ a. since C(a) is convex in @a a. h a can be interpreted as the responsiveness of . and À @IðT. @T @T Proof of Lemma 3: If B £ C’(a). B £ C’(a) for all a since C’’(a) > 0. aÞ @IðT .126 THE JOURNAL OF ENERGY AND DEVELOPMENT   for a < a. the optimal solutions for T and a are characterized by: 1 B À C 0 ðaÞ @IðT. aÞ ¼0 ¼ ÀeÀðrÀg1 þg2 ÞT ðBa À CðaÞÞ À @T @T @SW1 eÀðrÀg1 þg2 ÞT @IðT . aÞ ¼À = : r À g1 þ g2 Ba À CðaÞ @a @T In (A5). and a* = a. The cumulative distribution function of f(t) is: F ðtÞ ¼ 1 À eÀg2 t : Using (2) above. If B > C’(a). for a < a. aÞ = @IðT . expressed by Hence. It is noted that B À C 0 ðaÞ Ba À CðaÞ is equivalent to h where h is the percentage change in the economic a DðBa À CðaÞÞ Ba À CðaÞ Da a. Thus. surplus that occurs in response to a percentage change in the technology level. h is . (A1) and (A2) are rewritten as: @SW1 @IðT . Now. therefore. it is obvious that @a a* > a and a* is obtained by @SW1 ¼ 0. the optimal completion time T* is an interior solution  obtained by @SW1 ¼ 0. From Assumption 3. For a* > a. Thus. the probability density function of t is expressed by f(t) ¼ g2 eÀg2 t for t ³ 0 with parameter g2 > 0. which implies aà < a. we have @SW1 > 0 and T* = ‘. is the ratio between the marginal economic surplus with respect to the technology level and the economic surplus after developing renewable energy technology. B À C 0 ðaÞ Ba À CðaÞ 1 rÀg1 þg2 ðA5Þ is the net discount rate reflected by the growth rates of rural electrification under the plans of the rural community and the government. CðaÞ £ C’(a). aÞ ¼ 0: ¼ ðB À C 0 ðaÞÞ À @a @a r À g1 þ g2 ðA3Þ ðA4Þ ð2Þ From (A3) and (A4). @SW1 < 0 for all a. aÞ is the marginal rate of the trade-off between the @a @T technology level and the completion time for capital expenditures. B > C9ðaÃ Þ ³ a The Analysis of the Optimal T* and a* under Assumption 3 CðaÃÞ aà and the optimal completion time T* is an interior solution of equation (A1). from equation (3).

renewable energy technology will never be developed by the rural community. for the optimal completion time T* to be positive.RURAL ELECTRIFICATION IN DEVELOPING COUNTRIES 127 the economic surplus to the technology level on the basis of the optimal technology level. SW1* will approach to an infinitely positive value while SW2* will take finitely positive values. So. (ii) If the economic surplus of developing the technology is sufficiently close to the marginal sunk costs with respect to the completion time. If the rural community wants to complete the project earlier. that is. So. The condition A < 1 means that the economic surplus of developing renewable energy technology is greater than the marginal sunk costs of the completion time. we must have the condition A < 1 since r – g1 + g2 > 0 by Assumption 2. Proof of Proposition 3: (i) If g1 > g2 and r is sufficiently close to g1 . the term A given in (A6) is sufficiently close to one. the rural community will determine the completion time and the technology level by equating the time-discounting responsiveness of the economic surplus to the technology level with the marginal trade-off between the completion time and the technology level. thereby ln(A) is sufficiently close to zero. SW2* will be close to zero while SW1* remains strictly above zero. T* < ‘. renewable energy technology will be developed.g1 + g2 approaches zero from the above. . T* = ‘. T* is close to zero and thus eÀg2 T * is close to one. r . that is. Hence. the economic surplus of the project by earlier development must outweigh incremental costs of project investment for earlier development. it incurs more sunk costs. only for the case where the economic surplus is positive for at least the lowest technology level but below the threshold level. the optimal finite solution for T* is obtained from (A3) as: Tà ¼ À lnðAÞ @IðT à .g2. From Lemmas 1 through 3. (iii) If g2 is close to zero. Thus. Therefore. As a result. In such a case. aà Þ=@T where A ¼ À : r À g1 þ g2 ðBaà À Cðaà ÞÞ ðA6Þ In (A6). if either the economic surplus at the lowest technology level is non-positive or the technology level is above the threshold level. eÀg2 T * is close to one and the same argument as in (ii) follows.

and Qi is the total electricity supply. respectively. therefore. the technology level must be below the threshold level. micro-hydro. making the social welfare level positive. Pi is the tariff. the mean of the distribution is 1/g2. biomass. the larger is g2. Proof of Corollary 4: For the development of renewable energy technology by the rural community alone. To introduce the advanced technology. Hence. P2 < P1 implies Q2 > Q1 and thereby W1 < W2. a ³ a). The advanced technology would generate the higher welfare. MWP(q) is equivalent to the demand for the electricity.128 THE JOURNAL OF ENERGY AND DEVELOPMENT Proof of Corollary 1: Since the waiting time is distributed exponentially with the parameter g2. . W1 and W2 are consumers’ surplus defined by the total willingness to pay for the electricity less households’ expenditures on the electricity when the electricity is supplied by local renewable energy technology and the national rural electrification plan. the technology level must be below the threshold level for the development. consumers’ surplus.e. Hence. which leads to larger F(T *) ¼ 1 À eÀg2 T Ã . Assuming that MWP(q) decreases with q and remains unchanged regardless of the type of the electricity supply. Proof of Corollary 2: From Lemmas 2 and 3. the shorter the average waiting time. which will be beyond the threshold level (i. such as the national grid system. Proof of Corollary 3: Consider W1 and W2. As a result. W2 will be greater than W1.. it is more likely that SW1 < SW2. are expressed as: Wi ¼ Qi ð 0 MWPðqÞdq À Pi Qi for i ¼ 1. which implies the average time for electricity to be available. and the like. foreign subsidies will be essential to keep the economic surplus positive. if the tariff associated with the national rural electrification is sufficiently lower than that of renewable energy. W1 and W2. 2 where MWP(q) is the marginal willingness to pay for the electricity supply at q. whenever the available technology yields the positive economic surplus. incurring the higher sunk costs and operating costs. Therefore.

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