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Does Electrification Improve the Quality of Rural Life? Asian Development Bank's Assistance for Rural Electrification in Bhutan

Does Electrification Improve the Quality of Rural Life? Asian Development Bank's Assistance for Rural Electrification in Bhutan

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This report presents an impact evaluation study of the housing finance component of the Urban Development and Low-Income Housing Project in Sri Lanka (Loan 1632). The study empirically assessed the socioeconomic impacts of the project's housing loans and, on that basis, provides lessons and recommendations to help enhance the development effectiveness of ADB's future low-income housing finance projects.
This report presents an impact evaluation study of the housing finance component of the Urban Development and Low-Income Housing Project in Sri Lanka (Loan 1632). The study empirically assessed the socioeconomic impacts of the project's housing loans and, on that basis, provides lessons and recommendations to help enhance the development effectiveness of ADB's future low-income housing finance projects.

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12/03/2013

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94. The benefits of the two ADB projects, SREP and RENEP, were evaluated as likely to be
sustainable based on findings reported in their PCRs and PVRs. This was based on the
assumption that the government will continue its commitment to provide subsidies for electricity
consumption, and will receive funding from commercial operations and electricity export

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revenues. Electricity is assumed to be in abundance in Bhutan and is the chief export
commodity of the country, accounting for over 45% of national revenue.

95. Because of the subsidies, the domestic electricity tariff in Bhutan is the lowest in Asia;
hence, the general perception is that the tariff is reasonable. In addition, the lifeline block is
generous (80 kWh per month) under which consumers pay only Nu0.75 per kWh. Based on the
household survey conducted for the study, 85% of the electrified households stated that they
are happy with the current electricity charges. However, nearly 42% of the electrified
households reported increases in their electricity bills in the past 5 years, primarily associated
with greater use of electrical appliances and marginal increase in electricity tariff every 3 years
by BPC, although no change was made to the lifeline block in the tariff revision in 2007. In 2010,
Bhutan Electricity Authority approved a new tariff structure effective from 1 August 2010,
according to which the lifeline block has been increased from 0kwh–80kwh/month to 0kwh–
100kwh/month with 13.3% increase in unit price chargeable to the consumers. The basis for
tariff revision has not been revealed and hence the impact it would have on the lowest quintile in
particular remains yet to be determined.

96. When asked about their WTP for electricity, 84% of electrified households are willing to
pay higher costs for regular electricity service. This suggests that rural beneficiaries are
generally aware of the benefits and savings arising from electricity. Of those willing to pay
higher prices, 72% are willing to bear an additional 10% increase in their unit power cost.
However, 14% are not willing to pay higher charges because either they have limited need or
less disposal income. Similarly, 96% of unelectrified households are willing to have their houses
electrified. About 30% of households are willing to pay Nu2,001–Nu4,000 for their household
connection and internal wiring. One in seven households is willing to pay more than Nu9,000.
Only one in six households (considered to be the bottom tier on the poverty index) can afford up
to Nu1,000 for the same purpose. Thus, WTP is highly correlated with household income.
Similarly, 34% of the respondents are willing to pay monthly electricity bills of Nu26–Nu 50; 27%,
Nu51–Nu100; and 11% up to Nu25. One in 10 respondents is willing to pay more than Nu300
per month in electricity bills. These results should be interpreted with caution, however, as
indicative WTP may be on low side for unelectrified households.

97. Customer satisfaction with BPC is also very high based on short response time,
minimum power interruptions, and consolidated management of issuing electricity bills and
revenue collection. For example, 55% of the respondent households reported power outages
only once a month, followed by 13% once a week. Nevertheless, 3% experienced outages twice
a day, and 8% once a day. This is more prevalent in the two southern geogs of Samtse and
Samdrup Jongkhar districts, which depend on power supply from India.

98. Electricity consumption in rural Bhutan is largely limited to lighting, rice cooking, and
water boiling. Average consumption is far below the lifeline block, and more than 80% of the
electrified households fall into this category. Based on actual consumption data for the past
12 months, the western region consumes, on average, 84 kWh per month, followed by central
(57%), southern (55%), and eastern (48%). Similarly, only limited seasonal variation is observed,
which ranges from 54 kWh per month in June to 71 kWh per month in November.

99. The study team observed that in most of the households, little effort is made to promote
the use of energy-efficient appliances. No restrictions are in place with respect to type of
appliances sold in the markets. In addition, several households interviewed are reluctant to use
electricity for longer hours because they perceive that such use would increase their costs.
These households use electricity for only basic needs, after which they tend to revert to

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kerosene lamps. For the first time, Bhutan Electricity Authority formulated Safety Code for 2008
and Safety Regulation 2008.50

These are yet to be implemented, supported by guidelines.
Both documents do not cover electricity safety at home issues. There is a need to promote
safety as well as energy efficiency at the household level in a more systematic manner.

100. The SAPE of Bhutan’s energy51

sector highlights three key areas regarding sustainability
of the sector: (i) promoting institutional reforms and good governance, (ii) improving access to
electricity, and (iii) mobilizing investments for hydropower sector. The SAPE recognizes BPC’s
(i) improved managerial performance through adoption of modern utility management practices
such as enterprise resource planning, integrated inventory control, budget control, and a
management information system; (ii) successful experience in managing construction of high-
voltage power distribution lines and RE schemes; (iii) ability to attract and retain competent and
motivated staff with performance-based incentives; (iv) steady improvement in operational
performance in terms of transmission and distribution losses, and improved reliability indicators;
and (v) financial sustainability since 2006. The SAPE concludes that subject to continued
availability of royalty energy to BPC for domestic supply at a discount to the export prices, BPC
is likely to remain financially sustainable. It also recognizes that the Department of Energy has
built adequate institutional capacity by retaining a competent set of civil servants.

101. The SAPE notes that RE requires continued cross-subsidies from power exports and
urban and industrial consumers because of (i) the high cost of connecting rural consumers
because of difficult terrain and low population density in rural areas, (ii) low consumption in rural
areas, and (iii) lower tariffs applicable to rural consumers as the average consumption in rural
households is far below the lifeline block of 80 kWh per month. This would exert extra pressure
on government resources for continued subsidies to domestic consumers, both through higher
cost of last-mile connections, as well as lower tariffs. Nevertheless, the additional power
generation in the pipeline is likely to ensure that adequate revenues are generated to ensure
continued subsidy.

102. The findings from this study suggest that both ADB RE projects are likely to be
sustainable based on (i) the government's thrust and commitment to RE, which ensures that
sufficient funds are transferred to BPC to support it; (ii) revenues from electricity exports, which
are expected to further increase given the commissioning of the Tala Hydropower Plant and the
outputs from the Green Power Development Project, which aims to increase energy sales to
India through the Dagachhu Hydropower Plant; (iii) regular reviews conducted on the tariff
structure; (iv) under the cross-subsidy scheme, the proportion of the total projected increase in
the number of rural household consumers is not expected to exceed 10% of BPC's total sales;
thus, given the limited projected sales to rural consumers, it is unlikely that the subsidies will
greatly affect BPC's operations; (v) the adequate provision of budget for operation and
maintenance, which is essential, especially for the distribution networks; (vi) the high quality of
materials and equipment incorporated in the projects being well-suited for their intended
purposes; (vii) the institutional benefits of unbundling the power sector in the country; (viii) the
use of renewable natural resources, such as hydropower, to generate electricity; and (ix) the
positive financial performance of BPC from 2006 to 2008. The study, however, also recognizes
that in the light of the government's commitment to provide electricity for all by 2013,
the continued subsidy for households at some point is expected to exert extra pressure on the

50

BEA. 2008. Safety Code 2008. Bhutan Electricity Authority: Thimphu; and BEA. 2008. Safety Regulation 2008.
Bhutan Electricity Authority: Thimphu

51

ADB. 2010. Sector Assistance Program Evaluation: Energy Sector in Bhutan. Manila.

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government, particularly when the pace of urbanization and consumption increase at a rapid
rate.

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