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Tariffs for rural grid electrification

by Gerard Foley c/o Boiling Point editor, ITDG, Schumacher Centre for Technology and Development, Bourton
on Dunsmore, Warwickshire CV23 9QZ, UK email: gfoley@gfoley.demon.co.uk

Charging for electricity Tarifs pour l’électrification rurale à partir du réseau


It is now generally accepted that Des variations significatives caractérisent les voies selon lesquelles les
charges for electricity should fully différents coûts pour la consommation d’électricité sont établis: coût pour
cover the capital, operating and le raccordement initial, charge fixe et charges basées sur la quantité
expansion costs of the company d’électricité consommée. L’auteur soutient qu’il serait plus équitable
supplying it. Within this frame- d’instituer des tarifs, pour les populations pauvres, qui ne couvriraient que
work, the way these charges are les coûts d’approvisionnement. La réussite de ces structures tarifaires dans
levied and the levels of charges plusieurs pays montre que cette méthode doit etre considérée comme une
within successful rural electrifica- mesure politique visant à atteindre des objectifs techniques, financiers et
tion programmes show major sociaux clairement définis.
variations. Many electric compa-
nies charge new customers an ini- of electricity to be used, is also set charges for each unit of elec-
tial connection fee. In addition to levied by most utilities. tricity at levels well below the
this connection charge, many also supply cost. In some cases,
Benefits to the electricity company
impose a fixed minimum charge, charges are just a few cents per
The connection fee and minimum
even for people using very small kilowatt-hr compared with actual
charge provide assured and early
amounts of electricity. The great costs of up to 20 cents/kWh or
money to the electric utility on its
majority of consumers also pay a more. The main reason used to
capital investment in supplying
charge based on the amount of justify these low rural tariffs is
electricity. Immediately a con-
electricity they use; this is called that ‘rural people are too poor to
sumer pays the connection
an energy-, unit-, or kWh (kilo- pay the true price of electricity
charge, part of the capital invest-
and that they should be provided

Theme
watt hour) charge. (A kilowatt- ment is repaid. Thereafter, with a
hour is the amount of electrical with a subsidised supply.’
minimum monthly charge, there
energy given out when a kilowatt is a guaranteed return to the util- Subsidised unit charges – a
of power is used for one hour.) ity that does not depend on the questionable practice
level of electricity consumption. This is highly questionable. The
Connection fees and fixed people who connect to the elec-
or minimum charges High initial payments – a major
tricity supply are spending signifi-
The connection fee is designed to barrier to the poor
cant amounts of money on elec-
pay back some or all of the initial One of the major disadvantages of
tricity-using services. Obtaining a
investment made by the electricity the initial charge system is that
grid supply represents a major
company in the construction of poor rural families often find it dif-
the distribution system. The con- ficult to raise the necessary cash at

ITDG
nection charge usually includes the same time as they have to pay
the cost of electricity connection for house-wiring and electrical
up to a certain distance, often as appliances. High initial charges
little as 10 metres, from the near- can, in fact, be a major barrier to
est line. New consumers further rural people taking a supply (Fig-
from the distribution line are ure 1). Surveys in different devel-
obliged to pay the additional oping countries have often found
costs involved in their connection. that the initial payments demanded
The connection fee is often by the utility are too great an
accompanied by a ‘security obstacle for a high proportion of
deposit’ to cover one or more potential rural consumers to over-
month’s bills. The security deposit come. In cases where electricity is
is, in principle, repayable when subsidised, initial charges can pre-
the consumer leaves the dwelling, vent poor families from having the
but since a new deposit has to be low-cost electricity which the rich
paid for the next connection, it is, can obtain because they can afford
in effect, a permanent payment to the initial payment.
E3 Nepal H2.11

the supply company. A monthly


minimum charge, which may or
Unit charges
In many countries, there are Figure 1: Initial charges may be a major
may not allow a certain amount barrier, even to those close to a grid
strong pressures in rural areas to
supply

Boiling Point No 45 Autumn 2000 9


step upward in living standards, The case for setting electricity tar- enabling people to shift to elec-
even if they continue to pay out iffs at levels which are sufficient tricity from expensive and ineffi-
the same amount of money. The to cover supply costs is fairer to cient kerosene lamps and batter-
amount of money spent previ- poor people because, where elec- ies which provides the greatest
ously on batteries and kerosene tricity is supplied at less than its benefit to consumers, even at
would be more than enough to cost, it is the better-off con- UScents20/kWh, poor consumers
provide the household with a sumers, rather than the poor, who are benefiting greatly from an
level of service considerably benefit the most. In addition, electricity supply, so subsidising
higher than obtained before elec- there is a risk to the electricity these benefits is unnecessary.
trification. Put simply: supplier that it will not be able to Equity (fairness to all) is more
One kilowatt hour of electricity stay in business. likely to be served by using the
from an incandescent bulb is same resources to reduce or elim-
equivalent to the amount of light Tariff structures inate the connection fee.
coming from 12 litres of kerosene A wide variety of tariff structures
Declining block tariff
used in a kerosene wick lamp. (ways for charging for electricity)
The declining block tariff is based
A kilowatt hour of electricity are used throughout the develop-
on commercial logic. The fixed
used in a power tool produces ing world. In Costa Rica, there are
costs to the supply company are
the equivalent of a man working sixteen different consumer cate-
the same whether a consumer
for two days without the power gories with substantial differences
uses a small amount of electricity
tool. between their charges. In the
or a great deal per month. The
Philippines, the system is much
Cost of electricity from cost of supplying each kilowatt-
simpler and there is little differ-
hour therefore goes down with
batteries ence between consumer cate-
increasing consumption. Where
Electricity from dry-cell batteries gories.
there is more energy available in
costs at least $100 per kWh or Charges also vary with the
the supply system than is needed,
more. When car batteries are amounts consumed. Two oppo-
the reducing price encourages
used, the cost is likely to be in site approaches are in common
increased consumption and there-
the range $3-4/kWh. Where peo- use. One, which is used for
Theme

fore profit, but lowers the incen-


ple depend on small-scale private example in Costa Rica, is the ris-
tive to energy conservation
suppliers (non-grid), the effective ing block tariff, which charges
among large consumers. On the
rate for restricted evening sup- progressively higher rates for
other hand, where there is a
plies can be as high as $1/kWh. increasing consumption. The
shortage of available electricity
Even in the poor outlying islands other, the declining block tariff,
the declining block tariff gives the
of the Philippines, consumers charges progressively less per unit
wrong price signal to consumers.
have shown they are prepared to for higher consumption levels.
pay rural electric co-operative tar- Single price per kilowatt hour
Rising block tariff
iffs in the range UScents15- The simplest tariff of all sets a sin-
The rising block tariff assumes
20/kWh. Writing of car battery gle price per kilowatt hour to
that those using the largest
users in Uganda, an ESMAP study cover the electric company’s full
amounts of electricity are better
remarked that ‘Non-grid house- operating and capital expenses.
off and more able to contribute to
holds pay cash for every kilowatt- As well as its simplicity, this has a
the running costs of the utility.
hour they consume, they never number of important equity
This tariff is, in effect, a subsidy
default, and they pay on time at advantages. It completely
from the heavily consuming, and
30 times the grid-connected fee’ removes the problems created by
presumably better-off, customers
(ESMAP (1998a). the connection fee and initial
to the poor. The rising block tar-
deposit system, so that poor fami-
Grid electricity gives good value to iff, by acting as a progressively
lies are not barred from obtaining
the consumer stronger deterrent to increased
a supply. It also means that the
At these, and indeed higher, price consumption, can be a useful
capital investment and fixed
levels, electricity from the grid component in an energy conser-
charges for the network are
therefore represents extremely vation strategy.
shared between users in propor-
good value for consumers who The element of fairness of the
tion to the use they make of the
have been using kerosene or bat- rising block tariff system is seen
system. This system is coming
teries. Not only is the electricity most clearly when a lifeline tariff
into widespread use in South
much cheaper, it is far more at a specially low rate is provided
Africa where it has the additional
effective and versatile than the for the first block of consumption.
advantage of being ideally suited
energy sources they have been This allows poor people, who
to the system of prepayment
using previously. would not otherwise be able to
cards promoted by the national
afford it, to benefit from an elec-
Electricity should cover supply utility, Eskom.
tricity supply. However, since it is
costs
the initial block of consumption,

10 Boiling Point No 45 Autumn 2000


Load-limited tariff effective tariff structure to achieve
Another approach sometimes them can be undertaken.
used is the load-limited tariff. This
requires a specially designed con- Gerald Foley has been involved in
nection into the house which only energy and development issues since the
late 1970s
allows a certain level of current to
trickle through to the consumer. A
two-amp connection, for exam-
ple, will only be sufficient for
lighting and TV; if the consumer
tries to operate a kettle or electric
iron, the connection will cut out.
The consumer pays a fixed fee,
based on the level of electricity
they are allowed, irrespective of
the amount of electricity con-
sumed.
The advantage of the system is
that the amount of energy used
does not have to be measured
and bills do not have to be sent.
The disadvantage is that there is
no incentive for the consumer to
switch off appliances or
economise in any way. The
higher the allowable electrical
load, the greater the amount of
electricity the consumer can use.

Theme
One problem is that there is little
to prevent consumers bypassing
the system and using whatever
appliances they wish, while pay-
ing the fee for the lowest level
connection. This tends to make
most electrical supply companies
rather wary of the load-limited
approach. It has, however, a long
record of use in some countries,
among them Zimbabwe, and may
deserve to be considered in some
cases.

In summary
The successful application of
quite different tariff structures in
various countries shows that there
is no one universally applicable
or ‘correct’ system. The particular
method adopted should be seen
as a policy measure adopted to
achieve a clear set of technical,
financial and social objectives.
The most important objective has
to be a structure that allows the
electric utility to cover its full
operating costs and pay its debts.
Once the objectives have been
clearly defined, the technical
exercise of developing the most

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