Contract out Rural Power Supply





Most rural electrification programs have focused on connecting rural areas to national or local grids, but grid-supplied electricity is not always the cheapest option. Policymakers and planners should consider other possibilities like concession-based subsidies to generate power supply in rural areas. In Argentina a program of exclusive concessions pays private operators the lowest subsidy required to connect consumers in isolated areas often based on renewable energy.


The idea:


Challenge. Argentina has 2.5 million people living in dispersed rural areas with no access to electricity. Connecting them would require high investment levels, yet provincial governments have cash-strapped budgets. Also, provincial regulatory agencies are weak.

Solution. With World Bank assistance, rural communities are contracting private entrepreneurs who develop a viable business plan for providing rural electricity service. After the initial subsidies for establishing the electricity service, the business must demonstrate that it can maintain financial viability while continuing to serve the rural population.

Policies and actions. The concession model aims to minimize subsidies and encourage private sector participation. It depends on regulation by contract more than by market forces, but it helps to ensure that projects achieve large-scale economies. Concessionaires can choose from a range of off-grid technologies, though solar power systems are often the most cost-effective choice. Users pay a connection fee and monthly service tariff (set by the government), and the government pays the concessionaires a declining subsidy determined by their contract.

Concessionaires must provide service to all who ask for it within an exclusive area. The connection costs are partially subsidized by a World Bank loan, a Global Environment Facility grant, and a special electricity fund run by the Argentine government. Users must contribute at least 10 percent of the costs, with the share depending on capacity to pay in the province and on the size of the system. Connection subsidies are paid to the operator on proof of installation (checked by random audits). Where there is no local concessionaire or the operator does not want to provide service, new concessions will be offered in a competitive tender for the smallest subsidy.

Where and when: Argentina, 1999-present

Initiated by: Government

Effectiveness: In Jujuy province 750 household solar power systems were installed, and similar systems have been contracted for 167 rural schools in Salta province. Bidding has also been launched for about 2,000 household solar systems, 180 solar systems for rural schools, and 120 wind home systems. Private concessionaires are supplying rural power in Jujuy, Salta, and Tucuman provinces. In Chaco province a private cooperative ensures sustainable operations and maintenance and replacement of equipment under concession contracts.