Impact of Rural Electrification in Peru: A "New" Study

By Doug  Barnes

 

A “new” report on rural electrification in Peru demonstrates the usefulness of conducting energy surveys to help with assessing policies for such programs.  The usefulness stems from the ability to not only estimate the benefits of rural electrification, but to analyze if the subsidy policies are both effective and well targeted. There are many ways to structure subsidies for rural electrification in developing countries (see previous blog on energy subsidies).  Some types of subsidies can be progressive and others well could be regressive.   Assessing the appropriativeness type of subsidy generally is difficult to do without energy survey information.  

Rural Energy Expenditures by Income Class in Peru
in Soles per Month (1 US$  = 3 Soles) 
Source: Peru National Survey of Rural Energy Use

In developing countries generally people with higher income spend more cash income on energy than those with lower levels of income.  This same pattern can be found in Peru as indicated by the figure.  It is somewhat expected that electricity and LPG expenditures in rural Peru increase significantly with increases in income as measured by total expenditures.  But interestingly even cash expenditures on fuelwood rise with income which indicates that there is even a willingness to pay for what is probably high quality fuelwood. One reason that it is necessary to have quality surveys is to track both the effectiveness and the targeting of subsidies.

Overview of Subsidies in Peru

An important element of the Peruvian rural electrification program is the full recovery of operational costs by the distribution companies.  However, capital costs of rural electricity expansion are heavily subsidized.  Generally subsidies are provided to cover all or most of the costs of extension of distribution,  but the costs of operation, maintenance, and provision of customer services must be covered by consumer revenues.  Under these circumstances, extending access in rural areas requires a system of tariff subsidies that acknowledges the lower income and electricity consumption levels of rural households and higher costs of supply resulting from the remoteness of their locations. 

In Peru, policies do not mandate a single tariff structure nationwide or the concept of universal access, but the political objective that all citizens be treated equally is reflected in the country’s tariff and subsidy policies.  In addition to capital cost subsidies for extension of distribution lines, there are subsidies  to isolated generation and cross subsidies from large to small consumers and from urban to rural consumers.  This is to help equalize tariffs to consumers.

The subsidies to isolated generation apply in remote areas, most of which are located in the Amazon region.  Revenues from grid connected customers are channeled through the rural electrification fund to lower the isolated generation costs and make electricity more affordable in remote areas dependent isolated grid systems. 

Note:  1 US$ = 3 Soles

Cross subsidies from urban to rural consumers and from larger to smaller consumers are made through the Social Compensation Fund for Electricity (FOSE), operated by OSINERGMIN, the electricity regulator.  Higher electricity use consumers are generally better off compared to poorer consumers and they generally purchase more energy, but this purchased energy also is a smaller fraction of their income (see chart).  They pay a surcharge for electricity that is used to cross subsidize smaller and rural consumers. 

After all of these subsidies, the electricity distribution companies are expected to be financially viable business and this is ensured by the electricity regulator. 

A Look at Benefits

The Peru National Survey of Rural Energy Use provides some answers to for questions concerning both the benefits of rural electrification and whether subsidies are well targeted.  The 2005 Peru rural energy survey contained an extensive set of questions on household appliances and household energy use.  The report contains all the details of the methods, but I will provide a summary of benefits and how well the subsidies are targeted to poorer households. 

Electric Lighting:  it is primarily the poor who depend on high-cost and less-efficient alternatives to grid electricity, such as candles and kerosene, to provide lighting.  Using consumer surplus calculations, the report shows the benefits in switching to different forms of lighting.  Benefits from improved lighting range from US$ 5 to US$ 28 soles/month/household, depending on expenditure level and assumptions.  In fact, there is a real income gain for some household that use grid electricity, for some groups they spend less on lighting services than comparable groups that depend on kerosene, candles or batteries for lighting.  Click this link to see the blog posting on lighting measurement issues.

Communications:  The use of plug in electric radios by households on average reduces their expenditures by about one and one half dollars.  Those with grid electricity no doubt use  more high powered radios as well but this was not counted as part of the benefit.  Using consumer surplus methods, the benefit of having grid electricity is calculated to be US$ 7.5 dollars per month.  Interestingly, radio listening declines in households with grid electricity.  Households generally spend more time watching television and radios become less important.  For more on communications issue see the blog posting on rural electrification and communications. 

Education:  Children in households with electricity tend to study more presumably because they have higher quality light in the evening.    School enrollments are also higher for children with electricity even after controlling for household income.  These benefits are no doubt factored into the lighting benefits described above since lighting demand is based on perceived value of lighting for a family or household and their willingess to pay for lighting services.  

Targeting of Cross-subsidies for Electricity.  While the FOSE cross-subsidy is effective in helping to equalize kWh costs and differentiates between consumers in the 0-30 kWh and 31-100 kWh range, as well as between urban and rural consumers, the survey analysis indicates that the thresholds of 100 kWh and 30 kWh per month may be too high to properly target the poorest households.  The study showed that the subsidy would better target the poor if the lowest block were set below 15 kilowatt hours per month and the subsidy were phased out above 25 kilowatt hours per month.  This is of course based purely on the survey analysis.  There may be social and/or  political reasons to subsidize the first 30 kilowatt hours per month. 

This is only part of the interesting information in this “new” report.  As a caveat, I am one of the coauthors of this report along with Peter Meier, Tuntivate "Tig" Voravate, Susan Bogach and Daniel Farchy. 

Now why is this report “new” as the survey was conducted 5 years ago.  That is a story for another blog! 

Preview the report below or download the full report.