Difference between revisions of "National Approaches to Electrification – Price/Tariff Regulation"

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<p style="text-align: center;"><span style="color:#cb3300ff;">'''Price/Tariff Regulation:&nbsp;The basis on which the price of electricity (or of standalone systems) are regulated'''</span></p>
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<p style="text-align: center"><span style="color:#cb3300ff">'''Price/Tariff Regulation:&nbsp;The basis on which the price of electricity (or of standalone systems) are regulated'''</span></p>
 
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= Uniform Price/Tariff:<br/> =
 
  
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<span style="color:#FFFFFF;"><span style="font-size: 13.6px;">Definition:</span></span><br/>
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<span style="color:#FFFFFF"><span style="font-size: 13.6px">Definition</span></span><br/>
  
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'''<span></span><span></span><span>A regime under which all providers within a given category are required to sell electricity (or standalone systems) at the same price or tariff (or set of prices/tariffs).&nbsp;&nbsp;</span><span></span><span></span>'''
 
'''<span></span><span></span><span>A regime under which all providers within a given category are required to sell electricity (or standalone systems) at the same price or tariff (or set of prices/tariffs).&nbsp;&nbsp;</span><span></span><span></span>'''
  
<span>A uniform price/tariff arrangement may:<br/></span>
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<span>A uniform price/tariff arrangement may:</span><br/>
  
 
*Address purchase costs for standalone systems or connection charges and charges for electricity used or flat monthly changes<br/>
 
*Address purchase costs for standalone systems or connection charges and charges for electricity used or flat monthly changes<br/>
*<span>Encompass a set of prices/tariffs for different classes of user (eg household, commercial and industrial) or for different levels of provision (eg size of solar home system)&nbsp;&nbsp;&nbsp;</span><br/>
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*<span>Encompass a set of prices/tariffs for different classes of user (eg household, commercial and industrial) or for different levels of provision (eg size of [[Solar Home Systems (SHS)|solar home system]])&nbsp;&nbsp;&nbsp;</span><br/>
*<span><span>Relate to one, several, or all technologies. Thus it may cover just electricity from solar home systems, or just from wind-powered mini-grids, or require that isolated mini-grids supply electricity at the same prices as the grid (a grid-parity price/tariff)</span></span><br/>
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*<span><span>Relate to one, several, or all technologies. Thus it may cover just electricity from solar home systems, or just from [[Portal:Wind|wind]]-powered [[Portal:Mini-grid|mini-grids]], or require that isolated mini-grids supply electricity at the same prices as the [[Portal:Grid|grid]](a grid-parity price/tariff)</span></span><br/>
 
*<span><span><span>Be based on an assessment of the average cost of provision, on existing grid prices, or on estimates of the avoided cost of grid extension.&nbsp; &nbsp;</span><span></span></span></span>
 
*<span><span><span>Be based on an assessment of the average cost of provision, on existing grid prices, or on estimates of the avoided cost of grid extension.&nbsp; &nbsp;</span><span></span></span></span>
  
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== Internactions wiht other NAE Categories: ==
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== Interactions with other NAE Categories ==
  
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<font color="#ffffff">Technology</font>
 
<font color="#ffffff">Technology</font>
  
 
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<span style="color:#FFFFFF;"></span>It is usual for grid systems to use a uniform price/tariff structure, relying on the cross-subsidies inherent in a single unitary system with a single owner to balance differences in cost of provision in different areas. However, even in a grid context a uniform price/tariff structure can dis-incentivize the electricity provider from extending access to more remote, low demand areas, where the cost of provision is higher and they may be unable to recover costs or will have to raise prices for all customers.<br/><br/>If a uniform tariff is imposed on grid-connected mini-grids, distribution systems or isolated mini-grids, which are separately owned, it will be necessary to establish a system of subsidies or cross-subsidies between providers. Without this, providers in areas where costs are lower may make excess profits while in areas where costs are higher providers become insolvent<br/>or users remain unserved.&nbsp; For this reason individual price/tariff regulation is often applied to larger mini-grids, though for small mini-grids the costs may out-balance the benefits of individual price/tariff regulation, and a uniform tariff may be applied.<br/>
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<span style="color:#FFFFFF"></span>It is usual for [[Portal:Grid|grid]]&nbsp;systems to use a uniform price/tariff structure, relying on the cross-subsidies inherent in a single unitary system with a single owner to balance differences in cost of provision in different areas. However, even in a grid context a uniform price/tariff structure can dis-incentivize the electricity provider from extending access to more remote, low demand areas, where the cost of provision is higher and they may be unable to recover costs or will have to raise prices for all customers.<br/>
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If a uniform tariff is imposed on grid-connected [[Portal:Mini-grid|mini-grids]], distribution systems or isolated mini-grids, which are separately owned, it will be necessary to establish a system of subsidies or cross-subsidies between providers. Without this, providers in areas where costs are lower may make excess profits while in areas where costs are higher providers become insolvent or users remain unserved.&nbsp; For this reason, individual price/tariff regulation is often applied to larger mini-grids, though for small mini-grids the costs may out-balance the benefits of individual price/tariff regulation, and a uniform tariff may be applied.<br/>
  
For standalone systems, prices are frequently unregulated.&nbsp; If prices are regulated, it’s more likely to be on a uniform than an individual basis, since standalone system businesses are not usually tied to a location and so differences in costs are likely to be linked to their technology offer, efficiency of operation, or financing structure rather than any fundamental factors outside the businesses control. (Within any uniform price regulation of standalone systems it will be necessary to consider how to incentivize system providers to move into more remote areas where distribution costs are higher).
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For standalone systems, prices are frequently unregulated.&nbsp; If prices are regulated, it’s more likely to be on a uniform than an individual basis, since standalone system businesses are not usually tied to a location and so differences in costs are likely to be linked to their technology offer, efficiency of operation, or [[Portal:Financing and Funding|financing]] structure rather than any fundamental factors outside the business's control. (Within any uniform price regulation of standalone systems it will be necessary to consider how to incentivize system providers to move into more remote areas where distribution costs are higher).
  
The issues inherent in a uniform price/tariff regulatory structure will be all the greater if it is extended across more than one technology, for instance if isolated mini-grids or standalone systems are expected to supply electricity at the same prices as the grid system.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
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The issues inherent in a uniform price/tariff regulatory structure will be all the greater if it is extended across more than one technology, for instance, if isolated mini-grids or standalone systems are expected to supply electricity at the same prices as the grid system.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
  
 
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<span style="color:#FFFFFF">Delivery Model</span><br/>
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A uniform regulated price/tariff structure is consistent with a public delivery model, with cross-subsidy between publically-owned entities and subsidy from wider public resources being relatively straightforward. Combining uniform prices/tariffs with a private delivery model is problematic, since this model precludes public financial support, leaving cross-subsidies between providers as the only option for balancing differences in costs. The need for subsidy to support a uniform price/tariff structure is thus likely to result in a public-private partnership model rather than pure private sector delivery.
 
A uniform regulated price/tariff structure is consistent with a public delivery model, with cross-subsidy between publically-owned entities and subsidy from wider public resources being relatively straightforward. Combining uniform prices/tariffs with a private delivery model is problematic, since this model precludes public financial support, leaving cross-subsidies between providers as the only option for balancing differences in costs. The need for subsidy to support a uniform price/tariff structure is thus likely to result in a public-private partnership model rather than pure private sector delivery.
  
 
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<span style="color:#FFFFFF;"></span><span style="color:#FFFFFF;">Legual Basis</span><span style="color:#FFFFFF;"></span><br/>
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<span style="color:#FFFFFF"></span><span style="color:#FFFFFF">Legual Basis</span><span style="color:#FFFFFF"></span><br/>
  
 
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Uniform prices or tariffs may be established through either concessions or a licensing system. In principle uniform prices/tariffs may be set through general legislation without licensing electricity providers. Enforcement will then rely on prosecution of any providers who exceed set prices or tariffs.
 
Uniform prices or tariffs may be established through either concessions or a licensing system. In principle uniform prices/tariffs may be set through general legislation without licensing electricity providers. Enforcement will then rely on prosecution of any providers who exceed set prices or tariffs.
  
 
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<span style="color:#FFFFFF;">Finance</span><span style="color:#FFFFFF;"></span><br/>
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<span style="color:#FFFFFF">Finance</span><span style="color:#FFFFFF"></span><br/>
  
 
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<span>A uniform price/tariff regime will give private financiers clarity. Whether this attracts finance will depend critically on whether the prices or tariffs set enable them to make adequate return on investment. Given variations in costs of provision it is likely to attract investment into easier to access areas and lower cost electricity technologies, and potentially enable businesses providing these to make high profits, while excluding from electricity access those living in smaller communities in more remote areas. In addition private financiers may see uniform prices/tariffs as arbitrary, inflexible and non-cost reflective, thus presenting a risk to future revenues and so discourage investment.&nbsp; Grants and subsidies may, of course, be used to attract private finance in the context of a uniform &nbsp;price or tariff system, as may tax exemptions or guarantees.&nbsp; However if they, too, are set on a uniform basis, while they may extend the group of users to whom electricity can be economically provided, they are also likely to create additional excess profits for those elements of electricity provision which could anyway have been delivered economically, while leaving others outside this envelope. If grants or subsidies are structured to reflect costs of provision, they may counterbalance the rigidity of uniform prices/tariffs, by transferring cost –reflectivity from tariffs to grants/subsidies. Cross-subsidies are also used to transfer income from those providers who face lower delivery cost to those with higher costs.&nbsp; Establishment of uniform prices or tariffs will obviously directly affect finance derived from users through these charges and the need for users to be able to access finance, or pay-as-you-go arrangement to cover any up-front element of these costs.</span><span></span>
 
<span>A uniform price/tariff regime will give private financiers clarity. Whether this attracts finance will depend critically on whether the prices or tariffs set enable them to make adequate return on investment. Given variations in costs of provision it is likely to attract investment into easier to access areas and lower cost electricity technologies, and potentially enable businesses providing these to make high profits, while excluding from electricity access those living in smaller communities in more remote areas. In addition private financiers may see uniform prices/tariffs as arbitrary, inflexible and non-cost reflective, thus presenting a risk to future revenues and so discourage investment.&nbsp; Grants and subsidies may, of course, be used to attract private finance in the context of a uniform &nbsp;price or tariff system, as may tax exemptions or guarantees.&nbsp; However if they, too, are set on a uniform basis, while they may extend the group of users to whom electricity can be economically provided, they are also likely to create additional excess profits for those elements of electricity provision which could anyway have been delivered economically, while leaving others outside this envelope. If grants or subsidies are structured to reflect costs of provision, they may counterbalance the rigidity of uniform prices/tariffs, by transferring cost –reflectivity from tariffs to grants/subsidies. Cross-subsidies are also used to transfer income from those providers who face lower delivery cost to those with higher costs.&nbsp; Establishment of uniform prices or tariffs will obviously directly affect finance derived from users through these charges and the need for users to be able to access finance, or pay-as-you-go arrangement to cover any up-front element of these costs.</span><span></span>
  
 
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<span style="color:#FFFFFF;"></span><span style="color:#FFFFFF;">Non-Financial Interventions</span><span style="color:#FFFFFF;"></span><br/>
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<span style="color:#FFFFFF"></span><span style="color:#FFFFFF">Non-Financial Interventions</span><span style="color:#FFFFFF"></span><br/>
  
 
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Establishing (or amending or removing) a uniform price/tariff regime will require regulatory reform and capacity building or technical assistance may be required if the key actors lack the capacity to undertake this reform.&nbsp; Direct provision by implementing authorities is an alternative route to achieving uniform prices/tariffs. Other non-financial interventions, such as policy and target setting, establishment of quality and technical standards, awareness raising and demand promotion amongst users&nbsp;<span style="font-size: 13.6px;">and service providers, provision of market information and training (capacity building) for businesses and workers, may be&nbsp;</span><span style="font-size: 13.6px;">beneficial but are not specifically related to a uniform price/tariff structure. National energy planning will be key to establishing&nbsp;</span><span style="font-size: 13.6px;">the optimum mix of technologies to meet electrification needs across the country, regardless of the form of price/tariff&nbsp;</span><span style="font-size: 13.6px;">regulation employed.</span>
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Establishing (or amending or removing) a uniform price/tariff regime will require regulatory reform and capacity building or technical assistance may be required if the key actors lack the capacity to undertake this reform.&nbsp; Direct provision by implementing authorities is an alternative route to achieving uniform prices/tariffs. Other non-financial interventions, such as policy and target setting, establishment of quality and technical standards, awareness raising and demand promotion amongst users&nbsp;<span style="font-size: 13.6px">and service providers, provision of market information and training (capacity building) for businesses and workers, may be&nbsp;</span><span style="font-size: 13.6px">beneficial but are not specifically related to a uniform price/tariff structure. National energy planning will be key to establishing&nbsp;</span><span style="font-size: 13.6px">the optimum mix of technologies to meet electrification needs across the country, regardless of the form of price/tariff&nbsp;</span><span style="font-size: 13.6px">regulation employed.</span>
  
 
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== Advantages and Disadvantages ==
 
== Advantages and Disadvantages ==
  
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A public delivery model has the advantage of making use of existing institutions. Where these organisations have strong capabilities and are efficient, a public delivery model may allow strongly focussed and effective delivery of electrification and good coordination of grid, mini-grid and stand-alone solutions. However public organisations are often monolithic and slow moving. They may be more focussed on managing existing assets than serving new consumers, particularly in remote rural areas, and they may lack the capabilities needed to deliver new forms of electricity access. They are also vulnerable to political pressure and interference, which can hamper electrification efforts and result in poor allocation of resources. Following a private sector or private-public partnership model can allow private sector finance and skills to be brought to bear and may achieve greater flexibility, speed and efficiency.
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The main advantage of a uniform price or tariff arrangement is that of equity – allowing all users to access electricity at the same cost, preventing those in remote, low demand areas from being penalised by having to pay more for electricity and so enabling them to use it to improve their livelihoods and compete on a more level playing field. It thereby avoids “tariff envy” and smooths the transition from one form of electricity access to another for the user. The comparative simplicity of uniform prices/tariffs may also seem attractive, avoiding the need for appropriate prices/tariffs to be calculated and agreed for each scheme or business. This is a particularly relevant consideration for small-scale technologies (standalone systems and very small [[Portal:Mini-grid|mini-grids]]), where the burden and cost of setting individual prices/tariffs will be disproportionately high and the differentials between costs of provision relatively low. The main disadvantage is that, in the absence of cost-reflective subsidies, grants or cross-subsidies, they will inevitably benefit those providers operating in areas where costs of provision are lower, while effectively excluding provision to higher cost areas (or causing those operating in these areas to become insolvent).&nbsp; This issue is greatly exacerbated if uniform prices/tariffs are extended across multiple technologies, typically by requiring grid-parity tariffs from other forms of electricity provision (which are, almost axiomatically, used in areas where [[Portal:Grid|grid]]&nbsp;extension is uneconomic at these price levels). Subsidies, grants or cross-subsidies can be used to overcome this disadvantage while&nbsp; retaining equity for users, though these will inevitably either limit extension of provision to that which can be sustained from public funding or cause prices for other users (the customers of the providers from whom cross-subsidies are drawn) to rise. The sustainability of these arrangements must be seriously considered.&nbsp;&nbsp;
  
 
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== Further Informaiton and Guidance ==
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== Further Information and Guidance ==
  
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*Barnes, D. (2007). The Challenge of Rural Electrification: Strategies for Developing Countries. Book Chapter [https://books.google.co.uk/books?id=iOBi17Pr3fIC&printsec=frontcover&source=gbs_ge_summary_r&cad=0 https://][https://books.google.co.uk/books?id=iOBi17Pr3fIC&printsec=frontcover&source=gbs_ge_summary_r&cad=0 books.google.co.uk/books?id=iOBi17Pr3fIC&printsec=frontcover&source=gbs_ge_summary_r&cad=0#v=onepage&q&f=false]
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*<span>EUEI PDF (2014), Mini-grid Policy Toolkit: Policy and Business Frameworks for Successful Mini-grid Roll-outs&nbsp;[http://www.euei-pdf.org/sites/default/files/field_publication_file/RECP_MiniGrid_Policy_Toolkit_1pageview_(pdf,_17.6MB,_EN_0.pdf http://www.euei-pdf.org/sites/default/files/field_publication_file/RECP_MiniGrid_Policy_Toolkit_1 pageview_(pdf,_17.6MB,_EN_0.pdf]</span><br/>
*IEA, (2010), Comparative Study on Rural Electrification Policies in Emerging Economies [https://www.iea.org/publications/freepublications/publication/rural_elect.pdf https://www.iea.org/publications/freepublications/publication/rural_elect.pdf]
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*IRENA (2016), Policies and regulations to support renewable energy mini-grid development through private sector&nbsp;<span style="font-size: 13.6px">involvement&nbsp;[http://www.irena.org/DocumentDownloads/Publications/IRENA_Policies_Regulations_mini-grids_2016.pdf http://www.irena.org/DocumentDownloads/Publications/IRENA_Policies_Regulations_mini-grids_2016.pdf]</span>
*Vietnam. The World Bank, (2011). State and People, Central and Local, Working Together: The Vietnam Rural Electrification Experience. Washington. [http://documents.worldbank.org/curated/en/601001468027856008/Vietnam-State-and-people-central-and-local-working-together-the-rural-electrification-experience http://][http://documents.worldbank.org/curated/en/601001468027856008/Vietnam-State-and-people-central-and-local-working-together-the-rural-electrification-experience documents.worldbank.org/curated/en/601001468027856008/Vietnam-State-and-people-central-and-local-working-together-the-rural-electrification-experience]
 
  
 
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== Relevante Case Studies: ==
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== Relevant Case Studies ==
  
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*[[NAE Case Study: Bangladesh, IDCOL Solar Home Systems|Bangladesh, IDCOL Solar Home Systems]]<br/>
 
*[[NAE Case Study: Brazil, Luz para Todos (Light for All)|Brazil, Luz para Todos (Light for All)]]<br/>
 
*[[NAE Case Study: Brazil, Luz para Todos (Light for All)|Brazil, Luz para Todos (Light for All)]]<br/>
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*[[NAE Case Study: Cambodia “Light Touch” Regulation|Cambodia “Light Touch” Regulation]]<br/>
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*[[NAE Case Study: Kenya, Off-Grid for Vision 2030|Kenya, Off-Grid for Vision 2030]]<br/>
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*[[NAE Case Study: Peru, Concession Model for Standalone Systems|Peru, Concession Model for Standalone Systems]]<br/>
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*[[NAE Case Study: Rwanda, Sector-Wide Approach to Planning|Rwanda, Sector-Wide Approach to Planning]]<br/>
 
*[[NAE Case Study: South Africa, Integrated National Electrification|South Africa, Integrated National Electrification]]<br/>
 
*[[NAE Case Study: South Africa, Integrated National Electrification|South Africa, Integrated National Electrification]]<br/>
 
*[[NAE Case Study: Tunisia, Low Cost Distribution Technology|Tunisia, Low Cost Distribution Technology]]<br/>
 
*[[NAE Case Study: Tunisia, Low Cost Distribution Technology|Tunisia, Low Cost Distribution Technology]]<br/>
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'''<span style="color:#FFFFFF;"><span style="font-size: 13.6px;">Definition:</span></span>'''<br/>
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'''<span style="color:#FFFFFF"><span style="font-size: 13.6px">Definition</span></span>'''<br/>
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'''<span><span></span></span><span><span></span></span><span><span>A regime under which the price or tariff at which each&nbsp; provider can sell electricity (or standalone systems) is separately agreed with the regulator.</span></span>'''
  
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An individual price/tariff arrangement may:
'''<span><span></span></span><span><span>Delivery of electricity access by an entity or entities none of which are owned and managed by the state, using purely private finance.</span></span><span><span></span></span>'''
 
  
In this model all of the organisations engaged in provision of electricity access (whether through supply of electricity itself or provision of electricity systems), as part of the National Electrification Approach being considered, are non-state-owned. This implies that all the actors along the market chain1 (Project Development, Manufacture/Generation, Distribution and Retail) are non-state entities such as private companies, cooperatives, social enterprises, community organisations or NGOs (all characterised for this purpose as “private” organisations).&nbsp;<br/>
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*Address purchase costs for standalone systems or connection charges and charges for electricity used or flat monthly changes<br/>
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*Encompass a set of prices or tariffs for different classes of user (eg household, commercial and industrial) or for different levels of provision (eg size of [[Market for Solar Home Systems (SHS)|solar home system]])&nbsp;&nbsp;&nbsp;<br/>
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*Relate to electricity from one or more technologies and/or standalone systems as long as these are all provided by a single entity<br/>
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*Cover a single unit within the provider’s operation (eg a single [[Portal:Mini-grid|mini-grid]]) or the entirety of the provider’s operation<br/>
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*Be based (most usually) on the provider’s average or incremental costs, net of any grant or subsidy (cost-recovery tariffs) or on estimates of the avoided cost of [[Portal:Grid|grid]]&nbsp;extension to the area, or some other basis
  
 
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Few, if any, national grid systems have been established through a private delivery model (though in many countries privatisation has been used to transfer them into private ownership and bring in private investment). Grid-connected mini-grids and distribution systems have frequently been developed by private (non-state-owned) organisations. Where the grid system is also privately-owned, this constitutes a private model. (However, if the grid system is publically owned, and the mini-grid or distribution system uses electricity from the grid system, or the development draws on public grants, subsidies, loans, tax exemptions or guarantees, it constitutes a public-private partnership). The most frequently used models for delivery of standalone systems are private, though involvement of state-organisations along the market chain, or use of funding from grants or subsidies provided by the state, donors or international agencies, may result in private-public partnerships.
+
It is in principle possible to set individual prices/tariffs for different areas within a [[Portal:Grid|grid]]&nbsp;system. This could have the advantage of incentivizing the grid company to extend into more remote areas where costs are higher, but is often politically unacceptable and a uniform price/tariff structure is therefore most often used. Grid connected [[Portal:Mini-grid|mini-grids]]&nbsp;and distribution systems rely on the sale of electricity to the grid, and import of electricity from the grid and its sale to users, as well as sale of own-generated electricity to users. Clarity on how each of these tariffs is set and regulated is vital. Tariffs for import of electricity from and export to the grid will usually be on a uniform price/tariff basis. Tariffs for users of grid- connected mini-grids as well as isolated mini-grids are usually set individually for each mini-grid or distribution area (or mini-grid company) to reflect their specific costs and any subsidies or grants they may have received. For larger, particularly grid-connected, systems, these factors may be overcome by political considerations and attempts to achieve equal treatment of users considerations (but cost-reflective grants or subsidies, or cross-subsidies, will then be needed to maintain economic sustainability). At the other end of the scale, it may be concluded that the costs and bureaucracy of agreeing individual tariff levels for single small mini-grids may be unjustified. It is most usual to leave tariffs for mini-grids below a certain size unregulated (on the basis that they do not create an effective monopoly and so purchase decisions can be left to users), through use of a uniform price/tariff is also an option.
 +
 
 +
Prices for standalone systems are also generally unregulated, though where public funding is used to support provision of standalone systems, it may (as with the [[NAE Case Study: Bangladesh, IDCOL Solar Home Systems|NAE Case Study of the Bangladesh IDCOL programme]]) be regarded as appropriate to regulate prices. If the move towards pay-as-you-go, with users paying for electricity as they do from grid or mini-grids, while suppliers retain ownership of the capital equipment, continues or accelerates, regulation of electricity prices may become more relevant. If they are regulated it’s more likely to be on a uniform than an individual basis (since standalone system businesses are not usually tied to a location and so differences in costs are likely to be linked to their technology offer, efficiency of operation, or [[Portal:Financing and Funding|financing]]&nbsp;structure rather than any fundamental factors outside the businesses control).
  
 
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<span style="color:#FFFFFF;">Legual Basis</span><br/>
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<span style="color:#FFFFFF"><span style="font-size: 13.6px">Delivery Model</span></span><br/>
  
<br/>
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An individual regulated price/tariff structure may be used with a public delivery model where multiple public entities are involved in electricity provision. It is in the context of a private or a public-private delivery model, particularly,&nbsp; that individual regulated prices or tariffs are most likely to be needed, since this offers the private sector element both clarity and the opportunity to recover costs.
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A private delivery model calls for an explicit legal framework for any form of electrification which involves significant long-term capital investment (grid, mini-grids and potentially standalone systems which are charged for on a pay-as-you-go basis) in order to attract private finance and allow for price regulation to protect users. A concession, which offers protection from competition, will provide the greatest attraction for private financiers. Where no long-term capital investment is involved, as with standalone systems sold directly to users, it’s generally considered that no legal control (beyond that for any business) is necessary.&nbsp;<br/>
 
  
 
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<span style="color:#FFFFFF;">Price/Tariff Regulation</span><br/>
+
<span style="color:#FFFFFF">Legual Basis</span>
  
<br/>
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+
<span style="font-size: 13.6px">Individual prices or tariffs may be established through either concessions or a licensing system. Without some form of licensing it is impractical to regulate individual prices or tariffs.</span><br/>
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Where electricity is delivered by the private sector, using purely private finance, in a competitive market with no legal or effective monopoly (eg where several solar lanterns providers are operating) price regulation may be regarded as unnecessary. However, where any form of concession has been granted (or exists in practice), price regulation would be expected to protect users. On the other side, where significant capital investment is involved private financiers are likely to require a transparent framework for price/tariff regulation, to reduce the risk of price controls being introduced in the future at below cost-recovery levels and preventing full recovery of and return on investment.
 
  
 
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<span style="color:#FFFFFF;">Finance</span><br/>
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<span style="color:#FFFFFF">Finance</span><br/>
  
 
<br/>
 
<br/>
  
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As discussed above a private delivery model must be purely privately financed&nbsp; (since inclusion of any public finance would cause the delivery model to be categorized as a public-private partnership). Ultimately private delivery models will rely on connection and ongoing charges, and standalone system purchases from users. For multi-user systems (grids and mini-grids) there is also likely to be some element of cross-subsidy between users.<span style="font-size: 13.6px;">&nbsp;</span>
+
An individually regulated price/tariff regime will give those considering investing long term private capital confidence, reducing risk while protecting users. Whether this attracts finance will depend critically on whether the prices/tariffs set enable them to make adequate return on investment. A clear and transparent framework which allows potential investors to understand how prices/tariffs will be set and estimate levels likely to be acceptable to regulators will be key. (For smaller-scale, shorter-term investments, individual price/ tariff regulation may be regarded as a burden rather a protection). Any framework must factor in grants or subsidies received by the electricity business, so that their effect is to reduce prices/tariffs and make electricity more affordable to users. This also serves to ensure proper use of&nbsp;<span style="font-size: 13.6px">public funding and so where grants and subsidies are made available, prices/tariffs are more likely to be regulated. (Any cross-</span><span style="font-size: 13.6px">subsidies should also be incorporated into price/tariff calculations, but these are unlikely to be used alongside individually&nbsp;</span><span style="font-size: 13.6px">regulated tariffs). Tax exemptions and guarantees, will be reflected through their impacts on equipment, finance and other&nbsp;</span><span style="font-size: 13.6px">costs. The levels at which prices/tariffs are set will obviously directly affect finance derived from users through these charges&nbsp;</span><span style="font-size: 13.6px">and the need for users to be able to access finance, or pay-as-you-go arrangement to cover any up-front element.&nbsp;</span>
  
 
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<span style="color:#FFFFFF;">Non-Financial Interventions</span><br/>
+
<span style="color:#FFFFFF">Non-Financial Interventions</span><br/>
  
 
<br/>
 
<br/>
  
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National energy planning is key to establishing the optimum mix of technologies to meet electrification needs across the country, regardless of the delivery model employed. Institutional restructuring and capacity building or technical assistance may be needed where the key actors lack the capacity to undertake regulatory reform in order to establish the legal and regulatory framework for private electrification, or to set and implement technical and quality standards (needed where the private sector is delivering access through mini-grids or distribution systems to ensure safety and compatibility between systems, and to support user confidence). Awareness raising amongst users and other potential market actors and service providers, as well as training (capacity building) to develop the skilled workforce needed by new energy access businesses are likely to be particularly relevant under a private delivery model, and demand promotion may be needed to increase revenues and make electricity access economically sustainable. Private delivery models are often a means of introducing new technologies, with private sector players bringing in technologies which they believe will have advantages over existing options which will allow them to grow their businesses. (Such new technology introduction, however, brings risks, and the private sector will expect to reap additional returns to balance these risks).
+
Establishing individual price/tariff regulation will require regulatory reform and capacity building or technical assistance may be needed if the key actors lack the capacity to undertake this reform.&nbsp; Other non-financial interventions, such as policy and target setting, establishment of quality and technical standards, awareness raising and demand promotion amongst users and service providers, provision of market information and training (capacity building) for businesses and workers, may be beneficial but are not specifically related to a uniform price/tariff structure. National energy planning will be key to establishing the optimum mix of technologies to meet electrification needs across the country and should feed in to design of the price/tariff regulation system.
  
 
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== Advantages and Disadvantages ==
 
== Advantages and Disadvantages ==
  
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The private sector is widely seen as being more efficient, innovative flexible and nimble that the public sector and it is these virtues that it brings to energy access provision. Use of a private delivery model can be a way of bringing private sector skills and finance (both national and international), and the benefits of competition into the energy sector. Where public institutions are weak and ineffective, private delivery models may seem attractive, but it must be recognised that successful private delivery relies (particularly for grids and mini-grids) on effective public management including strong regulatory frameworks and this calls for capabilities within public institutions which they may lack. There are also elements needed for the private sector to deliver, such as workforce skills and user awareness, which individual businesses may be reluctant to provide, because of the costs involved and because in a competitive market&nbsp;<span style="font-size: 13.6px;">they will be unsure that they (rather than competitors) will capture the benefits and secure a return on their investment.&nbsp;</span><span style="font-size: 13.6px;">In addition, where modern energy access is not affordable on a purely private financed basis or public financial input is&nbsp;</span><span style="font-size: 13.6px;">needed to support the costs of early market development, a public-private partnership delivery model will be needed.&nbsp;</span><span style="font-size: 13.6px;">Grid-connected mini-grids can, in theory, provide any level of electricity supply, but in most cases if the investment is made for grid connection and associated standards are met, they&nbsp; provide a grid-equivalent service, meeting all household, commercial, industrial and community requirements (Tier 5). (If the grid system itself is over-stretched with inadequate generation; or insufficiently robust or poorly maintained transmission and distribution systems reliability and quality of supply may deteriorate so that while users have a physical connection, they may not in fact have reliable access to electricity (bringing the supply Tier 3 or lower). To the extent that a grid-connected mini-grid draws on electricity from the grid its construction should be coupled with development of additional centralized generation capacity to support the resulting additional demand.</span>
+
The main advantage of an individual price/tariff regulation system is that it can reflect genuine underlying differences in the costs of provision under different circumstances and so enable economically sustainable electricity provision and attract private finance and businesses, while also protecting users from over-charging, particularly in a monopoly or quasi-monopoly situation, and ensuring that public financial support is properly used and benefits users by increasing affordability (rather than boosting private profits beyond those needed to attract capital).
 
 
|}
 
  
<br/>
+
One disadvantage is that, if not well designed and rigorously applied by an expert and knowledgeable regulator, it may fail to incentivize energy businesses to work efficiently and control costs. Another is that, calculation and agreement of prices or tariffs for multiple providers on an individual basis is costly and resource intensive. This may be ameliorated by establishing a standard framework for price/tariff calculation, but some cost will remain. When deciding on an individual price/tariff calculation arrangement, consideration should therefore be given to materiality and the balance of costs and benefits.<br/>
  
== Further Informaiton and Guidance ==
+
A greater issue is that, relative to a uniform price/tariff system, it discriminates between users, allowing those who can be supplied with electricity at lower cost (particularly in urban areas and within reach of the [[Portal:Grid|grid]]&nbsp;system) to access electricity at a lower price and to benefit from the cross-subsidies inherent in a grid system, while requiring those in more remote areas to pay the full cost of their access. While grants and subsidies may partially off-set these differences they are unlikely to eliminate them entirely. Not only is this inequitable, but it constrains those receiving more expensive forms of electricity from using it economically, improving their livelihoods and increasing demand to levels at which electricity would become cheaper. It thus acts as a constraint on economic development in higher cost areas and holds people back from moving up the energy access ladder. As a result an individual price/tariff regulatory system may lead to “tariff envy”, as those who initially welcomed modern electricity as providing them with better energy at lower cost than traditional sources, see neighbouring communities receiving it at still lower cost – and hence to political pressures to move away from individual towards uniform prices/tariffs. Thought should therefore be given when setting up an individual price/tariff regulation system to the future, how the system may need to be amended as the national electricity access context changes, and how this can be achieved on a basis which maintains both users acceptability and investor confidence.<br/>
 
 
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*IRENA (2016), Policies and regulations to support renewable energy mini-grid development through private sector involvement <u>[https://policy.practicalaction.org/policy-themes/energy/poor-peoples-energy-outlook/poor-people-s-energy-outlook-2016 https://policy.practicalaction.org/policy-themes/energy/poor-peoples-energy-outlook/poor-people-s-energy-outlook-2016]</u>
 
*Practical Action, ODI, Solar Aid, GOGLA. (2016). Accelerating Access to Electricity in Africa with Off-grid Solar <u>[https://policy.practicalaction.org/policy-themes/energy/off-grid-solar https://policy.practicalaction.org/policy-themes/energy/off-grid-solar]</u><br/>
 
*UNEP & GOGLA, (2015), Developing Effective Off-Grid Lighting Policy <u>[https://www.gogla.org/sites/www.gogla.org/files/recource_docs/developing-effective-off-grid-lighting-policy.pdf https://www.gogla.org/sites/www.gogla.org/files/recource_docs/developing-effective-off-grid-lighting-policy.pdf]</u><br/>
 
*WBCSD, Business Case for Low-Carbon Microgrids (2016) <u>[http://www.ifc.org/wps/wcm/connect/topics_ext_content/ifc_external_corporate_site/ifc+sustainability/learning+and+adapting/knowledge+products/publications/publications_report_gap-opportunity http://www.ifc.org/wps/wcm/connect/topics_ext_content/ifc_external_corporate_site/ifc+sustainability/learning+ and+adapting/knowledge+products/publications/publications_report_gap-opportunity]</u><br/>
 
*World Resources Institute (2015),Clean Energy Access in Developing Countries: Perspectives on Policy and Regulation, Issue Brief 2&nbsp; &nbsp;<u>[https://www.irena.org/DocumentDownloads/Publications/Evaluating_policies_in_support_of_the_deployment_of_renewable_power.pdf https://www.irena.org/DocumentDownloads/Publications/Evaluating_policies_in_support_of_the_ deployment_of_renewable_power.pdf]</u>
 
  
 
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<br/>
 
<br/>
  
== Relevante Case Studies: ==
+
== Further Information and Guidance ==
  
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None of the examples examined have had a purely private sector delivery models (ie no public involvement in either ownership or funding).
+
*EUEI PDF (2014), Mini-grid Policy Toolkit: Policy and Business Frameworks for Successful Mini-grid Roll-outs <u>[http://www.euei-pdf.org/sites/default/files/field_publication_file/RECP_MiniGrid_Policy_Toolkit_1pageview_(pdf,_17.6MB,_EN_0.pdf http://www.euei-pdf.org/sites/default/files/field_publication_file/RECP_mini-grid_Policy_Toolkit_1pageview_(pdf,_17.6MB,_EN_0.pdf]</u>
 +
*IRENA (2016), Policies and regulations to support renewable energy mini-grid development through private sector involvement <u>[http://www.irena.org/DocumentDownloads/Publications/IRENA_Policies_Regulations_minigrids_2016.pdf http://]</u><u>[http://www.irena.org/DocumentDownloads/Publications/IRENA_Policies_Regulations_minigrids_2016.pdf www.irena.org/DocumentDownloads/Publications/IRENA_Policies_Regulations_mini-grids_2016.pdf]</u>
  
 
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<br/>
 
<br/>
  
= Public-Private Partnership Delivery Model =
+
== Relevant Case Studies ==
  
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'''<span style="color:#FFFFFF;"><span style="font-size: 13.6px;">Definition:</span></span>'''<br/>
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+
*[[NAE Case Study: Costa Rica, Distribution Cooperatives|Costa Rica, Distribution Cooperatives]]<br/>
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*[[NAE Case Study: Mali, Rural Electrification Programme|Mali, Rural Electrification Programme]]<br/>
'''Delivery of electricity access by an entity which is part publically and part privately owned or by a mix of publically and privately owned entities or using a combination of public and private finance'''<br/>
+
*[[NAE Case Study: Philippines, Islanded Distribution by Cooperatives|Philippines, Islanded Distribution by Cooperatives]]<br/>
 
+
*[[NAE Case Study: Tanzania, Mini-Grids Regulatory Framework|Tanzania, Mini-Grids Regulatory Framework]]<br/>
This includes cases where:
 
 
 
*a joint venture has been created between a state-owned organisation and a private company to provide electricity<br/>
 
*one or more state-owned organisation fill some of the functions along the market chain1, while others are filled by private businesses<br/>
 
*electricity provision is undertaken by private businesses with public financial support (subsidies, grants, loans etc)&nbsp; &nbsp;&nbsp;
 
  
 
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<br/>
 
<br/>
  
== Internactions wiht other NAE Categories: ==
+
{{Go to Top}}
 
 
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<span style="color:#FFFFFF;">Technology</span><br/>
 
  
 
<br/>
 
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= Unregulated =
Public-private models for grid systems might include:
 
  
*Publically owned generation and transmission combined with privately owned distribution;<br/>
+
For more information on this topic please see the [[National Approaches to Electrification – Legal Basis#Unregulated|'Unregulated' Sub-Section on the NAE Legal Basis Page]].
*Independent Power Producers (IPPs) connected to a publically owned transmission/distribution system;<br/>
 
*<span style="font-size: 13.6px;">A privately owned grid system using grants from public sources to connect new users.</span>
 
 
 
<span style="font-size: 13.6px;">For grid connected mini-grids and distribution systems:</span><br/>
 
 
 
*Mini-grids owned by a private developer connected to the (publically-owned) main grid, and thereby drawing on publically owned generation to meet demand;<br/>
 
*A private company, or public-private joint venture, taking on operation of a section of the publically-owned grid distribution system;<br/>
 
*Public grants or subsidies supporting development of a privately-owned mini-grid or distribution system.<br/>
 
 
 
For isolated mini-grids:
 
 
 
*Mini-grids developed on a Build-Own-Operate-Transfer basis (initially owned and operated by a private developer, but transferred to public ownership at the end of a concession period);<br/>
 
*Mini-grids built and operated by a public-private joint venture;<br/>
 
*Public grants or subsidies supporting development of a privately-owned mini-grid.
 
 
 
Use of public finance (grants, subsidies and loans) to enhance affordability and support market growth often results in a public-private model for standalone systems, even when there is a purely private-sector chain of manufacturers, importers, distributors and retailers. There could also be benefits in some circumstances from government energy agencies becoming directly involved in the standalone system market, by forming a joint entity to supply systems or by taking on one of the roles along the value chain (eg providing a distribution service for all system providers), as a means of supporting market development.
 
 
 
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<span style="color:#FFFFFF;">Legual Basis</span><br/>
 
  
 
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{{Go to Top}}
Because a public-private model involves private ownership and investment, an explicit legal framework will be required for any form of electrification which involves significant long-term capital investment in order to attract private finance and allow for price regulation to protect users. A concession, which offers protection from competition, will provide the greatest attraction for private financiers. Where no long-term capital investment is involved, as with standalone systems sold directly to users, no legal control (beyond that for any business) may be necessary – however if there is partial public sector ownership, a transparent legal framework&nbsp;<span style="font-size: 13.6px;">may be required to convince private market participants that they are not facing unfair competition, and also to ensure that&nbsp;</span><span style="font-size: 13.6px;">any public finance is not being misused.&nbsp;</span>
 
 
 
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<span style="color:#FFFFFF;">Price/Tariff Regulation</span><br/>
 
  
 
<br/>
 
<br/>
 
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Where significant capital investment is involved, a transparent framework for price/tariff regulation is likely to be required to attract the private element into any public-private partnership. Tariff regulation will also protect users and provide a means of ensuring that public finance is not being misused or exploited by the private sector. It may also demonstrate to private market participants that they are not facing unfair competition from partially publically-owned market participants.&nbsp;
 
 
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<span style="color:#FFFFFF;">Finance</span><br/>
 
 
<br/>
 
 
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All public-private partnerships will involve a combination of private and public finance. Private finance will come through ownership and investment in, and loans to electricity providers. Public finance may come through these routes, but may also be through various forms of grant, subsidy, tax exemption or guarantee. Ultimately public-private models, like other forms of electricity provision, will rely on connection and ongoing charges, and standalone system purchases from users. For multi-user systems (grids and mini-grids) there is also likely to be some element of cross-subsidy between users.&nbsp;
 
 
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<span style="color:#FFFFFF;">Non-Financial Interventions</span><br/>
 
 
<br/>
 
 
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National energy planning is key to establishing the optimum mix of technologies to meet electrification needs across the country, regardless of the delivery model employed. Institutional restructuring may be needed to establish public-private partnerships and capacity building or technical assistance may be required if the key actors lack the capacity to undertake regulatory reform or design arrangements for public financial support.&nbsp; Awareness raising amongst users and other potential market actors and service providers, as well as training (capacity building) to develop the skilled workforce needed by new energy access businesses can be beneficial alongside financial forms of public support. Public-private partnership may also provide the means to bring in new technology, with the private sector providing the technology know-how while the public sector bears the risk inherent in new technology which private investors may be reluctant to take on.&nbsp;<br/>
 
 
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<br/>
 
 
== Advantages and Disadvantages (Including Level of Electricity Provided) ==
 
 
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Public-Private partnerships offer the potential to combine the benefits of both models, with public security being combined with private efficiency, innovation and flexibility. Bringing in private finance can extend the capacity for electricity provision beyond that which the public sector alone can offer, while public financial support can be used to attract private finance and make electricity affordable for users.&nbsp; Combining public and private inputs is not, however, simple. Significant expertise is required to ensure that private investment is attracted while making optimum use of public resources. Moreover the appropriate form of public-private partnership will change as markets develop and levels of electricity access increase – and this must be recognised while at the same time creating regimes which can give the private sector the confidence in the future they require to invest.
 
 
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<br/>
 
 
== Further Informaiton and Guidance ==
 
 
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*<span>Clean </span><span>Energy Solutions Centre & </span><span>iied</span><span>. (2015). Policies to Spur Energy&nbsp;</span><span>Access</span>&nbsp;<span><u><span>[https://cleanenergysolutions.org/resources/policies-spur-energy-access https]</span></u><u><span>[https://cleanenergysolutions.org/resources/policies-spur-energy-access ://]</span></u><u><span>[https://cleanenergysolutions.org/resources/policies-spur-energy-access cleanenergysolutions.org/resources/policies-spur-energy-access]</span></u></span>
 
 
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<br/>
 
 
== Relevante Case Studies: ==
 
 
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|
 
*[[NAE Case Study: Bangladesh, IDCOL Solar Home Systems|Bangladesh, IDCOL Solar Home Systems]]<br/>
 
*[[NAE Case Study: Brazil, Luz para Todos (Light for All)|Brazil, Luz para Todos (Light for All)]]<br/>
 
*[[NAE Case Study: Cambodia “Light Touch” Regulation|Cambodia “Light Touch” Regulation]]<br/>
 
*[[NAE Case Study: Costa Rica, Distribution Cooperatives|Costa Rica, Distribution Cooperatives]]<br/>
 
*[[NAE Case Study: Ethiopia, Solar Market Development|Ethiopia, Solar Market Development]]<br/>
 
*[[NAE Case Study: Kenya, Off-Grid for Vision 2030|Kenya, Off-Grid for Vision 2030]]<br/>
 
*[[NAE Case Study: Mali, Rural Electrification Programme|Mali, Rural Electrification Programme]]<br/>
 
*[[NAE Case Study: Nepal, Rural Energy Development Programme|Nepal, Rural Energy Development Programme]]<br/>
 
*[[NAE Case Study: Peru, Concession Model for Standalone Systems|Peru, Concession Model for Standalone Systems]]<br/>
 
*[[NAE Case Study: Philippines, Islanded Distribution by Cooperatives|Philippines, Islanded Distribution by Cooperatives]]<br/>
 
*[[NAE Case Study: Rwanda, Sector-Wide Approach to Planning|Rwanda, Sector-Wide Approach to Planning]]<br/>
 
*[[NAE Case Study: South Africa, Integrated National Electrification|South Africa, Integrated National Electrification]]<br/>
 
*[[NAE Case Study: Tanzania, Mini-Grids Regulatory Framework|Tanzania, Mini-Grids Regulatory Framework]]<br/>
 
*[[NAE Case Study: Vietnam, Rapid Grid Expansion|Vietnam, Rapid Grid Expansion]]<br/>
 
 
|}
 
 
<br/>
 
 
= Unregulated =
 
 
For more information on this topic please see the [[National Approaches to Electrification – Legal Basis#Unregulated|'Unregulated' Sub-Section on the Legal Basis Page]].<br/>
 
  
 
= References =
 
= References =
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{{NAE Acknowledgements}}
 
{{NAE Acknowledgements}}
  
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[[Category:NAE]]
 
[[Category:NAE]]
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[[Category:Mini-grid]]
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[[Category:Grid]]

Latest revision as of 10:51, 15 March 2023

NAE Overview Page
TechnologyTechnology: Grid ExtensionTechnology: Grid-Connected Mini-Grid/Distribution SystemTechnology: Isolated Mini-GridTechnology: Standalone SystemsDelivery ModelDelivery Model: PublicDelivery Model: Private (Non-Government)Delivery Model: Public-Private PartnershipLegal BasisLegal Basis: ConcessionLegal Basis: LicenseLegal Basis / Price/Tariff Regulation: UnregulatedPrice/Tariff RegulationPrice/Tariff Regulation: UniformPrice/Tariff Regulation: IndividualFinanceFinance: PrivateFinance : UserFinance: Grants & SubsidiesFinance: Cross-SubsidiesFinance: Tax ExemptionsFinance: GuaranteesNon-Financial InterventionsNon-Financial Interventions: Direct Energy Access ProvisionNon-Financial Interventions: Institutional RestructuringNon-Financial Interventions: Regulatory ReformNon-Financial Interventions: Policy & Target SettingNon-Financial Interventions: Quality & Technical StandardsNon-Financial Interventions: Technical AssistanceNon-Financial Interventions: Capacity Building & Awareness RaisingNon-Financial Interventions: Market InformationNon-Financial Interventions: Demand PromotionNon-Financial Interventions: Technology Development & AdoptionNon-Financial Interventions: National Energy PlanningNational Approaches to Electrification – Price Tariff Regulation Page.png]]



Price/Tariff Regulation: The basis on which the price of electricity (or of standalone systems) are regulated



Uniform

Definition

A regime under which all providers within a given category are required to sell electricity (or standalone systems) at the same price or tariff (or set of prices/tariffs).  

A uniform price/tariff arrangement may:

  • Address purchase costs for standalone systems or connection charges and charges for electricity used or flat monthly changes
  • Encompass a set of prices/tariffs for different classes of user (eg household, commercial and industrial) or for different levels of provision (eg size of solar home system)   
  • Relate to one, several, or all technologies. Thus it may cover just electricity from solar home systems, or just from wind-powered mini-grids, or require that isolated mini-grids supply electricity at the same prices as the grid(a grid-parity price/tariff)
  • Be based on an assessment of the average cost of provision, on existing grid prices, or on estimates of the avoided cost of grid extension.   


Interactions with other NAE Categories


Technology


It is usual for grid systems to use a uniform price/tariff structure, relying on the cross-subsidies inherent in a single unitary system with a single owner to balance differences in cost of provision in different areas. However, even in a grid context a uniform price/tariff structure can dis-incentivize the electricity provider from extending access to more remote, low demand areas, where the cost of provision is higher and they may be unable to recover costs or will have to raise prices for all customers.

If a uniform tariff is imposed on grid-connected mini-grids, distribution systems or isolated mini-grids, which are separately owned, it will be necessary to establish a system of subsidies or cross-subsidies between providers. Without this, providers in areas where costs are lower may make excess profits while in areas where costs are higher providers become insolvent or users remain unserved.  For this reason, individual price/tariff regulation is often applied to larger mini-grids, though for small mini-grids the costs may out-balance the benefits of individual price/tariff regulation, and a uniform tariff may be applied.

For standalone systems, prices are frequently unregulated.  If prices are regulated, it’s more likely to be on a uniform than an individual basis, since standalone system businesses are not usually tied to a location and so differences in costs are likely to be linked to their technology offer, efficiency of operation, or financing structure rather than any fundamental factors outside the business's control. (Within any uniform price regulation of standalone systems it will be necessary to consider how to incentivize system providers to move into more remote areas where distribution costs are higher).

The issues inherent in a uniform price/tariff regulatory structure will be all the greater if it is extended across more than one technology, for instance, if isolated mini-grids or standalone systems are expected to supply electricity at the same prices as the grid system.     


Delivery Model


A uniform regulated price/tariff structure is consistent with a public delivery model, with cross-subsidy between publically-owned entities and subsidy from wider public resources being relatively straightforward. Combining uniform prices/tariffs with a private delivery model is problematic, since this model precludes public financial support, leaving cross-subsidies between providers as the only option for balancing differences in costs. The need for subsidy to support a uniform price/tariff structure is thus likely to result in a public-private partnership model rather than pure private sector delivery.


Legual Basis


Uniform prices or tariffs may be established through either concessions or a licensing system. In principle uniform prices/tariffs may be set through general legislation without licensing electricity providers. Enforcement will then rely on prosecution of any providers who exceed set prices or tariffs.


Finance


A uniform price/tariff regime will give private financiers clarity. Whether this attracts finance will depend critically on whether the prices or tariffs set enable them to make adequate return on investment. Given variations in costs of provision it is likely to attract investment into easier to access areas and lower cost electricity technologies, and potentially enable businesses providing these to make high profits, while excluding from electricity access those living in smaller communities in more remote areas. In addition private financiers may see uniform prices/tariffs as arbitrary, inflexible and non-cost reflective, thus presenting a risk to future revenues and so discourage investment.  Grants and subsidies may, of course, be used to attract private finance in the context of a uniform  price or tariff system, as may tax exemptions or guarantees.  However if they, too, are set on a uniform basis, while they may extend the group of users to whom electricity can be economically provided, they are also likely to create additional excess profits for those elements of electricity provision which could anyway have been delivered economically, while leaving others outside this envelope. If grants or subsidies are structured to reflect costs of provision, they may counterbalance the rigidity of uniform prices/tariffs, by transferring cost –reflectivity from tariffs to grants/subsidies. Cross-subsidies are also used to transfer income from those providers who face lower delivery cost to those with higher costs.  Establishment of uniform prices or tariffs will obviously directly affect finance derived from users through these charges and the need for users to be able to access finance, or pay-as-you-go arrangement to cover any up-front element of these costs.


Non-Financial Interventions


Establishing (or amending or removing) a uniform price/tariff regime will require regulatory reform and capacity building or technical assistance may be required if the key actors lack the capacity to undertake this reform.  Direct provision by implementing authorities is an alternative route to achieving uniform prices/tariffs. Other non-financial interventions, such as policy and target setting, establishment of quality and technical standards, awareness raising and demand promotion amongst users and service providers, provision of market information and training (capacity building) for businesses and workers, may be beneficial but are not specifically related to a uniform price/tariff structure. National energy planning will be key to establishing the optimum mix of technologies to meet electrification needs across the country, regardless of the form of price/tariff regulation employed.


Advantages and Disadvantages


The main advantage of a uniform price or tariff arrangement is that of equity – allowing all users to access electricity at the same cost, preventing those in remote, low demand areas from being penalised by having to pay more for electricity and so enabling them to use it to improve their livelihoods and compete on a more level playing field. It thereby avoids “tariff envy” and smooths the transition from one form of electricity access to another for the user. The comparative simplicity of uniform prices/tariffs may also seem attractive, avoiding the need for appropriate prices/tariffs to be calculated and agreed for each scheme or business. This is a particularly relevant consideration for small-scale technologies (standalone systems and very small mini-grids), where the burden and cost of setting individual prices/tariffs will be disproportionately high and the differentials between costs of provision relatively low. The main disadvantage is that, in the absence of cost-reflective subsidies, grants or cross-subsidies, they will inevitably benefit those providers operating in areas where costs of provision are lower, while effectively excluding provision to higher cost areas (or causing those operating in these areas to become insolvent).  This issue is greatly exacerbated if uniform prices/tariffs are extended across multiple technologies, typically by requiring grid-parity tariffs from other forms of electricity provision (which are, almost axiomatically, used in areas where grid extension is uneconomic at these price levels). Subsidies, grants or cross-subsidies can be used to overcome this disadvantage while  retaining equity for users, though these will inevitably either limit extension of provision to that which can be sustained from public funding or cause prices for other users (the customers of the providers from whom cross-subsidies are drawn) to rise. The sustainability of these arrangements must be seriously considered.  


Further Information and Guidance



Relevant Case Studies



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Individual

Definition

A regime under which the price or tariff at which each  provider can sell electricity (or standalone systems) is separately agreed with the regulator.

An individual price/tariff arrangement may:

  • Address purchase costs for standalone systems or connection charges and charges for electricity used or flat monthly changes
  • Encompass a set of prices or tariffs for different classes of user (eg household, commercial and industrial) or for different levels of provision (eg size of solar home system)   
  • Relate to electricity from one or more technologies and/or standalone systems as long as these are all provided by a single entity
  • Cover a single unit within the provider’s operation (eg a single mini-grid) or the entirety of the provider’s operation
  • Be based (most usually) on the provider’s average or incremental costs, net of any grant or subsidy (cost-recovery tariffs) or on estimates of the avoided cost of grid extension to the area, or some other basis


Interactions with other NAE Categories


Technology


It is in principle possible to set individual prices/tariffs for different areas within a grid system. This could have the advantage of incentivizing the grid company to extend into more remote areas where costs are higher, but is often politically unacceptable and a uniform price/tariff structure is therefore most often used. Grid connected mini-grids and distribution systems rely on the sale of electricity to the grid, and import of electricity from the grid and its sale to users, as well as sale of own-generated electricity to users. Clarity on how each of these tariffs is set and regulated is vital. Tariffs for import of electricity from and export to the grid will usually be on a uniform price/tariff basis. Tariffs for users of grid- connected mini-grids as well as isolated mini-grids are usually set individually for each mini-grid or distribution area (or mini-grid company) to reflect their specific costs and any subsidies or grants they may have received. For larger, particularly grid-connected, systems, these factors may be overcome by political considerations and attempts to achieve equal treatment of users considerations (but cost-reflective grants or subsidies, or cross-subsidies, will then be needed to maintain economic sustainability). At the other end of the scale, it may be concluded that the costs and bureaucracy of agreeing individual tariff levels for single small mini-grids may be unjustified. It is most usual to leave tariffs for mini-grids below a certain size unregulated (on the basis that they do not create an effective monopoly and so purchase decisions can be left to users), through use of a uniform price/tariff is also an option.

Prices for standalone systems are also generally unregulated, though where public funding is used to support provision of standalone systems, it may (as with the NAE Case Study of the Bangladesh IDCOL programme) be regarded as appropriate to regulate prices. If the move towards pay-as-you-go, with users paying for electricity as they do from grid or mini-grids, while suppliers retain ownership of the capital equipment, continues or accelerates, regulation of electricity prices may become more relevant. If they are regulated it’s more likely to be on a uniform than an individual basis (since standalone system businesses are not usually tied to a location and so differences in costs are likely to be linked to their technology offer, efficiency of operation, or financing structure rather than any fundamental factors outside the businesses control).


Delivery Model

An individual regulated price/tariff structure may be used with a public delivery model where multiple public entities are involved in electricity provision. It is in the context of a private or a public-private delivery model, particularly,  that individual regulated prices or tariffs are most likely to be needed, since this offers the private sector element both clarity and the opportunity to recover costs.


Legual Basis

Individual prices or tariffs may be established through either concessions or a licensing system. Without some form of licensing it is impractical to regulate individual prices or tariffs.


Finance


An individually regulated price/tariff regime will give those considering investing long term private capital confidence, reducing risk while protecting users. Whether this attracts finance will depend critically on whether the prices/tariffs set enable them to make adequate return on investment. A clear and transparent framework which allows potential investors to understand how prices/tariffs will be set and estimate levels likely to be acceptable to regulators will be key. (For smaller-scale, shorter-term investments, individual price/ tariff regulation may be regarded as a burden rather a protection). Any framework must factor in grants or subsidies received by the electricity business, so that their effect is to reduce prices/tariffs and make electricity more affordable to users. This also serves to ensure proper use of public funding and so where grants and subsidies are made available, prices/tariffs are more likely to be regulated. (Any cross-subsidies should also be incorporated into price/tariff calculations, but these are unlikely to be used alongside individually regulated tariffs). Tax exemptions and guarantees, will be reflected through their impacts on equipment, finance and other costs. The levels at which prices/tariffs are set will obviously directly affect finance derived from users through these charges and the need for users to be able to access finance, or pay-as-you-go arrangement to cover any up-front element. 


Non-Financial Interventions


Establishing individual price/tariff regulation will require regulatory reform and capacity building or technical assistance may be needed if the key actors lack the capacity to undertake this reform.  Other non-financial interventions, such as policy and target setting, establishment of quality and technical standards, awareness raising and demand promotion amongst users and service providers, provision of market information and training (capacity building) for businesses and workers, may be beneficial but are not specifically related to a uniform price/tariff structure. National energy planning will be key to establishing the optimum mix of technologies to meet electrification needs across the country and should feed in to design of the price/tariff regulation system.


Advantages and Disadvantages


The main advantage of an individual price/tariff regulation system is that it can reflect genuine underlying differences in the costs of provision under different circumstances and so enable economically sustainable electricity provision and attract private finance and businesses, while also protecting users from over-charging, particularly in a monopoly or quasi-monopoly situation, and ensuring that public financial support is properly used and benefits users by increasing affordability (rather than boosting private profits beyond those needed to attract capital).

One disadvantage is that, if not well designed and rigorously applied by an expert and knowledgeable regulator, it may fail to incentivize energy businesses to work efficiently and control costs. Another is that, calculation and agreement of prices or tariffs for multiple providers on an individual basis is costly and resource intensive. This may be ameliorated by establishing a standard framework for price/tariff calculation, but some cost will remain. When deciding on an individual price/tariff calculation arrangement, consideration should therefore be given to materiality and the balance of costs and benefits.

A greater issue is that, relative to a uniform price/tariff system, it discriminates between users, allowing those who can be supplied with electricity at lower cost (particularly in urban areas and within reach of the grid system) to access electricity at a lower price and to benefit from the cross-subsidies inherent in a grid system, while requiring those in more remote areas to pay the full cost of their access. While grants and subsidies may partially off-set these differences they are unlikely to eliminate them entirely. Not only is this inequitable, but it constrains those receiving more expensive forms of electricity from using it economically, improving their livelihoods and increasing demand to levels at which electricity would become cheaper. It thus acts as a constraint on economic development in higher cost areas and holds people back from moving up the energy access ladder. As a result an individual price/tariff regulatory system may lead to “tariff envy”, as those who initially welcomed modern electricity as providing them with better energy at lower cost than traditional sources, see neighbouring communities receiving it at still lower cost – and hence to political pressures to move away from individual towards uniform prices/tariffs. Thought should therefore be given when setting up an individual price/tariff regulation system to the future, how the system may need to be amended as the national electricity access context changes, and how this can be achieved on a basis which maintains both users acceptability and investor confidence.


Further Information and Guidance



Relevant Case Studies



►Go to Top


Unregulated

For more information on this topic please see the 'Unregulated' Sub-Section on the NAE Legal Basis Page.


►Go to Top


References

Authors

Authors: Mary Willcox, Dean Cooper

Acknowledgements

The Review was prepared by Mary Willcox and Dean Cooper of Practical Action Consulting working with Hadley Taylor, Silvia Cabriolu-Poddu and Christina Stuart of the EU Energy Initiative Partnership Dialogue Facility (EUEIPDF) and Michael Koeberlein and Caspar Priesemann of the Energising Development Programme (EnDev). It is based on a literature review, stakeholder consultations. The categorization framework in the review tool is based on the EUEI/PDF / Practical Action publication "Building Energy Access Markets - A Value Chain Analysis of Key Energy Market Systems".

A wider range of stakeholders were consulted during its preparation and we would particularly like to thank the following for their valuable contributions and insights: - Jeff Felten, AfDB - Marcus Wiemann and other members, ARE - Guilherme Collares Pereira, EdP - David Otieno Ochieng, EUEI-PDF - Silvia Luisa Escudero Santos Ascarza, EUEI-PDF - Nico Peterschmidt, Inensus - John Tkacik, REEEP - Khorommbi Bongwe, South Africa: Department of Energy - Rashid Ali Abdallah, African Union Commission - Nicola Bugatti, ECREEE - Getahun Moges Kifle, Ethiopian Energy Authority - Mario Merchan Andres, EUEI-PDF - Tatjana Walter-Breidenstein, EUEI-PDF - Rebecca Symington, Mlinda Foundation - Marcel Raats, RVO.NL - Nico Tyabji, Sunfunder -



NAE Overview Page

Any feedback would be very welcome. If you have any comments or enquires please contact: mary.willcox@practicalaction.org.ukbenjamin.attigah@euei-pdf.org, or caspar.priesemann@giz.de.

Download the Tool as a Power Point: https://energypedia.info/images/a/aa/National_Approaches_to_Electrification_-_Review_of_Options.pptx


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