Empowering Electrification: Innovative Approaches to Overcome Financial Barriers in Developing Countries

Many distribution companies in developing countries with low electricity access are often in a dire financial situation (their revenues don’t cover their costs). Here's what can be done to accelerate the electrification process in the presence of this problem. In the wake of the current announcement by the Nigerian utility to increase the electricity tariff, here's an explanation of the situation.

Non-reflective tariffs i.e. tariffs that do not cover the total costs are one of the downsides of the standard distribution regulations.

For context, tariffs that are collected in 39 countries of Sub-saharan Africa except for two countries (Seychelles and Uganda) don't recover the total cost.

This is majorly because of the losses that take place through illegal connections and unpaid bills plus. This situation is further helped by the Viability Gap - which is the difference between the cost of supply of electricity and what people can afford. This difference creates more problems that become worse when the utilities are inefficient (poor infrastructure and the likes) which causes operational costs to go up even more.

A curious characteristic that would help in alleviating the problem, is to realize that most of the non-paid bills come from large customers, typically institutions that don't pay their bills, and customers that would be able to pay, but they decide not to. The government can figure out a way around this particular trait. Starting from identifying these classes of people, taking measures and steps to ensure that they pay or punish them.

To REDUCE this problem and accelerate the electrification process, the utilities can:

1.) Work towards mechanisms that will reduce theft and unpaid bills

2.) Reduce the inefficiencies that exist in operational investment

3.) Cross-subsidize, up to a certain limit, overcharging commercial and industrial customers in order to reduce the tariffs for residential ones.

4.) Create activities around electricity access to stimulate additional demand from productive users which will in time increase the economic situation of the residential customers, so that they will be able to pay higher prices.

5.) Promote the standardization of appliances (suitable low cost equipment), so that the costs of consuming electricity and producing electricity will be lower.

6.) Increase, despite the political difficulties, the tariffs to be cost-reflective.

A MAJOR approach to addressing the problem is the inclusion or participation of private investment. The incumbent, mostly publicly-owned distribution companies, have not been able to address the problem in decades. So clearly, the private investment approach should be adopted.

What Other Developing Countries can Learn from India

The Indian privatization helped the country's electricity sector to leapfrog many of its obstacles bringing access to electricity to 900, 000 more people (from initial 700, 000 - 1.6 Million people). Developing countries could learn from this model. Utilities and governments do not have to immediately jump into full privatization, they may decide to do that gradually.

So they can have different implementation levels of what we can call concessions or franchises. In some cases, a private company is given the possibility of doing metering and the billing, in some other cases they are also in charge of maintenance or operation, in some other cases they are able also to do some investment or own part of the company, in some other cases it is full privatization. So utilities and governments can explore what will work for them.

What are your thoughts?