A case study on subsidizing rural electrification in Chile

Abstract

EN ER G Y ER V IC ES FO R TH E W O R LD ‘S PO O R In Chile in the early 1990s, nearly 240,000 rural households—more than 1 million people, or almost half the rural population—had no access to any source of electricity (figure 1). By contrast, 97 percent of urban households had electricity supply. The lack of access was concentrated in a few regions where most of the rural population lives (figure 2). It affected mainly lower-income families, since the wealthier could usually afford to install generators or pay for extension of the distribution grid. To increase rural access to electricity, Chile launched a rural electrification program in 1994. Like many rural electrification projects, the program has had to address these challenges: how to ensure sustainability, how to avoid politicization and corruption of the process (and subsidy delivery mechanisms), how to develop ways to deliver service to isolated communities, and how to involve the private sector. The program set up a special fund to competitively allocate a one-time direct subsidy to private electricity distribution companies to cover part of their investment costs in rural electrification projects. Operating costs have to be financed with tariff charges set by the regulatory authority. Bids are conducted annually. To apply for a subsidy, companies present their projects to the regional governments, which allocate the funds to those scoring best on several objective criteria: cost-benefit analysis, amount of investment covered by the companies, and social impact. The central government allocates the subsidy funds to the regions on the basis of two criteria: how much progress a region made in rural electrification in the previous year and how many households still lack electricity. Regional governments also allocate their own resources to the program. The program, which is expected to run until 2004, has made significant headway in achieving its goals. It has increased the coverage of electricity systems in rural areas from 53 percent in 1992 to 76 percent at the end of 1999, exceeding the 75 percent target set for 2000. The program has promoted social equity and improved the living conditions of the poor. And it has shown that it is possible to create market incentives that lead to efficient private solutions to rural electrification—an important lesson at a time that so many developing countries are reforming their power markets and privatizing their state-owned electric utilities.

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Cite this paper

@inproceedings{Jadresic2000ACS, title={A case study on subsidizing rural electrification in Chile}, author={Alejandro Jadresic}, year={2000} }